Thursday, May 31, 2012

The Most Important Finance Books Ever Written................

The Most Important Finance Books Ever Written

These 21 selected books appear on must-read lists over and over.  They are the best finance books ever 

written, and the list should save you some time when perusing a book store or online searches.

Benjamin Graham, 'The Intelligent Investor'

Benjamin Graham was a mentor to Warren Buffett, and is considered to be the father of value investing, which Graham became famous for in both his teachings at Columbia Business School and in his book, Security Analysis.

'Security Analysis' is the longest running investment text ever published, and 'The Intelligent Investor' was called "the best book about investing ever written" by Warren Buffett.

John Burr Williams, 'The Theory of Investment Value'

John Burr Williams was one of the first financiers to utilize the discounted cash flow theory, which is still an extremely popular method for company evaluation.

Williams is a founder of fundamental analysis and his 1938 book, 'The Theory of Investment Value', is one of the most popular investing books in history. In this book, he articulates the DCF theory and focuses heavily on dividend based valuation.

Williams held four Harvard degrees and taught economics at the University of Wisconsin. Along with 'The Theory of Investment Value', Williams published 'International Trade Under Flexible Exchange Rates' in 1954 as well as many articles for economic journals.

Philip Fisher, 'Common Stocks and Uncommon Profits'

Philip Fisher's book, which was published in 1958 and titled 'Common Stocks and Uncommon Profits' contains many studies that are still applied heavily by investors nearly 50 years later. It was the first ever investment book to make the New York Times bestseller list.

Fisher's claim to fame was his focus on growth investing. Along with his writing, Fisher founded Fisher and Company, a money management firm, in 1931. He is famous for buying shares in Motorola in 1955 and holding those shares until his death in 2004. In Fisher's opinion, the best time to sell a stock is "almost never."

Eugene Fama, 'The Foundations of Finance'

Eugene Fama received his undergraduate degree from Tufts University and his MBA from the Booth School of Business at the University of Chicago. He continued to teach at the University of Chicago after receiving his Ph.D.  He's known as the father of the efficient market hypothesis.

'The Foundations of Finance: Portfolio Decisions and Securities Prices' is one of many pieces of work by Fama, and covers many of the ground works of finance and investment practices. Fama has published many works for journals and other publications, but 'Foundations of Finance' is a highly recommended text.

Peter Lynch, 'One Up On Wall Street'

Peter Lynch is a research consultant at Fidelity Investments. He received his undergraduate degree from Boston College and his MBA from the Wharton School of the University of Pennsylvania. As a portfolio manager, Lynch drove Fidelity's Magellan Fund from holding just $18 million in assets to $14 billion when he retired.

Lynch has two very popular books, 'One Up On Wall Street' and 'Beating the Street.' The first book details Lynch's investment technique and provides many of his theories on investing. The second provides the application of said techniques and theories, and elaborates on many specific stocks and investments that Lynch made.

Aswath Damoradan, 'Damodaran on Valuation'

Aswath Damodaran is the legendary finance professor at the Stern School of Business at New York University. He teaches both corporate finance and equity finance, and graduated from UCLA, The Indian Institute of Management Bangalore, and Madras University.

One of Damodaran's many books, 'Damodaran on Valuation' is his most popular book, in which he elaborates on which models to utilize in any valuation scenario.

Jeremy Siegel, 'Stocks for the Long Run'

Jeremy Siegel is a finance professor at the Wharton School of the University of Pennsylvania, and contributes regularly to nearly every financial television network and also Yahoo! Finance. Siegel completed his undergraduate studies from Columbia University and received his Ph.D. from MIT.

Siegel's most popular book is 'Stocks for the Long Run.' In this book, he argues that the stock market is actually very safe as he details the history of the stock market and why investing in stocks long-term is a wise decision. Siegel states that he would much rather see investors push for long-term, diversified investments rather than pursuing hot stocks or trying to time the market.

Robert Shiller, 'Irrational Exuberance'

Robert Shiller is an economics professor at Yale University and is one of the developers of the Case-Shiller index. Shiller graduated from the University of Michigan and received his masters and Ph.D. from MIT.

Shiller authored 'Irrational Exuberance' looks at the market crash of 2000, when the first edition of the book was published. He had predicted the peak and crash, but was not attempting to educate potential investors on market timing, but rather on understanding long-term investments.  The second edition of the book predicted the housing market crash.

John Murphy, 'Technical Analysis of the Futures Market'

John Murphy is widely considered to be the father of inter-market technical analysis. He graduated from the University of Rhode Island with a degree in Economics and also received his MBA from URI.

Murphy's book, 'Technical Analysis of the Futures Market' has a rather straight forward title. Murphy provides a history of the futures market and conversationally discusses how to attack a very complex market. While this is a niche book, there is likely no better book in regards to analyzing the future market than Murphy's book.

