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What to do when bubble bursts

February 15, 2018

My previous blog suggested standing pat when there is a substantial drop in the stock market. Today I want to discuss what to do if we are in a bubble and note that there is always the danger of the bubble bursting.

When the bubble bursts, it could be too late, but we haven’t seen a bubble in the Dow Jones Industrial Average or S&P 500 since maybe October 1987 when the DJIA fell 508 points which was 22.6%. There was a rapid run up of 44% the previous year so it looked like there had to be a reality check. Coinciding with the 44% increase were a number of major economic and political disasters exacerbating the stock market climate. However, this recovered fully by early 1989. Also the economy appeared to be unaffected by the “crash.”

The Dot Com bubble burst in 2000 but the DJIA was relatively unaffected and the S&P 500 somewhat affected since many of the large NASDAQ companies were also in that index.

The 2008/2009 crash was not as much from a bubble as from the massive failure of a number of banks, brokerage firms and investment banks caused by the spurious mortgages that were granted. The low point of the DJIA was on Mar 9, 2009 at 6509. However, we recovered quite quickly from this.

There have been other bubble bursts and some huge drops such as the reaction to the terrible events of Sep 11, 2001, and but that recovered pretty quickly and then we had the Enron failure which actually had a greater effect on the market than the Sep 11 attacks, but these were not bubbles.

So, what do you do if there is a stock market bubble and how do you protect yourself from it bursting?

  • I define “bubble” as a huge run up in prices that are not founded in underlying substance, in particular projected sustainable profitable sales.
  • Occasionally certain stocks can have great run ups without the underlying profitable sales, but these are usually exceptions and special cases.
  • If stock investments are in a broad based diversified portfolio then the sudden and dramatic drop in some components should not cause havoc and great losses for the portfolio.
  • The problem arises when there is a bubble in an entire sector or major grouping, such as with the Dot-Com companies in late 1990s.

Now, let’s look at the markets today. The 2017 run up in the DJIA, S&P 500 and NASDAQ were from 20 to 27% [see the chart in the Jan 11, 2018 blog]. These are certainly high, but the underlying fundamentals were reasonable and were able to support the new index levels. I explained this in my Jan 16 blog, and that explanation did not indicate an unnecessary concern by me given the low interest rate and inflation environment. So what happened since Jan 16? Nothing much and to me, nothing alarming. The short term treasury rate went up about .4% to about 1.8% and the 10 year Treasury went up also about .4% to about 2.8%. The 10 year rate, in context, was not alarming. The T-Bill rate was somewhat alarming to the news media since that gave them something to talk about. It was also an indication that there might be inflation and every time there is a threat of inflation the stock market drops. This action contradicts what my father told me when I was a little boy about the stock market being a hedge against inflation. It is, for the long term, but for the short term, interest yields could approach or exceed the dividend yields with complete safety of principal. So, there is some liquidation of stocks in favor of T Bills or shorter term Treasuries (up to five years). That would pull stocks down.

You see, stocks compete with fixed income choices when bond yields rise making stocks less attractive. Rising rates also portend inflation which also means higher interest rates. However, over a long period, inflation will work its way into corporate earnings and that will push stocks prices higher, making my father’s belief right.

Getting back to the relative values, some of the trailing P/Es are pretty high, but the forward P/Es, not so far off traditional amounts. Dividends are also pretty reasonable for DJIA and S&P500, but low for the NASDAQ but keep in mind that this includes heavily weighted and high PE Alphabet, Google, Amazon, and Facebook that do not pay any dividends. Also these four are also heavily weighted in the S&P 500, but there are much more higher dividend paying stocks to bring up the yield there. None of those stocks are in the DJIA.

I am a CPA and financial planner and do not manage portfolios or offer specific investment advice, so did not do the exhaustive studies and analysis needed for such recommendations, but experience indicates that there is no bubble that is risking being burst. There will be events that cause momentary drops but I believe the long term strength of the market is strong. I do not see any reason at this time to change investment plans or your asset allocation.

This blog discussed bubbles and seemed to indicate my opinion that we are not in a bubble. I tried to explain how to recognize when we are approaching a bubble. There will be drops but these are expected in the journey to the future financial security we should all carve. I did not say what to do when the bubble bursts, because I do not think we are in a bubble. Let’s hope I never get to write that blog. Let’s also hope that you will never need to read it.

FYI, Wikipedia has a great list of stock market crashes and bear markets. Here is a link:

Everyone’s a genius when the market is up

February 13, 2018

And everyone is an expert in what to do when it goes down. Wrong and Wrong.

