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The Technology Stock Advisor Weekly Advice Column For
The Week of Monday, July 21, 2008, Thomas E. Vass
Market Timing Follies: Fretting Over A Gain Taken
TD Ameritrade writer, Jennifer Pellet, in her recent article, The Trouble With Timing (Summer 2008), succinctly notes that “The object of market timing is to be out of the market on its worst days, not its best.”
As she and Stephanie Giroux, TD AMERITRADE's Chief Investment Executive, note, “trying to escape before the market dives is often more costly than letting investments ride.”
Most of the investment media focuses attention on the movement out of the stock market before it goes down, or out of a stock before it declines. There is another aspect of market timing that suffers from the same risks, and that is angst over taking a gain, and then seeing the stock go up.
How To Avoid the Angst
I have had the experience of managing money for clients who express dissatisfaction at taking a gain. A typical response would be “Hey, you sold that stock at $30, and then it went to $35. We left $5 on the table.”
My normal response is to get the five-year stock price chart and fold it into 3 parts, about six months apart. Then, I unfold the chart to the first part only, and ask the client: “Okay, on this day, the stock closed at $25, please tell me where you think the stock will close in 6 months.”
“How should I know,” retorts the client, “you’re the expert, not me, That’s why I hired you to manage my money.”
So, I unfold the second part of the chart to the six months, and show her that closing price. “Is there any reason for you to think that the past performance of this stock is an indicator of future performance?” I ask.
“No,” says the client, “everyone knows that the past is not a predictor of the future.”
“Well, I do not predict what happens after we take a gain, and further more, have you ever met an investor who lost all of his money by taking a gain?” (version of a quote attributed to Bernard Baruch).
I advise that you avoid the angst of a gain taken by setting the target sell price when you buy the stock. Based upon my research, the right time to sell most stocks is about at a 40% gain.
But, What About Taxes?
Sometimes, investors and their tax advisors express angst at taking a gain, and then having to pay taxes.
“Hey, why did you sell that stock? Now, we have to pay gains,” says the investor.
“Yes,” say I, “ and a blessing it is to pay them.”
My job, as an investment advisor, is to take the gain at the target sell price, not time the market. Tax advisors who advise their clients not to take the gain should be legally liable for the losses when the stock declines.
From the day of the gain taken, there is not a valid method, on that day, that will indicate what will happen next.
Both types of angst are based on the psychology of opportunities foregone that the investor feels. My approach to dealing with these feelings is to always send a stock chart of when I bought the stock, and when I sold it, and ask the client to please keep a record of what happens next, which tends to take the investor’s mind off of the angst.
The Technology Stock Advisor Disclosure:
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
We offer investment advice in our newsletter based upon our understanding of how the US economy responds to changes in income and profits. Our investment strategy directs attention to the flows of knowledge into technology industrial sectors, primarily SIC 25 – 39. We tend to focus on economic indicators that indicate to us how capital markets are working in the current time period for technology stocks.
Once we have identified a pool of likely stock investment candidates from our economic screening methods, we apply components of the Graham and Dodd securities analysis to come up with a smaller list of stocks that meet our criteria.
Together, the economic screening and the subsequent stock analysis make up the patented methodology we deploy to make investment decisions in our newsletter and to our investment management of investment accounts.
We are especially interested in predicting how current investments in technological innovation creates new flows of income and new future markets.
We believe that changes in incomes and profits today are translated into future capital investments, which hopefully, several years later, will lead to increased economic demand and new markets.
Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
We target our investments today into the industrial sectors and individual companies whose financial ratios fit our investment methodological framework. While our methodology for portfolio management is patented, it is not foolproof or guaranteed to result in investment success.
The Technology Stock Advisor Weekly Advice Column The Week of Monday, July 14, 2008, Thomas E. Vass www.technologystockadvisor.Bonds and Stocks
Introduction: When to Buy Bonds?
Today’s question comes from Kiplinger.Com. A reader asks about the idea of just portfolio of bonds. The question concerns what to do in his IRA account if the economy markets continue to get worse and worse.
Here is the Question:
Bond Market and Bond Portfolios? Instead of stocks?
I'm curious if it's viable (lack of returns compared to stocks already being the obvious) just on the bond market the way one would normally focus on the stock market?
Buy Bonds At the Same Time That You Buy Stocks
Bonds are an essential ingredient to investment success over the long run, (more matched with investments in stocks. It does not matter if the bonds are held in exactly the stocks, but in the case of the reader, the IRA should hold both stocks and bonds.
Buy Only Investment Grade Bonds
Most individual investors do not have the experience to buy less than investment issued by high quality large companies. Investment grade means bonds rated by very high quality in terms of repayment of principal and payment of interest.
Bonds are a form of debt, where the investor is loaning the company money. Some than others, and the judgment of risk requires a high level of sophistication.
Generally, both investment grade corporate bonds and bonds issued by governments grade.
Buy Bonds Through a Closed End Bond Trust
Most individual investors will not have the ability in smaller investment accounts bonds. If the account has enough capital, buying individual bonds makes sense, broker that is trustworthy.
In the smaller accounts, like the IRA, the investor should seek bond units issued Much good research on the closed end bond trusts is available at ETF Connect.
The bonds from the closed end trust need to be put on dividend reinvestment.
T
he Technology Stock Advisor Weekly Advice Column For
The Week of Monday, July 07, 2008
How To Invest In a Bear Market: Is This The Right Time To Begin Investing?
A Lost Decade?