Robert C. Merton, 'Continuous-Time Finance'

Robert C. Merton is a professor at the MIT Sloan School of Management and Nobel laureate in Economics. He received his undergraduate degree from Columbia University and received his masters from the California Institute of Technology, as well as a doctorate in economics from MIT. Merton also co-founded Long-Term Capital Management.

Merton's book 'Continuous-Time Finance (Macroeconomics and Finance)' dives into modern finance and as the title states, continuous-time finance. The book is a collection of papers written by Merton over 25 years, and the combination of the papers makes for one of the most intellectually stimulating investment books ever created.

John Bogle, 'Common Sense on Mutual Funds'

John Bogle founded and was the CEO of The Vanguard Group before his retirement. He earned his undergraduate degree from Princeton University.

'Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor' is nearly universally known as a must read among anyone who wants to learn about investing. Bogle elaborates on investment strategies, mutual fund values, and uses quantifiable reasoning to come to his conclusions. Three main keys that Bogle notes are to stay the course, that impulse is your enemy, and that time is your friend.

Warren Buffett, 'The Essays of Warren Buffett'

Warren Buffett is one of, if not the, most popular investors in the history of the world. Buffett graduated from the University of Nebraska at the age of nineteen and earned his masters in economics from Columbia, under the teachings of Benjamin Graham and David Dodd.

'The Essays of Warren Buffett: Lessons for Corporate America' is a series of letters that Buffett sent to shareholders of his company, Berkshire Hathaway. The letters serve as an education of business principles and concepts that he has utilized throughout the existence of his tremendously successful company, and provide a first hand look at how he has made his business so successful.

Anthony Crescenzi, 'The Strategic Bond Investor'

Anthony Crescenzi is a graduate of the City University of New York and also received his MBA from St. John's University. Currently, Crescenzi is an executive vice president, market strategist, and portfolio manager for PIMCO.

Crescenzi has published five books, the most notable of which is 'The Strategic Bond Investor: Strategies and Tools to Unlock the Power of the Bond Market.' There are many stock and investing books, but very few focus heavily on bonds as Crescenzi does in this book. He helps explain every detail of the market. Bill Gross has a very kind review of his book on

Geoffrey Moore, 'The Gorilla Game'

Geoffrey Moore is a venture partner at Mohr Davidow Ventures, and formerly worked at The McKenna Group and a company in which he founded, The Chasm Group.

'The Gorilla Game' details Moore's opinion on how to invest in high tech companies. Moore uses a more conversational approach, rather than mathematically heavy, to determine which technology companies are bound to grow and which ones are bound to tumble. He breaks companies down to three categories, The Gorilla (the leader), the Chimp (the challenger), and the Money (the follower).

Burton Malkiel, 'A Random Walk Down Wall Street'

Burton Malkiel was twice the chairman of the economics department at Princeton University. He graduated from Boston Latin School and received his MBA from Harvard University.

Malkiel's most famous work, and one of the most popular finance related books of all time, is 'A Random Walk Down Wall Street.' The book examines many popular investing techniques, specifically both technical and fundamental analysis. Malkiel breaks down both strategies and notes the flaws in each, suggesting that passive strategies will provide better results than either of these methods.

Adam Smith, 'The Money Game'

Adam Smith is a pen name for the Harvard-and-Oxford trained George W. Goodman. Smith is the author of three books, most notably 'The Money Game.' Goodman was once the editor of The Harvard Crimson.

In 'The Money Game' breaks down the stock market and was his first non fiction title. Smith discusses skepticism revolving around reported numbers and uses a humorous and conversational tone to discuss the inner workings of Wall Street.

Nassim Taleb, 'The Black Swan'

Nassim Taleb is a professor at Oxford  University, after having formerly been a hedge fund manager and Wall Street trader. He completed his undergraduate studies at the University of Paris, where he also received a Ph.D., and received his MBA from the Wharton School at the University of Pennsylvania.

Taleb's book, 'The Black Swan' focuses on how large, improbable events can completely disrupt any forecasts or expectations of the future. The unpredictable nature of such large events that alter markets adds an additional layer of risk that is often not considered by investors.

George Soros, 'The Alchemy of Finance'

George Soros is the chairman of Soros Fund Management, and he is a graduate of the London School of Economics.

His book, 'The Alchemy of Finance' acts as an instructional guide of the marketplace. He interprets how instrumental investors' perception of market values are, and states that this is what really moves prices up and down.

Edwin Lefevre, 'Reminiscence of a Stock Operator'

Edwin Lefevre was an American journalist and stockbroker who graduated from Lehigh University.

Lefevre's book, 'Reminiscences of a Stock Operator' is a the only fiction book on this list, but his detail of the happenings of Wall Street during the early 20th century make this one of the most classic finance books in history. The book was a 12 article series published in a newspaper, but was eventually put together and published.