If you have a long term plan and it includes a broad based stock portfolio, you should stick to your plan, unless there are major changes in your life causing an alteration of your plans. Let’s examine what is being recommended and what I suggest.

The recommendations fall into two categories. Either stand pat and continue with your plan; or lessen the risk in your portfolio by shifting some funds into bonds. I agree with the former – stand pat. Not only that, but if you are a continuous buyer such as with your 401k, you have the opportunity to buy additional shares at lower prices. How often do you go to the butcher and hope the price of chop meat just went up? Well, stocks are on sale. There is a caveat – you must have a broad based stock portfolio.

Now, let’s look at the advice to sell some stocks to “lessen your risk.” If you have a sound plan with a sensible asset allocation to get you toward your goals, why would you change that after 3 or 4 days of a market drop? If that is what your advisors are recommending, then might I suggest that they did not put much thought in, and do such a good job with, the initial plan, and maybe you should look for other advisors. Also, if that is what they are recommending then might I also suggest that they are reacting to the market turmoil and not with the skilled aplomb expected of such esteemed and knowledgeable professionals. Two strikes against them!

Now a third comment. What does “lessen your risk” mean? If you want to lessen your risk, I think you should invest in risk free or very low risk investments. That means, to me, either short term U.S. Treasury bills, notes or bonds, insured bank certificates of deposit or most money market funds.

Now, let’s go a little further. The term “bonds” is a general description, not a specific investment. There are short, mid or intermediate, and long term bonds. There are treasuries, government, municipal and corporate bonds. There are U.S., foreign and emerging market bonds. There are investment grade AAA to BBB rated bonds, and junk or high yield and distressed bonds. Shifting stocks into bonds is not a by-the-numbers process. It takes thoughtful consideration and because each investor has different needs, risk tolerances, beliefs, dynamics, education, understanding and personalities you just don’t sell stocks and buy bonds. At least you don’t it if you want to understand why each recommendation is being made and how it fits into your long term plan and the effect on you and what can go wrong. Yet these so-called experts are interviewed and spew their sage advice to lessen risk with bonds – which I say is not responsible advice!

Further, some recommend bond funds. Totally full of risk and totally not risk free. Ask any financial planner if they believe bond funds are risk free. I believe none would say they are risk free. Now, I haven’t heard it all, but I’ve heard a lot of the arguments and these geniuses say that, because of the risk, they only recommend shorter term bond funds. Well, 1) Shorter term bond funds do not have any greater yield than bank certificates of deposit so why pay a fee for a bond fund when you can get insured CDs with no fee? 2) Shorter term bond funds, and CDs for that matter, will not get you closer to your goals since the yields barely exceed the inflation rate. 3) Shorter term [or any] bond funds have no maturity date. This means there is never a time when you can get your money back; you can only get the market value of the fund when you want to get out, and that could be higher or lower than what you invested. Either way, these are not risk free. Bond funds are not risk free PERIOD!

This should be enough to make my point to stay on your plan. By the way, I exclude what I call rainy day funds from asset allocation plans. This is the amount you should feel that you must have available in cash for a given period – whether it is six months or up to two years. And while you are holding this money, you should get some yield on it and that would be with a somewhat laddered CD portfolio. That is money you want absolutely safe, secure and available. The rest of your money is for investing to attain your goals and the asset allocation is a key for that. Keeping some of that parked in CDs is not a strategy I recommend.

I posted many blogs with my opinions and recommendations of how I think people investing to attain their long term financial security should invest. This blog is a reaction to the current market activity and calls I received and does not contain the details that each blog addressing singular topics goes into. You can search the archives for topics of your interest. Enjoy! Have fun! And be smart!

Sixth Anniversary of Partners-Network Blog

February 8, 2018

The Partners-Network blog started Feb 8, 2012 and this is the 624th twice a week blog posted since then. All of the postings can be accessed in the archives shown to the right of this site.

I regularly refer to my prior blogs. A problem is that they are not tagged with topics, but I have a single Word® file with all the blogs so I can search them using key words and it usually works, but not always. I also sorted them into categories making it a little easier, but there are far too many to be able to maneuver quickly through them. I am not complaining, I am proud of the vast volume and wide range of the content and topics covered.

I like what I write and occasionally I get an idea to comment on something and a search shows I’ve already covered it and in a way that I don’t need to embellish or add to it; and I occasionally repost them to social media.

