Author: kdrevik

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

This is the Fourth book in the author’s five part series on finances. In the previous three they showed how to use long-term trends to “time the market” in the long term (10 – 15 years +), how to set up an income producing portfolio in these low-yield times, and finally how baby-boomers can still retire even after the dotcom crashes, through using the right steps, savings and planning. This book is written more for millennials and Gen Xers, and discusses the steps and objectives individuals should be taking throughout their lives (their 20s, 30s, 40s….). The book is chock full of bits of knowledge and wisdom for specific points of your life, and is well worth reading for those just getting started.

The book starts off discussing the four parts of getting your financial life’s crises ironed out, which are no more than having a general idea of:

1. How much predicable events will cost (marriage, house, car, etc.)
2. How much you’re likely to earn at different stages of your life
3. How much money to save and when
4. Some grasp of when and how much to borrow

One of the key points of the book is the “life cycle” model of financial planning, where a person’s income starts out low, builds up, then plateaus, while their consumption level stays relatively flat. Thus, they’ll need to do some borrowing to start with (house, college, etc.) then pay it off as they peak, while saving for that period as they retire and their income drops. It is around this cycle that the book is based.

The book then goes into numerous chapters, focused around:

• Your 20s (challenges, saving & investing in your 20s, housing for couples & singles, babies, etc.)
• Your 30s (challenges, saving & investing in your 30s, insurance, career advice, etc.)
• Your 40s (challenges, saving & investing in your 40s, being sinvle and 40)
• Your 50s
• Your 60s and beyond

Each of these chapters has detailed graphs/charts, tables for recommended savings rates, recommended portfolio allocations, and notes on personal purchases which are typical at that point of your lifeThe only critique I would make is that this is based around the standard “work till your 60” plan for life, which for many FIRE enthusiasts is too long. We prefer to accelerate our savings and become independent much earlier. Still, I think this book would be very valuable for folks just graduating (either High School or College), probably alongside Dave Ramsey’s book.

I would rate in 3.5 stars out of 5.

 

Mr. 39 months

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

 

This is the third book in the author’s five part series on finances. In their first, they wrote about using certain metrics to be able to “time the market” in the long term (10 – 15 years +). In the second book, they discussed the steps to create an income producing portfolio, through the use of bonds, dividend stocks and REITs. This book, written in 2005, is mostly addressed to the baby-boom generation, who had recently seen their retirement money damaged in the dotcom meltdown. The book’s concept was that, with the right steps, savings and planning, and individual could still retire comfortably.

The book starts off with some of the basic rules for retirement (Maximize your abilities, start saving early, don’t spend more than you earn, etc.) and then flows into retirement planning by decade – what you should be doing in your teens, 20s, 30s, etc. It is all sound advice, and falls in line with other things the authors have written (like Ben Stein’s “how to screw up your life” book). It finishes its first part by discussing the coming baby-boomer retirement crisis. As many of you know, a lot of boomers have not saved anything like what they will need for retirement. They only really started to do it in the 00s and this decade. That is probably why the 2007-2008 meltdown go so much press – it hurt the boomers badly.

The second part of the book goes into topics like how much you will need, how to setup a savings plan, and at what rate you will need to get your retirement money income. The charts in chapters 3 & 4 are priceless, as they show, based on typical returns, what you’ll need to save at whatever point you are at (5, 10, 15 years from retirement) and what your overall nest egg should be, based on projected lifetimes. The second section then talks about Monte Carlo simulations (to test your plan), income investing, and how to draw down your funds over your retirement. This is the heart of the book, and its best section. The only issue I have (and it’s a personal one) is that he relies a lot on bonds (his portfolio is 50% bonds, 50% stocks). In the 80s and 90s, bonds had high rates, and there were corporate bonds at 6% and 7% in the late 90s. Based on his knowledge there, I think he believed the bonds would return to that – but in our current low interest rate environment, they are only coming in around 3% – 4%.

