By Charles Rotblut
Should you buy Facebook (FB) or avoid it? The answer depends on whether you are looking to speculate or invest.
Benjamin Graham defined speculation in his classic book, The Intelligent Investor, as primarily “anticipating and profiting from market fluctuations.”
Conversely, he defined investing as “acquiring and holding suitable securities at suitable prices.” Notice the final two words used to describe investing: “suitable prices.” When it comes to investing, valuation matters—always.
If the name of the company and the fact that it is involved in social media were hidden, Facebook’s initial public offering would be completed at a far lower price than the $38 per share price assigned to it. (The offering equates to a market capitalization of $104 billion.)
CEO Mark Zuckerberg is very young, has no experience running a publicly traded company, and has the final say over all decisions—including who gets elected to the board of directors.
His short stint as CEO has been marred by various lawsuits and customer complaints. Customers are switching to mobile devices, a platform that the company has yet to figure out how to monetize. The company’s product continues to be blocked by the Chinese government.
An article in Wednesday’s issue of The Wall Street Journal reported that General Motors (GM), the third-largest advertiser in the U.S., has concluded that ads running on Facebook’s Web site have no influence on customers’ buying decisions. Finally, the majority of the proceeds from the offering will not go to the company, but rather to insiders seeking to profit from their pre-IPO investments.
Yet this is Facebook, the 800-pound gorilla of social media. Due to this very factor, enthusiasm for the offering is extremely high—so high that the stock could easily fetch a price-earnings ratio of 100 or more once its shares start trading publicly today. This valuation, by any measure, is excessive.
Tags: news
In February, I spent some time dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a way to value stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
A quick check can help determine whether a company might be worthy of a look using Graham’s teachings. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. At the time, there were 56 companies that met these criteria. Now, after a couple of months that have pushed prices down, as well as recent earnings releases, the list has swelled to 73 companies.
I’m going to take another look at some of these companies and will be making a CAPScall on most of them after comparing them to competitors and examining their current value in relation to their Graham numbers. Up first will be industrial manufacturer Corning (NYS: GLW) .
What do they do?
Corning primarily makes industrial-grade glass for use in electronics. For example, Corning’s Gorilla Glass is used to make the screens in many tablets and smartphones. It also makes the glass used in LCD televisions, selling it to companies like AU Optronics (NYS: AUO) and LG Display (NYS: LPL) , although both companies appear to be shifting to OLED screens this year, benefiting OLED producer Universal Display (NAS: PANL) .
It’s not all bad news. Corning revenues during the most recent quarter exceeded expectations, and speculation abounds that Gorilla Glass will be the screen used in Apple‘s (NAS: AAPL) iTV, if and when such a product hits shelves. Corning also stands squarely in the middle of many emerging trends, and still provides its Gorilla Glass for Apple, which sold 35 million iPhones and nearly 12 million iPads during its recent quarter. Finally, mutual fund manager Donald Yacktman, so buoyed by the prospects of the company, recently added more shares to his mutual fund that has returned 175% over the past decade.
What’s it worth?
When I last looked at Corning, its Graham number was right around 23, and it remains at that point. Since most of its direct competitors continue to post quarterly losses, it is difficult to compare them directly. Only Universal Display has seen a profit the last 12 months, and it currently trades well above its current Graham number. At its current price, Corning is still 40% below its Graham number, giving it plenty of room to grow into that valuation. I will be maintaining my current “thumbs-up” over on my CAPS page and updating the call with the new values.
Corning is a great way to profit from the smartphone and tablet revolution, but not the only way. Our free report “The Next Trillion Dollar Revolution” can point you in the right direction. Click here to get your free copy today.
At the time this
article was published Fool contributor Robert Eberhard owns shares of Universal Display, but he holds no other position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Universal Display and Corning. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Universal Display, and Corning. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Tags: news
Should you buy Facebook (FB) or avoid it? The answer depends on whether you are looking to speculate or invest.