In his recent blog in the WSJ, entitle Lost Decade, Mark Gongloff noted that the most recent 10 year period had negative returns in the stock market. He wrote “If you’re at the beach house this weekend and Uncle Ned tries to tell you stocks are a good long-term investment, counter with this, then have another strong margarita: Adjusted for inflation and dividends, the return on the S&P 500 was negative for the decade that ended on June 30.”
We think Uncle Ned is right about investing. Over the long-term, investing in stocks is the right thing to do. But, what about the idea of starting right now?
When To Begin Your Lifetime of Investing
The question for today’s TSA advice column comes from a stock column on AllExperts.
Question
Me and my wife own a cafe. The hours are long and hard but the bills are paid. I had a customer tell me little bit about stocks and how if you do it right it can be a good investment. Whats the best way to start or try it?
The best time to start investing is when you first organize your family budget to set aside 10% of each paycheck to invest.
The best way to start is with an investment plan that tells you how much you should be investing today in order to retire in the future.
How To Start Investing
You start the investing program by setting up the initial asset allocation plan. For a middle age couple who run a café, I would recommend an asset allocation of 20% Government Bonds, 20% Investment Grade Corporate Bonds, and 60% US Common Stocks.
At TSA, we call this allocation the Equity Income Asset Portfolio.
In the case of the question, it is unlikely that a novice could pick individual stocks and bonds, so the best way to begin is with 3 different mutual funds that reflect the asset allocation goals.
Each month, 20% of the income available for investment is sent to the government bond mutual fund, and all interest income and capital gains are put on dividend reinvestment.
Each month, 20% of the income available for investment is sent to the corporate bond fund.
Each month, 60% of the income available for investment is sent to the common stock fund.
The More Important Question is How To Learn From the Experience
The café owner needs to learn from the experience of investing with the pros at the mutual funds. That means doing homework every time the mutual fund sends literature to read.
The homework is designed to begin the process of understanding what the pro is buying and why. In other words, it is a process of reverse engineering, trying to figure out the mutual fund’s investment methodology.
In the case of common stocks, the café owner would pick out 2 or 3 stocks, and begin investigating them and watching their price history every day.
Eventually, the café owner would begin buying small amounts of individual stocks, outside of the mutual fund. The investment strategy would be aimed at buying the stocks low, and selling them high.
At TSA, our newsletter sets the buy and sell price targets for the investors. We do most of the heavy lifting and leave the lighter loads to the readers of the newsletter.
Investing In a Bear Market?
At TSA, we do not believe any investor can “time” the market. We know it is a bear out there, and we know that one day, the bear will turn into a bull. On that magical day, you must have your money invested to be a part of the market.
Our advice to the café owner: Dedicate part of your income to investing during this bear, and keep your assets diversified, and keep your powder dry.
The Technology Stock Advisor Disclosure:
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
We offer investment advice in our newsletter based upon our understanding of how the US economy responds to changes in income and profits. Our investment strategy directs attention to the flows of knowledge into technology industrial sectors, primarily SIC 25 – 39. We tend to focus on economic indicators that indicate to us how capital markets are working in the current time period for technology stocks.
Once we have identified a pool of likely stock investment candidates from our economic screening methods, we apply components of the Graham and Dodd securities analysis to come up with a smaller list of stocks that meet our criteria.
Together, the economic screening and the subsequent stock analysis make up the patented methodology we deploy to make investment decisions in our newsletter and to our investment management of investment accounts.
We are especially interested in predicting how current investments in technological innovation creates new flows of income and new future markets.
We believe that changes in incomes and profits today are translated into future capital investments, which hopefully, several years later, will lead to increased economic demand and new markets.
Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
We target our investments today into the industrial sectors and individual companies whose financial ratios fit our investment methodological framework. While our methodology for portfolio management is patented, it is not foolproof or guaranteed to result in investment success.
The Technology Stock Advisor Weekly Advice Column For The Week of Tuesday, July 01, 2008, Thomas E. Vass
Understanding How The Speculative Collusion In The Oil Markets Drives Up The Price of Gas
The Case of Brutal Republicanism
Introduction:
President Bush came to Washington making two promises. First, he promised that he would “change the tone” of politics in America by not engaging in partisan sniping. Second, he promised he would provide “compassionate conservatism” that would endeavor to use public policy in way that would not harm the financial interests of non-wealthy Americans to the betterment of the rich.
President Bush has been strangely silent the past 6 months as oil and gas prices skyrocketed He changed the tone of politics by refusing to speak about the oil speculation and substituted a form of brutal republicanism for his compassionate conservatism.
The way the President could kill the speculative bubble is to announce that the resources of government are going to be used directly on the failure of the market system to deliver the huge supplies of oil to the market. Any announced policy, even just the hint of a policy, that aimed at increasing the expected future supply of oil would immediately kill today's speculative price.
Any oil policy that President Bush announced today that aimed both increased the future supply of oil, or aimed at reducing the future demand for oil in the U.S. or elsewhere, would lower prices and increase consumption today. The policy does not have to be implemented to kill the speculative bubble, it just needs to be announced.
What has transpired in the oil commodity future markets in Chicago and New York is a brutal assault on the American consuming public. It is an assault without justification and without economic rationale. Any American professor of economics who claims that the current oil market collusion is just the “workings of the free markets,” needs to be taken out back and shot.
Collusion is not how free competitive markets work. This is brutal republicanism in the form of massive collusion to artificially limit supplies between future traders and oil companies. American citizens need to be taught the truth about how the collusion works, not told some fairy tale that provides political cover for the American Republican Party to continue to do nothing to stop the speculation.
Berko Gets It Right.
