Blog posts on Investing

Posts selected fromManagement Blog - Engineering Blog - Investing Blog and other blogs

• Companies Trumpet Stock Buybacks and Act as Though Stock Givaways Don’t Matter

  "One of the things that annoy me as an investor is how happy the executives are to grant themselves huge amount of pay in general and stock in particular. The love to giveaway huge amounts of stock to themselves and their buddies and then pretend that isn’t a cost.

  Thankfully the GAAP rules changed a few years ago to require making the costs of stock giveaways show up on official earnings statements. Now, the companies love to trumpet non-GAAP earnings that exclude stock based compensation to employees."

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• Modified Cockroach Portfolio

  I think something along the lines of this would make sense today for someone living in the USA (but I would vary it a fair bit depending on the person’s situation and it would change in different market conditions)

  • 35% Total Stock Market Index Fund (VTSMX)
  • 15% Total International Stock Index Fund (VGTSX)
  • 10% Vanguard emerging markets fund (VWO), or something similar
  • 20% high quality “dividend aristocrat” type stocks
  • 10% REIT Index Fund (VGSIX) or direct real estate ownership
  • 5% bonds
  • 5% cash

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• Retirement Portfolio Allocation for 2020

  The markets continue to provide difficult options to investors. In the typical market conditions of the last 50 years I think a sensible portfolio allocation was not that challenging to pick. I would choose a bit more in stocks than bonds than the commonly accepted strategy. And I would choose to put a bit more overseas and in real estate.

  But if that wasn’t done and even something like 60% stocks and 40% bonds were chosen it would seem reasonable (or 60% stocks 25% bonds and 15% money market – I really prefer a substantial cushion in cash in retirement). Retirement planning is fairly complex and many adjustments are wise for an individual’s particular situation (so keep in mind this post is meant to discuss general conditions today and not suggest what is right for any specific person).

  This post was written before #covid19 became the enormous economic clamity it has become. Based on the poor preparation to fight Covid19 by the USA and Europe I sold some stocks and reduced global exposure and emeriging market exposure.  I didn't reduce it to zero or anything close to that, but as I say I am usually overweight stocks and I had reduced how much I was overweight due to high stock valuations and with the likely Covid 19 problems I further reduced stocks to make my portfolio probably even a little bit underweight stocks (but still over 50% stocks).

  I am more active than most people should be with their investments (I think it works for me but maybe I should be less active too, I just pay much more attention than most people and feel I can make some adjustments that are sensible.).

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• We Need to Consider Changing Conditions When Looking at Historical Stock Returns

  Just to over simplify the idea if lets say the market valued the average stock at a PE of 11 and everyone found stocks a wonderful investment. And so more and more people buy stocks and with everyone finding stocks wonderful they keep buying and after awhile the market is valuing the average stock at a PE of 14.

  Within the market there is tons of variation those things of course are not nearly that simple, but the idea I think holds. Well if you look back at historical data the returns will include the adjustment of going from a PE of 11 to a PE of 14. Now maybe the new few decades would adjust from PE of 14 to PE of 17 but maybe not. At some point that fundamental re-adjustment will stop.

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• Investing in Peer to Peer Loans

  As long as you have a well diversified portfolio of personal loans there is a long track record of the risk. And while plenty of risky personal loans will default, and more will default if the economy has a downturn the interest rates on the loans provides good income even after such losses. And even if things go poorly the actually losses of capital should be small (over the whole portfolio)...

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• Financial Independence Retire Early (FIRE) and Location Independent Working

  Combining FIRE and location independent work provides some valuable benefits. If you have some investments saved up that can be tapped as you travel that can meet some of your living costs, this aids on of the bigger challenges – how to earn money while you travel. And if you travel frugally you can reduce your costs (below what you speed where you used to live).

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• Interview with Investing Blogger John Hunter
  • Minimize costs on investments, use Vanguard or similar low fee funds. Buying individual stocks reduces even the costs of Vanguard. There are tradeoffs to diversity of your portfolio when buying individual stocks.
  • Pay attention to the overall risk of the portfolio, and even beyond that, your entire financial picture. For example, in the USA we have extra healthcare expense risk that is outside our portfolio risk, but is part of our entire financial picture. Building your portfolio with extra-portfolio risks in mind is wise.

