Archive for November, 2009

Thanksgiving Comes None Too Soon

November 26th, 2009

Thanksgiving DayAmid the international chaos, domestic disappointment and rising loss of civility that has intruded on our daily lives, this day of gratitude is a welcome opportunity to put things in perspective. And it comes none too soon!

Each of us, regardless of our individual condition, needs to pause, take a mental step back, and focus on those things we have to be thankful for this day—even if it’s only to be glad not to be a turkey! Read more…

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PE Expansion: Huh?

November 25th, 2009

Gas_coffee_stockPE Expansion—big deal! Lots of talk about it recently among “our kind of investors.” More than I think it warrants.

The price/earnings ratio or PE is a unit cost—much like the cost of a pound of coffee or a gallon of gas—which allows one to assess a price by comparing it with a typical, historical unit cost. You can certainly tell if a pound of coffee or gallon of gas is higher or lower than normal.

In this case, it’s the cost of one dollar’s-worth of that company’s earnings. And PE expansion is an increase in that cost—and a very good way to illustrate the difference between the intelligent investor and the herd.

The intelligent investor knows what his share of stock is worth because he’s aware of its “normal” PE. We actually quantify this multiple as the mid-point of PEs over a significant historical period. Assuming the company continues to operate satisfactorily and grow its earnings as expected, prices (and therefore PEs) should fluctuate comfortably above and below this midpoint.

When we buy shares in a company, we’re concerned mostly with buying our shares at a reasonable price—at or below that “normal” PE—so our investment will grow as earnings grow going forward. If, however, we find that the shares are selling at a lower-than-normal multiple, we can happily add the benefit of PE expansion to our estimated return and consider it a bonus or a discount!

Want to chat about this? Join me on Take Stock with Ellis Traub, Thursday evening at      7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen.
Dial “1″ to join the conversation.

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Fundamental Investment Views, Investment Concepts, NAIC Veterans' Lounge, Successful Investing , , , ,

Breaking Eggs

November 19th, 2009

broken eggsThe front page headline in my morning’s newspaper was a shocker!

Unemployment Tax to Surge for Employers,” it screamed—a huge display ad for legislative idiocy. And, sure enough, the story went on to tell us that Florida’s Unemployment Trust Fund was depleted and the cost to employers paying the lowest rate was to rise from $8.40 per employee to $100.30!

Yes, folks, this was on the front page, not in the comic strips. Coming at breakfast time, I couldn’t resist the metaphor, “If you’re going to make an omelet, you gotta break eggs.” Commonly used to excuse the inconvenient wreckage that slows traffic around construction sites until they’re completed, it’s even more apropos when applied here.

Reminder: Join me on Take Stock with Ellis Traub, Thursday evenings at 7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen. Dial “1″ to join the conversation.
This evening: Is today’s investment climate “new”? Or is it “same old, same old”? Join us!

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Nothing Changes!

November 16th, 2009

Nothing_ChangesI’m old enough to have heard it often enough to know better!

Every time the market takes an excursion somewhere—up or down—some of those whose investment experience I truly respect can take it only so long before they begin to mutter, “Our way used to work; but it’s a new world out there! Things have really changed!”

We’ll, I’m here to tell you that the validity of our basic investment philosophy has not changed and never will! The market is acting just has it always acted; and the herd is doing the same. It’s only a matter of degree.

The only thing that does change is the variety of approaches a fresh, new corps of gurus comes up with to deal with the “new world.” And the number of new products the financial institutions come up with to take advantage of the situation and take your money.

But, when the dust settles at the end of the day (Wow, two trite metaphors in the same phrase!), nothing ever turns out to have worked as well as the tried and true: holding the shares of good quality companies that produce their goods and services—and profits for their owners—throughout, with no regard for the price at which their shares might be selling.

Don’t forget, those companies already received all they’re going to get for those shares when they issued them.

One of the most desirable benefits of our way of investing is the serenity that accrues to the true believer. Don’t miss out on that folks!

Current Events, Food for Thought, Fundamental Investment Views, NAIC Veterans' Lounge , ,

Fast Track to Economic Health

November 10th, 2009

SHAKEIt appears we’re very likely to incur another $861 billion in committed entitlements to cover healthcare  reform. When the dust settles, we will have indulged our social consciences to the extent that we officially establish health care as a right instead of a privilege. Actually, it may not be all that bad in the long run.

After all, we’ve already committed to huge amounts of debt  that can encumber our kids, and theirs, for a long time. This would be a little more for a good cause.

My point here is that the role of the conservative has never been to simply throw roadblocks in the way of progress, as the liberal establishment would have us believe. Rather it’s role is important and two-fold: protector and facilitator!