Kathryn Staley, 'The Art of Short Selling'

Kate Staley is an expert short seller, and her book 'The Art of Short Selling' breaks down the market of overpriced stocks and how to sell short to make substantial profits. This is an extremely specialized niche, and there are not many publications that break down short selling in the same manner that Staley does in her book.

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Charles Mackay is a journalist who was educated at the Caledonian Asylum.

Mackay's book, 'Extraordinary Popular Delusions and the Madness of Crowds' attempts to explain why relatively intelligent individuals decide to follow crowds rather than sticking to their own opinions on matters. This is vital in finance due to the nature of the market and its swings.


Investors should tilt the odds of success in their favor. 

Here are eight methods that each tilt the odds a little in your favor. Individually, each tilt is worth a little. As a group, they can be very powerful for your investing results. 

1) Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.

2) Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.

3) Stick with higher quality companies for a given industry.

4) Purchase companies appropriately sized to serve their market niches.

5) Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.

6) Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.

7) Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.

8) Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

Each of these rules enforces a discipline on the overall portfolio that most professionals and individual investors do not possess. It takes the emotion out of investing, and forces us to think like risk-sensitive, profit-seeking businessmen. 

The 10 Shakespearean Rules Of Investing

The 10 Rules Of Investing

Believe in history

"The market is gloriously inefficient and wanders far from fair price but eventually, after breaking your heart and your patience (and, for professionals, those of their clients too), it will go back to fair value. Your task is to survive until that happens."

Neither lender nor borrower be

"If you borrow to invest, it will interfere with your survivability. Unleveraged portfolios cannot be stopped out, leveraged portfolios can. Leverage reduces the investor's critical asset: patience."

Don't put all your treasure in one boat

"Several different investments, the more the merrier, will give your portfolio resilience, the ability to withstand shocks. Clearly, the more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you."

Be patient and focus on the long term

"If you've waited and waited some more until finally a very cheap market appears, this will be your margin of safety. Now all you have to do is withstand the pain as the very good investment becomes exceptional. Individual stocks usually recover, entire markets always do. If you've followed the previous rules, you will outlast the bad news."

Recognize your advantages over professionals

You're better than them.

"By far the biggest problem for professionals in investing is dealing with career and business risk: protecting your own job as an agent. The second curse of professional investing is over-management caused by the need to be seen to be busy, to be earning your keep. The individual is far better-positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals."

Try to contain natural optimism

This glass: it's half empty.

"...But optimism comes with a downside, especially for investors: optimists don't like to hear bad news...Here again it is easier for an individual to stay cool than it is for a professional who is surrounded by hot news all day long (and sometimes irate clients too). Not easy, but easier."

But on rare occasions, try hard to be brave

"You can make bigger bets than professionals can when extreme opportunities present themselves because, for them, the biggest risk that comes from temporary setbacks – extreme loss of clients and business – does not exist for you. So, if the numbers tell you it's a real outlier of a mispriced market, grit your teeth and go for it."

Resist the crowds: cherish numbers only

"Watching neighbors get rich at the end of a bubble while you sit it out patiently is pure torture. The best way to resist is to do your own simple measurements of value, or find a reliable source (and check their calculations from time to time)...Ignore especially short-term news: the ebb and flow of economic and political news is irrelevant. Stock values are based on their entire future value of dividends and earnings going out many decades into the future. Shorter-term economic dips have no appreciable long-term effect on individual companies, let alone the broad asset classes that you should concentrate on. Leave those complexities to the professionals, who will on average lose money trying to decipher them."

In the end it's quite simple. Really

"GMO predicts asset class returns in a simple and apparently robust way: we assume profit margins and price earnings ratios will move back to long-term average in 7 years from whatever level they are today. We have done this since 1994 and have completed 40 quarterly forecasts. (We started with 10-year forecasts and moved to 7 years more recently.) Well, we have won all 40 in that every one of them has been usefully above random and some have been, well, surprisingly accurate. These estimates are not about nuances or PhDs."

This above all: to thine own self be true

To manage or not to manage my own money. That is the question.

"To be at all effective investing as an individual, it is utterly imperative that you know your limitations as well as your strengths and weaknesses. If you can be patient and ignore the crowd, you will likely win. But to imagine you can, and to then adopt a flawed approach that allows you to be seduced or intimidated by the crowd into jumping in late or getting out early is to guarantee a pure disaster. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely MUST NOT manage your own money."

Who Gets It When You're Gone............Basic beneficiary designations

Who Gets It When You're Gone

Basic beneficiary designations

Given the current environment—rising costs of living, market volatility, high unemployment—it may seem somewhat optimistic to plan for having "enough" to last for your own lifetime, much less have anything left over to pass on to your loved ones. But let's think positively! Better to have a well-defined inheritance strategy than assume one won't be needed at all.

