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Financial Decisions – I Can See the Future

February 26, 2015

Not really.  But, I am pretty good at predicting what might happen if one course is taken over another with many investing and financial decisions.  This “skill” developed over many years of advising clients and being able to look back at the many things they’ve done and the results.  Experience, knowledge, time and the ability to apply the experience and knowledge to advise other clients can go a long way in making someone prescient.

Clients are individuals and have personal issues, desires, goals and feelings. They also have risk tolerances, investing prejudices and usually have limited knowledge in areas they are not intricately involved in such as investing.  The last part is what led them to me for either a review of their financial plan or to help them establish one.  And, this is where I can glimpse into their future.

While every plan is different, there are certain characteristics that can lead to success or otherwise.  An advantage I have is a professional charge and focus to help the client accomplish their goals and to attain the financial security they need and want.  I can see clearly when they choose to do something that won’t bring them toward their desired result and, likewise, when they do something that takes them in the wrong direction.

I can’t predict what stocks will go up and which way interest rates will go, but I can help with a plan that has the best chance of accomplishing a client’s goals.  Determining goals is a plan; reaching goals is a prognostication; but doing the wrong thing likely would result in an evident negative result.

I can see the future – most of the time it is pretty clear.  Doing wrong things usually does not work.  Doing the right things usually works.  There are no guarantees, but many people do not get a second chance, so try to do it right the first time.

Enron files for Bankruptcy

February 24, 2015

In his book MONEY: Master the Game, Tony Robbins dredges up the old Enron story, which I agree with, and want to call to your attention now.  Here is a brief listing copied from Tony’s book of the lauds Enron received right up until their bankruptcy filing.

Mar 21, 2001   Merrill Lynch recommends

Mar 29, 2001   Goldman Sacks recommends

Jun 8, 2001     J.P. Morgan recommends

Aug 15, 2001   Bank of America recommends

Oct 4, 2001     AG Edwards recommends

Oct 24, 2001   Lehman Brothers recommends

Nov 12, 2001  Prudential recommends

Nov 21, 2001  Goldman Sacks recommends (again)

Nov 29, 2001  Credit Suisse First Boston recommends

Dec 2, 2001    Enron files for Bankruptcy

Millions of Investors trusted these venerable firms and followed their recommendations.  A question I had at the time was, “How much work did they do before they made their recommendations?”  It could not have been too much since every recommendation was wrong.  Another observation is that many of the largest mutual funds had significant positions in Enron.

Now, let’s fast forward to today.  Has anything changed?  Were lessons learned?  Are more intensive analyses being done now before recommendations are made or additions to the mutual funds’ holdings?  I suggest that nothing has changed.  Examples are in the many recommendations to buy oil stocks a few months ago before a subsequent additional 35% drop.  Other recommendations are to buy intermediate term bond funds which provide cash flow less than inflation rates and are destined to drop as soon as interest rates increase, if they ever do.  It also seems many of the firms recommending these funds are incapable of offering viable alternatives.  Next, as Robbins points out, most actively managed mutual funds do not outperform the index they are trying to beat, yet management fees keep increasing.

Even today as we speak, brokerage firms recommend stocks they could not have researched carefully because they do not perform well at all.  Some picks can be wrong, but there are just too many and they could not be that stupid, so it indicates to me that they are simply not doing the work.  Enron redux!

Tony Robbins’ 7 Steps

February 19, 2015

Reading Tony Robbins MONEY: Master the Game is like being in a personal symposium with him.  His intermixed motivational, inspirational and teaching style makes you feel he is talking directly to you.

To write this book, Tony used – what he thought was – his financial knowledge until he met and interviewed over 50 of the top money masters.  He shares what he learned and what he thinks we should do to create personal financial security.

