One of the things that makes investing interesting and fun is the unexpected math quirks you can encounter when constructing a portfolio. For example, it is sometimes better for an income investor to buy a lower yielding asset that is growing its payouts quickly than it is to buy a higher yielding asset that is stagnant or declining. To walk you through the mathematics, I did a short case study of John Deere & Company, the farm equipment manufacturer, over the past decade. Take a few moments to read it and it might change how you think about getting your hands on income streams ...
The Annual Report, 10K, and Proxy Should Not Be Summarized or Replaced When Making Big Investment Decisions
A situation came up today that reminded me of the importance of going to source documents, especially as an investor. If you invest in stocks or bonds, you should not get all of your data from financial portals. They can, and do, generate mistakes as a result of the scripts used to produce the numbers. Instead, get your hands on a copy of the annual report, break out the 10K filing, and get cozy with the proxy statement. Read the disclosures. Go through the figures until you see the business and can explain where the profits are made.
Nothing else you do as an investor can replace those activities.
Last week, I began reading former Treasury Secretary Timothy Geithner's book, Stress Test: Reflections on Financial Crises. For new investors, they may not understand how the Federal Reserve controls interest rates, so I thought it would be a good exercise for you to read about both the discount rate and the Federal Funds rate. Getting a grasp on the basics can make a lot of economic and policy news more accessible. From there, you can branch out into things like LIBOR, which touches every single household and family in the country.
I was reading someone's thoughts today on how much money investors should keep in a savings account or cash reserves, and it made me realize that this is one of those areas that few experts offer advice beyond the six month emergency fund rule. You see different practices all over the board. Recently, it was revealed that billionaire investor Warren Buffett was leaving his wife a portfolio allocated 90% to a low-cost S&P 500 index fund and 10% to cash. When starting Microsoft, Bill Gates wanted cash sufficient to pay 12 months' worth of expenses without a single penny in additional sales coming in the door.
I'm going to break out some of my spreadsheets, do a bit of research, and begin working on a mathematical model for what might be optimal under certain investing conditions. It seems like an interesting project.
Thirteen years ago, I wrote an article on the site that detailed the world of shareholder perks. Back then, companies were fond of giving away free stuff to their owners. Some of the businesses have been acquired - William Wrigley is no longer publicly traded, so you can't get your free sticks of gum - but most gave up the practice, presumably due to the proliferation of one share owners who raised cost and didn't have a major stake in the enterprise.
This afternoon, on my personal blog, I was engaged in a conversation about Swiss chocolate maker Chocoladefabriken Lindt & Sprüngli AG after mentioning that it was Nestlé's dividend day for holders of the American ADR. The firm has two classes of shares, the main stock, which sells for 50,000 CHF per share, and the participation share, which go for 4,330 CHF at the moment. One of the readers pointed out that registered owners of the firm who attend the meeting in Switzerland are given a bhaltis. It's a suitcase filled with 4.5 kilogram of the world's finest chocolate, with a market value of 140 to 150 Euros. According to one source, you must own the more expensive share class to get the free chocolate.
That's the kind of property dividend investing I could get behind ... I want one of those boxes.
With the S&P 500 hitting an all time high, it's hard to forget that only a few short years ago, it had reached a 12-year low. With such vicissitudes, there are several lessons that investors can take away by studying the ups and downs of equities. Let's go through them together ...
If you are thinking about putting assets aside for someone in a trust fund, at some point, the trust is probably going to end up being serviced by a bank trust department. If you've never worked with one before, it may seem a bit daunting but the entire process is fairly simple. A bank trust department provides services under two big umbrellas: 1.) Trust Administration, and 2.) Investment Management. You may need one or the other, possibly both. To get an idea of what they cost, what you might expect, and more, check out Bank Trust Departments 101.
When it comes to investing in stocks, the best assets are those that throw off money decade after decade. John Bogle once wrote about how rich families very rarely sell these precious holdings, instead passing them for generations, while everyone else hyper-trades, turning over their portfolios with increasing rapidity. To illustrate how a long-term investor might approach buying shares of a blue chip stock today, let me walk you through an analysis of a conservative food company like General Mills ...
Earlier this week, we talked about three fundamental questions you should answer before you begin building your portfolio as they will inform the type of holdings you choose to keep on your family's balance sheet. Once you've done that, the next steps are going to be to decide:
- Stocks - Do you want to hold stocks directly, invest through mutual funds, or buy index funds?
- Bonds - Do you want to hold bonds directly or invest through a bond fund? What types of bonds do you want to own? Corporate bonds? Tax-free municipal bonds? Treasury bonds?
- Real Estate - Do you want to invest in properties directly? Buy tax lien certificates? Purchase REITs through a brokerage account? Underwrite mortgages to collect interest income?
Generally speaking, the more sophisticated you are, the better off you're going to be owning assets outright (stocks, bonds, and real estate). Likewise, generally speaking, the less sophisticated you are, the better off you're going to be having someone else or a proven methodology manage your money (mutual funds or index funds).
There are six things you can do to drastically increase your chances of long-term investing success. Every new investor owes it to themselves to learn what they are ...