Why Should I Specify Beneficiaries (Heirs) on My Assets?

I think most of us who hope to have something to pass on to our heirs have pretty specific ideas about who should get what, but we often don't follow through with fairly simple planning to make sure 1) our wishes are carried out and 2) the inheritance process is as painless as possible for our heirs.

Estate attorneys and tax professionals can help you determine which combination of structures and legal documents—will, trust, power of attorney, limited partnership, limited liability corporation, etc.—make the most sense for your situation and for current tax regulations, but even those documents and structures do little good if they are not properly implemented.

Appropriate Registration (Account Titling) May Help Avoid Probate

Please do your heirs and beneficiaries a huge favor, and plan wisely so they don't have to put your estate through probate.

  • Probate can be expensive (i.e. some of your assets will go to attorneys and court costs rather than to your heirs)
  • Probate can take a long time (i.e. your heirs will not be able to access their inheritance in a timely fashion).
  • Probate is a matter of public record (i.e. your assets and who inherits them is no longer private to your family or heirs).

Generally speaking, assets at certain levels held by "deceased persons" are subject to probate. Each state has different asset limits that "trigger" probate proceedings, so consult an estate attorney or review your state's inheritance/probate laws to see if they might apply in your case.

However, there are ways to title your assets to avoid probate:

  • Entities (trusts, corporations, partnerships, etc.) are not "persons," so assets registered to entities generally don't pass through probate.
  • Assets registered to "persons" but that have joint owners or designated beneficiaries (heirs) typically are able to pass to the joint owner or beneficiaries without going through probate.

Assigning Beneficiaries to Accounts at Financial Institutions

Generally speaking, accounts or assets registered in the name of an entity, such as a trust, already specify flows of assets in their documentation, so I'm only going to address assets owned, at some level, by "persons."

Retirement Accounts: IRAs, 401(k)s, Profit Sharing, Defined Benefit, Etc.

Most retirement account paperwork includes a section where beneficiaries may be selected, as well as forms to change beneficiaries as needed. IRA (Individual Retirement Arrangement) beneficiary changes generally only require the signature of the account owner, while most employer-sponsored plans—such as 401(k)s—require the signature of the account owner's spouse.

Can I Register My IRA in the Name of My Trust?

No. An IRA is an "individual retirement arrangement." It must be registered in the name of an individual (person). However, a trust may be named as a beneficiary on an IRA account. Consult an estate attorney about using a trust as a beneficiary on IRA or other retirement accounts, since the trust must meet certain IRS guidelines to qualify to "pass" the assets through to the beneficiaries.

Inherited IRAs or "Stretch" IRAs

Generally speaking, spousal beneficiaries who inherit IRA monies have three options (1, 2 & 3 below), while non-spousal beneficiaries only have two (2 & 3 below); more nuanced details may be found on the IRS's website in the Publication 590: Individual Retirement Arrangements (IRAs) under the "What if You Inherit an IRA?" section. There are deadlines and timelines for implementing these options, so swift action by the beneficiary is suggested:

  1. Take control of the IRA assets as if the IRA assets belonged to the beneficiary. This option is only available for spouse beneficiaries, and only when certain conditions are met. 
    Example: Joe Smith and Mary Smith are married. Joe has named Mary as the primary beneficiary on his IRA. Joe passes away. Mary can open an IRA account in her own name and move Joe's assets into it. Mary has other options as well, which are outlined in IRS publication 590 under the section "Inherited from spouse" subsection of "What if You Inherit an IRA?," and includes the two options that follow below, but the bulk of our clients make the choice to move the assets into an IRA in their own names.
  2. Deplete the assets in the account within five years of the death of the original account owner. The IRS doesn't care if you take the assets as one big lump-sum distribution, or if you spread the distribution over 5 tax years, or even which tax years in which you take the distributions, you just have to zero out the account within five years.
  3. Deplete the assets in the account over the remainder of your lifetime. This option is only available if certain conditions are met (see "Figuring the Beneficiary's Required Minimum Distribution" section of IRS publication 590), and is sometimes referred to as "stretching" the IRA. This option involves required minimum annual distributions over the course of the beneficiary's lifespan; these distributions generally begin the year following the death of the account owner. If the beneficiary is a trust, often the lifespan of the oldest trust beneficiary will apply. (Currently there is some talk in government circles about rescinding the lifetime distribution option for inherited IRA assets.)

Note: In options 2 & 3, inherited IRA assets can be subject to different distribution rules than regular IRAs; for example, the 10% penalty for withdrawals by individuals who are younger than 59 1/2 does not apply, since the beneficiary is choosing the "five year" depletion option or the "lifetime" depletion option. 