The third section of the book discusses what to do if you haven’t got enough. It’s a bad spot to be in, but there are some alternatives:

• Immediate annuities (to guard against outliving your money)
• Relocation to a less expensive area
• Reverse mortgages

The book closes with “25 big truths of retirement planning” another list of pearls of wisdom from the authors.

This was a good one, and I refer back to it occasionally to see if I am “on track” based on his numbers.

 

I would rate in 3.5 stars out of 5.

 

Mr. 39 months

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

This is the second book in the author’s five part series on finances. In their first, they wrote about using certain metrics to be able to “time the market” in the long term (10 – 15 years +). In this book, they talk about how to set up an income portfolio that will pay you dividends – something often used by folks for their retirement. There is also a school of investing that says that the only real stocks you can count on are ones generating dividends – all the other “growth” stocks are just hot stocks that can easily come crashing down.

Written in 2005, the book discusses how, in reaction to the dot.com stock meltdown, the fed dramatically dropped rates in the US. The risk-free T-bill of 2000 was 6.2 percent, while in 2005, it was at 1.7 percent. This affected a lot of folks looking for income generating investments, like dividend stocks, bonds, annuities, etc. The book starts out explaining how the chase for growth can lead to major stock drops (like 2000) – which can be very painful depending on the timing. Their alternative is income investing, where you put money in the market when it is too expensive. Their idea is not to buy into growth, but to buy into investments that produce a regular yield.

The key measurement for them is yield – both yield from stocks, and yield from bonds. The caution that you should get your yield information from the same source for all your investments (since some calculate yield a little differently) so that you are always comparing apples-to-apples. They also caution that some of the info in the book is time sensitive (like from 2005?) so do the analysis yourself to get up-to-date information.

The book spends several chapters discussing Bonds (a topic that many FIRE folks don’t spend a lot of time on).It discusses the risks and rewards, how to measure yield, essential bonds for fixed-income investors, and then higher yielding bonds. These chapters alone are a real benefit for folks, because most people are poorly educated on the bond market.

The book then moves into income producing stocks, including preferred stocks. Much of the info here has been covered before, but the emphasis on yield and dividends, over growth, is the key concept.

The book then covers Real Estate Investment Trusts (REITs) which are another key source of income. REITs are a special class of companies, dedicated to real estate investments. Because they have to distribute 90% of their earnings as dividends each year, they benefit from certain tax codes write offs. Since they distribute so much of their earnings via dividends, they are income producing machines, and a key part of anyone’s income portfolio.

The book closes by working up some sample income portfolios:

1. A very simple one, consisting of four index funds (20% Vanguard REITs, 20% IShares Stock select dividend, 30% Vanguard Inflation protected securities and 30% Vanguard short-term bonds). Four funds, low expenses, no fuss. In 2005, this generated a 3.8% annual yield. In 2016, it was around 2.6%.
2. A slightly more aggressive allocation (20 different REITs, 10 dividend stock, 10% in IShares, 30% in Vanguard inflation protected securities, and 30% in Vanguard total bond market). This increased the yield in 2005 to 4.3%
3. A very aggressive allocation (20% in leveraged REIT fund, 20% in leveraged dividend funds, 30% in Inflation-protected securities and 30% in PIMCO corporate income fund – to get some emerging markets yield). This gets the yield in 2005 up to 6.9%, even with the bump up in expenses.

The last thing they note is tax strategies. Specifically, tax sheltered accounts (401Ks, IRAs, etc.) is where you want to stock your Treasury Inflation-Protected securities. It helps avoid having to pay taxes on income that is one of the major hassles of TIPs bonds. Also consider putting REITs in your tax advantage accounts, for the same reason.

Overall, I found the book to be interesting, and I’ve used my father’s remainder IRA to setup something similar. It has produced some good yield for me (around 3.42%).

I would rate in 3.5 stars out of 5.