Benjamin Graham defined speculation in his classic book “The Intelligent Investor” as primarily “anticipating and profiting from market fluctuations.” Conversely, he defined investing as “acquiring and holding suitable securities at suitable prices.” Notice the final two words used to describe investing: “suitable prices.” When it comes to investing, valuation matters-always.
If the name of the company and the fact that it is involved in social media were hidden, Facebook’s initial public offering would be completed at a far lower price than the $38 per share price assigned to it tonight. (The offering equates to a market capitalization of $104 billion.) The CEO is very young, has no experience running a publicly traded company, and has the final say over all decisions-including who gets elected to the board of directors. His short stint as CEO has been marred by various lawsuits and customer complaints. Customers are switching to mobile devices, a platform that the company has yet to figure out how to monetize. The company’s product continues to be blocked by the Chinese government. An article in yesterday’s issue of The Wall Street Journal reported that General Motors (GM), the third-largest advertiser in the U.S., has concluded that ads running on Facebook’s website have no influence on customers’ buying decisions. Finally, the majority of the proceeds from the offering will not go to the company, but rather to insiders seeking to profit from their pre-IPO investments.
Yet this is Facebook, the 800-pound gorilla of social media. Due to this very factor, enthusiasm for the offering is extremely high-so high that the stock could easily fetch a price-earnings ratio of 100 or more once its shares start trading publicly tomorrow. This valuation, by any measure, is excessive.
An excessive valuation means high risk, but, over the short term, it does not always equate to a falling stock price. Quite the opposite; a hot potato stock can continue to rise in price as greed overtakes thoughtful analysis. As John Maynard Keynes is attributed as saying, “The market can stay irrational longer than you can stay solvent.”
This brings us back to the key difference between an investment and a speculative trade. An investment is a commitment to holding reasonably priced securities as long as their underlying fundamentals and business models remain attractive. A speculative trade is a short-term position designed to take advantage of expected price movements. A planned long-term investment can turn into a short-term trade if the price unexpectedly jumps, but a short-term trade should never turn into a long-term investment.
If, despite its risks, you are interested in acquiring shares of Facebook, treat it as a speculative trade. And keep in mind that Graham pointed to three top cases in which speculation can be “unintelligent”:
- Speculating when you think you are investing;
- Speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and
- Risking more money in speculation than you can afford to lose.
Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Tags: news
There is an old saying that the match is not always won by the strongest nor the race won by the swiftest, but that is generally a pretty good way to bet. The same goes for investing.
“Best in Show” companies such as Starbucks (NASDAQ: SBUX) and McDonalds (NYSE: MCD) reward shareholders over time due to a superior product. The same is true for Cray Computer (NASDAQ: CRAY).
As detailed in a previous article on www.smallcpanetwork.com, Cray Computer, the premier company in advanced computers, is the home of the uber intelligent. For those investing in Cray Computer since that article on December 2, 2011, “Invest Intelligently with the Supersmart at Cray Inc (CRAY, YHOO, MSFT,” have enjoyed a price rise of more than 70% as stock has risen from around $6 a share to about $11 at present.
As Cray Inc focuses
on large projects, it does not have the predictable and steady earnings
stream of a McDonalds or a Starbucks. Cray Inc generally performs better in the latter quarters. That was true for 2010 and 2011; and the past decade. On a quarterly basis, revenue growth is up 414.99% for Cray. Sales growth has increased by 181.70% on a quarterly standard.
There is a bullish outlook for the future of Cray Inc. The price-to-earnings growth ratio is 0.98. Legendary investor Peter Lynch considers this to be one of
the most critical ratios. According to Wikipedia, the price-to-earnings growth
ratio is “a valuation metric for determining the relative trade-off between the
price of a stock, the earnings generated per share (EPS) and the company’s
expected growth.” In his book, One Up On Wall Street, Lynch wrote
that “The P/E ratio of any company that’s fairly priced will equal its growth.”
That means a fairly valued company will have a price-to-earnings growth ratio of
1. A price-to-earnings growth ratio of 1 is considered to
be adequate: the lower the better, obviously. The 0.98 price-to-earnings growth ratio for Cray Inc is very solid.
