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9 Simple College Savings Tricks

Summary Why is saving for college so hard? How to co-opt your kid and work together to save all you need. Demand an adequate ROI and decide if it is really worth it. Why is saving for college so hard? How can I pay for my kids’ college? Like everywhere else, where the government has entered into a market as a massive, price-insensitive third-party payer, it has completely distorted the price system. If you have ever heard a politician say “_________ is not a privilege, but a right”, then it is probably a subject with significant malinvestment. Here is what has happened with some of the most distorted markets over the course of my lifetime: So that is the world we face when paying for college. Here are ten simple tricks for facing this daunting task. Long-term Goal While I want to have everything organized as efficiently and rationally as possible for my kids, my long-term goal is to nurture independent adults. I have a reminder on my Microsoft (NASDAQ: MSFT ) Outlook calendar to have the locksmith come to change the locks when the youngest kid turns eighteen. After that, I expect them to succeed under their own power. One: co-opt your kids First, co-opt your kids as active participants in the process of saving for college. Whenever they want to spend money, make sure that they denominate that expense in the length of time that it will take them to earn that money. Two of my favorite places for them to save include Toronto-Dominion Bank (NYSE: TD ) and MainStreet Bank. Each kid can make $10 per year at TD. TD offers a summer reading program in which kids can earn $10 each for reading 10 books. You can get the form here . In addition, our TD branch has a coin deposit machine. As it accepts only U.S. dollars, the rejects slot typically contains a few dollars’ worth of Canadian and other foreign coins for the kids to collect. Each kid can make $40 per year in interest from MainStreet Bank. Kids can each earn $40 per year in interest in a Junior Airsavings account . These accounts offer an annual percentage yield/APY of 4% for accounts up to $1,000 owned by depositors under eighteen years old. Each kid can make $50 per year from DFCU Financial. Deposits age 0-17 get $50 in cash per $100 account. If you have an account at DFCU or if you can open one (either via a family relationship or living in their region of Michigan), it might be worth getting your kids set up with accounts too. If you live in a state that offers refunds on beverage container deposits, kids can help collect bottles. My final step in co-opting each of my kids in this effort is to offer them $0.50 on the $1.00 for any merit or athletic scholarship (or any other kind they can find) that they earn. There is a ton of money out there and I want them to have the mentality of constantly looking for such opportunities to exploit. “Never, ever, think about something else when you should be thinking about the power of incentives.” – Charlie Munger Two: start them on credit cards Kids can make an average of $272 each year from Fidelity. The best credit card deal available is the Fidelity Investment Rewards American Express (NYSE: AXP ) Card. There is no age limit. You can co-sign the agreement, get cards in your kids’ names and start building their credit history. The average American kid’s expenses are $13,611 per year. With the 2% cash back on this card, that comes to a rebate of $272 each year. Once the kids are legitimately earning income from chores, they can start funding their IRAs with this card. Three: set up a family bank Kids can make about $109,565/ each year with a family bank. According to the IRS, the long-term adjusted Applicable Federal Rate/ AFR is currently 2.3%. In order to qualify as a loan, parents need to charge that amount of interest to each kid. However, parents can also gift the interest rate payment up to $28k . So, one can loan up to $1,217,391 from each couple to each of their kids per year without it costing them any net interest. If they can compound at 9% per year, that will come to just under $110k per year per kid. Four: Max out your 529 You can contribute $370,000 to each kid’s Nevada 529. Here is why I think Nevada’s is the best one. If you fail to max out any tax-advantaged saving and investing opportunity, you are stealing from yourself. Five: Odd Lots Throw around your (lack of) weight. With my kids, we focus on how small scale can be an edge. One tactic is to exploit odd lot opportunities. These have proved to be lucrative – a great relationship between risk and reward with a limited downside. For kids’ accounts with under a million dollars in them, they can be among the best opportunities. The question of how to make $10,000 