This week’s TSA advice column topic comes from Malcom Berko, who once again, nails it. A reader to Berko’s column asks:Dear Mr. Berko: Why has the price of oil has doubled in the past year? I would like to know if Big Oil (Chevron, BP, Exxon) are the culprits or if firms like Merrill Lynch, Citigroup, their traders and their hedge funds have fixed the market. And if they have, why doesn't Congress and the Commodities Futures Trading Commission step in? P.S., Louisville, Ky.
Understanding the Cash Market for Oil
There are two markets that are tied together and work in tandem. There is the cash market, where consumers meet producers. And, then, there are the futures markets.
The cash markets have existing huge supplies of oil that are already tapped and ready for delivery in the cash markets. The world is awash with oil that could be delivered to the cash market.
Berko describes how the collusion in the two oil markets work to enrich the current producers.
Berko responds:
Dear P.S.: “ExxonMobil Corp. (XOM-$88.04) owns 29 billion barrels of proven reserves at an average cost of less than $5.50 a barrel. And at today's price of $130 a barrel, XOM's combined oil patches are worth a cool $3.8 trillion -- and that's trillion with a "T." Chevron has 9 billion barrels of reserves, Total SA owns 6 billion, Royal Dutch Shell has 3.5 billion, Conoco owns 4.1 billion and BP claims more than 10 billion barrels of oil. And at $130 a barrel that's a lot of trillions with a "T." For the first six months of 2008, the largest U.S. oil companies reported over $80 billion in net income.”
In other words, the oil companies are sitting on huge supplies of oil and do not need to do anything in order to foster the collusion. Vast quantities of new oil is being found every day that would add to the current supplies that are idly sitting in the ground. Every day the oil companies delay pumping and producing gas, they make trillions of dollars.
Understanding the Futures Market for Oil
It costs an average of $12 a barrel to pump oil out of the ground and get it delivered to the refineries. The highest cost in the world, in the harshest environmental conditions is about $18 per barrel.
Any price over $40 per barrel, delivered to the final demand cash market is excessive.
Any price over $75 is brutal.
The futures market is setting the price at $145 per barrel for delivery in six months. In other words, the future markets open a price window six months out in the future, and that becomes the current cash market price.
The Arabs are exactly right when they say that the current oil price is being manipulated by the Americans.
They should know because they are part of the collusion. The parties to the collusion are intertwined all the way from joint ownership of the Arab oil cartels and American oil companies to the retail markets. This is not simply the workings of a cartel called OPEC. This is collusion between OPEC, Big Oil and the futures market. And, under the Bush Republicans, it is perfectly acceptable behavior.
The collusion is only illegal if it the American President found it to be in violation of the anti-trust laws, or perhaps the Racketeering and Corruption (RICO) laws, or the new anti-money laundering laws, all of which could apply to this case of Republican brutality. Under the Bush administration, the collusion is not illegal.
Big oil is working with Arabs hand in glove, to limit supplies, which are vast. That is how the oil collusion works in the futures market. Traders call this technique “cornering the market.” The producers limit supplies through collusion and let the traders in the futures markets drive the speculation.
There is not one thing about the supply of oil today, at $145 per barrel that is different than the supply of oil at $65 per barrel a year ago. The only difference is a President who is blithely ignorant and allows this form of brutal Republicanism to work its black magic by maintaining his silence.
My Advice About The Case of Brutal Republicanism
In my political past, I have been a conservative Republican activist in North Carolina because the Democrat corporate plantation political system needed a competitor. I am no longer a Republican because the Republicans are incompetent to offer a compelling vision of government.
I believe in limited government, maximum individual freedom, and free competitive markets. Republicans do not share my values.
I voted for President Bush, twice, because the choices on the other side were so abysmal.
My advice to you, and to myself, this week, is fairly simple. Do not ever vote for Republicans, again.
President Bush and the Republicans have unleashed an economic scourge on America. Bush did nothing to build the Republican Party on conservative principles. And, he is doing nothing to stop the oil collusion.
John McCain fancies himself as a “maverick” who operates outside of the 2 party system. McCain is not a conservative. McCain is, politically, nothing at all. The difference between Bush and McCain is that McCain has no idea how the collusion works.
The medicine of socialism preached by Michele and Barack Obama is bad news for America. But, nothing could be worse than the case of Brutal Republicanism we have now. Democratic socialism will kill the oil speculation because it will substitute socialism for collusion.
But, it will also have the beneficial effect of killing the brutal republicanism that is responsible for allowing the oil speculation to flourish under President Bush. And, their socialism may also kill the Republican Party, not entirely a bad thing.
Disclosure:
We offer investment advice based upon our understanding of how the US economy responds to changes in income and profits. Our investment strategy directs attention to the flows of knowledge into technology industrial sectors, primarily SIC 25 – 39. We tend to focus on economic indicators that indicate to us how capital markets are working in the current time period.
Once we have identified a pool of likely stock investment candidates from our economic screening methods, we apply components of the Graham and Dodd securities analysis to come up with a smaller list of stocks that meet our criteria.
Together, the economic screening and the subsequent stock analysis make up the patented methodology we deploy to make investment decisions in our newsletter and to our investment management of investment accounts.
We are especially interested in predicting how current investments in technological innovation creates new flows of income and new future markets.
We believe that changes in incomes and profits today are translated into future capital investments, which hopefully, several years later, will lead to increased economic demand and new markets.
Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
We target our investments today into the industrial sectors and individual companies whose financial ratios fit our investment methodological framework. While our methodology for portfolio management is patented, it is not foolproof or guaranteed to result in investment success.