The mean analyst rating for Cray Inc is bullish too at 1.70. A 5 is the worst rating and a 1 is the best. Over the next year, the mean analyst target price for Cray Inc is $13.83.
Tags: news
In February, I spent some time dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a way to value stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
A quick check can help determine whether a company might be worthy of a look using Graham’s teachings. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. At the time, there were 56 companies that met these criteria. Now, after a couple of months that have pushed prices down, as well as recent earnings releases, the list has swelled to 73 companies.
I’m going to take another look at some of these companies and will be making a CAPScall on most of them after comparing them to competitors and examining their current value in relation to their Graham numbers. Up first will be industrial manufacturer Corning (NYS: GLW) .
What do they do?
Corning primarily makes industrial-grade glass for use in electronics. For example, Corning’s Gorilla Glass is used to make the screens in many tablets and smartphones. It also makes the glass used in LCD televisions, selling it to companies like AU Optronics (NYS: AUO) and LG Display (NYS: LPL) , although both companies appear to be shifting to OLED screens this year, benefiting OLED producer Universal Display (NAS: PANL) .
It’s not all bad news. Corning revenues during the most recent quarter exceeded expectations, and speculation abounds that Gorilla Glass will be the screen used in Apple‘s (NAS: AAPL) iTV, if and when such a product hits shelves. Corning also stands squarely in the middle of many emerging trends, and still provides its Gorilla Glass for Apple, which sold 35 million iPhones and nearly 12 million iPads during its recent quarter. Finally, mutual fund manager Donald Yacktman, so buoyed by the prospects of the company, recently added more shares to his mutual fund that has returned 175% over the past decade.
What’s it worth?
When I last looked at Corning, its Graham number was right around 23, and it remains at that point. Since most of its direct competitors continue to post quarterly losses, it is difficult to compare them directly. Only Universal Display has seen a profit the last 12 months, and it currently trades well above its current Graham number. At its current price, Corning is still 40% below its Graham number, giving it plenty of room to grow into that valuation. I will be maintaining my current “thumbs-up” over on my CAPS page and updating the call with the new values.
Corning is a great way to profit from the smartphone and tablet revolution, but not the only way. Our free report “The Next Trillion Dollar Revolution” can point you in the right direction. Click here to get your free copy today.
Tags: news
Today I am reviewing A Modern Approach to Graham Dodd Investing. Read my other book reviews here.
Thomas Au is a value-focused portfolio manager who, like many value investors, found his calling by reading the original Graham and Dodd classics, Security Analysis and The Intelligent Investor. Recognizing the changes that have taken place since the time these books were published, Au sought to update their methodology to account for modern realities.
Some of you might be doubtful that there is much to add to Graham and Dodd; I certainly was. But Au does an excellent job supporting his thesis. For example, Graham focused largely on asset value and paid particular attention to dividends. This due to the fact that in his time this was really the best data available. According to Au, the income statements of Graham’s time were at best skeletal versions of their current incarnations, with only a very brief summary which did not lend itself to robust analysis, and the statement of cash flows didn’t even exist in the 1930s (I was unaware of this). Thus, given the evolution of these statements, there have been a number of new ways of assessing companies which should be considered in light of Graham and Dodd.
Au accomplishes his task by beginning with the basics, which comprise Part One of the book. Here, he goes right to the fundamentals of the time value of money, evaluating investment projects, and an introduction to financial statements. All but the absolute beginner can safely skip this section, and had I edited Au’s manuscript, I would have suggested that anyone buying the final copy would be advanced enough to find this unnecessary.
Parts Two and Three of the book cover fixed income and equity investments. In these sections, Au discusses new products (such as inflation-linked bonds) as well as shifts in focus (like the increase in LBOs post-Graham and the use of Off Balance Sheet Assets and Liabilities ). Part Four discusses investment vehicles like mutual funds, as well as diversification through international investments and real estate. In Part Five, he discusses portfolio management and in Part Six he discusses what he calls ‘contemporary issues’ such as the components and performance of the Dow as a measure of the broader market, and his fears over credit growth. In each section, Au begins with the basics and works his way up to more complex concepts. At times this can be tedious, as Au does not appear to allow for much prior understanding on the part of his readers.