As protector, that side of the aisle has always been the side to turn to for national security. That will not change.

As facilitator, it supports business, commerce, and production—ultimately the only source of funds to cover all of our national expense. There’s simply no other place to get it. So the sooner the left makes peace with the guys on the right who can pay for all their good works, the better off we’ll all be!

In return for accepting healthcare reform (and with it a public option that can prevent the insurance business from devouring so much of both the providers’ and the patients’ dollars) the conservative side of the aisle should demand legislation that will enhance business’s ability to provide the funds  to pay that debt, that will foster entrepreneurialism, and free up funds for investment in job-producing enterprise.

That would seem a win-win situation that might just bring us back to economic health faster than anything else could.

What do you think?

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Let’s Teach Them to Cheat!

November 10th, 2009

Kids CheatLet's Teach Them to Cheat

It was bound to happen! You simply can’t miniaturize cell phones, equip them with keyboards, cameras, text messaging capability, and access to the Internet, and expect kids not to figure out how to use them to cheat on exams in school. Kids are too smart for that! Unfortunately, they’re also too competitive and too amoral not to.

A recent Miami Herald article, reports the lament of teachers who reveal an incredible array of ways that at least 35 percent of our high school students have have put technology to use in obtaining and sharing answers during exams. In an earlier, ABC News piece, 74 percent of students polled said they had cheated within the past year!

There are actually sites out there that cater to those who cheat, providing everything from a 99 cent download of Cliff’s Notes to answers for specific exams. It’s common to photograph exams and e-mail them to friends, right from the exam room. And the innovation has only begun.

The Herald article goes on to say that only 14 percent of our kids believe there’s anything wrong with it! Well, is there?

Of course there is! The fundamental immorality is evil! And the notion of disobeying the rules by which everyone is expected to abide, to gain an advantage over those who do obey them, is nothing short of contemptible. Any parents who have raised their kids not to know they’re doing something wrong are dead wrong! Although let’s face it, it’s a terribly difficult challenge to explain to our kids how good it feels to be self-righteous about not cheating, when they’re competing with other classmates who crib their way into the dwindling number of openings at the good colleges!

The Obama administration is working overtime to come up with new ways to make education work; and they’re putting billions of dollars into incentives for the states to do it. I suggest that it might be time to take a new, “zero-based” look at education and challenge our venerated system right down to its basic premises. We did that with math some years ago, when the argument raged about the use of calculators vs. learning the multiplication tables. And we emerged from that battle hardly unscathed, but a little wiser I think.

Fulfilling Public Education’s Purpose

When public education was made mandatory, its purpose was to fulfill America’s promise to give every child an equal opportunity to prepare to go out into the world and be self sufficient. This meant being productive and perhaps creative enough to make a contribution of sufficient value to an employer to warrant being compensated for it.

Is public education fulfilling that intended purpose? It certainly is not! Somehow, over the years, parents and children alike view it as a way to obtain a credential without which an employer won’t even let you through the door. And, isn’t it the American way to invent the quickest way to accomplish one’s goal with the least effort? So….cheat!

Picture, instead, an education system that starts with role-playing in kindergarten to teach kids about barter and the real nature of money—a token received for doing something of value for someone else. Imagine making financial literacy the core principle around which “reading, ‘riting, and ‘rithmetic” flowed through the elementary years. It would be much easier to justify to those kids the importance of learning those basic skills by equating their present and future material success with how much they learn and how well, rather than what credentials (however earned) they might present to a prospective employer.

How about teaching them to be entrepreneurs—to be sensitive to the needs and desires of those around them, and then finding innovative ways to meet those needs—while they’re still just kids! Suddenly we’d develop a culture that created jobs, rather than one that simply taught graduates to look for them. And, it would be a culture in which being attuned to the needs of others was habitual. (Contrast that with the selfish, self-centered culture in which it’s most important to “Look Out for Number One!”)

Imagine a kid entering high school knowing the difference between earning and making money, how to account for it and manage it, the value of saving and investing it, how to keep others from scamming them out of it—and understanding viscerally that there’s no free lunch! That their value to others equates to what their efforts produce and not how much time and energy they expended in the process.

Most important, they could be taught the basics of morality, ethics, and fairness as a practical rather than a spiritual imperative (which doesn’t carry all that much weight in today’s culture). Instead of teaching that some behavior is simply forbidden because it’s immoral or “wrong,” how about exploring what life would be like for an individual if everyone were to do the things we regard as immoral or unethical! Starting in the formative years—again with role playing—those lessons could be firmly embedded by the time they reach high school. And there would be no room or reason for concern about the collision of church and state.

High School can be Fun!

High school could and should be a fantastic, exciting experience! Kids should not be arbitrarily barraged with an increasingly demanding and challenging set of static facts to commit to memory: dates, procedures, or formulae. Instead, they should be exposed to and taught the kinds of information they will need to successfully pursue a wide variety of professions, jobs, or entrepreneurial activities they might aspire to, and how best to find and compile  that information—how to “cheat,” if you will. Curiosity should draw kids into learning what they need to know; and the challenge should make those quests self-propelling. If a high school kid wants to find out something today, he’ll go looking for it. And if what he looks for can be found to have value, so much the better!

Exams might consist of an assortment of situational examples that required the student to select a subset from that assortment and solve problems using whatever tools or technology might be available at the time. The selection process might well complement both aptitude testing and the ultimate decision about a “major.”

And, of course, all kids could be issued laptops and cellphones to level the playing field—at a lower cost than equipping them with the myriad of books, since they would not be obsoleted by changes in course material or level of difficulty.

Changing from “Higher” to “Hire” Education?

In this kind of educational world, colleges become research institutions and incubators for industry. College students could get a running start at the things that will make them not only useful but valuable to prospective employers. The economics of higher education would change drastically, as industry joins more closely with education in partnerships that would provide “funnels” for gifted students to flow from academia into the real world. The transition from learning to producing would be more seamless. And there would be far less distance between the theoretical, academic world and the practical world.

And, of course, the pursuit of Masters Degrees and Doctorates could take on a whole new meaning. The requirements for examinations and dissertations might not change appreciably; but the metamorphosis from the theoretical to the practical throughout the entire spectrum of teaching could have a profound effect on the realm of extended degrees. Studies leading to such degrees could be commissioned by industry and the results of those dissertations could more often be put to practical and profitable use.

…And Beyond

No longer would employers need to be concerned with credentials. Instead, they would offer testing for applicants that would seek out the most innovative and productive within their own industries. Rather than depending upon someone else’s evaluations, they could determine first-hand who showed the most skill in finding out what they needed to know, and the greatest aptitude for implementing what they needed to do to apply it. Creativity would have a place in that process. And the conventional prejudices and barriers of race, creed, color, etc. that still subtly influence hiring,  would more easily fall away as the ability to evaluate the real potential of candidates to contribute to the business overrides stereotyping and profiling.

A whole new industry might spring up, born out of the need for crafting and administering such application tests and procedures. And, the bedrock of financial literacy that was imbued in kids, beginning in their formative years, would provide for a far more productive workforce— one that could identify more readily with the mission of the company and which could provide a more wholesome path to management than do the business schools of today and the networked boards of directors and top management cliques that too amply reward executives for their sub-par performance.

This may seem like a giant leap from just teaching kids to use technology to answer questions; but it all falls together naturally; and there’s no question in my mind about the potential for Utopian capitalism that could arise from such a makeover in the education of our children.

Investment Concepts

Derivative Action?

November 5th, 2009

DonQuixoteWindmillDerivative action is a legal process that would seem tailor-made to combat the wolves that have invaded our corporate boardrooms and have so outrageously ravaged the companies we shareholders entrust to their stewardship.

There are already some signs of restlessness on the part of some of the natives in the corporate jungle. Some of the institutional shareholders are no longer sitting still while the boards of the companies they own shares in betray those whose interests they’re supposed to protect.

But what about us little guys? I, for one, don’t think it’s enough to rely on this apathetic nation of shareholders to patiently wait for their proxy statements to arrive and check the boxes necessary to throw out the offending directors. Something more immediate and effective is in order. And, by definition, a derivative action suit should be just the ticket. But…

Reminder: Join me on Take Stock with Ellis Traub, Thursday evenings at 7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen. Dial "1" to join the conversation.
This week: Let’s talk about how long to hold the stock in a faltering company.

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Current Events, Food for Thought , , , ,

Thinking Bigger

November 3rd, 2009

buggy-whip Have you ever thought about what happens to the people who run, or who work in, industries like the buggy whip business, when they succumb to technological evolution?

I mean, look at what happened to the railroads, soon it will be the oil companies, and maybe the automotive industry. And, there will be lots more, as technology relentlessly spawns new products, services, and the industries to produce them.

The toll taken on loyal and productive employees who have unstintingly done all their employers ever asked of them is heartbreaking. And it provides an understandable incentive for organized labor to dig in its heels and demand some kind of security for such employees—at a tremendous cost to their industries.

Reminder: Join me on Take Stock with Ellis Traub, Thursday evenings at 7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen. Dial "1" to join the conversation.

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