out of $5,000 is very different than making $1 billion out of $500 million. You might as well take advantage of all of the quirky opportunities strewn around the capital markets to make money at small scales. However, due to capacity constraints, I am keeping all of my best odd lot opportunities here . Six: Dividends I do not expect much of a tailwind from the U.S. equity market over the next few decades based on the market multiples discussed here . So a substantial part of the total returns that one may expect will come from dividends. One example of a high dividend payer worth considering is Digirad (NASDAQ: DRAD ): While it has returned over 20% since it was first disclosed on Sifting the World, it remains an attractive opportunity. You can read more about their recent acquisition in M&A Daily . Seven: hire world-class asset allocators… for free There is only a small number of world-class asset allocators running publicly traded companies. Berkshire Hathaway’s ((NYSE: BRK.A )/(NYSE: BRK.B )) is the most famous. Whenever you can get them at a discount to their net asset value, it is as if you are hiring one of the greats for free. For example, from time to time, you can get the Tisch family for free by buying Loews (NYSE: L ) at a discount to NAV. Today, you can get John Malone for free when you buy Liberty Media (NASDAQ: LMCA ). Seize such opportunities. In investing, you get what you don’t pay for. Eight: demand a strong return on investment This formula doesn’t just work for your money, but works well for any constrained resource including your time, energy, and focus. Demand a strong ROI on everything that you do. “I don’t get out of bed for less than $10,000 a day.” – Linda Evangelista Well I don’t get out of bed for less than a 10% ROI. Some of the top ROI for undergraduate schools include Stanford, MIT, and Princeton. Many of the best educational ROIs are degrees in computer science, medicine, business, engineering, and law. While there are many subjects that may be intrinsically interesting, one should ask if it is worth piling up mountains of debt for them, especially if they are subjects that you can pursue on your own. Generally, hard subjects pay off. If you learn something quantitative, data-based, and difficult, you can probably pick up the qualitative, subjective, and easy stuff on your own later. However, if you slide through school working on easy subjects, then the hard stuff will torture you later in life. Nine: no one has to go to college Fayetteville State University notable alumni “Junkyard Dog” If your kid gets accepted to MIT and wants nothing more than to pursue computer programming, it is probably a worthwhile endeavor. But there are also many schools and many degrees that have substantially negative ROIs. If your best bet for college is Fayetteville State University or you want to study mime, then the annual return over the subsequent twenty years will probably be quite negative. Consider skipping college altogether. You can apply here for a $100,000 Thiel Fellowship to skip college and build new things. Some people, including some extremely wealthy people, cannot afford college. Even if they have the tuition bill in their petty cash drawer, they cannot afford college because the opportunity cost is too high for people with ideas worth acting on right away. Four years is a long time, especially if you have a great idea worth pursuing. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

8 Questions That Should Be Keeping Buy-And-Holders Up At Night

By Rob Bennett Set forth below are eight questions that should be keeping Buy-and-Holders up at night. 1) What are the top ten changes that have been made in the Buy-and-Hold strategy as a result of Shiller’s “revolutionary” findings? Yale Economics Professor Robert Shiller showed in peer-reviewed research published in 1981 that valuations affect long-term returns. That “revolutionary” (Shiller’s word) finding changed everything we thought we knew about how stock investing works. If valuations affect long-term returns, stock risk is variable rather than fixed; that means that we can reduce risk by taking valuations into account when setting our stock allocations. Shiller’s book exploring this finding in depth was a national bestseller. He was awarded a Nobel prize for his work. Given the importance of this advance in our understanding of how stock investing works, one would have expected that the Buy-and-Holders would have made scores of changes to their strategy to reflect the new understanding. Can the Buy-and-Holders identify even ten changes? Can they identify even one? 2) Why was there no reaction from the lead promoters of Buy-and-Hold when Brett Arends of the Wall Street Journal wrote that they are “leaving out half