The book ends with his comparison between the current (as of 2004) era versus what he believes is the closest historical analogy: the 1930s, when a recession turned into a deep depression. His fear is that we share a similar fate. From page 314:
[F]undamental factors seem to be deteriorating worldwide. Hence, the U.S. economic recovery in 2002-2003, which seemed to be built around a false foundation, was not reassuring. If that’s the case, the market retreat – and it was no worth than that of 2000-2002, would be a dress rehearsal for something far worse in 2004-2006.
In the present context of the Great Recession, this has turned out to be eerily accurate (though slightly early). Interestingly, Au calls China the “nouveau riche country of our time,” comparing it to Nazi Germany of the 1930s. He warns that China “will probably take an ‘opportunistic’ foreign policy, which, if opposed, could lead to war” (page 319).
My complaint with the book is that, rather than updating Graham and Dodd (which I have always viewed more as philosophical treatises meant to inform the use of modern methods), it feels more like a general investment textbook which attempts to explain the modern methods of security assessment and valuation. Viewed as an investment textbook, Au did an okay job, but he faces stiff competition in this space. A far better way to learn the modern methods is to read the gold standard Principles of Corporate Finance by Brealey Myers, or better yet, complete the CFA curriculum. Unfortunately, I can conceive of no scenario where I could recommend this book in place of either of these alternatives, even with Au’s explicit discussion of Graham and Dodd and various value concepts throughout.
Tags: news
Many investors like trading low priced stocks because any change in price results in bigger percentage gains (and losses). But because there’s a notable risk to these stocks, traders often wait for some sort of confirmation the shares are on a bullish path.
Investors could do that by looking at rallying stocks, meaning companies that are increasing in value at a rapid rate. It’s believed that the momentum behind these names can keep the stocks running on an upward trend for days and weeks to follow, especially if the rally is complemented by high trading volume.
What’s more, investors like to know what the big institutional buyers on Wall Street are up to. It’s often thought that the more intelligent traders are the ones calling the shots in these big hedge funds, so when there is net buying of shares by these institutions, main street investors can consider their purchases a strong vote of confidence on the stock’s future.
Here’s more information about “rallying” and “institutional buying” and why investors often use this data as trading signals. Below is a list of stocks that have met all these criteria.
Rallying
When a stock is rallying it means it is performing above its moving average for a given time period. It is presented as a percent of performance relative to the average. When a stock is trading above its 20-day moving average (MA) as well as its 50 and 200 day moving averages, it signals bullish momentum. All the stocks in this list are rallying above their 20, 50, and 200-day MA.
Institutional Buying
Institutional investors are also known as “big money” investors. They manage large pools of money such as mutual funds and hedge funds. When they invest in stocks, they can invest hundreds of thousands of dollars or more at one time. These transactions, called “block trades,” can have a significant effect on share prices.
Because institutional investors handle such large amounts of money, it is easy enough to assume that the big money managers know more than the average investor. This is why these investors are also sometimes referred to as “smart money,” and why their trades are so closely followed.
Business Section: Investing Ideas
To make the list below, we started with stocks between $1 -$10 that are trading above their 20, 50, and 200-day moving averages. Then we check those names for institutional purchases during the current quarter. Do you think these companies will continue their rallies?
List sorted by market cap.
Use the Turbo Chart to Compare the Performance of the First Two Companies in the List to the SP 500:
1. PulteGroup, Inc. (PHM, Earnings, Analysts, Financials): Engages in homebuilding and financial services businesses primarily in the United States. Market cap at $3.71B, most recent closing price at $9.68. The stock is currently trading at 5.20% above its 20-Day SMA, 7.73% above its 50-Day SMA, and 45.82% above its 200-Day SMA. Net institutional purchases in the current quarter at 19.2M shares, which represents about 5.6% of the company’s float of 343.14M shares.