Personal Non-Retirement Accounts: Individual, Joint, Etc.

Some non-entity (entities being structures like trusts, corporations, partnerships, limited liability companies, etc.) personal non-retirement account types may be set up as "transfer on death" (TOD) or "paid on death" (POD) registrations. In our industry, these registrations generally include:

  • Individual Transfer on Death 
    Example: Joe Smith Transfer on Death Mary Smith. Joe passes away. Mary supplies some basic paperwork to the financial institution and takes ownership of the assets.
  • Joint Tenants with Rights of Survivorship Transfer on Death 
    Example: Joe Smith and Mary Smith Joint Tenants with Rights of Survivorship Transfer on Death Bob Smith 
    Scenario A: Joe predeceases Mary. Mary supplies some basic paperwork to the financial institution and takes ownership of the assets. 
    Scenario B: Joe and Mary pass away at the same time. Bob supplies some basic paperwork to the financial institution and takes ownership of the assets.
  • Joint Tenants in Entirety with Rights of Survivorship Transfer on Death (joint owners must be married to each other) 
    Example: Joe Smith and Mary Smith Joint Tenants in Entirety Transfer on Death Bob Smith 
    Scenario A: Joe predeceases Mary. Mary supplies some basic paperwork to the financial institution and takes ownership of the assets. 
    Scenario B: Joe and Mary pass away at the same time. Bob supplies some basic paperwork to the financial institution and takes ownership of the assets.

You should be able to contact your financial institution and request documents to add "transfer on death" or "paid on death" beneficiaries to your individual or joint account.

Note: Consult with an estate attorney prior to registering an account as "transfer on death" or "paid on death" since some states' inheritance/probate codes do not support these designations.

"Layers" of Beneficiaries

Most assets that can be titled or registered to specify beneficiaries offer two "layers" of inheritance:

  1. Primary beneficiaries. This "first layer" of beneficiaries kicks in when the account owner(s) pass away.
  2. Contingent beneficiaries. This is the "backup" or "second layer" of beneficiaries. It would only kick in if or when:
    • The decedent(s) and the primary beneficiary(ies) pass away at the same time.
    • The primary beneficiary(ies) had predeceased the decedent (original owner of the assets)
    • The primary beneficiary(ies) were determined to not be in good order.

Since basic beneficiary designations are fairly simple, if you have complicated family situations or inheritance scenarios, you may want to discuss designating an entity (such as a trust) as a primary or contingent beneficiary with your estate attorney. As noted earlier, consulting an estate attorney about using a trust as a beneficiary on IRA or other retirement accounts is particularly important, since the trust must meet certain IRS guidelines to qualify to "pass" the assets through to the beneficiaries.

Naming a Non-Person As a Beneficiary

While it's common for clients to designate trusts as beneficiaries, some have designated specific non-profit organizations, religious organizations, educational institutions, or other entities as their beneficiaries. You'll just want to contact each organization to make sure you have their correct tax identification number and correct legal name.

 "Per Capita" versus "Per Stirpes"

Per Capita (By Head)

Generally, most beneficiary designations are "per capita" or "by head" by default. This means that the assets pass through to the beneficiaries by "head count."

Example: Joe Smith has named each of his children Bob Smith and Sally Smith as 50% per capita primary beneficiaries on his IRA (head count of primary beneficiaries = 2). Bob predeceases Joe (head count of primary beneficiaries now = 1). Joe then dies without updating his beneficiary information. Sally inherits 100% of Joe's IRA since she's the only remaining primary beneficiary.

Per Stirpes (By Branch)

To visualize "per stirpes" (literally "by branch"), imagine a genealogical tree, where inheritance of assets passes on by "branch of the family" rather than by "head count." My clients sometimes use this designation as a way to pass assets on by generation: first layer = pass to children; per stirpes = pass to grandchildren.

Typically, you have to pro-actively select "per stirpes" as an option on your beneficiary paperwork or forms for it to be in effect. Important note: Per stirpes designations typically require you to provide information on an executor or other contact on the account documentation or forms.

Example: Joe Smith has named each of his children Bob Smith and Sally Smith as 50% per stirpes beneficiaries on his IRA (branch count = 2). Bob predeceases Joe, but has three living children (branch count still = 2 since Bob's branch of the family is still around). Joe then dies without updating his beneficiary information. Bob's children (Bob's "branch" of the family) inherit Bob's 50% of Joe's IRA. Sally inherits her 50% of Joe's IRA.

Per stirpes definitions vary by state—some include stepchildren and adopted children, others don't—so you'll want to read your account documentation carefully and consult with an estate attorney prior to selecting this option. Since per stirpes legislation sometimes changes, you'll also want to revisit per stirpes designations every few years.

Keep Those Beneficiary Designations Updated!

