Tuesday, March 31, 2009
A Good Month But Another Awful Quarter/Ingersoll Rand: Awful Guidance and a Dividend Cut/Can No Longer Rely on Dividends as a Source of Income/Alcoa
Monday, March 30, 2009
Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets/ Novartis or Sanofi
If stocks are more risky than previously thought for a long term investor, as suggested by this analysis, then consideration needs to be given to reducing their weight, at least where an investor faces significant situational risk, that is, a need for capital unique to the individual investor based on their personal situation.
In the example that I gave in a previous post, I postulated what would happen to me if I lived another 35 years to the ripe old age of 92 and my stock portfolio suffered a horrendous meltdown at age 88, followed by a relentlessly long bear market lasting several years. What if that was accompanied by stagflation that reduced the value of my bonds, and I had to sell them at a loss? Duality of Long Term Risks
Or, what happens when I am depending on stocks to finance my retirement, and they fall 50 to 70% quickly soon after I retire? Another example would be having a heavy weight in stocks in a 529 plan with the child starting to enter college right now. There are countless situational risks where new thinking needs to be done to weigh the long term risk of stocks with the applicable situational risk even with a five year or longer time frame. And, the end result of that analysis may be less weighting to stocks as an asset class than you would normally see in a target funds glide path.
LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK
Stocks for the Long Run?/End to Irrational Exuberance for Now
A bond mutual fund has no maturity. Its net asset value fluctuates with changes in the values of its bond positions. Even in periods where bonds have performed well, it is not unusual to find bond funds that continue to decline in their NAV. Even when you add the dividends back, you may easily realize a total return once the shares are sold in an amount less than the total dividends paid out (loss on shares subtracts from the dividend return).
It will get a lot worse when the long term secular bull market in bonds comes to an end, which will happen, and this major asset class starts to fail. This will happen when inflation becomes a problem again, as in the 1970s and early 1980s over a long period of time and periodically thereafter. Then the decline in the NAV will far exceed the dividends paid out and the option of recovering your principle at maturity does not not exist in that ownership structure.
So I have elected to buy individual bonds and to supplement my individual securities with four bond ETFs: TIP, WIP, BWX and LQD. I will trade the ETFs but the first three are in areas of the bond market where I will most likely never buy an individual security. TIP is U.S. Treasury Inflation Protected Bonds; WIP includes International Government Inflation Protected Bonds; and BWX contains International Government Bonds.
This risk postulates that every investor only has a limited amount of capital to deploy, the amount is not relevant. The query is whether the phrase would be appropriate to describe the risk of the price rising so much that the opportunity is lost.
I would say it could be used both ways but the more appropriate description for a bear market would be to use opportunity risk to describe the risk to the downside and the consequences of buying too early. In a secular bull market, the risk would not be buying at all and/or waiting too long.
So, in a clearly defined long term secular bull market, the risk of lost opportunity can be best described as not taking a full position in the security all at once. The reverse is true in the current market, where risk is managed by slicing and dicing orders into several parts, selling some securities on spikes, and repurchasing at lower prices on downdrafts using volatility to gradually build up positions at the lowest possible prices in preparation for the next bull market. So, my use of the phrase, and the way I manage opportunity risk, will depend on whether the market is characterized as a long term secular bull market or bear market.
This is a link to the prospectus: http://www.sec.gov
Sunday, March 29, 2009
From my point of view, the longer the period an asset is held creates more risk that an unanticipated event may occur that will decimate the value of the asset. This does relate to what Taleb is saying about the black swan events. I may do okay in the stock market for 15 years and then something happens in year 16 that takes away 50% of my gains, something that I could not anticipate and model, no mater how many MIT pets that I employed or the sophistication of my models. Those who have been investing every year in the stock market since say 1996, with equal contributions every year, know first hand about the point that I am making and it may feel like the bullet was in the chamber. The bullet is always there and the longer the game is played, exactly as before, the odds increase of an unpredictable and potentially catastrophic loss.
So then I did a quick calculation, adding thirty years to my age, counting with fingers on both hands, and realized that I might actually live another 30 years. For the sake of argument let's assume that I live another 35 years. So, would I be better of in a 3.5% 30 year treasury bond or the S & P 500 index, making the choice now, for the next thirty years as opposed to say making a choice between a ten year treasury and the S & P index for 10 years. Then, at the end of ten years, I would decide again. In the meantime, assume stocks had had a record similar to the 1990s and the treasury had been decimated in price and rising in yield to say 8%. What then? What would be the better choice if I had to choose one or the other?
My gut told me that stocks would do better than the 30 year treasury bond bought now with a 30 year time horizon but what if something unexpected happened causing the market to fall 70% near the end of that 30 year period. The longer that I stayed with the S & P 500 index, the odds of an outlier event happening increases which would decimate my returns. That might happen several times over the course of thirty years but would be devastating to me if it occurred in year 29 with only a few years left to recover. So, in this example, the duration of risk becomes important in the long term analysis, so I would pick the S & P 500 over the 10 year treasury bond for just the next ten years, or stocks over the 5 year Treasury. So, I have in the last analysis more confidence in the risk with a shorter duration, but not so short as a day, a month or even a year.
Friday, March 27, 2009
AINV Upgrade, TGB Share Float/Casinos & Debt/Risk Management for a Single Security/AIG Risk Managers
Thursday, March 26, 2009
Sold 1/2 of LXPPRD: Risk Reduction and Risk Transfer/Bought SLGPRC: Anticipated Risk Reduction and Transfer
My goal is to achieve a 10 to 15% annualized yield on cumulative REIT preferred securities as a sub-asset class, including dividends and netting profits and losses on all positions. This requires some trading to take advantage of their volatility.
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.