Writing the blogs is a multipart process. I need the idea of the subject matter. I then write what I want to say as a quick draft. Next is to research any facts or additional information that can be included. And finally I edit it, and edit it and edit it. That usually takes longer than the first draft. I try to make it tight without unnecessary verbiage. I want to convey my thoughts and ideas in a way that provokes ideas from readers while not boring anyone and having them wish they did not get started reading it. The final step is sending it to Matt Basilo, Withum’s interactive marketing manager who schedules the postings, usually for the middle of the night so it is there when you log on in the morning.

If I had unlimited time I would organize the blogs and possibly get a few books out of it. However, that is something that for now will not get done. I have a fantasy that I would put all my investing and financial planning blogs together into an e-book, spend some serious money promoting it, and then sell a million e-books netting $5.00 per book. In all modesty, I believe my advice and information is better than any that I have read in the so-called experts’ books. Hmm, maybe I will find the time to get this done.

In the meanwhile, you are welcome to search the archives or email me asking for the dates of blogs on topics covering your area of interest.

For more information on the purpose of these blogs and what I am trying to accomplish, you can read the first blog and the prior anniversary blogs.

Thank you for reading the blogs, and I welcome your comments.

The Market Tanked – Does it mean anything?

February 6, 2018

Yesterday and the day before the market had its biggest two day point drop ever. For those invested in stocks, it is a lousy feeling… but, does it mean anything?

Many individual investors (including those with 401k and 403b plans) are in it for the long haul. Daily or weekly drops really don’t mean much, financially. If you are using your stock values for credit purposes or are making withdrawals to live on, it might, but for the average investor, I don’t see any real effect. Those that regularly add to their investments actually have the opportunity to buy at lower prices – so why be upset when values drop?

My approach to the stock market is that it should be part of a properly considered investment plan as a method to provide long-term financial security. Week-to-week changes or even a month-to-month or year-to-year change should not have much effect.

One method of growth is the increases in the stock values. However, you do not spend stock values. It’s like a house. When a comparable house is sold at a high price, you think you are richer. But, what does it matter? You are living there. It is a sunk cost. If markets are depressed when you sell, you will buy something also at a reduced price. Only when you die and your family sells the house, will that value be meaningful, and then, will you really care?

Stocks have a second way of providing growth and that is with the payment of dividends. Regardless of the stock values, except for super-severe drops, dividends do not decline. Maybe the yields change, but the dollar amount of dividends do not. They actually increase. For the twenty-four years from 1994 through 2017, dividends paid by stocks in the Dow Jones Industrial Average increased from $105.66 to $523.94. The only period that had a drop was from the year ended Sep 2008 going from $325.27 (its then all-time high) to $272.78 for the year ended Mar 2010 (a 16% drop). In the year ended Mar 2012 the dividends increased to a new all-time high of $326.87. For the year ended Dec 31 2017 dividends paid were $523.94. During this same period the DJIA rose from 3,757 at the beginning of 1994 to close at 24,719 at the end of 2017.

A lot of numbers, but what do they tell you? They should tell you not to worry about momentary drops or even extended drops in stock values. It is the dividends you will spend or reinvest. And if you reinvest, you are buying additional stocks at a sale price. As long as the dividends keep being paid, and based on the experience illustrated above, there is no reason to expect otherwise; you should not be overly concerned about falling values in the market as a whole. If you typically buy stocks that do not pay dividends, then you are in a different circumstance and what I wrote would not apply to you.

Over long periods of time [minimum of seven to ten years] balanced stock portfolios should increase in value and the steady payment of dividends will provide cash-flow to spend or reinvest. Momentary decreases should be no harm to your plans.

This is a reposting of a blog originally posted on January 28, 2014 with some minor changes and updated number amounts.

Elaine’s, Skype and the Illusion of Value

February 1, 2018

This is a reissue of a blog I posted on May 18, 2011 at the NJ Society of CPAs’ website, but is still relevant, with some small changes.

Yesterday I read that the famous Elaine’s in NYC, and the restaurant of choice for Linda Fairstein, is closing. Last week Microsoft acquired Skype for $8.5 Billion, $6 Billion more than the seller paid for it 18 months earlier. And that seller bought it from eBay who took a $600 Million loss having purchased it from its founders in 2005 for $3.1 Billion. The company was formed in 2003.