the story” of how stock investing works? I have been writing about the dangers of Buy-and-Hold for 13 years now. So I was encouraged when I saw the Arends article saying that to ignore the effect of valuations on long-term returns is to leave out half the story of how stock investing works. I was amazed to see the article go down the memory hole without generating comment (except by me). Arends could be wrong. But, if he were, it would be in the interests of the Buy-and-Hold advocates to point out his mistake. Why did no one do this? 3) Why has there been no clear explanation of the errors that were made in the Old School safe-withdrawal-rate studies? I pointed out the error in the famous “4 percent rule” in May 2002. I got a lot of flak from Buy-and-Holders for doing so. But 13 years later just about every major publication in the field has run an article noting that the 4 percent rule is not backed by the historical data and that it would be dangerous for retirees to continue to follow it. How was this mistake made? Why did it take so long to discover it? What can we learn from the mistake? 4) How was Shiller able to predict an economic crisis that began in September 2008 in a book published in March 2000? I am the only person in this field who has blamed the economic crisis on the heavy promotion of Buy-and-Hold strategies (the idea that investors don’t need to lower their stock allocations when prices reach insanely dangerous levels caused the out-of-control bull market of the late 1990s and the loss of the $12 trillion of pretend wealth created by the bull market caused consumer buying power to constrict enough to cause hundreds of thousands of businesses to fail). Except for Shiller. Shiller has not said in the wake of the 2008 crash that Buy-and-Hold caused the economic crisis. But he did predict the loss of trillions in pretend wealth in Irrational Exuberance , a loss that he suggested would likely take place late in the first decade of the new century. How did he know? And why have others not drawn the obvious conclusion that, since Shiller’s investing model was the one that predicted the crash and the economic crisis, it has earned credibility in the eyes of fair-minded people? 5) How did Bogle come up with his rule that investors never need to lower their stock allocations by more than 15 percentage points no matter how high stock prices go? A regression analysis shows that the most likely 10-year annualized return for an index-fund purchase made in 1981 was 15 percent real. In 2000, it was a negative 1 percent real. An 80 percent stock allocation makes sense in the former circumstance. A 20 percent stock allocation makes sense in the latter circumstance. That’s a change of 60 percentage points, not 15. Bogle’s number is off by 400 percent. 6) Why do Buy-and-Holders become so emotional when their claims are challenged? I have been banned at over 20 investing discussion boards and blogs. It is a common experience for me to receive apologies from the site owners who ban me in which they note that they believe that my work has great value and that they consider me one of the most polite and warm posters on the internet. They say that they are banning me solely because their Buy-and-Hold readers demand it and because they don’t want to lose the business brought by these followers of a purportedly research-based strategy. Huh? Why would followers of a research-based strategy be upset by challenges to their beliefs? Wouldn’t they see such challenges as a way to confirm and thereby strengthen their convictions? 7) Why was Wade Pfau not able to find a single peer-reviewed study showing that long-term timing doesn’t work or isn’t required? I worked with Academic Researcher Wade Pfau for 16 months. Wade holds a Ph.D. from Princeton. He performed an in-depth search of the academic literature trying to identify a single study showing either that long-term timing (changing one’s stock allocation in response to big valuation shifts with the understanding that it might not produce benefits for ten years or longer) doesn’t work or isn’t required without success. Could it be that, contrary to the core belief of the Buy-and-Holders, one form of market timing always works and is always 100 percent required for investors seeking to keep their risk profiles roughly constant? 8) Is there any reason to believe that price matters any less in the stock market than it does in every other market known to humankind? Price is what makes the car market run. Price is what makes the banana market run. Price is what makes the sweater market run. Price is what makes the grass-seed market run. How can we be so sure that price does not matter when buying stocks? If large numbers of the participants in these other markets became convinced that it was not necessary to take price into consideration when making purchases, it would cause them to collapse. Could that be why we have been seeing so much turmoil in the stock market in recent years? Disclosure: None

