Tag Archives: apple

Invest In The Next Boom

By Carl Delfeld “My interest is in the future because I am going to spend the rest of my life there.” – Charles Kettering One of the best economic thinkers out there right now is Robert Gordon, who gave a great speech about the American economy at a recent TED conference. Gordon spoke about America’s amazing run of economic growth from 1870 to 1970 with innovation being a big part of the story. Breakthroughs such as electricity, indoor plumbing, transportation (trains, cars, and aircraft), infrastructure, communications, and medical care – in addition to rising educational achievements and population growth – drove steady increases in American productivity, income, profits, and a rising middle class – the backbone of any healthy economy. Looking ahead, Gordon thinks that America’s economy will have a tougher time keeping the momentum. Why? Because instead of enjoying tailwinds, it now faces challenging headwinds such as poor demographics, weak education, crushing debt, and rising inequality. This is pretty consistent with the mood in the country right now, and forms the talking points of many of the candidates running for president – with the significant exception of Marco Rubio. But a new book by Alec Ross paints an altogether different picture of America’s future: The Industries of the Future. Ross paints an upbeat, lively picture highlighting many emerging industries, from cyber security and big data to financial technology, along with a huge, emerging trillion-dollar industry at the heart of life sciences – genomics. He sees huge opportunities for young people in this industry, as there’s a sizable skills gap with many good-paying jobs for those with only a technical degree. Broaden Your Horizon From an investment point of view, I think the current challenges China is facing – as well as the weak relative performance of emerging markets over the last several years – are blinding many to the real opportunity. In short, you need to move emerging markets from the fringes of your portfolio, to the very center of your investment strategy. And corporate America needs to put selling to emerging market consumers at the top of its growth agenda. Why not capture the growth of markets that offer significant tailwinds that supercharge growth and profits? Just think of it. About 70% of the world’s population is just beginning to enjoy the many innovations that propelled Americans’ growth from 1870 to 1970. And per capita incomes and production rates of emerging nations are at about 10% to 15% of Americans’. Many living in emerging markets still don’t have access to electricity, clean water, or indoor plumbing. The need for better infrastructure is enormous. Demand for better transportation, consumer goods, technology, education, medical care, and luxury goods, is booming along with the means to pay for them. This “catch up” of past innovations plus the ready adoption of new technologies is fuel for much higher growth and investment returns. You need to capture this growth – or risk falling behind. The Right Strategy Is Crucial To capture most of these big gains, and avoid these downturns, you need the right strategy. This means a disciplined, opportunistic, active, and value-based approach. What is the common denominator of all great value investors? At all costs, they avoid buying into emerging market companies after they have made a nice run, have become too expensive, and are vulnerable for a pullback. With emerging and frontier markets cheap and out of favor, this is the time to take action. Finally, if you want to really supercharge your wealth, you must look far beyond the usual suspects of Brazil, Russia, India, and China (BRIC). With the possible exception of India, they have significant flaws. There are much better opportunities in many other countries – some offer us better opportunities than the China of 20 or 30 years ago. These markets are also completely off the radar screen of Wall Street analysts and the financial pundits. Investments and capital are headed to these markets, and it’s starting to show up in the performance numbers. By shifting your emerging market strategy away from “buy and hold,” and the BRIC countries , to an active value approach targeting other emerging markets, you’ll put the probabilities of success in your favor. Original Post