Don't forget that your "pool of heirs" changes over time. You'll want to review your beneficiary designations every few years in case you need to make changes to accommodate:

  • Birth
  • Death
  • Marriage
  • Divorce

You'd be surprised how often an ex-spouse ends up inheriting because the account owner neglected to update beneficiary information after the divorce…

In addition to changes among your group of potential heirs, legislation changes make it a good idea to review your beneficiary designations every few years to accommodate:

  • Changes in your estate plan or estate plan documentation
  • Changes in estate/probate legislation
  • Changes in estate taxation

Choose to Control Who Inherits & How Tough It Is to Do So

When it comes down to it, organizing how your assets are registered and who the beneficiaries are on your various assets puts you rather than a probate court judge in control of who gets it when you're gone.

Go for providing your heirs with not just an inheritance, but an efficient inheritance!

The Art Of Selling Your Stocks...........

The Art Of Selling Your Stocks

Many investors openly admit they struggle with selling their stocks, be they winners or losers. Everyone has heard adages like "ride your winners, sell your losers" but most still struggle to come to a decision. Most of us have an uneasy feeling about hitting the "sell" button. Lots of questions race through our mind like "Am I selling to too early and missing the next run up?" and "Wait, why should I take a loss, will it not rebound"?

This article presents the various inputs collected from investment books like "One up on wall-street" by Peter Lynch (of the Fidelity Magellan fame) as well as some experienced investors in Seeking Alpha like Norman Tweed and David Crosetti. Please bear the following points in mind before jumping onto the article:

The article is about investing and not trading, as the number of trading strategies equals the number of traders out there.
Now, every category mentioned below is going to have some exception and one such exception is actually mentioned in the "Growth stocks" category. Going by the outliers instead of the general norm will not be profitable for the majority of the crowd.
This article talks strictly about selling and almost assumes the investor has already picked good to great stocks but is confused about selling them. However, some of the generic rules can be used to cut losses on existing bad purchases as well.

So, let's take a look at some of the most popular sell signals.

Category based sell rules:

a. Growth stocks: In our view, this is the trickiest of the lot. Apple (AAPL) is the best example in this category. Investors who bought Apple in the late 1990s or early 2000s would have been tempted to sell their shares at double or triple price but hindsight tells us they would have missed out a potential 50 to 100 bagger. Investors owning value-growth stocks look at the PEG ratio. Typically, a strong sell signal on the growth stocks is when the PEG reaches 1. The glaring exceptions here are companies like Coca-Cola (KO) in the 1960s and Microsoft (MSFT) in the 1990s, when their PEG was greater than 1 but still the stocks did very well for the investors. For all its recent run up in price, Apple's PEG is less than 0.60. That's the type of stock you should own if you believe in growth at reasonable price.

b. Dividend stocks/Long term investors: The most common and proven successful sell signal for the dividend stocks is when the company cuts it dividend repeatedly or stops increasing its dividend. Most retirees look for an increasing stream of income from their dividend stocks and when the dividends aren't raised or even worse, slashed, it's not a good sign.

c. Cyclical stocks: Examples of cyclical stocks are Freeport-McMoRan Copper and Gold (FCX) and Arcelor Mittal (MT) which flourish or flounder depending on the general economic condition. Peter Lynch advises to sell cyclical stocks when inventories are piling up in the balance sheet, as it's a bad sign the company doesn't have any control over the supply-demand. Companies cannot control the demand beyond a point but sure can control the supply. This topic was touched upon in a recent articleabout the Potash Corporation of Saskatchewan (POT).

d. Turnarounds: Turnarounds are stocks that were once a high-flyer or an above average performer but went down the dumps. History shows a lot of auto companies fall in this category. The best time to sell a turn around is after the turnaround. Ha, how simple? In other words, sell when the PE compression is off. Let's say Research in Motion (RIMM) comes up with some magical product and starts to turn around, the PE will grow. The sell sign is when the PE reaches the market average or goes beyond that.

Other ideas:

3:1 Rule: William O'Neil, author of "The Successful Investor" suggests setting up a strict rule (irrespective of the stock's category) that involves using stop losses at a predetermined rate of say 5%, while letting the winners run up to at least 15%. Going by this rule, you can technically afford to have 3 losers for every single winner and the odds are stacked heavily in your favor to eke out a meaningful gain from a moderate sized portfolio. We've been following this rule in 2 or 3 of our family's portfolio and it has been quite successful so far.

Portfolio Rebalancing: Out of all the points mentioned in the article, this one is the least universal. Some investors rebalance their portfolio when one particular sector/company becomes overweight. So, if a stock runs up a lot, it would affect the portfolio distribution. Investors do sell in such cases and redeploy their money to keep the numbers even.