Ameren Offers Utilities Investors With Protection From Higher Interest Rates

Summary Midwestern electric and natural gas utility Ameren has seen its share price perform well YTD, with even a disappointing Q2 earnings report proving to be just a speed bump. Following years of underperformance compared to the peer average, Ameren is changing its focus so as to take advantage of demand for new transmission infrastructure. Its Illinois operations will provide it with a buffer against higher interest rates due to that state’s regulatory linkage between allowed return on equity and interest rates. While Ameren’s shares are overvalued on a forward basis, a warm winter in its service area due to El Nino could create an attractive long investment opportunity. Shares of Midwest electric and natural gas utility Ameren (NYSE: AEE ) have rebounded strongly since setting a 12-month low at the end of June, with a disappointing Q2 earnings report only providing a slight bump on the way to an 18% price increase since then. The company has not been one of the sector’s better performers in recent years as weather volatility and arbitrary regulator behavior have held it back. Its regulatory outlook has improved this year, however, in a way that will reduce its exposure to higher future interest rates. Adverse weather conditions in Q4 will provide short-term headwinds first, however. This article evaluates Ameren as a potential long investment opportunity in the context of this operating environment. Ameren at a glance Headquartered in St. Louis, MO, Ameren is a relatively large electric and natural gas utility with more than $20 billion in total assets and a market capitalization of $10.7 billion. The company operates in a 64,000 square mile service area that includes much of eastern Missouri and most of Illinois, excluding Chicago and its surrounding environs. Its operations are divided into 3 segments. Ameren Missouri oversees electric generation, transmission, and distribution plus natural gas distribution in that state’s share of the service area. It currently has 1.2 million electric customers and 127,000 natural gas customers, with the former receiving electricity generated by the company’s 10,200 MW generating fleet. Unlike many of its peers, Ameren Missouri remains heavily reliant on coal, which comprises 53% of its fuel mix (the balance is split between nuclear, natural gas, and hydro). Unlike its counterpart across the Mississippi River, Ameren Illinois only engages in electric and natural gas distribution activities. It has 1.2 million electric and 813,000 natural gas customers in the state. Much of the electricity that it uses is sourced from Ameren’s generating capacity in Missouri via the third and final segment, Ameren Transmission Company of Illinois, which operates 4,600 circuit miles of 345 kV regional transmission lines. Historically, Ameren Missouri has made the primary contribution to the company’s total rate base, reaching 63% in 2011 compared to 29% from the Illinois operations and 8% from the transmission operations. This has negatively impacted Ameren’s past consolidated earnings due to the lack of a favorable regulatory scheme in Missouri. While the state’s scheme does provide utilities with a fuel cost recapture mechanism that insulates them from the type of fuel price spikes that are not uncommon during Midwest winters, its use of historical test years result in a large amount of regulatory lag. This lag prevents Ameren from recognizing higher rates due to infrastructure investments and similar capex for roughly 2 quarters despite incurring higher depreciation, O&M, and property tax costs during the interim. The regulatory scheme employed in Illinois, on the other hand, has improved in recent years. The most substantial change has been the decision to base the allowed return on equity for electric utilities on the 30-year Treasury rate plus 580 basis points. While this formula currently results in a below-average allowed rate for Ameren Illinois, it will mitigate the impact of higher interest rates following the Federal Reserve’s planned rate hike on Ameren’s consolidated earnings. Furthermore, electric utility rates are based on a year-end rate base and provides for the recovery of “prudently incurred” actual costs, greatly reducing regulatory lag. Illinois natural gas utilities operate within a similar scheme that bases rates on future test years and includes infrastructure riders, similarly reducing lag. Finally, Ameren’s transmission operations are