Questions Answered

     I mentioned in a previous post that some investors would be better-off putting their money in a portfolio of laddered CDs. The question has been asked several times "what's a laddered CD?" This is a very simple and timely concept, one that I personally am employing. You simply buy CDs in staggered maturities so that every year or so you have one that matures. This works well in an increasing interest rate environment like what we are experiencing now. The premise is that every time a CD matures your renew it at a higher rate, especially if you lengthen the maturity. Lets say I've saved up $50,000 and I want it in a safe and federally insured investment. I go to my favorite bank or credit union and tell my banker that I want to build a ladder of CDs. Then I ask about any specials they may be offering at that time. I always take advantage of specials if they meet my investment objectives. My ladder might look like this: $15,000 in a 1 year CD,  $20,000 in the 18 month CD which is their special bonus rate, and $15,000 in the 3 year CD. The staggered maturities does several things for me: it gives me a higher yield than just buying one short term CD, it gives me flexibility if I might need the money for something, and it allows me to renew at higher rates in the future. A new product being offered by banks is the "bump up CD". This CD allows you to increase the rate you are receiving on your CD one time during the life of the instrument. The trick here is to take advantage of this feature somewhere around the middle of the term. If you wait too long there won't be much time to enjoy the higher rate. It's important to not forget about your right to raise your interest rate, so mark your calendar to call the bank. Financial Institutions offer CD specials from time to time to increase their assets and capitol. Funds with a stated maturity are preferred because they won't fly out the door during any crisis. Specials don't last long because savers are hungry for yield and flock to them. When the bank meets it's capital requirement, the special is over. Knowing your money is safe and sound and insulated from any stock market shocks makes for a good nights sleep. Good night.

Go With What You Know

     There are two things in life that are certain: Death and Taxes. As a volunteer tax preparer, I often get asked "how long do I have to keep doing this". The elderly client thinks that at a certain age, they can stop paying taxes.Wrong! I usually respond with another question "How long are you going to live". Just like Uncle Sam wants his due each year, the Grim Reaper is also waiting for each of us. What does this have to do with investing? Well, investors are always looking for a sure thing, here it is. Every day, 10,000 Baby Boomers turn age 65. This trend will continue for another 10 to 12 years according to the Pew Research Center. By year 2030, fully 18% of all Americans will be age 65 or older. Younger generations need to think about investments that will benefit from this demographic trend. The first thing that comes to mind is the health care sector. Demand for health care will be very strong for the foreseeable future. The current uncertainty around Trump's Repeal and Replace legislation may create a buying opportunity for hospital stocks. Pharmaceutical stocks should also outperform during this period.  Insurance companies are filling my mailbox each day with offers to sell me a Medicare Supplement policy (they wouldn't do this if it wasn't profitable). A larger and larger part of our economy is going to be dedicated toward the aging Boomer generation.  Finally, the death of Boomers will also be a growth industry. There are about a dozen public companies that handle final arrangements for families of Boomers. One growing trend is cremation instead of traditional embalming, which saves money. One thing I didn't mention is the massive transfer of wealth to widows and children of the decedents. This should benefit financial companies that offer wealth management products like annuities, mutual funds, ETFs and management of funds.
     I have been writing  this blog for several months now and have had a good response in the amount of traffic to it. However, I am sure that by now I have confused some of you. There is a feedback feature with this Google blog and I would love to read some comments or questions. I try not to offer specific investment recommendations but like to point my readers in what I think is the right direction. So let me hear from some of you.

"I Want to Hold Your Hand"

     This song by the Beatles, first sung live on the Ed Sullivan Show in 1964, had the teenie bopper girls screaming and fainting with derision. Today,  this same song is being sung by a different group, called Full Service Brokers. The same girls who swooned to the Fab Four are now in their 70's and need help with their life savings. Many are widowed and not of entirely sound mind. They think they have found "a guy" who will always act in their best interests financially. WRONG! Most brokers are in the business for their OWN best interests. Are they all bad? No! If I were a broker, I would want a six figure income too! I would be reluctant to tell an elderly female client, who knows virtually nothing about finance, to take her money elsewhere and buy a laddered CD portfolio. But that is exactly what most seniors should do. It's not sexy, it has no bragging rights, and the current yields are low, but it's the right investment for many seniors. As a volunteer tax preparer, I see many cases where a senior has a brokerage statement (1099 consolidated) where there are 30 plus pages of transactions. Usually, the individual trades don't amount to much money, but the annual amount of proceeds is a major percentage of the person's portfolio. More often than not, a capital loss is the result of this "churning" of assets. Each trade generates a commission for the broker in addition to fees charged for "managing" the account. The client is usually oblivious to the scam. Not every widow has a son who likes to manage assets. I see my job managing Mom's money as simply protecting her from the Wolves of Wall Street. At 92 years of age, blind and with severe dementia, she needs some protection from these guys. Do I detest these Full Service Brokers? No. I actually use one for a portion of Mom's assets and also some of my assets. The key is that I carefully evaluate their recommendations before making a purchase. Managing a portfolio is like owning a home, you should have the skills and tools to do a proper job. If you have no stomach for finance, you should not own a stock portfolio, buy a low cost mutual fund with a good track record instead. Bottom line, hand holding in the financial world is expensive and can result in yearly stock losses so if you don't know an ETF from an ATM, then do yourself a favor and take your money to your local bank.