Mr. 39 months

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a masters & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

The book was written in 2003, after the dot-com crash. It came out of a series of lunches and bike rides in Santa Monica from 1997 to 2000, where the two argued/discussed how the market appeared to be overpriced. However, since conventional wisdom was that you couldn’t “time the market” what were you to do? Market timing “had been the province of short-term fortune-telling cranks” and has had a justified bad reputation in investing circles. What the two authors wondered (and set out to research) was that, in the long-term (10+ years) were their valuation metrics that could be used to determine when to buy, and when not to buy, stock funds. Note that they were using stock mutual funds (S&P 500 Index) for your purchasing decision here, because individual stock analysis is something completely different.

The authors then set out to look at various metrics for determining the time to purchase, compared them, provided their strengths and weaknesses, and then judged them over various time periods (5, 10 and 15 years). They also provided methods for the reader to do similar analysis in the ongoing years, so you could continue to use the methods. The list of metrics they came up with were:

• Price vs 15-year moving average of price
• Price-to-earnings ratio (PE) vs 15-year moving average
• Dividend yield vs 15-year moving average
• Fundamental value (can’t use this now, their source no longer provides the data)
• AAA bond yield vs stock “yield”
• Price-to-Cash Flow and Price-to-Sales (can’t use this now, their source no longer provides the data)

Each of these metrics provide a point where the investor should start purchasing stocks, or should stop purchasing (but continue to let the stocks sit and reinvest the dividends). Again, this is long-term timing, so there is nothing in here to show when to exit the market completely and put it in bonds or your bank.

They end by showing that, by combining each of these metrics, rather than using just one, and using that to determine your time to purchase, you can enjoy even greater stock.

Price: This metric is just a comparison of the current S&P 500 (adjusted for inflation) versus the 15-year moving average. When the current price is above the 15-year average, you should stop purchasing and let your stocks ride. When it dips below, you can begin purchasing again. As you would expect, since it has been climbing steadily for many years, this one doesn’t provide a signal to purchase as much. In fact, using this metric, it suggests you shouldn’t have been purchasing from 1985 to 2008 (one of the great run ups of stocks). The only time it wanted you to buy recently was from 2009 – 2012.

 

Price chart

Price-to-Earnings: This one seems to be a little more accurate, in my opinion. Many folks have used the P/E ratio for their investing decisions. Here you are measuring the current S&P500 P/E ratio versus the 15-year moving average. Again, when its above the average, you shouldn’t buy, when it is below the average, you should buy.

PE chart

Again, if you look at the chart, it recommends not continuing to buy in 1985, and only starting back up again in 2004. The book provides documentation to show that, as of 2003, this method rewarded the investor better than continuing to purchase during the great stock run up. Perhaps if t went past 2003 (when the book was written) it wouldn’t be valid. Something for me to check out in the future.

Dividend Yield: Companies can elect to distribute some of their excess earnings to their shareholders, and these take the form of dividends. Nowadays, companies don’t like to give out dividends – their CEOs think they have a better use of the earnings to grow the business. In the book, they track the S&P500’s dividend yield versus the 15-year moving average. When the current yield is below the 15-year average, the assumption is the stocks are overpriced, and you should not be purchasing new stocks (but you should continue to reinvest the dividends). Again, based on this, the book shows how, over a long period (15-20 years) the investor beat out the others (in the case of 20 years, it was almost a 50% increase in overall returns). This is also the third metric in a row which says to stop buying new stocks n 1985 (?)

Dividend yield chart

Earnings Yield vs AAA Corporate Bond: In this fourth and final metric,  the book compares the yield of a AAA corporate bond to the S&P500 Earnings Yield (you get this by dividing 1 by the P/E ratio). The earning’s yield has always been a short-hand way to compare bonds to stocks. The idea here is that if someone can earn more “yield” from a bond than a stock, they should invest in bonds. Except for a dip between 2008-2010, this metric was also suggesting investing in stocks for the past several years.

Earnings vs bonds

The book concludes with an analysis of how to use all the metrics together to significantly increase your returns. It compares using 1, 2, 3 or 4 of the metrics together, and their returns over 5, 10, 15 and 20 years, as well as comparing them with other strategies (asset allocation, other investments like real estate, etc.) In the end, this long-range market timing was shown to be more successful.

