I often write about diversification and the benefits diversification offers to investors. Diversification is said to be the only free lunch in investing. It allows you to lower risk, without sacrificing meaningful return. The basic concept of diversification is of course intuitive. Don’t put all your eggs in one basket. And don’t invest your entire portfolio in one security—that would be too risky. You want to spread your assets among many different securities. If one goes bust you only lose a little bit instead of everything. But there is more to diversification than spreading your assets … [Read more...]
Archives for July 2010
Global House Price Imbalance
According to The Economist, there are still six global real estate markets that are more than 30% overvalued. Australia shows the largest overvaluation at 61.1%, followed closely by Hong Kong and Spain. What happens when these market values return to fair value? Frightening. … [Read more...]
Get Yourself Some Debt
“Get yourself some debt” isn’t the advice you’d expect to hear from your financial advisor. But with interest rates at record lows it makes sense to continue carrying debt in the form of a refinanced 15-year mortgage on your primary residence or vacation home. One of the key advantages of debt is its defensive qualities against inflation. A dollar today locked in at these low rates goes at least as far tomorrow and could go much further in the not too distant future. I realize paying off a mortgage today with rates of return on treasury bonds so low can make sense, especially if you’re on a … [Read more...]
Ethanol Subsidies Four Decades Later – Still Wrong
Survival of the Fattest – Review & Outlook, The Wall Street Journal “The best refutation of the theory of the survival of the fittest is probably the corn ethanol lobby, whose annual $6 billion in federal subsidies have managed to outlive both its record of failure and all evidence and argument…CBO reveals that it costs taxpayers $1.78 in ethanol "incentives" to reduce U.S. gasoline consumption by one gallon…Given these realities, the only mystery is how an industry that produces a fuel that no one would willingly buy has managed to be subsidized over four decades at costs that are higher … [Read more...]
High-Octane Fuel for Stocks
Since I graduated from Shaker Heights High School in 1959, the most important driver of long-term stock market returns has been the direction of interest rates. Bonds compete with stocks in investors’ portfolios. When interest rates rise, the prospective return on bonds goes up. In order for stocks to remain competitive with bonds, their prospective returns must also rise. Prospective stock returns rise when prices and valuations fall. Think of the dividend yield on a stock. If you own a $100 stock that pays a $4 annual dividend, you are looking at a 4% yield. If the price of that stock falls … [Read more...]
An Alternative to Ultra-Low Treasury Yields
The short end of the yield curve remains punishing for investors. Yields on two-year notes are now below the lows reached at the height of the financial crisis, and five-year notes yield a scant 1.68%. Going out longer on the yield curve still isn't an answer to paltry yields, though. Long bonds are significantly overvalued from both long- and short-term perspectives. The low level of Treasury yields is both frustrating and maddening. Policymakers are attempting to recapitalize the banking system by engineering a steep yield curve. The Fed has essentially lowered the risk-free … [Read more...]
A Raging Bull Market in MLPs
The raging bull market in MLPs shows no signs of slowing. Since the S&P 500 peaked in October of 2007, MLPs have gained more than 33%, while the S&P 500 dropped 25%. YTD, MLPs are up 17%, compared to a loss on the S&P 500. … [Read more...]
Raters Now Liable for Mistakes
Bond Sale? Don't Quote Us, Request Credit Firms – Anusha Shrivastava, The Wall Street Journal “Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales…Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law…The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately…That is important because some bonds, notably those that are made up of consumer loans, are required by law to include ratings in … [Read more...]
Big Troubles in China
Hong Kong's Populist Turn – Review & Outlook, The Wall Street Journal “Hong Kong's prosperity was built on its economic freedom…So it's alarming to see the territory's leaders turning their backs on that tradition…Hong Kong became wealthy by resisting the statist fashions of the postwar West. It would be tragic if it adopted those fashions just as we are re-learning the damage they can do.” Chinese Banks: Informal Securitisation Increasingly Distorting Credit Data – Chu, Wen, and He, Fitch “Against this backdrop, the reported deceleration in lending in H110 (Chart 1) has received much … [Read more...]
Vanguard CEO’s Biggest Worry
You can probably count on one hand the people you trust to give you sound investment advice. For a number of reasons, talking about money even with them isn’t always the easiest thing to do, and often it’s worse than talking about religion and politics. Trust is paramount. Two companies that have gained the trust of individual investors are Vanguard and Fidelity (disclosure: Richard C. Young & Co., Ltd., invests in some Vanguard funds and uses Fidelity as a custodian for client accounts). Billions of dollars have poured into both firms while less desirable firms have dealt with net … [Read more...]