governed by a federal regulatory scheme that reduces regulatory lag by employing forward-looking calculations with an annual reconciliation mechanism. Ameren has reported slow but steady earnings growth since 2013, although its annual EPS results have yet to return to their pre-financial crisis highs. Its annual EBITDA, meanwhile, has remained flat over the same period, highlighting the lack of growth in its service area over the last several years. The company was hit especially hard by the 2008 financial crisis and slashed its dividend in that year. Since then the dividend has only increased by 10%, causing the company to lag significantly behind its peers. Its yield had been much higher than the sector average before the crisis and remained high even after the cut, however, and as a result, it has a forward yield of 3.9% despite this low growth rate. Q2 earnings report Ameren reported Q2 earnings at the end of July that missed the analyst consensus on both lines. It reported revenue of $1.4 billion (see table), down by 1.4% YoY and missing the consensus by $40 million. Revenue from its electric operations increased by 1.2% and provided 89% of consolidated revenue as higher demand in Illinois more than offset reduced demand in Missouri as the latter state experienced a mild early summer. Natural gas revenue fell by 18% YoY due to a 3.2% decline in volumes as Illinois experienced a warmer than normal spring, reducing the number of heating degree days. A sharp fall in energy prices over the previous 12 months also contributed to the lower natural gas revenues in particular. Ameren financials (non-adjusted) Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Revenue ($MM) 1,401.0 1,556.0 1,370.0 1,670.0 1,419.0 Gross income ($MM) 1,049.0 975.0 880.0 1,273.0 1,031.0 Net income ($MM) 141.0 108.0 48.0 293.0 149.0 Diluted EPS ($) 0.58 0.45 0.20 1.20 0.61 EBITDA ($MM) 447.0 459.0 336.0 762.0 522.0 Source: Morningstar (2015). Gross profit rose slightly to $1.05 billion from $1.03 billion YoY despite the revenue decline. The increase was the result of the company’s cost of revenue falling by 9.3% YoY due to lower fuel prices, more than offsetting the negative impact of lower revenues. Operating income fell sharply to $237 million from $322 million in the previous year. While a large loss provision for the construction license of a new nuclear unit was the decline’s major driver, higher O&M and depreciation costs resulting from regulatory lag in Missouri also contributed. Ameren’s consolidated net income fell to $141 million, or a diluted EPS of $0.58, compared to $150 million, or a diluted EPS of $0.62, in the previous year, missing the analyst consensus by $0.03. The most recent result included a $52 million boost resulting from the recognition of a tax benefit via the resolution of an uncertain tax position that the company treated as discontinued operations. EPS from continuing operations came in at only $0.40 versus $0.62 YoY. EBITDA also declined, falling from $522 million YoY to $447 million. Outlook Ameren reaffirmed its FY 2015 EPS guidance range of $2.45-$2.65 during its Q2 earnings call based on the assumption of normal temperatures in Q3 and Q4. The company’s service area did experience more cooling degree days than average in Q3, reinforcing this range. El Nino can be expected to impact its Q4 earnings, however, by bringing warmer than normal temperatures into the company’s service area between October and January. This year’s event is expected to be one of the strongest on record and previous such events have introduced warm weather in Missouri and Illinois during the quarter, reducing demand for natural gas. Ameren is unlikely to be as exposed to El Nino’s adverse weather impacts as many of its peers since the bulk of annual consolidated earnings have traditionally been brought in via its electric operations during the Q2 and Q3 summer months. Furthermore, temperatures in its service area have historically returned to normal by February during past El Nino events. Investors can expect its Q4 earnings to be lower than normal, however. Ameren’s earnings in FY 2016 and beyond will be driven by the company’s ability to utilize its planned capex in a manner that takes advantage of its regulatory environment where possible. The company expects capex to drive a rate base CAGR of 6% through FY 2019 as it invests in a combination of reliability, environmental, and new capacity projects. The latter will be the most important as they are designed to increase the share of its total rate base attributable to its transmission segment from 8% currently to 19% by FY 2019. The transmission segment will achieve a rate base CAGR of 27% over the same period, ultimately reaching $2.3 billion in total capex. The company