However, the authors note that this strategy is not for the faint of heart. It is a true contrarian strategy, where people will be purchasing stocks when there is “blood in the streets” and refusing to buy, when the market is going up like a rocket. It is also, very much, a long-term strategy, where you are not looking to capitalize on the investments for 15-20 years.

 

By the way, as of August 1, 2017, three of the four metrics have turned to “don’t buy” additional stocks. Only the S&P500 earnings yield vs bond yield still is pointing towards buying more, and even that is pretty close (S&P500 yield was 4.05%, AAA bonds were 3.75%). Also remember that this metric does not say to sell your stocks, just don’t buy any new ones (and continue to reinvest your dividends).

Overall, I liked the book, and may keep the metrics in mind for my “fun money” accounts. For my 401K/IRAs I plan on sticking with my asset allocation strategy.

I give it 3.5 stars out of 5

 

Mr. 39 Months

For those of you who have read some of my previous comments on investing, you know that I have a “fun money” fund which I use to invest in individual stocks. You also know that, for the most part, I haven’t been able to keep up with my simple Index fund investments in my IRAs and 401Ks. Imagine that, a stock picker who doesn’t do as well as the Index, who would have thought?

However, the purpose of this “fun money” is for me to learn about investing, stock picking, and what works (and what doesn’t). To do this, I’ve taken to doing some reading, looking at articles on the net, and planning my future purchases.  In that area, I took the opportunity to review the Little Book of Value Investing by Chris Browne. The book seeks to go through the concepts for value investing in a short amount of text, but still provide sufficient “value.”

The book starts off with a couple of chapters going over the basics of value investing, basically discussing the concept of “intrinsic value” for a stock (what it is truly worth, without hype or negative news). It provides some basic history of the concept, based on Benjamin Graham’s initial work, and the author displays his “credentials” with it, due to his father’s company being the firm that did most of Graham’s trading (they were located in the same building).

The book then dives into the various places to seek value stocks (large cap, small cap, international, etc.) The author discusses his early work with his father’s firm, where he searched through documents the old fashion way, before the advent of computers. This enabled them to find good bargains, because there weren’t many firms willing to do the deep research necessary to find the bargains. For example, back in the day, the firm was able to find a large number of companies selling for less than the cash the company had available!

Today, with modern computers and data, it isn’t as easy to find bargains like that, but it also is easier to get a list of companies with some of the criteria for value, and then do additional research to find the one you want. The book’s final chapters go through the process of how to do that:

1. Create list of Candidate stocks
2. • Price to book value below 2/3
   • Price to earnings
   • Price to net current assets
   • Buying of shares by insiders
   • Visit competitors data

1. Determine why are they cheap

1. • Too much debt?
   • Didn’t make earnings estimate?
   • Cyclical?
   • Competition?
   • Obsolescence?

1. Review the Balance Sheet (especially trend over last 5-10 years)

1. • Current assets 2X current liabilities
   • Long term assets vs. liabilities – is ratio increasing over time?
   • Debt-to-equity ratio: less than 1 (or company being funded by debt) – compare with other companies in the industry

1. Review the income statement (again looking at trends

1. • Revenue growth
   • Expense growth in line or less than revenue growth?
   • Gross profit percentage (revenue – expenses / revenue). Is it growing?
   • Earnings per share, and diluted earnings per share (which take into account stock options). Trend?
   • Look at trends over last 5-10 years. Here is where you are going to find how the company is doing
   • Return on capital ratio & trend (should be rising)
   • Net profit margin & trend (should be rising)

1. Research other factors of company (products & their outlook, Can it be as profitable as it used to be, One time expense that affected price, unprofitable operations that can be shed, competitors, etc.)

Finally, the book goes into one of the key parts of value investing – the fact that it is a Marathon, not a sprint. To invest for value means you are going to purchase a stock that is worth more than it is currently selling for – and then wait for the market to realize that fact. It may take a month, a year, or several years. To be a value investor is to be  a patient investor. If you don’t have the patience, then maybe this strategy is not for you.

 

Of course, that is something that I’m struggling with.

 

Mr. 39 Months