Capital-Free Ride: Let's say you invest $1000 in a stock and the value of the holding goes to $2000 in X years, including capital gains and dividends reinvested. This strategy involves selling enough shares to take out your initial $1000 investment but leave the remaining $1000 on the table. This lets you deploy the money elsewhere and diversify if you believe in it, while making sure you still gain from the stock which doubled your money in the first place.

Taking Losses: A lot of people sell their losers right at the end of the year to claim losses on tax returns. The prudent thing to do when a stock you like tanks is to check if the losses are because of the company's woes or any external problems. People who were active in the market in 2011 would remember how Greece totally ruled the direction of the U.S. market. Unless the company's fundamentals are deteriorating and better alternatives are available in the same sector, it's better to stick with your picks.

Conclusion: We hope at least one of these rules is helpful for each individual investor out there. Pick and choose the ones you believe in and stick with it. There are also other mechanisms like charting, which traders use heavily. You may also choose to use a combination of these strategies, like yours truly does. Irrespective of the strategy used,always remember that no one gets hurt taking profits.

5 Techniques For Buying Stocks................

5 Techniques For Buying Stocks

Insider buying: While insiders sell for various reasons, like having to buy a new home, they buy for just one reason; they believe and almost know the stock is going up. High flying stocks usually do not have many insider purchases, while there is plenty of selling. Take a look at insider transaction of Netflix (NFLX) before it crashed. You will find zero purchases and a lot of direct sells. Though it might be a faulty premise to argue that insider selling or the lack of insider buying is bad (Even Apple (AAPL) doesn't have much insider buying to show) it is very very safe to assume insider buying is a big plus. Philip Morris International (PM), in spite of its recent run up in price, had a recent insider buy at around $81. Nothing can be more bullish than that.

Buy what you know: It can't get simpler than that. Lynch suggests taking a hard look at things happening in your industry of work. You must have a two minute drill or the elevator speech for each of the stocks you own. If you do not have the "story" you do not have a reason to own the stock. Some examples are "This is a dividend champion, hasn't cut its dividend in the past 50 years" and "The growth in China is going to consume a lot of this metal." What good is a "cloud computing" stock to someone who struggles to do basic things on a computer and doesn't understand the industry?

PEG ratio: While a lot of people focus on the PE ratio and do not buy stocks if PE is too high, Lynch advocates buying high PE stocks if the expected growth rate is high as well. This is called the Growth at Reasonable Price [GARP]. PEG ratio is calculated as the PE divided by the growth rate. PEG greater than 1 means the company is overvalued, and less than 1 is undervalued relative to its growth prospects. Familiar names with PEG less than 1 as of this writing include: Apple and Baidu (BIDU), the chinese internet giant.

Buy Spinoffs: Spinoffs usually do well on their own. Lynch's logic is that the parent company will not let down the spinoff to bite the dust, as it would reflect badly on the parent as well. Fair enough. It's like saying you as a parent will try your best to leave your kids in the best possible shape. Some of the best spinoffs in the history are the AT&T's (T) "baby" bells and the Altria (MO) "kids" Philip Morris and Kraft Foods (KFT). Ironically, Kraft will soon be split into two companies (this makes Altria a grandparent by the way).

No growth industry with negative rumors: People chase growth stocks, and yes, some have been really successful. There are these rare gems like Apple and Bidu that make the shareholders rich. Those companies have done well because they survived cut throat competition. But Lynch would rather pick a company with little to no competition, has a niche, and drives out new companies because of negative rumors about the industry. When you have too many companies competing to win the consumers, guess who the end winner is? It is the consumers and not the shareholders of these companies. A "boring" example without too many competitors would be your local utility company.

Wednesday, May 30, 2012

Will This Time Be Worse Than 2008?............AN ABSOLUTE MUST READ

Will This Time Be Worse Than 2008?

Politicians and investors all over the world are now trying to prepare for the inevitable consequences.

What they don't seem to realize is that the next major megashock will be more severe than the Lehman Brothers failure.

Never forget the key differences between then and now:

In 2008, it was strictly individual financial institutions that were on the edge of collapse. Today, entire nations are on the brink.

In 2008, the U.S. federal deficit of the prior fiscal year was $161 billion. Today, it's $1.327 trillion, or 8.2 times larger.   YOU HAVE TO BE A COMPLETE IDIOT NOT TO UNDERSTAND WHAT IS COMING OR YOU PREFER TO LIE BECAUSE YOUR LIVING DEPENDS ON THE LIES.

In 2008, most of the megabanks at the epicenter of the crisis were in the United States. Today, although some U.S. megabanks are still taking excessive risk, it's primarily the far LARGER European banks that are in the most trouble. 

In fact the weak European banks are so large, their total assets are greater than the total assets of ALL U.S. commercial banks combined.