expects that this will in turn result in an EPS CAGR of 7-10% through at least FY 2018. The company’s ability to achieve and maintain this earnings growth target will ultimately depend on how quickly the Federal Reserve implements its expected interest rate increase. At first glance, Ameren is more exposed than many of its peers to higher interest rates due to its BBB+ credit rating from S&P and Fitch (the credit ratings of its state units are higher). Interest rate spreads have widened in recent weeks as expectations of a Federal Reserve rate increase occurring by the end of the year have grown, with the largest increases occurring for lower-rated debt. At first glance, this would suggest that Ameren will be at a disadvantage to those of its peers with superior ratings. Unlike many of its peers, however, a substantial segment of the company’s operations reside within a regulatory scheme that links the allowed return on equity to interest rates. While this has kept the return on equity below the peer average during the current era of low interest rates, it will support Ameren’s ability to both finance its planned capex and mitigate the negative impact of higher interest costs on its earnings. Looking beyond FY 2016, Ameren’s Missouri operations are likely to be burdened by the U.S. Environmental Protection Agency’s [EPA] recently released Clean Power Plan, which requires individual states to achieve predetermined reductions to the carbon intensities (greenhouse gas emissions per unit of electricity generated) of their respective state utilities beginning in 2022. Illinois has one of the country’s highest carbon intensities and must achieve a 28% reduction by then, while Missouri is not far behind with a required 19% reduction . One advantage of these reductions is that they could pave the way for additional capex to convert existing coal-fired power plants to natural gas and possibly even build new, cleaner capacity. The presence of substantial regulatory lag in Missouri would contribute to earnings volatility. Valuation The consensus analyst estimates for Ameren’s diluted EPS in FY 2015 and FY 2016 have increased modestly over the last 90 days in response to warmer Q3 weather and the Federal Reserve’s decision not to increase interest rates in September, as had been widely expected by the market. The FY 2015 estimate has increased from $2.55 to $2.56 while the FY 2016 estimate has increased from $2.70 to $2.72 over the same period. Based on a share price at the time of writing of $44.10, the company’s shares are trading at a trailing valuation of 18.0x and forward valuations of 17.2x and 16.2x, respectively. The forward ratios in particular are at the high end of their respective 5-year ranges, albeit lower than they were at the end of 2014, suggesting that the company’s shares are modestly overvalued at this time. This is especially true for the company’s short-term outlook given the likelihood of a warm Q4 in its service area. Conclusion Ameren’s shares have exhibited an above-average amount of volatility in 2015 to date as the company has attempted to recover from its past history as a relative laggard in the electric and natural gas utilities sector. Recent developments have mostly been favorable, with its Illinois regulatory scheme changing to link the allowed return on equity to interest rates and the company’s own focus shifting away from Missouri’s poor regulatory environment to its growing transmission operations. This new approach will be necessary if Ameren is to bring its earnings growth closer to the sector average, let alone above it. Fortunately, the combination of new transmission projects, reliability investments, and environmental controls will provide it with large capex opportunities over the next 5 years that will be necessary to support faster earnings growth. Furthermore, its forward dividend yield of 3.9% is relatively high already. The main draw that Ameren has to offer to potential investors is its linkage between allowed return on equity for a substantial segment of its operations and interest rates, as this will offset one of the market’s major current concerns about utilities in general. The company’s shares are also overvalued on a forward basis, leaving them exposed to a substantial decline in the event that this year’s El Nino has a greater than expected negative impact on its Q4 and potentially also Q1 2016 earnings. Yield-seeking investors who wish to be insulated from higher interest rates could view such an event as a potential buying opportunity, however, and I would consider Ameren’s shares to be attractively valued in the event that its forward P/E ratio falls back to 14x its FY 2016 earnings, or $38 per share, as it has already done twice in the last 3 months.