2. Glimcher Realty Trust (GRT, Earnings, Analysts, Financials): Operates as a real estate investment trust (REIT) in the United States. Market cap at $1.38B, most recent closing price at $9.93. The stock is currently trading at 0.25% above its 20-Day SMA, 0.01% above its 50-Day SMA, and 11.40% above its 200-Day SMA. Net institutional purchases in the current quarter at 10.0M shares, which represents about 7.28% of the company’s float of 137.27M shares.
3. PDL BioPharma, Inc. (PDLI, Earnings, Analysts, Financials): Engages in the management of antibody humanization patents and royalty assets, which consist of Queen et al. Market cap at $902.3M, most recent closing price at $6.44. The stock is currently trading at 3.49% above its 20-Day SMA, 3.03% above its 50-Day SMA, and 9.54% above its 200-Day SMA. Net institutional purchases in the current quarter at 12.4M shares, which represents about 9.65% of the company’s float of 128.50M shares.
4. Western Alliance Bancorporation (WAL, Earnings, Analysts, Financials): Provides various banking and related products and services in Nevada, Arizona, California, and Colorado. Market cap at $715.96M, most recent closing price at $8.80. The stock is currently trading at 1.21% above its 20-Day SMA, 2.30% above its 50-Day SMA, and 25.76% above its 200-Day SMA. Net institutional purchases in the current quarter at 3.5M shares, which represents about 5.06% of the company’s float of 69.16M shares.
5. Demand Media, Inc. (DMD, Earnings, Analysts, Financials): Operates as a content and social media company in the United States. Market cap at $717.45M, most recent closing price at $8.65. The stock is currently trading at 13.72% above its 20-Day SMA, 17.19% above its 50-Day SMA, and 15.79% above its 200-Day SMA. Net institutional purchases in the current quarter at 3.1M shares, which represents about 12.4% of the company’s float of 25.01M shares.
6. Flagstone Reinsurance Holdings SA (FSR, Earnings, Analysts, Financials): Operates as a reinsurance and insurance company worldwide. Market cap at $564.01M, most recent closing price at $7.98. The stock is currently trading at 6.19% above its 20-Day SMA, 2.91% above its 50-Day SMA, and 0.89% above its 200-Day SMA. Net institutional purchases in the current quarter at 2.4M shares, which represents about 5.18% of the company’s float of 46.33M shares.
7. The E. W. Scripps Company (SSP, Earnings, Analysts, Financials): Operates as a diverse media company with interests in television stations, newspapers, and local news and information Web sites. Market cap at $526.39M, most recent closing price at $9.61. The stock is currently trading at 4.88% above its 20-Day SMA, 2.13% above its 50-Day SMA, and 14.33% above its 200-Day SMA. Net institutional purchases in the current quarter at 1.5M shares, which represents about 8.47% of the company’s float of 17.70M shares.
8. BioScrip Inc. (BIOS, Earnings, Analysts, Financials): Provides pharmacy and home health services in the United States. Market cap at $425.04M, most recent closing price at $7.67. The stock is currently trading at 5.04% above its 20-Day SMA, 10.38% above its 50-Day SMA, and 23.09% above its 200-Day SMA. Net institutional purchases in the current quarter at 3.8M shares, which represents about 9.83% of the company’s float of 38.66M shares.
9. Hot Topic Inc. (HOTT, Earnings, Analysts, Financials): Operates as a mall- and Web-based specialty retailer in the United States. Market cap at $417.46M, most recent closing price at $9.92. The stock is currently trading at 0.18% above its 20-Day SMA, 1.0% above its 50-Day SMA, and 23.96% above its 200-Day SMA. Net institutional purchases in the current quarter at 2.3M shares, which represents about 6.5% of the company’s float of 35.40M shares.
10. Santarus, Inc. (SNTS, Earnings, Analysts, Financials): Engages in acquiring, developing, and commercializing proprietary products that address the needs of patients treated by physician specialists. Market cap at $404.46M, most recent closing price at $6.46. The stock is currently trading at 8.67% above its 20-Day SMA, 15.81% above its 50-Day SMA, and 64.63% above its 200-Day SMA. Net institutional purchases in the current quarter at 2.8M shares, which represents about 6.65% of the company’s float of 42.11M shares.