   

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• Looking at Real Estate in This Challenging Investing Climate

  I continue to believe the choices for investors are much more challenging than they normally are, as I have written about several times. Though maybe soon, this will just be the new normal (in which case investors won’t have the fairly easy choices they have had for much of the last 100 years).

  In previous posts I have discussed the value of real estate investments in this investing climate. Real estate is one way to cope with the challenges of extremely low yields today.

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• Engineering Graduates Earned a Return on Their Investment In Education of 21%

  Engineering graduates earned a return on their investment of 21%. The next highest were math and computers (18%); health (18%); and business (17%). Even the lowest returns are quite good: education (9%), leisure and hospitality (11%), agriculture (11%) and liberal arts (12%).

  These returns look at graduates without post-graduate degrees (in order to find the value of just the undergraduate degree).

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• Management Advice from Warren Buffet

  Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%
  …
  A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.

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• Finding Great Investments Keeps Getting Harder

  In some ways investing recently has been pretty easy, anything you have bought (almost) goes up – and usually goes up a lot. But when looking for bargains to invest in, it just keeps getting more and more difficult in my opinion.

  ...

  Overall I am going much more into cash as a safe haven than I have before. Normally I am extremely overweight stocks. Even today I am still overweight stocks compared to the conventional wisdom

  ...

  While the markets are giving investors great returns finding good buys is becoming more and more difficult (at least for me). For example, my 10 Stocks for 10 Years (2018 version) has done very well. But several of those stocks are much less a bargain today that they were. Apple is up from $225 to $450. Danaher from $103 to $206. Amazon from $2,000 to $3,150. Tencent from $43 to $68...

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• US Savings Bonds – Actually a Good Investment Option

  I will admit I have only recently looked at US Savings Bonds as an investment option. Series I USA savings bonds are based on the inflation rate and given how strongly the Fed has been surpassing interest rates this offers an option to get a higher rate of interest.  The rate is calculated as follows:

  Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

  2.22% = [0.0020 + (2 x 0.0101) + (0.0020 x 0.0101)]

  This is calculated based on a fixed rate of .2% (showing how depressed interest rates are) and 1.01% inflation rate for a 6 month period (which also is low but compared to interest rates pretty high).

  You may buy series I US savings bonds online via TreasuryDirect. In a calendar year, you can acquire up to $10,000 in electronic I bonds.

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• Stock Buybacks, Giveaways to Executives and Non-GAAP Earnings

  One of the things executives like about non-GAAP earnings is they pretend the stock they give away to themselves doesn’t have a cost to shareholders. When you call attention to spending over $2 billion in the quarter to buy back 3.2 million shares it seems silly to then claim that the stock you gave away shouldn’t be considered as an expense.

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• Foreign Ownership of USA Stocks Reached 26% in 2015

  In 1965 foreign ownership of USA stocks totaled about 2%, in 1990 it had risen to 10% and by 2015 to 26%. That the foreign ownership is so high surprised me. Holdings in retirement accounts (defined benefit accounts, IRAs etc.) was under 10% in 1965, rose to over 30% in 1990 and to about 40% in 2015. The holdings in retirement accounts doesn’t really surprise me.

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• Science and Engineering Macroeconomic Investment

  The United States has benefited tremendously from the decisions to fund the National Science Foundation (as well as other investments in science) for decades. Other countries have seen the wisdom in those investments and seem to be committing much more to those investments than the US lately. I think it is very wise of them and will serve the world well. But I fear the United States has already allowed itself to lose a great deal of the competitive advantage it built up in the middle of the last century.

  In the last couple decades we have been able to coast on the lead we had. We could have many of the best minds come to our colleges and then keep them here once they graduated with advanced degrees. However, the lead we had is rapidly being eliminated. This does not mean the US will immediately be uncompetitive. But it will mean one of the great advantages we had will be greatly reduced.

  The United States still has competitive advantages that will continue to serve us well in harnessing advanced technology for economic gain. But others have been making strategic decisions to gain some of those advantages for themselves. And the United States will almost certainly continue to see its scientific and engineering leadership in the world erode. And the economic consequences will be dramatic.

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