This got to me thinking about what a business is worth and the illusion of its value. I am sure that most every customer of Elaine’s thought it was a gold mine wishing they could have a piece of it. Likewise, I am sure that eBay thought Skype was a “steal” at $3.1 Billion and two years later were glad when they were able to unload it for $2.5 Billion. (Note that eBay retained a minority interest so they just recouped their loss.) The “killing” was made by the venture capital group that sold it for $8.5 Billion to Microsoft who believed they got a great deal in buying it.

I perform many business valuations. Frankly, much of what I do represents a “scientifically” calculated value to fulfill a purpose such as for gift planning or estate tax purposes, employee compensation, or to present a value in a business break up or martial conflict. But none of the values are real – the real values are determined by an actual sale and then that value is valid only for that seller and that buyer at that time, for the terms negotiated, and because of the purposes, motives and pressures causing the sale. Perhaps a death compelled the family to sell a business quickly; or a business is sold so the owner could escape bankruptcy; or a buyer wants to get access to certain customers; or the key people working for a company offer to buy the business threatening to quit and start up their own company if it isn’t sold to them.

Stock market values are likewise illusory – solid companies miss earnings by a few pennies, or announce a bad year coming up and billions vanish overnight. A new CEO or a fired CEO similarly can cause wide swings in values. Staid established companies with well-known brands have likewise seen their values dissipate due to outmoded business models, backward or myopic managers or an inability to understand or adapt to how business has changed.

Much value is illusory. In planning for your future financial security understand this. When making investments of any type, don’t be deluded by current or immediate circumstances, but consider the long view and the potential for value creation, or destruction.

Getting started with the stock market

January 30, 2018

I deal with many people in varied circumstances. A small group are people that do not own any stocks in their own name. Some might own stocks in their 401k accounts but they do not really understand anything about it except that someone told them which choices to make. Here is a method to get started owning stocks in your own name.

I suggest opening an account at one of the major discount brokerage firms such as Fidelity, Schwab, TD Ameritrade, Vanguard or the many others that are now divisions of banks. Most have $10.00 or less brokerage fees for a single transaction.

A suggestion is to then purchase one share of Berkshire Hathaway B stock (Ticker BRK-B) which right now would cost around $230.00 including brokerage commission. This will establish a stock account, will not unduly empty your bank account and will qualify you as a stockholder to receive the BRK annual report each year. That report is pure financial literature which includes Warren Buffett’s letter to shareholders and is a must read for anyone interested in investing in any manner. You will even get a ticket to the BRK annual meeting in Omaha which is attended by 40,000 BRK stockholders.

Note that I am not providing investment advice and have no way to determine if this is a good or bad investment, but it is the company that Warren Buffett is Chairman of and he is frequently quoted and talked or written about almost daily. Also note that this stock does not pay a dividend.

An alternative to BRK-B could be exchange traded fund (“ETF”) shares such as SPY, DIA, QQQ or IWM (those are the ticker symbols for stocks that try to mimic what I consider the four major indexes – the S&P 500 Index, Dow Jones Industrial Average, NASDAQ 100 or the Russell 2000). You can find out more about them in my annual charts and chart explanations blogs posted earlier this month. Owning these shares will provide you with a basket of the stocks in those indexes, and also some dividends which would accumulate and can be added to any additional funds you decide to use to add shares to your account.

A further alternative is to buy some shares in a company whose products you own or use such as GM or Ford, Nike or Under Armour, or Apple, Starbucks, Madison Square Garden or Disney. Whatever you choose, I suggest your first investment, which would be for no more than $300.00 be in a company you can relate to or feel connected to.

This is a first step to getting started in investing. Once you are in, you can start to consider a more serious method of selecting stocks to implement a long term plan you have. This gets you in, and then you can follow through in a more thoughtful manner of investing.

Note that I am not recommending any of these stocks. I am suggesting familiar companies as a way to get you started in the “strange” stock market world.

Pope Francis’ New Year’s Eve Message: Be Nice

January 25, 2018

“I feel a sense of fondness and gratitude for all those people who each day contribute, with small but valuable concrete gestures, to the good of Rome: they try as best they can to fulfil their duty; they move through the traffic with discernment and prudence, respecting public places and signaling the things that do not work; they are attentive to people who are elderly or in difficulty, and so on. In these and a thousand other ways they concretely express love for the city. Without speeches, without publicity, but with a style of civic education practiced in daily life. And in this way they quietly cooperate for the common good.”

The above is a portion of Pope Francis’ Homily delivered at the Vatican Basilica on New Year’s Eve December 31, 2017. The essence of what he said should be adopted by everyone – Be nice!

Be nice!

A link to his entire message is: