Over this past holiday weekend, my family and I were talking about about “today.” And “attitude.”

The thrust of our conversation was why no one out there seems to have any interest in investing at all! It wasn’t that long ago when NAIC volunteers, looking to build attendance for an annual investors’ fair, could find plenty of folks who wanted to find out what it was all about and learn how they, too, could make a buck in common stocks. Not so today!

I suggested that it might be a generational thing. The world is evolving and our youth are moving into active adulthood. And it’s they who set the attitude for “the world out there.”

I also suggested that the same kind of disinterest shows up in the schools. Few are in it for the education; more are in it for the credentials so they can “get a good job.” (I’ll leave the definition of a “good job” for another day.)

Could it be that those of us who are financially well off have been so successful and intent on not making our kids “go through what we had to go through” that we’ve stripped them of the need, the urgency, the ambition—and the satisfaction—that comes with doing it themselves?

For all these months, I’ve been trying  awfully hard to arouse some interest in making money with one’s money, to no avail! What am I missing?

Any ideas?

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Whether you celebrate Christmas, Hanakkuh, Kwanzaa, or whatever, there’s an almost universal commonality among faiths—and non-faiths—that this is the season to give.

In that spirit, I’ve spent some time putting together as concise a summary of our investment approach as I could. And, because it’s so simple, I’ve been able to cram everything I think anyone needs to know about investing into my thirty-minute broadcast on Take Stock with Ellis Traub this evening at 7:30PM Eastern (6:30PM Central).

As you know, my intent is to separate as many folks from “the herd” as I can; and I’m hopeful that this offering might help them to understand why our way works and the herd’s doesn’t. Read more…

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As typically happens, interest in investing declined in lock-step with the Dow. But there are signs that some color is returning to the cheeks of a nearly moribund body of amateur investors.

Many investment clubs—microcosms of that larger body—attest to the same phenomenon in their ranks. Members lost interest as the market value of their clubs’ portfolios seemed to evaporate while they stood helplessly by; and many clubs lost members or, worse, fell by the wayside.

In view of this, the question must arise in the minds of some whether clubs are even relevant any more.

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All of us know that it’s not smart to put all of our eggs in one basket. It just makes good sense.

What makes no sense to me. after all these years of being  advised to diversify by industry and by company size, is the potential dilution of return that this practice produces. So I quit doing it! For the same reason I don’t invest in index funds or EFTs.

I’m looking for a return of as close to 15% as I can get. Therefore I invest in companies whose operations are capable of consistently producing the highest earnings growth possible. And, once I own them, I’m happy to let their managements do their jobs and keep that performance rockin’ until they can’t do it any more.

Diversification, for me, is nothing more than having enough of those excellent companies in my portfolio.

Warren Buffet says that six are enough for him because, once he’s found that many good companies, he’d only dilute his return by adding others that are not quite so good. I find it more comfortable to have at least eight, but no more than fifteen in my portfolio.  I don’t dig into the research nearly as diligently as he does [understatement of the week], so I accept a little sacrifice in my return, just to have enough to cover me when the inevitable Enrons and Worldcoms come along to prove that the “rule of five” works.

Any other effort to diversify by market sector or size—to compensate for down markets—tends to produce a lackluster return over time. Certainly investing in indexes, EFTs, or other broad “market baskets”—even mutual funds—guarantees you  no better than the average return, which is lousy, compared with the performance of the undiluted cream of the crop!

You don’t need to compensate, you just need to be patient!

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PE 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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I’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!

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Asset allocation is a device used by investors and financial planners to populate a portfolio with an appropriate mix of investment vehicles selected from a smorgasbord of stocks, bonds, and occasionally other investments, each deemed to carry with it a uniquely predictable degree of risk.

Its goal is to optimize the return on the portfolio while taking into account  that investor’s tolerance for risk. And, risk aversion is analyzed using such factors as the point the client has reached in her life cycle, her current and future responsibilities, her earning capacity—as well as the nuances of his or her character and personality.

The assumption is that there is an inverse relationship between risk and return; and, the more aggressive the portfolio—one invested primarily in common stocks—the more risky it is.

Few amateur investors have the experience or know-how to apply asset allocation without the help of a professional. And, considering the view that most amateurs have of “investing,” the expense of such a professional might easily be justified. But….

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First of all, let me make it clear that I absolutely love the herd!

They are those wonderful gamblers who provide us with most of the bargains we come across when we actually invest. So, while I’ve chosen to dedicate myself to trying to convert as many herd-members as possible to become solid and successful investors, I would hate to think of what this investing arena would be like without them!

Before I say anything, you’ve got to know that I was once very much the herd-member. So I can speak with some authority.

That said, here are ten ways you can tell if someone runs with the herd:

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 chat. This week we’re going to talk about "risk," and why there should be none.

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Two of my favorite organizations have just jointly announced a wonderful program to offer investment clubs an opportunity to move up to the next level of convenience and efficiency in executing their trades, and to do so without paying any commissions. For clubs, which frequently trade in small, odd lots, this can substantially cut down the cost of each transaction and increase the return on their shares. And there are other benefits as well.

FolioFN, recently renamed “FolioInvesting,” is a folio brokerage, which means that they have the technical capability to not only execute trades conventionally on the various exchanges, they also can execute window trades, an exciting new means of permitting their clients the benefit of inexpensively trading on a dollar basis rather than a per-share basis.

Read more…

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Let’s talk about unrealized gains. Are they real? Or are they “only on paper?”

As you can probably tell, I’m spending more and more time trying to widen the gap between us “real investors” and the herd out there whose members think investing is gambling on the stock market. So, this topic provides a good opportunity to highlight that distinction.

When the typical trader out there buys a stock, her sole focus is on buying it at a low enough price so she can sell it to someone else at a higher price and make money on it.

Read more…

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