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
The Technology Stock Advisor Weekly Investment Advice Column for June 23, 2008
Understanding Stock Performance: Claims vs. Reality. Thomas E. Vass
Introduction: Fantastic Performance?
This week’s advice topic comes from a letter to Malcom Berko about stock performance. I liked Berko’s 4 point questionnaire to ask about stock market performance:
In response to the reader’s question about stock investment performance that seemed too good to be true, Berko says:
" I'd like to ask you four simple questions.
1. If those boys can make 50 percent a year, why are they wasting time selling their secrets at $3,000 a pop to suckers like you?
2. How come those results are not audited according to accepted accounting practices?
3. What is the truthful business background of those two birds who claim they averaged 50 percent a year for a decade?
4. How come not a single one of the 15,000 mutual fund managers, portfolio managers, pension fund managers, hedge fund managers, securities analysts or professional traders here or overseas uses the iDayo system?
Verifying Claims on the Internet?
The historical returns in question were in the range of 50% per year.
Here is the question from the reader:
These people are magicians and you can verify all these claims on the Internet by going to www.idayo.com. Please tell me if you can find a hole in their work because if you can't find fault with iDayo, I'm going to subscribe to their program and hopefully begin to make some decent money.
The subscription price is $3000.
Is There A Better Way To Find Reality? Ask For Time-Weighted Returns of Real Accounts
Time-weighted means that the inflows of money into the account, and the date of purchase and the date of sales are all accounted for in the preparation of the investment performance.
This time issue is important because most investment performance is provided on an annualized basis. If a stock is held for 3 months, and then sold for a 20% gain, for example, the annual return would be 80%.
If the same stock had been held for 3 years, and then sold for a 20% gain, the annual return would be about 6%.
Most money managers and mutual funds use statistical packages to compute their time weighted returns, but be sure to ask for actual real life customer accounts, and not hypothetical accounts based upon "What-If" scenarios.
Ask For Independent Verification of The Returns by Outside Auditors
Companies who have stock that trades in public markets are required to report their income so that investors can see how the company is doing. But, what happens if the company lies about its income?
The SEC requires that the income statements of companies be audited by outside accountants, who use elaborate statistical methods to judge whether the financial numbers are real.
Stock advisor and money managers also have outside auditors examine their performance claims. There are many methods in use to verify the claims of money managers, and the fellow who wrote in the question to Berko should have asked the guys at iDayo for their AIMR report.
AIMR is an international reporting and presentation standard that outside auditors use to verify investment performance numbers.
If It Sounds Too Good To Be True…
One of the great things about the free enterprise system is that there are no FREE Lunches. Real returns on stocks in the S&P 500 over a long period of time are around 10 – 12% per year. That would be FANTASTIC returns.
Investments by venture capitalists in the most risky pool of private companies, over a long period of time, are around 25%, but that figure is open to speculation because private returns are never audited.
Any claim over these historical standard returns are too good to be true.
The Technology Stock Advisor Weekly Investment Advice Column for June 9, 2008
The Technology Stock Advisor Weekly Investment Advice Column for June 16, 2008
How Long Do You Hold A Stock? The TSA Version of Buy and Hold
Introduction:
The main idea of investing in stocks is to make a capital gain profit by buying low and selling high. How long to hold a stock depends on the movement in the stock price, not the duration of time it is held. The idea is to pull the trigger when the gain occurs, whenever that moment arrives.
It is also important to keep the goal of profits firmly in mind when considering taxation issues. The goal of investing is not to manage the tax bill. The goal is to make as much profit as possible, knowing that all profits are going to be taxed. Profits drive the stock investing method, not tax strategy.
The buy and hold strategy is the right idea but needs to be a management approach, not a inflexible rule. There are important considerations during the holding period that guide the decision about taking the gain.
The BusinessWeek Version of
BusinessWeek’s advice nicely captures the nuances of the buy and hold strategy:
The "buy and hold" approach to investing in stocks rests upon the assumption that in the long term (over the course of, say, 10 or more years) stock prices will go up, but the average investor doesn't know what will happen tomorrow. Historical data from the past 50 years supports this claim. The logic behind the idea is that in a capitalist society the economy will keep expanding, so profits will keep growing and both stock prices and stock dividends will increase as a result. There may be short term fluctuations, due to business cycles or rising inflation, but in the long term these will be smoothed out and the market as a whole will rise. Two additional benefits to the buy and hold strategy are that trading commissions can be reduced and taxes can be reduced or deferred by buying and selling less often and holding longer. Some proponents of the buy and hold strategy of investing often believe in the Efficient Market Hypothesis or the Random Walk Theory.
The BusinessWeek advice tends to set a 10 year time horizon to view the stock holding period. There is some economic research that can fine-tune this large period of time.
What The Evidence Shows
In the presentation on their stock market research, entitled, Corporate Innovation, Price Momentum, and Equity Returns (November 8, 2004, 1st Annual UBC Finance Conference), Maria Vassalou and Kodjo Apedjinou were primarily interested in the relationship between innovation and stock price appreciation.
They did not realize that there is a deeper connection to the issue of technological innovation than the one they were able to document. What they found was that "Corporate Innovation (CI) contains important information about expected equity returns."
They came up with evidence that supported the contrarian strategy as it related to innovation:
"Whereas (stock price) winners outperform losers in horizons of six to twelve months, they tend to under perform losers in horizons of three to five years. This last observation, attributed to DeBondt andThaler (1985) is the base for the contrarian strategies. As the term implies, contrarian strategies aim to buy securities that performed poorly (TSA note: Buy Low) in the past and short securities that did well. The holding period for such strategies is typically 3 to 5 years. (TSA note: Sell High)."
Their research tends to support the idea that the usually holding period for a stock is about 3 years.
The Innovation Connection
They hit upon the key relationship between innovation and stock market prices of innovative companies. In the short, one-year horizon, the stock price of an innovative firm tends to outperform the less innovative firm. But, the process of innovation can only deliver gains for a short period of time because competitors see what the innovative firm is doing and copy their ideas.
The forces of innovation tend to erode the initial stock market gains of the innovative firm. Applied to the TSA holding period advice, this would mean to watch the stock price of the innovative firm and take the gain during a 12 month holding period.
As Vassalou and Apedjinou state, "top levels of CI may not be sustainable over very long periods of time as Table 10 reveals. Successful ideas are often imitated by competitors, leading innovators to lose part of their competitive edge."
The TSA Buy and Hold Strategy
The initial set of companies that were termed "losers" by Vassalou and Apedjinou are eventually going to be winners, but it is going to take them about 3 years to become the new winner. During that period of time, their stock price is going to slowly appreciate from a very low price.
During the last 12 months of this 3 year period, the winner’s stock price will gain at a much faster pace, according to the research evidence. During this period of time, the loser’s price will look very anemic compared to the winner’s price movement.
Then, the winner’s stock price will decline and, all things being normal, the loser’s stock price will enjoy about 12 months of relatively fast price appreciation.
The main idea is to own both the winner and the loser’s stock three years before this event. In other words, the holding period, especially for technology stocks is generally about 3 years.
Sometimes, events occur more rapidly, and the holding period is dramatically cut short. Other times, really bad things happen to good companies, and the stock price goes way down.
However, as a general piece of advice, the holding period is about 3 years, and when this holding period is combined with the statistical evidence on the Sell Price Target, (when to pull the trigger), an investment strategy that makes good business sense can be implemented by ordinary investors.
Disclosure:
We offer investment advice based upon our understanding of how the US economy responds to changes in income and profits. Our investment strategy directs attention to the flows of knowledge into technology industrial sectors, primarily SIC 25 – 39. We tend to focus on economic indicators that indicate to us how capital markets are working in the current time period.
Once we have identified a pool of likely stock investment candidates from our economic screening methods, we apply components of the Graham and Dodd securities analysis to come up with a smaller list of stocks that meet our criteria.
Together, the economic screening and the subsequent stock analysis make up the patented methodology we deploy to make investment decisions in our newsletter and to our investment management of investment accounts.
We are especially interested in predicting how current investments in technological innovation creates new flows of income and new future markets.
We believe that changes in incomes and profits today are translated into future capital investments, which hopefully, several years later, will lead to increased economic demand and new markets.
Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
We target our investments today into the industrial sectors and individual companies whose financial ratios fit our investment methodological framework. While our methodology for portfolio management is patented, it is not foolproof or guaranteed to result in investment success.
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
Buy and Hold
KUDOS In Order For Malcom Berko on Business Development Companies
Introduction:
The American economy is in trouble and the best solution is a high rate of investment in new high tech companies. Hopefully, the companies created today will add new employees in about 3 years. Most of the new high tech companies have less than five workers until then.
Most high tech companies need growth capital, or sometimes called “seed” capital to get started, and a group of investors called Venture Capitalists, (VCs) make much of these investments.
At age 3, the venture capitalists become anxious for an “exit event,” and either sell the company to a bigger player, or, in very rare cases, take the company public in an IPO.
In their research on exit events, “Stock Exchange Markets for New Ventures,” Cécile Carpentier, Jean-François L’Her, and Jean-Marc Suret (April 2008) discuss this waiting period for both U. S. and Canadian companies. “The average time before IPO exits (success) for VCs is estimated at about 3 years in
the U.S. (Cumming and Johan, 2007; Giot and Schwienbacher, 2007), and at about 2.45 years in Canada (Cumming and Johan, 2007). We estimate a mean time to graduation of 5.02 years (standard deviation of 4.29 years), while the median is 3.45 years. The time to graduation is twice as long for TSXV successes as for VC exits by IPO, which is consistent with our proposition 2b.”
For them, the term “graduation” means moving from the private stock exchange to the public stock exchange in Canada. In America, there is not organized public exchange for private company stock, but there is private company stock held by a special type of public company, called a Business Development Company (BDC).
A better solution than an IPO, if the goal is economic vitality is to have a little company grow into a very big company. However, growing a little company into a big company does not provide a profitable exit for the VCs, and thus, there is a conflict of interest between what is good for the economy and what is good for the pocketbook of the VCs.
That is one reason why the American investment model of BDCs is so important to correcting the current economic dysfunction in the U. S. But, even if the small companies could obtain growth capital, there is a lag in time before they create jobs.
Research from “Success Factors in New Ventures: A Meta-analysis,” by Michael Song, Ksenia Podoynitsyna, Hans van der Bij, and Johannes I. M. Halman (2008) detail this issue. They write, “ In our most recent empirical study of 11,259 NTVs established between 1991 and 2000 in the United States, we found that after four years only 36 percent, or 4,062, of companies with more than five full-time employees, had survived. After five years, the survival rate fell to 21.9 percent, leaving only 2,471 firms still in operation with more than five full-time employees.
Berko Gets It Right With A Gutsy Call
Malcom Berko writes a syndicated column on stock investing. In his May 29, 2008, advice column he answers the following question from a reader about BDCs.
May 29, 2008
Dear Mr. Berko: Please tell me what a business development company is. I have between $25,000 and $30,000 that I would like to invest in a dozen or so that have dividend yields higher than 10 percent.
W.E., Des Moines, Iowa
Berko wrote back and advised the reader to invest in 3 publicly-traded BDCs. It is such a delight and relief to see a widely-read columnist give this gutsy advice.
I suspect that most advisers would have ducked. For the country’s sake, ducking does not work any more.
The TSA Stock Advice on BDCs
If you have a family income over $200,000 per year, and have an existing investment account that is well-diversified, then I think you should create a second investment account, and invest in BDCs.
Like Berko’s advice on diversification, I would advise investing in at least 5 different companies, and in at least 3 different industrial sector BDCs.
I would not recommend investing in real estate BDCs, and I would not recommend BDCs that invest in outside hedge funds, but rather find BDCs that direct investments to small innovative companies.
Your overall investment returns should be better, after 5 years, than your comparable returns on publicly-traded companies.
Disclosure:
We offer investment advice based upon our understanding of how the US economy responds to changes in income and profits. Our investment strategy directs attention to the flows of knowledge into technology industrial sectors, primarily SIC 25 – 39. We tend to focus on economic indicators that indicate to us how capital markets are working in the current time period.
Once we have identified a pool of likely stock investment candidates from our economic screening methods, we apply components of the Graham and Dodd securities analysis to come up with a smaller list of stocks that meet our criteria.
Together, the economic screening and the subsequent stock analysis make up the patented methodology we deploy to make investment decisions in our newsletter and to our investment management of investment accounts.
We are especially interested in predicting how current investments in technological innovation creates new flows of income and new future markets.
We believe that changes in incomes and profits today are translated into future capital investments, which hopefully, several years later, will lead to increased economic demand and new markets.
Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
We target our investments today into the industrial sectors and individual companies whose financial ratios fit our investment methodological framework. While our methodology for portfolio management is patented, it is not foolproof or guaranteed to result in investment success.
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
The Technology Stock Advisor Weekly Investment Advice Column for June 2, 2008
The Perils of Trading Stocks Without A Method,
Thomas E. Vass
An Investment Method versus A Stock Trading System
We always advise our clients to complete two important tasks before they start investing:
- Define your risk tolerance number by completing a Risk Profile assessment.
- Use your risk tolerance number to establish the right asset allocation for your Investment Policy Statement (IPS).
The two steps are part of a bigger business plan for investing for individuals that helps guide the selection of stocks and bonds into an investment account.
Within each investment category, such as stocks, there are many types of stocks from stable, safer stocks to more volatile stocks. One good way to judge the riskiness of stocks is to assign a statistical range around the average price.
Generally, but not always, a decline in a stock 40% from the buy price would explain about 99% of the range of movement in the stock price.
Translated to a stock trading system, if an investors’ risk tolerance indicated a comfort level that at any moment in time during his holding period, he would absorb a 40% loss, than buying a risky stock would make sense.
Harold Needs A Good Stock Trading System
Today’s question is from Harold, over on Kiplinger. Harold says that recently he has incurred some losses, and asks readers to give him some advice. Let’s look at Harold’s statement:
I had been trading in stocks for a while and had been good with them. But recently have been facing a bit trouble from the market and have incurred some losses. I am looking for a system that helps me to judge the right kind of moves in the stock market and prove as a guide to smart investing.
The Right Kind of Moves
I never assume that the most important investment goal is maximum capital gain in the shortest period of time. Rather, what I assume is that investors have some idea of how long they can invest before they need their capital back.
Usually, if it is a longer period of time, the right move is an equity income asset allocation of 20% Government Bonds, 20% Corporate Bonds, and 60% common stocks, some of which may be the riskier, smaller, high technology stocks.
This would be a smart asset allocation for Harold, if he has longer than 5 years as an investment horizon, because, usually, but not always, a stock may take as long as 3 years to reach a maximum selling price.
The Right Kind of Stocks
Let’s make believe for a moment, that Harold took this advice, and diversified his investments into the three asset categories. Then, after that, would kind of stocks should Harold buy?
The historic average rate of return on common stocks drawn from the 500 largest companies in America would generally be about 10%. In some 10-year periods of time, the historic average return is higher.
For comparison, the historic average return on private company stocks, the types owned by venture capitalists would be around 25 – 30%. The venture capitalists lose big on most of their investments, with as much as 50% of their investments being written off in the first 3 years.
Harold should target a rate of return for all of his stocks of around 10%. Harold should own at least 20 individual stocks in his account. Of those 20 stocks, 12 should be drawn from the universe of the S&P 500. The remaining 8 stocks should be drawn from the Russell 1000.
The TSA Patented Method of Stock Selection
We never load up on the riskier stocks in a client’s account, no matter what the client tells us. It is just too risky.
On the other hand, we know a good thing when we see it, and that means knowing when to pull the trigger to take a gain. What should Harold’s number one rule be for his stock trading system?
One piece of wisdom is that you will never go broke taking your gain. Harold needs to learn how to set his sell price target for his gain, and most importantly, set his sell price for a loss.
Disclosure:
We offer investment advice based upon our understanding of how the US economy responds to changes in income and profits. Our investment strategy directs attention to the flows of knowledge into technology industrial sectors, primarily SIC 25 – 39. We tend to focus on economic indicators that indicate to us how capital markets are working in the current time period.
Once we have identified a pool of likely stock investment candidates from our economic screening methods, we apply components of the Graham and Dodd securities analysis to come up with a smaller list of stocks that meet our criteria.
Together, the economic screening and the subsequent stock analysis make up the patented methodology we deploy to make investment decisions in our newsletter and to our investment management of investment accounts.
We are especially interested in predicting how current investments in technological innovation creates new flows of income and new future markets.
We believe that changes in incomes and profits today are translated into future capital investments, which hopefully, several years later, will lead to increased economic demand and new markets.
Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
We target our investments today into the industrial sectors and individual companies whose financial ratios fit our investment methodological framework. While our methodology for portfolio management is patented, it is not foolproof or guaranteed to result in investment success.All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
The Technology Stock Advisor Weekly Advice Column For May 28, 2008
Realistic Rates of Return
What Is Real?
One of my favorite stories was the Velveteen Rabbit, when the stuffed rabbit said he knew he was real because someone had hugged him so hard that the velvet had worn off of his nose.
Sometimes, when I see questions about real rates of return from investing, I think someone may need to have their nose rubbed hard, too.
A good example is the question submitted on the website Saving Advice by the investor who states that he has some “mad money” that he would like to invest and get double his money in one year.
Here is his question:
Investing for the little guy
“Lets say, for example, that I have $1000 in my mad money budget. Naturally, I'd like to double that over the next year or so. Without going into debt, how do I take such a small sum and invest it without buying stocks/bonds.”
Without Buying Stocks or Bonds?
The investment returns on stocks and bonds are one of the few places in the financial world where there is solid empirical evidence about performance over a long period of time.
Even if the investor who asked the question did not want to invest in stocks and bonds, the returns in that market provide a valuable benchmark to compare to other potential investments.
Since he wants to double his money, in one year, he needs at least a 100% gain on his $1000 investment.
How rare would that type of gain be in the stock market?
In his investment column, Ben Steverman compiles the list of stocks that doubled over “a couple of years.”
He begins his story by stating, “In my new story and slideshow today, BusinessWeek asked fund managers and other stock market gurus to recommend stocks they think could double in the next couple years. As I say in the article, it’s a tough task: Less than 100 stocks — out of almost 6,700 that trade on major U.S. exchanges — succeeded in doubling in the past year, according to data provider Capital IQ.
Return Rates and Risk
A realistic rate of return on S&P 500 stocks over a long period of time would be about 10-12%. For risky private companies, that do not trade on the public markets, the economists at the University of New Hamshire estimate returns for private investments for 2007 ranged from 20% to 40% .. http://wsbe.unh.edu/files/2007%20Analysis%20Report_0.pdfAlong the way to those rates of return, there is also a rate of loss. In any given 5 year period of time for the larger public stocks, there is a high likelihood that the initial investment could be down as much as 40%, or up as much as 40%.
For the private companies, there is about a 50% chance that the single private venture capital-backed company will go out of business in a three year period of time.
My Advice To The Investor
The term “mad money” is the right description of the idea that $1000 would double in one year.
One of the columnists wrote in to suggest that the investor open up an E Bay account and buy and sell goods online. Another suggested he go to Vegas and always bet on black on the roulette table.
I have a better idea: Buy a closed end government bond trust and put the dividends on reinvestment, and forget about the idea of doubling the amount in one year.
I would hazard a guess that my advice would result in about double whatever else the investor decided to do.
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing
tvass@technologystockadvisor.com
The Technology Stock Advisor Investment Advice Column For The Week of May 19, 2008©
Cash Flow Is King
Introduction: Our investment methodology is generally related to our understanding of how the US economy responds to changes in income and profits. Eventually, changes in incomes and profits are translated into capital investments, which hopefully, several years later, will lead to increased economic demand.
While not always the case, increased capital investments usually translate into increased stock prices, so we tend to focus on economic indicators that indicate to us how capital markets are working in the current time period. Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
The Concept of Cash Flow
A good idea for investigating the merits of a company as an investment target is to examine the cash flow from continuing operations over a three-year period of time. In this case, cash can be converted to funds for innovation in new products.
Where Does The Corporate Cash Come From and Where Does It Go?
The concept of free cash flow is an invention of accountants, who needed a way to describe what happens to profits after they became an asset of the company. Operational cash comes from net income, or profits. Cash also comes from investments the company may make in its investment accounts.
The TSA investment methodology examines a company’s free operational cash over a 3 year period to gain an impression of what the financial health of the company is. Short term fluctuations in cash flow are not
really very interesting data for making investments, but the longer term durability of positive cash flow indicates that senior managers are taking good care of the company’s assets.
Sometimes, the cash is used to pay investors a dividend on their common stock, which is a form of profit sharing. Bond holders and owners of preferred stock in the company are also due interest payments, which sometimes come out of the cash assets of the company.
TSA always wants to see if the company is sharing profits with investors because that is a good sign that senior managers understand the importance of treating investors fairly.
TSA is also very interested in seeing if the company is using free cash flow for investments in innovation or if the senior managers are using cash in ways that may not be beneficial to investors. One key indicator of a bad use of cash flow is when the cash is used to go on a company buying binge, especially if the company is buying assets that are not related to the company’s historical mission.
Cash and Debt
TSA watches both cash flow and corporate debt to gain an idea about how senior managers are financing corporate operations and corporate growth. Growth consumes cash in huge quantities, and sometimes, senior managers believe that the cash must be supplemented by debt to meet the demands of growth.
Assuming large amounts of debt is a negative indicator for a company’s stock, especially a high tech company. TSA watches the long term debt to shareholder equity ratio over a 3 year period, and if the ratio goes up dramatically in any quarter, the general rule for investing would be to eliminate the stock.