The principles in the book are easy to understand, digest and act on.  His seven steps are big (and long) so I have condensed them and will restate as follows:

  1. Commit to a regular savings program
  2. Know and understand what you are investing in
  3. Develop a plan and, while at it, reduce spending, keep investment costs low and shed debt
  4. Allocate your assets carefully and rebalance periodically
  5. Create a lifetime income plan
  6. Invest like the .001%, i.e. don’t be stupid and re-look at step 2
  7. Be happy by growing and giving

All good advice you can start following today.

Analyzing Stocks Using Apple as the Illustration

February 17, 2015

Last week, Apple hit a $736 billion valuation so I thought this would be a good opportunity to talk about how stocks are valued using Apple as the illustration.  Note that this discussion should not be considered as a recommendation to buy, hold or sell Apple shares.  I just found it to be a good stock to use for an illustration.  All amounts are as of the market close on Feb. 12, 2015.

The valuation or market capitalization is the price of a share multiplied by the number of shares outstanding.  In Apple’s case it is $126.46 x 5.824 billion shares.  From here on out, I’ll use rounded estimates.

Now, you might wonder if Apple is overpriced.  Well, so do many people particularly those that sell it each day.  Let’s look at some fundamentals.  The P/E is 17. This means that each share earns $7.42 ($126 / 17). For comparison, the S&P 500 Index components have a P/E of 20, and the NASDAQ P/E is 22 so this P/E looks pretty good when compared to these indexes.  However, on some level 17, 20 and 22 are considered by many to be high.  Comparisons can deflect from reality when all are outside a “reasonable” range, with reasonable being determined separately by each investor.  The dividend yield is 1.5% ($1.88 dividend per share / $126).  The S&P yield is 2% and the NASDAQ yield is 1.3%.  It falls between those too indexes so not too bad.  It is also higher than the 5-year U.S Treasury bond which many use as a guide to yields. 

A P/E of 17 indicates 5.9% earnings per share price (1 / 17 = 5.9%).  The dividend payout is 25% (1.5% / 5.9%).  That means 75% of the profits are retained by Apple to either be reinvested by them or to increase their dividend or stock buyback (or all three) whichever the Board decides.  This payout percent is lower than both the S&P 500 and NASDAQ.  We seem to be looking at a reasonably valued company.  One comment about the indexes – Apple is included in both indexes so Apple’s numbers also affects the comparisons.

Apple’s Beta is .89.  A Beta of 1 indicates the stock is as risky as the market as a whole.  Lower than one is less risky. Also, 60 million shares are sold short which is about a day’s trading volume indicating that the short sellers do not believe Apple could drop too much.

Now, let’s see what can happen if there are some changes.  If the P/E ratio changes – either up or down by 1 becoming 18 or 16 it can result in a 6% up or downward change in the stock’s price or $9.00 at today’s price.  The P/E is market driven and reflects degrees of optimism in many things such as individual company performance, movement in a sector, political activity, interest rates and the economy as a whole.  If the earnings change, the P/E ratio will also be affected.  Apple just reported humongous earnings.  Investors need to assess the sustainability of a company’s earnings.  Investing in a company reflects confidence about the continuance and growth of future earnings.   A drop in earnings will increase the P/E just as an increase will decrease the P/E.  If the price drops the dividend yield percent will increase as it will decrease if the price increases; but in neither case will the dollar amount of the dividend change.  Dividend increases [or decreases] will also usually affect the stock’s price as will stock buybacks which reduce the number of shares outstanding.  I said usually since nothing is ever as we think.

Apple just came off of a very large quarterly profit and its sustainability is what you have to have confidence in if you own the stock or are thinking of buying it.  If the profits and P/E remain stable the stock’s price should hold up as is.  If the profits and/or P/E increase or decrease there should also be resulting changes in the stock’s price.

One might ask whether Apple is a growth or value stock; and it would not be unreasonable to respond that “it depends.”  Some might consider Apple a growth stock because of its “low” yield, but its P/E is not that high for a growth company.  Others might consider it a value stock because of its relatively “high” dividend with potential for a dividend increase and a possible accompanying ambivalent attitude toward dramatic price increases.  I suggest that both growth and value mutual funds will be adding Apple to their portfolios if they already do not own it.