(Written by Danny Guttridge)
Use Kapitall’s Tools: Looking for ways to analyze this list?
Use this article snapshot as a launch pad (click here for help): Simply click on the links, and use Kapitall’s tab navigation to browse through the data…
Analyze These Ideas: Getting Started
Dig Deeper: Access Company Snapshots, Charts, Filings
- PulteGroup, Inc. (PHM, Chart, Download SEC Filings)
- Glimcher Realty Trust (GRT, Chart, Download SEC Filings)
- PDL BioPharma, Inc. (PDLI, Chart, Download SEC Filings)
- Western Alliance Bancorporation (WAL, Chart, Download SEC Filings)
- Demand Media, Inc. (DMD, Chart, Download SEC Filings)
- Flagstone Reinsurance Holdings SA (FSR, Chart, Download SEC Filings)
- The E. W. Scripps Company (SSP, Chart, Download SEC Filings)
- BioScrip Inc. (BIOS, Chart, Download SEC Filings)
- Hot Topic Inc. (HOTT, Chart, Download SEC Filings)
- Santarus, Inc. (SNTS, Chart, Download SEC Filings)
New to Kapitall?
1. New to the site? Click here to register for a free account, and gain access to more tools and data
2. Looking for more investing ideas like this? Click here to sign up for your free copy of Kapitall Weekly
3. Follow us on SeekingAlpha, Motley Fool, Nasdaq and Twitter
Tags: news
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) — Well over a decade ago, I got a note from an investor who said he did not understand how average investors were supposed to keep up with “recommended behavior for fund investors.”
By his reckoning, Morningstar Inc., a leading investment research firm, had developed a style box that broke the world into nine categories for stocks, and another nine for bonds. There also were a few categories outside of the box.
Click to Play
Zweig on J.P. Morgan: Self-deception will kill you
WSJ.com ‘Intelligent Investor’ columnist Jason Zweig pulls up a chair on Mean Street to explain how J.P. Morgan violated a simply rule in its $2 billion trading loss: You must not fool yourself. Photo: Reuters.
Properly diversifying meant two funds in each style box, then at least one from every other category.
“How is any investor expected to pick and then keep track of more than 40 funds,” he wondered.
They weren’t supposed to invest that way then, or now.
I was reminded of the story this week when Morningstar introduced two new fund categories: foreign small/mid-cap blend and India equity.
An investor who didn’t know better might think that if an influential company like Morningstar has decided these funds deserve their own group, it means they belong in a portfolio.
Nothing could be further from the truth.
Investigate before you invest
“The reason we create so many categories of funds is to more closely compare like funds, and to make sure that the groups of funds we are comparing really are similar, so that the comparisons are most clean and effective,” said Gregg Wolper, senior mutual fund analyst at Chicago-based Morningstar
/quotes/zigman/86514/quotes/nls/morn MORN
-0.02%
.
He added: “We don’t want people to buy funds from every category, and no one should think that just because we have added a new category means they should go out and buy something from it, or that we are recommending funds from it.”
Typically, Wolper said, Morningstar creates a new category once there are about 20 funds to be grouped by asset type or specific investment style. Otherwise, existing funds are kept in the category that most closely fits their objective; at some point, however, a bunch of slightly misplaced funds muddies the ratings picture and necessitates change.
“Being in the 20th percentile doesn’t say much when you are one fund out of five,” Wolper said. “If we waited until there were 40, 50 or 100 funds for the new group, then the category they were in would have problems, and investors couldn’t be sure the comparisons were real. With about 20 funds, there’s enough interest from fund companies that it makes sense to break out with a new category.”
The growth of fund categories — whether it is from Morningstar, Lipper Inc. or any data provider — is a reflection of what fund companies themselves are doing, namely coming up with different ways to serve the investment world.
