This week, Berkshire Hathaway announced that Todd A. Combs would be joining Berkshire as an investment manager and likely successor to Warren Buffett in the role of chief investment officer. Mr. Combs is an obscure 39-year-old manager of the $400-million Castle Point Capital hedge fund based in Greenwich, Connecticut. Not much is known about Mr. Combs. As of this writing, the media still hasn’t been able to track down a photo of the new Berkshire investment manager. That’s remarkable in this day and age. We do know that Mr. Combs graduated from Florida State University and Columbia Business … [Read more...]
Stock Returns at Half the Risk
Including dividends, the S&P 500 is now up 7.5% YTD. Not bad. At a 7.5% compounded annual return, you would double your money every 10 years. But when you consider the volatility that stock market investors had to endure to earn that 7.5%, it doesn’t sound so compelling. Study my chart below. The grey line is the growth of a $100 investment in the S&P 500 at year-end 2009. To start the year, the S&P fell more than 4%. Then it rallied about 15% over the ensuing three months. When sovereign debt issues intensified in Europe, the index sold off sharply, falling more than 15% from its … [Read more...]
Are You Bullish?
The sentiment survey done by the American Association of Individual Investors (AAII) shows that individual investors are bullish on stocks. The AAII’s weekly investor sentiment survey asks members if they are bullish, bearish, or neutral on the stock market for the next six months. Last week, 47.1% of respondents were bullish, and only 26.8% were bearish. That’s a spread of 20 percentage points, which is high based on recent history. As you can imagine, the weekly investor sentiment survey can fluctuate quite a bit from week to week, so it is useful to look at a moving average. I smooth the … [Read more...]
A Steaming Stew of Toxic Bonds
With short-term interest rates pinned near zero and long rates moving downward on the prospect of more Fed money printing, conservative investors and savers are being starved of yield. These investors are busy scouring the investment landscape for opportunities to pick up yield. The hucksters and promoters smell opportunity. If it’s yield you need, Wall Street has you covered. The Street’s financial engineers have cooked up a steaming stew of complex structured products that promise all the income you could ever want. How does an 11% yield sound? Wall Street’s peddlers can set you up with a … [Read more...]
Vital Intelligence for Investment Success
If you read The Wall Street Journal or the Financial Times, you have likely heard about the “risk trade.” It’s a term journalists have been using with increasing frequency to explain the behavior of financial markets. You see, since the financial crisis struck, risky assets have either been rising together or falling together. There has been much less distinction among the returns of risky assets. You have days where either bonds are up or stocks, commodities, and risky currencies are up—it’s risk on or risk off. This recent phenomenon can be explained by an increase in the correlation among … [Read more...]
Stocks with the Highest Prospective Returns
For decades, I have advised my monthly strategy report subscribers to invest in stable companies with entrenched competitive positions, strong balance sheets, and a history of paying dividends. Many of the stocks I advise are considered high-quality stocks. What is a high-quality stock? There are varying definitions of quality. Standard and Poor’s generates quality rankings for stocks based on the growth and stability of earnings and dividends. Others include measures of debt and returns on capital. Most investors would consider stocks with consistent earnings growth, strong balance sheets, … [Read more...]
Don’t Miss This Opportunity
Long-term interest rates are at their lowest level in over four decades. Today, the Treasury can borrow money for 30 years at an interest rate of less than 4%. Adjusted for trend inflation, Uncle Sam is looking at a rate below 1%. Long rates of less than 4% are even more surprising given the sorry state of public finances and the vast supply of high-powered money sitting on bank balance sheets. The prospect of an oversupply of treasury issuance or rising inflation could send interest rates soaring. Long bonds would get crushed in such a scenario. Today’s ultralow long bond rates are a grave … [Read more...]
3 Reasons to Invest with Caution
At Young Research we maintain three cyclical stock price indexes—an early cyclical index, a late cyclical index, and a stable growth index. When evaluated together, the relative performance of these indexes versus the S&P 500 serves as a useful real-time indicator of the economy. The benefits of using asset prices as one gauge of the strength of the economy are that they are not subject to reporting lags, data is not revised, and there is no chance of modeling error. Asset prices are determined daily by the collective wisdom of millions of well-informed investors. These investors have … [Read more...]
A Risk Worth Taking
In today’s environment of low interest rates, there are few places to turn to add yield to your portfolio. Sure, you can tie up your money in 30-year Treasury bonds to lock in a 3.70% yield, but you will take it in the neck when interest rates rise. A 1% increase in interest rates will result in a devastating 20% price decline in 30-year coupon bonds. Not exactly the type of risk most fixed-income investors are looking to take. A better strategy for adding yield to your portfolio is to take prepayment risk on mortgage-backed securities (MBS). I am not talking about the toxic private label … [Read more...]
Which Portfolio Would You Rather Own?
Given a choice, most investors would rather own the portfolio represented by the blue line in my chart. But in reality, many own something closer to the portfolio represented by the black line. The black line tracks the performance of the S&P 500. The blue line tracks the performance of a balanced portfolio. The balanced portfolio is invested 30% in corporate bonds, 30% in intermediate-term treasuries, 30% in equities, and 5% each in gold and the Swiss franc. The balanced portfolio is also rebalanced annually. Over the last decade, my balanced portfolio earned a compound annual return … [Read more...]
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