One further consideration is Apple’s cash hoard – $178 billion with $33 billion in long term debt. That works out to net cash per share of $25.  It that is subtracted from the current share price you would create an enterprise value with even better fundamentals.

The above is a simple illustration and you can see that it can get pretty nutsy and confusing even though on its surface Apple is not a very complex company to analyze. The purpose of this blog is to teach and offer some considerations in how a stock is valued.  I hope you learned from this.  Do not under any circumstance consider this discussion as a recommendation to buy, hold or sell Apple.  I just found it to be a good stock to use as an illustration.

Life Insurance

February 12, 2015

After the Individual Responsibility blog was posted, I received quite a few calls questioning why I don’t recommend whole life, universal or other forms of life insurance.  I will address this, but first I would have liked it better if instead of calling me, the callers made the comments to the blog instead.  This way, not only could I have responded, but my readers could have also.

The previous blog on individual responsibility recommended term life insurance to insure the unlikely premature death of the main family breadwinner.  Its purpose was single-minded, affordable and would serve a valuable function if it were needed.  It would also secure the future cash flow for the people that might be thrust into the role of guardians and have to care for the children.  It might also be advisable to get such insurance on both parents. Further, the need for this insurance would vanish when the children were grown and on their own.

Life insurance is an important part of estate and family wealth planning.  Additional reasons for life insurance would be to create liquidity for survivors where assets are not able to easily be liquidated; to pay or cover a large portion of estate taxes; to leave benefits to someone that will not be inheriting family assets; or to create a tax-sheltered investment fund.  The blog covers a single essential and important need.

One of the arguments made against the term insurance suggestion is that nothing will remain at the end of the period while a substantial fund will be accumulated with the “right” type of policy.  I reject that theory on a few accounts.  1) The young family needs the coverage to provide for their security while growing and the low cost of fixed premium term makes the adequate coverage easily affordable.  2) If a savings and investment vehicle is more advisable, then it should be set up separate and apart from the necessity of providing the proper coverage for the family.  3) On some level, no matter how much insurance is taken out today, in 20 or 30 years it would likely be inadequate given inflation and a permanent policy would end up with depreciated “permanent” coverage.  4) Assuming a policy was taken out today to provide for a fund equivalent to or greater than the total premiums paid over the 20 or 30 year period, the deposits and premiums paid would be in dearer current dollars and would be returned with devalued tomorrow dollars – and would not provide a corresponding benefit to offset what was given up in current and ongoing spending while the payments were being made. At the end of the day, the investment fund would be created with your dollars paid in over the long period of time. 5) Your situation and needs might change and the coverage you applied for today would possibly be inadequate to insure what you might need later on, and a higher premium “permanent” policy – no matter how good it was constructed today – would not cover what you need want to later on.

Another thing I have seen is that many young people buy life insurance based on what they could afford, and it usually is not too much.  If the same amounts were used for a whole life policy, then they likely would have about 80 percent less coverage – not what they need and the family’s potential problem would not be alleviated.

In an ideal world, everybody would get everything they want and need… not really so for most people.  If you have young children, get the full coverage you need for the full period you need it at the lowest cost you can afford.  And to me, that looks like fixed period bare bones term life insurance.

One final note about life insurance:  There are many creative agents that can come up with a type of policy that can fit almost every situation.  If you can afford more than the minimum amounts suggested in these two blogs, I recommend you meet with an agent and find out what can be done for you tailored to your circumstances, needs and goals.

If you have comments, please post them

Individual Responsibility

February 10, 2015

Recently, I have read about some tragic events happening to noble people that have been killed while performing their public service jobs.  Some occurred through accidents and some were murdered by dastardly people.  In response to news reports that include information that they left a young family with high mortgages and have little or no savings, people rush to contribute to special funds established to pay off the mortgage and create college funds for the children.