More Investing Ideas

     Over the past 40 years or so, I have developed many strategies or "themes". Some have proved profitable, some were losers and many were forgotten. One that has produced proven results and will most likely continue to outperform is investing in Spin-offs. A spin-off is the creation of a whole new company by a large corporation. The new company was a division of the parent company that was determined to be better-off as a stand-alone company. The shares of the new company are usually distributed to the existing shareholders as of a certain date. The share price is determined based on the amount of assets and the valuation of other business in that sector. As soon as the independent new company starts to trade on a stock exchange, the market will determine what the share price will be.Why would a large company decide to spin off one of its divisions? One obvious answer is that an activist shareholder like Carl Icahn takes a large position in the parent company and demands that they unlock shareholder value by spinning-off divisions that are not related to the core business. Another example could be that the spun-off company just was not profitable enough. What often happens is that the newly independent company is freed from the constraints of the larger corporation which allows it to pursue more profitable businesses. One reason that this presents an investing opportunity is because the new shares often drop in price and offer an attractive valuation compared to other companies in the same sector. Just imagine the many large mutual funds that hold shares of the parent company because the parent fit the investment objective of these funds. Now they hold a smaller company that possibly is not in the same sector. Many funds will sell the new shares because this new company does not fit their stated investment objectives. The selling causes the new shares to fall in price temporarily creating a short term buying opportunity. One study done in 2012 compared spun-off companies over 1 billion dollars in size to the performance of the S&P 500 index over a seven year span. The spin-offs almost doubled the performance of the  index. Is this strategy a sure thing? Of course not, there are many spin-offs that won't outperform. Make sure that the new company wasn't saddled with a ton of debt by the parent just to clean-up its balance sheet. A google search of  "corporate spin-offs" will reveal many examples to review. There is also an ETF which just invests in spin-offs, if you want to take a safer more diversified approach.

When to Let Go

     One of the hardest things about investing is the decision of when to sell a particular position. It's important to not let emotions enter this decision. One thing I agree with Jim Cramer about is the notion that when a stock appreciates, the investor should sell a portion of his position gradually, until the whole position is gain. This is because your initial investment has been returned to you, resulting in you playing with "house money". The danger here is that if the stock continues up rapidly, you will have fewer shares to profit from. Maybe its just me but I think being conservative will win out in the long run. Another reason to sell is if the reasons that you bought the stock in the first place are no longer valid. Remember the "theme" investing strategy from a previous post? Well themes don't last forever. That is why I write a new forecast each year. Sometimes themes last for several years and sometimes they are very temporary. Last year I noticed that everywhere I went, I saw young mothers with babies. It seemed to me that the baby-boomer's children were starting families and even their grandchildren were starting families. The one thing that most parents will spend money on is their kids. I decided to invest in the struggling toy company Mattel. With an 8% dividend and increased demand for their products, I had a good year holding Mattel. However, they could not compete with industry leader Hasbro so I sold out and moved on. I will continue to watch Mattel in the future for another possible buying opportunity. Just yesterday, I placed about seven limit orders to sell some of my holdings.A limit order allows you to name the price you are willing to sell at. I always use limit orders for all buys and sells unless there is some special circumstance. Why am I selling some shares? Actually, I am concerned about several things: increasing interest rates, high valuations, political unrest, changes in trade relations with our trading partners, and so on. I still believe in stocks but it just seemed like a good time to lighten up on some positions, It is also a good idea to look at your portfolio for some losing positions to offset your gains. The tax code allows capital losses to offset capital gains entirely and even up to $3000 excess losses over gains. Any losses above $3k will have to be carried over to the following year. In conclusion, with today's low cost brokerage commissions, selling is not the costly move it once was. Just consider your tax consequences and the timing of dividend payments or distributions.

Executive Compensation

     This may be my most controversial post to date. I'm writing about it because of a telephone conversation with my daughter about the recent Snapchat IPO and who makes money from these Initial Public Offerings. The conversation soon morphed into the high pay of top executives and specifically the CEO. As a guy who punched a timeclock his whole working career, and who always held stocks for investments, I have a unique perspective on this subject. First, I am not envious of the folks who draw huge salaries. Some actually are worth the millions they receive each year. Need some examples? How about Steve Jobs. He returned to Apple Computer after a series of CEO's tried to return the company to profitability, only he knew how to resuscitate the company he founded. Even years after his death, his vision lives on for the future of the company which has one of the largest market caps of all stocks. Jobs returned to Apple in 1997 and worked for $1 a year but by 2010 his stock compensation amounted to $1.2 billion. I can also remember the outrage over Michael Eisner's salary at Disney, however, the wealth he created for shareholders during his tenure justified his pay. History is littered with high paid executives who proved their worth by navigating their company through difficult or challenging times. There are also many CEO's who have managed to destroy wealth at an amazing rate. Unfortunately, they were also highly compensated. The good news is that the Board of Directors would usually can the slacker after giving him a reasonable amount of time. It's important to remember the huge responsibility these top exec's have to employees, shareholders, customers, and affiliated businesses. One boneheaded move could destroy thousands of jobs and billions in stock value. My point here is that the person leading the company you invest in, is just as important as the business itself. Since you can't personally know all the CEO's in your portfolio, diversification is the key to keep one jerk from spoiling your retirement. One guy who does get to know all his CEO's is Ron Baron who founded Baron Asset Fund. The annual report of this fund reads like a "Who's Who"of the business world. Although Ron has turned over management to an employee, I know Ron still has personal relationships with his top exec's. Ron's philosophy is that he invests in people first and businesses second. It has served his fund well. I am not recommending this particular fund because it may not be suitable for all investors, mainly because of high management fees, but the investment style has been a valuable lesson.