About waiting for the right time

It is amazing how much chatter there is about whether a particular stock is going (still) to go lower or whether it is "right time" to buy (supposedly at the bottom).

Then there are articles where commentators beat other investors or companies about being wrong on their timing.

Putting short term speculation aside,

my view is that the only right way to think about whether or not to buy (as investor) or execute buyback (as company) is to look at the price today. Nobody can predict the future reliably. The one who could would make a fortune in instant so would not bother making anything else than trading on perfect information.

If the price is attractive given the outlook today then it is a buy. If it is cheaper in the future, then buy some more. It is then even a better bargain.

Take for example, Micron (NASDAQ: MU) stock buyback program. Yes, the price has dropped while company buying back stock, but so what?

I do not know how Micron or any other management team executes stock buybacks, but generally it would make sense NOT to try to chase the market or try to please market commentators.

I would personally spread it out evenly and reserve a possibility for opportunistic buybacks in case market goes insane and the stock drops way below level I would view as attractive.

Another way to look at this is that nobody can really in their right mind say Micron is grossly overvalued or in bubble (i.e. investors have gone insane the other way - which they have in my opinion for some other tech stocks). That being the case, the alternatives are "the right price" (market is right always) or then there is a small chance market is undervaluing the company.

Stock market is about risk and reward. You do not get reward if you do not take risk. I rather have skin in the game than stay in the sidelines with the chance I can look smart afterwards if the stock continues lower.

Apart from speculative short term investors, who really cares where the stock goes from here short term if you are in for the long term?



Disclosure: Long Micron.

Buffett's Apple vs. IBM positions

I have been thinking of initiating position in Apple (NASDAQ: AAPL).

While digging into this idea, I bumped into the fact that Apple has been the largest common stock holding of Berkshire Hathaway's (NYSE: BRK.A / BRK.B) portfolio for quite some time now. I kind of knew that they were heavily long into it, but it had not hit home how sizable the position was even for the Omaha-based legend.

Accoding to the datasource I used (Dataroma) Buffett's 252 million Apple shares makes it now close to 26% of Berkshire's U.S stock portfolio.

Since I recalled IBM (NYSE: IBM) was the first technology company where Buffett had a sizable position, I wanted to make a small comparison on the two positions and how they have evolved in last 5 years (IBM is in blue and AAPL is in yellow).

Table: Top 20 U.S common stock positions of Berkshire Hathaway [data source: Dataroma]

Clearly IBM was a favourite for a long time and then Apple replaced it in top 20. The interesting thing behind the top 20 table is that the value of the entire common stock portfolio has grown from 105 billion to 221 billion USD during the five years. Therefore, it is likely that many of the positions have grown in absolute monetary terms moving from left to right in the table.

I wonder what is the average cost of Apple share in Berkshire's portfolio.

According to various sources Buffett accumulated some 57 million shares by end of 2016. Then by Q1/2017 the total of Apple shares was 133 million and year later 240 million.

Let's look at Apple share price during the same timeperiod:

Apple share price during the time Buffett has accumulated it [Chart courtesy of StockCharts.com]

It can be concluded that Buffett accumulated 57 million shares of Apple in 2016 in the neighborhood of USD 100 +/- 15. Then 76 million shares in Q1 2017 between USD 110 and 140 and in the year that followed (until end of Q1 2018) 107 million shares more between USD 137 and 182.

Looking closer to the information at hand from various sources, it can be seen that bulk of 107 million shares were accumulated in Q4 2017 (31 million) and Q1 2018 (75 million).

This is now purely quesswork, but it looks like average purchase price per share of Berkshire could be somewhere in the ballpark of USD 140 +/- 10.


Disclosure: At the time of writing the author did not have position in Apple, but was seriously considering initiating one in near future.

Major changes to portfolio

Fear has taken over the market.
We have lost all gains this year to date and then some.

However, the sell-off offers excellent point to make investments to smaller companies which otherwise would be rather illiquid.

I have no idea what-so-ever whether this is sensible timing or not (are we near bottom or not), but since I do not believe anyone can consitently time the market correctly, I try not to worry about it and concentrate on fundamental analysis (stock price vs. dividend vs. long term outlook).

I have shuffled a bit the positions in the bigger corporations, but the major part of the action lately has been to move money from ETFs to individual small cap stocks.

All ETFs except for few sector specific ETFs (e.g. health care) have been sold.
The net result is that the share of ETFs have gone first time below 10% of portfolio.

Also, since the small caps I am investing are almost exclusively from Finnish stock market, the share of European stocks in the portfolio has grown to 68%. The rest have been invested to U.S. stocks.

Our direct exposure to emerging markets is now 0%.