This is very honorable and admirable especially since the tragic circumstances of their deaths can only evoke sympathy by all of us who are indebted to these public servants and who also believe in fair play and decency.

However, I have a problem with the family being left destitute.  Doesn’t the main breadwinner of the family have a responsibility to make sure this doesn’t occur if there should be an untimely death?  I also apply these thoughts to any head of a family that would be left in a position where their family could not maintain the life style decided on when they were active and well.

There is an easy, low-cost way to protect the family from an unforeseen and untimely death and that is with fixed premium guaranteed term life insurance for a period of 20 to 30 years.  The purpose of the insurance is to provide funds should the unmentionable occur.  Bare-bones term insurance can be very inexpensive – for example $1 million coverage for a 30 year old is not more than $40 per month for 20 year coverage and $70 for 30 years; for a 40 year old $60 per month for 20 years and $100 for a 30 year policy.  All of these are less than the cost of a meal in a nice restaurant.  And, the family is protected. 

Once taken, you should pray to God that you will be “wasting” your money and the benefits will never be paid.  This adoption of family protection is a responsibility that cannot and should not be delegated – it is an individual responsibility and certainly very affordable for any family leader.

IRS Form 3115 Sin and Travesty

February 5, 2015

IRS regulations are requiring every business with materials, supplies, equipment and real estate to change their accounting method and file an eight page Form 3115 with their tax return and to mail a copy of the form to an IRS group in Ogden, Utah.  This is a sin and a travesty.

Form 3115 is used to adopt a change in accounting method and, in this case, the change gets an automatic approved acceptance by the IRS so no oversight or permission is needed.  The change is necessitated by the IRS making it more restrictive to get current tax deductions for materials and supplies that are not used in the year purchased and certain changes to how repairs and similar items were previously deducted.  We are not questioning the IRS changes.  We are appalled by the required method to report the adoption of the changes to the IRS.

The instructions to Form 3115 are 20 pages long and provide estimated times to keep records, learn about the law or the form and to prepare and send the form to the IRS.  The total time is estimated at 82 hours!!!  Now, not everyone will have to fill out every schedule but even a quarter of this time is over a half week of work time.  Even a tenth of this estimated time is over a day’s work.

The forms have to be attached or included with the tax return and also mailed to Ogden Utah. If nothing else, this will cause extra handling and “paperwork” in a fast developing digital world.

Further, the IRS does not have adequate personnel to answer taxpayer phone calls with over half of those calling hanging up within an hour and those actually speaking to someone subjecting themselves to being on hold for over one hour.  And then many of the answered calls cannot be responded to by the IRS person fielding that call and they are told to call back using the same number!  How can the IRS even attempt to open the mail they will receive in Utah, let alone review each form?

Next is that most businesses use professionals to prepare their returns.  These professionals will need to be paid extra to do this work.  And in a larger sense it is work that will likely be ignored by the IRS.

This requirement is a clear illustration that the IRS as an organization is losing it, is failing to grasp the cost of what they are legislating, and certainly doesn’t look at the overall benefit to the country and economy.  The forcing of filing these forms in this case is a clear sin and travesty.

A simple solution is to have the taxpayer attach a brief statement to their return that the “repair” regulations have been adopted.  No eight page form attachment and no form mailed to Utah.  The IRS can include a review of this compliance during their normal audits of businesses.  Nothing is lost by the IRS.  Taxpayers will save the fees they will need to pay and everyone will save the handling and mailing cost and time and the ecology will save trees that would be chopped down to provide the paper for the forms and mailing envelopes.

Stupid is as stupid does and the Form 3115 requirements is big time stupid!  The IRS should rescind this immediately.  A copy of this blog has been e-mailed to my Congressman, two Senators, and the Commissioner of the IRS.  You should also do that to stop this sin and travesty.


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