Think of it like the famous 31 flavors of Baskin Robbins ice cream, where every choice represented a different taste but you didn’t need a scoop of every single flavor to make a good sundae. A few flavors — based on how you are feeling, the taste you crave, trying something new — is sufficient.
So it goes in mutual funds, where a financial sundae that contains every flavor would have too many funds for the average person to digest.
What you hear about every new type of fund and asset class is that it is somehow “improved” or “better.” But it’s hard to know how all of these funds work together, whether owning a “large-cap growth fund” and a “core growth fund” gives you real diversification of just a false sense of security.
Put simply, as the fund world gets increasingly complex, coming out with new metrics, products and research tools, investors shouldn’t feel compelled to follow suit.
“There are definitely people who have an idea about, say, India and who want to know the best funds investing there, so having a category that gives a real and honest comparison of those funds is good,” Wolper said. “But if the average person never buys an India fund, they probably won’t miss it. … You don’t need to have a fund in every style box or every category, and that won’t change no matter how many categories we have to create.”
/quotes/zigman/86514/quotes/nls/morn
Add to portfolio
MORN
Tags: news
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) — Investors say investment performance is not what drives them to work with a financial adviser. But when performance sours, the investing results — supposedly a secondary factor in the hiring decision — typically lead to the adviser being fired.
Click to Play
Zweig on J.P. Morgan: Self-deception will kill you
WSJ.com ‘Intelligent Investor’ columnist Jason Zweig pulls up a chair on Mean Street to explain how J.P. Morgan violated a simply rule in its $2 billion trading loss: You must not fool yourself. Photo: Reuters.
A new study helps show why that is, and leaves investors and consumers a lesson to consider about hiring a broker or financial planner.
The 2012 U.S. Full Service Investor Satisfaction study released Thursday by J.D. Power Associates found that the public’s overall satisfaction with full-service investment firms is basically back to the levels of 2008, before the market tanked during the financial crisis.
But investors are less happy in the three categories which are most critical to their satisfaction — their financial adviser, investment performance, and commission/fee structure.
Where things actually have gotten better — bringing the overall study numbers in line with the pre-recession levels — are in categories like account information and an investment firm’s Web site.
Advice and consent
“When you just look at the numbers, you think everything has returned to normal, that people are as satisfied with their investment firm as they were in 2008,” said David Lo, director of investment services at J.D. Power. “When you look at the factors individually, you find that’s not really true. People are more satisfied with the little things, but not as happy with the factors they consider the most important.”
Part of what is interesting in the J.D. Power research is that the top firms have more customers attributing performance to the adviser.
Good advisers don’t actually promise performance. Their job is to develop a plan, to equip customers with the right tools so that they can execute the plan, and to provide the emotional discipline necessary to see the whole thing through when market conditions are nerve-wracking and make the average person want to cut and run.
“An adviser who is promising people ‘Switch to me and I will make you 15% more than before or 20% more than the other guy’ is going to have problems, because the customer is going to be unhappy the first time performance doesn’t reach that level,” Lo said. “So a good adviser tells you what they can do for you, the services they can provide, and they help you determine the performance you need and how to go about getting it.”
But Lo noted that when people leave their adviser, the top reason is almost always that the counselor “didn’t make me enough money.”
Some of that, he believes, is a survey bias. Ask people the most important factor in a decision, he noted, and they almost always will come up with results or price.
He thinks the bigger issue is that the investors who are firing their advisers are the ones who attribute their results to something besides the advice they are getting. It might be that the adviser is executing their suggestions, or that the market simply is rewarding everyone, but the customer doesn’t feel that whatever they are getting is the result of the adviser’s work.
That’s a key lesson for shareholders because it highlights the importance of knowing why you are going to an adviser in the first place.
Let’s be clear on this: There is nothing so special in the financial planning business that a consumer can’t do it themselves. If you want to go learn the right things, educate yourself, make use of free resources and take responsibility for the outcome, a planner or broker is not necessary.