While these moves increase the risk in the portfolio we still hold quite many stocks that I consider low risk (so we are quite far still from all-out "risk-ON" position). Also, there is a two-fold reason why investing into individual stocks looks to be better trade right now than going broad market via an ETF:

1. The individual stocks in Finland that we have in portfolio have much better dividend yield than any broad market ETF
2. There is a taxation benefit in Finland to invest directly into stocks vs. via ETFs: dividend from a stock is taxed less than same dividend amount from an ETF. The difference isn't big, but long term even small differences matter.

Besides, we have hold on to some broad market ETFs that have gone almost nowhere last 5 years compared to rest of the market..

Vampires and wolves (Part II)

Continued from Part I ..

Mark Hanna: "Revolutions, you follow?" 

Jordan Belfort: "Revolutions."

Mark Hanna: "Keep the client on the Ferris wheel, and it goes, the park is open 24/7, 365, every decade, every go**amn century. That’s it. Name of the game." 

-- ending of a scene in the movie The Wolf of Wall Street where Matthew McConaughey (playing Mark Hanna) explains to Leonardo DiCaprio (playing Jordan Belfort) how the brokerage business works.

Enter dream customer.

I would imagine this is the dream scenario what comes to milking a client in investment services business:

• investments are inside insurance or other 'wrapper' with a yearly fee and there is significant penalty in changing from one financial services provider to another (e.g. being exposed to taxes)
• inside the 'wrapper', client is instructed to invest into funds-of-funds (many layers of cost)
• to top off the dream cake, client is instructed often to change allocation (because it is both "free of cost" and tax free)

I have been there as a client long time ago so I know exactly how this works.

A smooth-talking person in an expensive suite invites you to a meeting to discuss about investing. The setting will be impressive and everything will be free of charge. You may wonder how these guys are paid. You may even ask it directly (I did). Because they are good salesmen they will have an answer for pretty much anything you will ask. One by one they will eliminate any reason you may have for not investing via their shop.

Naturally they are not going to voluntarily expose all the ways they or their business partners are going to take money from your pocket (extract fees from your investment). Just the surface of it (the obvious commissions and fees).

If you read everything about their products and dig deeper into the funds you will slowly understand all the ways you are getting milked. Because of course you are. How else they will pay for their rent in the most expensive part of your city or get paid ridiculous amounts of money in the top tiers of their management pyramid.

Like you have a fund, which invests in other funds (I wonder how many layers there can be..).
And like you are not charged "anything" if you change from one fund to another, but then you note that there is a significant spread (difference between the bid and the ask price) in all of their funds.



Garlic, anyone?

Avoiding vampire squads is easy.

It starts by avoiding complex hard-to-understand financial constructs and companies who are just men/women-in-the-middle.

You can minimize your costs by handling the investments by yourself and invest directly in stocks and passive low-cost (yet high quality) index ETFs.

Do not be lured into frequent buy/sell flip-flop. I am a customer who mostly buys and rarely sells.

Also, please check my old article 'avoid costs' on why even 1-2 percent periodical holding cost/fee makes a big difference over the years.

THE END

Vampires and wolves (Part I)

"In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the Marketplace."  

-- Warren Buffett in 1987 letter to shareholders of Berkshire Hathaway Inc.

Buy! Sell! Short! Boom! Crash! Panic!

The constant barrage of market news and opinions has got much worse than anyone could have imagined back in 1980s. One can get easily lost without clear principles on which articles are worth reading and who to believe.

Fugazzi

I personally dismiss articles that are not based on real fundamentals. These include articles where author tries to time market or uses extensively technical analysis.

I suppose every investor will at some point get lost in moving averages, trend lines, support levels, resistance levels, MACD, RSI and so on. To me it happened quite early on. People want to believe they can predict the future via past/present and that they are smarter than the others. And everyone will try to time the market.

There are a lot of people who benefit from frequently changing mood of "Mr. Market" and keeping up the illusion that this would be predictable. In fact, the ones who benefit have also clear incentive to feed Mr. Market with either fear or greed - whatever it takes to create fuzz.

The stories can be based on company fundamentals, market fundamentals, market timing, pure technical analysis or unicorns and fairy dust. They really don't seem to care.

In the modern attention economy market commentators, blogs and news media get paid by clicks they get. So they want to create a lot of stories and market them via luring click-bait titles. However, sharing advertisement revenue via various mechanisms pales in comparison to profit that 'masters of the universe' have been extracting as long as there has been a stock market.

Enter vampires

"Name of the game, move the money from your clients pocket into your pocket."
-- Matthew McConaughey (playing Mark Hanna) in the movie 'The Wolf of Wall Street'

There are two main ways to milk a client in investment services business.

Somebody always benefits from trading (buying and selling) no matter what is told to the customer.

Secondly, some financial assets (e.g. mutual funds) expose clients to periodical holding and other costs (some of which may be well hidden especially in the case of mutual funds wrapped inside an insurance envelope).

The providers of financial services seek to maximize both.
Neither is in the interest of the individual investor.


To be continued (in part II) with e.g example of dream customer (for vampires)..