3 Lies About The Stock Market

We’ve all been told outright lies about the stock market that do not square with the evidence. Today, we’re going to debunk some insidious lies. Lie #1: “Superior returns come from stock picking.” This lie is especially dangerous because it is partially true. High returns can come from stock picking. But higher returns most often come from not picking stocks. For example, if you had been smart enough to predict that Apple (NASDAQ: AAPL ) would trounce most of the S&P 500 after the unpleasantness of the financial crisis, you would be a great stock picker – you just wouldn’t be very bright at generating extremely high returns with a solid MAR ratio (CAGR/Maximum Drawdown). A 50/50 portfolio of leveraged S&P 500 and leveraged long duration government bond exposure would have trounced Apple. Take a look at 50% ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO )/50% Direxion Daily 30-Year Treasury Bull 3x Shares (NYSEARCA: TMF ), rebalanced weekly, vs. the performance of Apple. It’s not even close. And that’s holding stocks and bonds! The dramatic diversification not only provides Apple-trouncing performance but also does so with much higher Sharpe and MAR ratios. (click to enlarge) Click to enlarge Which leads us to: Lie #2: “Focus investing leads to the highest returns.” Absolutely not. As we have seen above, holding two major asset classes is the opposite of Phil Fisher style focus investing. If holding Apple (the greatest growth company of all time) since the summer of 2009 is not as good as holding two leveraged ETPs which give exposure to stocks and bonds, focus investing is not optimal. Focus investing may be better than holding the entire S&P 500, but it is not as good as holding the entire S&P 500 and long duration government bonds – i.e., dramatic diversification boosts returns more than focus. Remember, correlations between asset classes are, as a rule, more persistent than company earnings growth. Lie #3: “If you’re going to pick stocks, you need to predict earnings.” This lie is especially dangerous. Guessing quarterly earnings is a loser’s game. Here’s what’s better – measure the number of competitors in an industry. Long’s Law is the ultimate reductionist statistic which is predictive of sustained company outperformance. Long’s Law states that long-term free cash flow margins (FCF/revenue) in any industry over a multi-decade time frame tend towards the inverse of the number of competitors in that industry. Dozens of seemingly predictive statistical ratios really collapse causally to one number – the number of competitors in the industry. And there are the added benefits of determining if the measured outperformance is sustainable, and if and when the outperformance is threatened (the entrance of meaningful new competition, etc.). For example, in an industry with three competitors, FCF margins will tend towards 33.33% or 1/3. However, Economic “Laws” should best be termed Economic “Tendencies.” The rule roughly holds across a vast array of industries. But why is this important? FCF margins directly impact the sustainability of high long-term Return on Assets (ROA) rates. And longer term, sustained high ROA numbers dictate the unlevered return of a business. But the key word is “sustainable”. And high FCF margins, according to Long’s Law, are only sustainable longer term in industries with few substantial competitors. But what are examples of publicly traded companies that might rank very highly under Long’s Law? Here is an illustrative, but by no means complete, list below: Major Payment Networks (Network Effect Businesses) Visa (NYSE: V ) MasterCard (NYSE: MA ) Major Futures Exchanges (Network Effect Businesses) CME Group (NASDAQ: CME ) Intercontinental Exchange (NYSE: ICE ) CBOE Holdings (NASDAQ: CBOE ) Major Credit Rating Agencies (De Facto Regulators) Moodys (NYSE: MCO ) McGraw-Hill Financial (NYSE: MHFI ) Get the picture? Don’t predict earnings. Measure the number of competitors in the industry. Longer term, margins and sustained earnings growth follow the lack of or the brutality of competition in an industry. The robber barons understood this, and you should too. And you don’t even need to pick stocks, but if you’re going to, pick oligopoly businesses with few competitors. You’ll earn much higher returns than the major equity indices over time, but without the need to guess quarterly earnings. Why are these 3 lies so persistent and widespread? It’s because they are partially true. But if we want to optimize returns, we need to discard these lies, and replace them with evidence-based thinking. Thanks for reading. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Covered Call ETFs Sidestep Market Volatility

Many investors have now transitioned to a lower stock allocation during the midst of this early 2016 decline. In fact, it has likely created a new sense of reality that it may be time to transition to a structure of low volatility to wait out the storm. A conventional and highly touted method has been to own stocks with lower historical price fluctuations than their peers like the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). However, there is also another way for ETF investors to own a basket of stocks with built-in options to collect income and potentially reduce price volatility. Covered call ETFs are also often referred to as a “buy-write” options strategy. This process involves owning a group of publicly traded stocks and selling call options on the underlying securities to collect the premium. This can be done by sophisticated investors on individual positions or you can effectively own an ETF or two that will do it for you on a diversified basket of stocks. The end goal is to collect income from the options contracts, which will ultimately reduce the effectiveness of these ETFs during a sustained uptrend in the market. Nevertheless, they have shown far less relative drawdown than their fully loaded index peers during the last two recent corrections. The oldest and most established fund in this group is the PowerShares S&P 500 BuyWrite Portfolio (NYSEARCA: PBP ). This ETF debuted in 2007 and has accumulated $312 million in assets. As you can see on the chart below, PBP has been able to sidestep a great deal of the decline versus the broad-market SPDR S&P 500 ETF (NYSEARCA: SPY ). It was also able to accomplish that same feat in the summer 2015 swoon as well. It’s worth noting that over longer periods of time, the PBP performance story falls short of the stock-only SPY. This is primarily due to the drag of the options buy-write strategy on 3, 5, and 10-year time horizons. In addition, PDP charges a premium expense ratio of 0.75% for the implementation of its unique approach. The income from PBP is interesting because it often experiences big changes over time. Distributions are paid on a quarterly basis to shareholders and over the last 12-months the trailing yield is 5.40%. Some of those distributions have included short and long-term capital gains as well. Another worthy contender in this space is the Recon Capital NASDAQ 100 Covered Call ETF (NASDAQ: QYLD ). This ETF implements a similar strategy based on the NASDAQ-100 Index. The end result is a more concentrated mix of stocks with concentrations in technology and consumer discretionary sectors. This ETF has been able to achieve a similar pattern of reduced draw down relative to the PowerShares QQQ (NASDAQ: QQQ ) during periods of market stress. QYLD charges an expense ratio of 0.60% and income is distributed on a monthly basis to shareholders. This may be a more attractive feature for income investors who are searching for a more regular dividend stream . The trailing 12-month distributions indicate a yield of 10.49% based on the current share price of QYLD. These buy-write strategies have traditionally been a more obscure way to generate income while reducing draw down during sideways or falling markets. This likely means that they are going to be more of a tactical opportunity in the context of a diversified portfolio rather than a dedicated core position. Investors considering these funds should closely research the underlying mechanics of how the income is generated and compare against other potential low volatility alternatives as well. Disclosure: I am/we are long USMV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.