But think of this like hiring an auto mechanic or a plumber. You don’t need those pros either; you can learn what’s necessary to fix your own car — and get the supplies at the local auto-parts store — and you can take care of a leaky faucet or toilet, and get a do-it-yourself video to help you do it right, but the majority of people want or need help precisely because they lack the skill set to be comfortable that they will do the job right.
With everything they have invested in a home or a car, they worry that their own deficiencies in doing the basic maintenance and repair jobs will damage the value of what they’ve got.
Investor, know thyself
It’s the same with financial advisers. The fact that we live in a time where there is plenty of information available for people to do it themselves doesn’t mean that most people will take the time and do what is necessary to be good at it.
So when someone makes the decision to work with an adviser, they should know what they are getting, that they are looking for an action plan — helping them determine where they are, what the financial destination is — and then guidance to get from today to their goals.
“If you know what you are looking for — and that it’s about more than performance — when you start looking to work with an adviser, I suspect you will be much happier with what you get,” Lo said.
For anyone working with an adviser, setting expectations is crucial, not only on performance but as to how often there will be contact, how investment ideas will be pitched and more. Ultimately, the idea isn’t to be satisfied just on performance — although the survey numbers show that is essential — but to be satisfied on all factors.
“The best relationships,” said Lo, “are the ones where the customer is satisfied with everything, and they are out there, in all market conditions. … If someone is managing your money, what they are doing for you is too important to leave much to chance, so working with the adviser to make sure they know what you expect — and holding to those expectations – will be what leads to a good relationship.”
Tags: news
<!–
Email
Print
Facebook
MySpace
Delicous
Stumble
Digg
More Destinations…
–>
The FINANCIAL — Thomson Reuters, the
world’s leading supplier of intelligent information for businesses and
professionals, today announced the launch of the first end-to-end
brokerage processing solution for alternative investment products.
Through a collaborative agreement with the Depository Trust Clearing Corporation (DTCC), Thomson Reuters has designed the first service bureau processing solution to allow broker-dealer firms to manage the submission of orders for non-traded real estate investment trusts (REITs), business development companies (BDCs), dividends, commissions and settlement processes through DTCC’s AIP system and Thomson Reuters BETA Systems AIP platform (BETA).
According to Thomson Reuters, until now, managing trading and settlements for an alternative investment product has been labor-intensive. By integrating with DTCC’s AIP service, Thomson Reuters’ BETA Systems brokerage customers will benefit from a standardized and streamlined process, thereby mitigating risk for the broker-dealers and their advisors. Brokerage firms can benefit from more timely and accurate access to account position data, tax lot information and integrated statements.
“Technological advances coupled with a much needed knowledgeable personal touch are at the core of enhanced client service,” said Eric Jones, global head of BETA product management at Thomson Reuters. “We are delighted to collaborate with DTCC to develop standards that meet a growing market demand for alternative investment products within the retail investing community.”
Because DTCC’s AIP platform is seamlessly integrated with BETA, any BETA service bureau broker-dealer firm can use the system to drive efficiency. Back office professionals can easily send and track customer information to the AIP sponsor, submit and track client orders, process advisor/firm commissions and track the settlement process.
“We are pleased to work with Thomson Reuters to make their alternative investments processing system available to brokers and advisors, said Ann Bergin, DTCC managing director and general manager of Wealth Management Services. “It represents a critical first step in helping investors achieve their alternative investments goals with greater transparency and reduced costs.”
DTCC subsidiary NSCC filed a rule amendment on March 7 with the Securities and Exchange Commission (SEC) pertaining to broker/dealers’ custody and possession requirements for uncertificated alternative investments. The filing, which took effect immediately, marks a milestone because it allows DTCC’s AIP service to offer an industry-wide solution that allows securities that are processed on AIP to be deemed in a good control location, further reducing cost and risk, which benefits all parties to these transactions.
The AIP system currently handles non-traded REIT and BDC (Business Development Companies) securities. Firms can manage other AIP security types, such as managed futures, hedge funds and private equity funds, but they will continue to be processed manually. Future enhancements include new features and functionality to process other AIP securities.
Related Stories
Tags: news