The Housing Bubble and The U.S. Economy
The housing bubble has caused economic distress in many sectors of the U. S. economy. At one point in mid 2006, economists had speculated that the economic effects of the housing bubble would be contained to a small part of the economy, but that hope was not realized.
On the other hand, parts of the economy, especially the nine high technology value chains are making good profits and delivering free cash flow to their cash asset accounts.
As long as profits remain positive and cash flows remain positive, also, making investments in those nine high tech value chains will continue to be a good idea.
Investing In Disruptive Technology
TSA Column May 15, 2008 ©
Disclosure:
We offer investment advice based upon our understanding of how the US economy responds to changes in income and profits. Our investment strategy directs attention to the flows of knowledge into technology industrial sectors, primarily SIC 25 – 39. We tend to focus on economic indicators that indicate to us how capital markets are working in the current time period.
We are especially interested in predicting how investments in technological innovation creates new flows of income and new future markets. We believe that changes in incomes and profits today are translated into capital investments, which hopefully, several years later, will lead to increased economic demand and new markets.
Then, if everything works out, we suspect that increased investments will affect the stock market prices of a set of industrial sectors which benefit the most in terms of economic activity related to increased economic demand.
We target our investments today into the industrial sectors and individual companies whose financial ratios fit our investment methodological framework. While our methodology for portfolio management is patented, it is not foolproof or guaranteed to result in success.
All investments have risks that you may lose your capital, and the past performance of stocks and investments is not a guarantee of future performance. There are no guarantees related to investing.
Investment Strategy Comment
What Happens Inside The Company Is Not As Important As What Happens Outside the Company
In her BusinessWeek.com article Don't Look to New Ideas for Growth (Insight January 17, 2007, ) Jeneanne Rae makes a counterintuitive point about the value of ideas that come from within a company’s bureaucracy. "Idea management" (inside the company) is fine, but it shouldn't be the starting place for innovation,” she states.
“If the primary pipeline for innovation is insider-generated ideas, you are guaranteed to have too many ideas to act upon successfully. A suggestion box approach is too easy to ignore. Exploration dollars get spread too thin to understand any level of corporate implication for the plethora of candidates, while the big ideas can remain hidden and underfunded if treated like all the rest.”
Rae points to examples of companies with successful innovations that had their innovation radar focused on the market. “Systemic innovators such as BMW, Starwood Hotels (HOT), Google (GOOG), and others recognize the value of new ideas that come from their ranks, but they don't place all their eggs in one basket. These companies have developed sophisticated market-sensing mechanisms that inform their innovation agendas.”
Fumble Forward
Clayton Christen makes a similar point in giving advice to large multinational corporations. In his Forbes article, How To Be A Disrupter (01.23.07), he and Scott D. Anthony suggest that, “Companies hoping to maximize the chances of realizing their innovative potential should seek to “fumble forward” down the disruptive path while constantly assessing how all competitors will respond to their approach... disruptive innovations trade off pure performance in favor of simplicity, convenience or affordability. Disrupters target customers who find existing solutions too expensive or too complicated. They offer “good enough” solutions at a lower price.”
Translation to Investment Strategy
Both Christensen and Rae write from the perspective of giving advice to existing corporations who seek to develop new growth platforms from developing innovative new products. Their advice to companies on managing the innovation process provides some kernels of advice for making investments in technologically innovative companies.
As the example of Vonage, that Christensen shows, everything about the disruptive technology and product could fit the framework, and the stock market could punish the company.
1.Avoid investing in the startups until they have 3 years of operational history. In The 10 Riskiest Businesses To Start Maureen Farrell points out that “While some two-thirds of small firms make it past the two-year mark, just 44% can hack it for four years, according to the latest data from the Bureau of Labor Statistics. And by "hack it," we're just talking survival rates here.
2.Watch their sales revenues from new products. S&P estimates that 2007 revenues in Medical Device Stocks will rise by about 11% to 12%, as improved pricing in orthopedics joins with slowing growth in the interventional cardiology category.
Robert Gold covers this group for S&P. Gold thinks that sales growth will persist in the spinal surgery, pain management, robotic surgery, diagnostic imaging, and diabetes management product areas. Sales in those established areas will most likely lead to product development in related fields, which Christensen would call a “sustaining innovation.”
There is some slight evidence that companies with the ability to use revenues from existing new products to fund future new products are likely to experience increased stock prices. It is risky because, as Christensen notes, “research suggests that innovators have at best a 10% chance of starting with the right strategy. That means companies must constantly adapt and experiment to find the right path to success.”
In other words, just because the company has converted revenues to new product development does not automatically indicate that the new product will find a new market.
3. Look for New Markets and Smart CEOs. Not much research is focused on how new markets are created. But, to hit the investment home run, an existing company today, must target a new market that does not currently exist.
That would mean that the company’s senior management had a strategy for leading the company away from the incumbent market to the new market. Adopting that strategy takes an unusual breed of cat. But, that is the cat you should be looking for when you are looking for a disruptive technology company today.
Summary
Disruptive technology companies have extensive business and social networks that feed them ideas about new technology. They have internal knowledge networks that analyzes this outside knowledge.
Disruptive technology companies have had success in selling existing products, and are
converting revenues today to fund new products tomorrow, even though those new products are going to
disrupt the company. The company that gets disrupted the most is the company that does the innovation.
Disruptive technology companies are led by CEOs who have a track record of managing disruptive companies. Look for these CEOs, because they are few and far between, but when you find one, keep careful notes on where she goes when she disrupts her current company.
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