In 2008, governments had not yet deployed their "big gun" cures for the debt crisis. So they still had the firing power to squelch the crisis with a series of unprecedented rescues. Today, we have seen the rapidly diminishing returns — or outright failure — of nearly every possible stimulus plan, bailout deal or austerity measures known to man.

In 2008, governments encountered little public resistance to major new policy initiatives. Today, millions of citizens are rebelling at the polls — or on the streets — in France, Greece, Portugal, Spain, Italy, and even Germany.

Most important, until late 2008, central banks restricted their role to traditional manipulation of interest rates. Now, however, four of the most powerful central banks in the world (the Fed, ECB, BOE and BOJ) have departed radically from tradition and embarked on the greatest wave of money printing in the history of mankind.

The stock market is poised for a big move. 

There are still three major variables to consider, Europe, the U.S. election, and the global economy. Europe seems to be the closest to some kind of definitive point, although that is not entirely clear. The election, in our opinion would be the next most important variable as the action in the economy could well follow. 

Investors should be extremely vigilant in this market and not make any huge bets ahead of developments. Cash and caution are the key ingredients for success over the next few weeks to months.




Here's The Realistic Scenario That Could Send Stocks Below Their 2009 Lows.............

Here's The Realistic Scenario That Could Send Stocks Below Their 2009 Lows

Given the recent decoupling of the S&P 500 from European stocks and other markets, is the U.S. really set to outperform?   

This chart, overlays Japanese stocks during their lost decade with U.S. stocks and European stocks starting 11 years later;

The next EU summit could be crucial in determining the next move in developed world stock markets:
A Japanese-style scenario for the eurozone could gain traction, particularly if the 28-29 June EU summit fails to deliver concrete results. The capacity of European leaders to agree on the eurozone's future is key to restoring the Greek population's confidence and avoiding social unrest. 

If the outcome is paralysis we can expect equity markets to plunge even deeper, to 2009 levels and even below if the Japanese-style scenario were to materialize.




The European mess proceeds with no reasonable solution possible. The problem countries are hopelessly bankrupt. Saving them is unlikely and may bankrupt the rest of Europe.

The result of Europe’s policy paralysis is more likely to be a disorderly break-up as Spain – and others – act desperately in their own national interest. Se salve quien pueda. Only it is not only Europe. It is the entire world. But it will start in Europe. And specifically Spain, which unlike Greece is too big to be swept under the rug. 

Ultimately Europe will fail, although the hemlock they choose is still in doubt. Ultimately too, the interconnectedness of financial markets will bring the failure across the ocean to the US. Then we too will follow suit.

The inevitability of this results from the fact that all Western economies are paper-mache models of real economies. All are inflated to be bigger than they are by debt that cannot be supported.

"Salve-se quem puder!" is a famous saying meaning something like "Run for your lifes!"   Đ•very man for himself!


The beatings continue, especially in Spain, where the IBEX is down 1.7%.

This marks three straight days of substantial losses.

Yield on the Spanish 10-year bond has shot above 6.556%.

As a reminder, we're talking about a potential crisis in a country whose economy ranks 12th in the world and makes Greece's look like a joke.

Italy's borrowing costs, meanwhile, keep edging up, with the 10-year yielding 5.8825. Its market is down 0.45%.

Overall the tone is negative. The Aussie dollar (a representation of risk appetite in Asia) had a horrible night and US futures are lower.

Another heart-stopping chart on retail sales from Markit's Italian Retail PMI.

No more words are necessary.



The DJ industrial Average recorded a high of 13,279.32 on May 1, 2012.  This Dow high was not confirmed by the Transports.  The two averages then turned down and broke below their April lows.  This action confirmed that a primary bear market is still in progress -- it was and is a textbook bear signal.

The bear confirmation is particularly valid because nobody seemed to notice it, nor did many analyst's appear to be aware of it.

For the first time ever, 3 year Japanese government bond (JGB) yields are trading below 1 year JGB yields as the world's inexorable desire to repatriate, delever, and seek safety while reaching for as much term yield as is still 'safe' come home to roost. With Swiss rates already grossly negative and German rates rapidly converging, the world's (d)evolution (since evolution conjures a rebirth into something better) is shifting investors out the yield curve as ZIRP is here to stay forever, wherever you look in so-called developed economies (who can print their own money). 

In the last 4-5 weeks, 3Y Japanese bond yields have dropped 6bps to around 10bps (pretty much the same as every other maturity inside of 3Y) as the entire yield curve gradually flattens pushing out investor's perception of 'cash' to longer- and longer-maturities. Be careful what you wish for US equity investors, as the Keynesian Endpoint is upon us (and perhaps, just perhaps that is why Central Banks of the world are checking to the Fed, the ECB is playing hardball, and the Fed remains on hold unless apocalypse occurs - which, by the way, is not an 8% retracement of a 30% straight line rally).