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Shooting Hoops With Peter Lynch And The Gurus

Many funds focus exclusively on one particular type of stock, such as large-cap value picks. But different types of stocks come in and out of favor in the market over time. Allowing your portfolio free range to go wherever the best values are at a particular time can enhance your long-term returns. The 2015-16 NBA season is fast approaching, and many teams are getting ready to show off the off-season changes they made in hopes of shoring up their weaknesses and improving their squads. Take the Toronto Raptors. Last year, the Raptors scored the fourth most points in the NBA, but gave up the 18th most points. Advanced metrics showed an even wider gap, indicating that Toronto had the third most efficient offense in the league, but the eighth least efficient defense, according to ESPN. Not surprisingly, the Raptors have made several moves in the off-season to try to bolster their defense. The name of the game, of course, is balance. In basketball, just as in any other sport, you are not going to get too far if your team has several weaknesses that counterbalance its strengths. So you of course want a mix of players whose skills complement each other. Building a team of only big, strong centers or only small, lightning-quick point guards would give you certain strengths in certain situations, yes. But it would also both limit the pool of talent from which you could choose, and leave you with some major weak spots in certain aspects of the game. Unfortunately, when it comes to picking stocks, that’s just what a lot of fund managers – and the investors who buy their funds – do. Many funds will focus only on a specific “style-box” category – large-cap value stocks, for example – filling the fund primarily or entirely with just that type of stock. To be sure, style boxes serve a purpose, particularly for institutional investors, who often are required to put a certain portion of their portfolios into certain categories of stocks. But for individual investors, I think style-box investing significantly eats away at returns. Why? Because, much as with basketball players, good stocks come in all different styles and sizes; focusing on one style and size simply limits your opportunities to find winners. Sometimes, for example, the small-cap growth area of the market may be offering the most attractive values; other times, mid-cap value plays may feature the best opportunities. Why not allow yourself to go where the best opportunities are, regardless of size and growth/value distinctions? In addition, much like basketball players, the size and style of a stock often means that it will perform better in certain situations than others. Sometimes, for example, large-cap value stocks will go out of favor, and a portfolio that is focused only on them will get hit hard. A portfolio that includes stocks of various sizes and styles, however, has some natural hedges built in that should smooth out returns – making it more likely you’ll stick with it over the long haul. This “free-range” approach is what I do with my Validea Hot List portfolio, which looks for consensus from all of my Guru Strategies (each of which is based on the approach of a different investing great) when choosing stocks. At any given time, the portfolio could be tilted towards smaller stocks or larger stocks, growth-oriented picks or value plays. The strategy has paid off, with a 10-stock version of the Hot List more than doubling the S&P 500 since its July 15, 2003 inception, and a 20-stock version nearly doubling the index. What sort of stocks is this approach on right now? Here’s a look at a handful of picks that are in my 10- and/or 20-stock portfolios. The Travelers Companies, Inc. (NYSE: TRV ) : Minnesota-based Travelers ($31 billion market cap) provides property casualty insurance for auto, home, and business. The 162-year-old company does business in the US, Canada, the United Kingdom, Ireland, and Brazil. Travelers’ mix of solid growth and reasonable value helps it earn strong interest from my Peter Lynch-based strategy. Its 17% long-term earnings per share growth rate (I use an average of the three-, four-, and five-year EPS figures) and high sales ($27 billion over the past year) make it a “stalwart” according to the Lynch approach – the kind of large, steady firm that Lynch found offered protection during downturns or recessions. To find growth stocks selling on the cheap, Lynch famously used the P/E-to-Growth ratio, adjusting the “growth” portion of the equation to include dividend yield for stalwarts, since they often pay solid dividends; yield-adjusted P/E/Gs below 1.0 are acceptable to my Lynch-based model, with those below 0.5 the best case. When we divide Travelers’ 9.2 P/E by the sum of its growth rate and dividend yield (2.4%), we get a yield-adjusted P/E/G of 0.43 – a sign that it’s a bargain. South State Corporation (NASDAQ: SSB ) : South State provides retail and commercial banking services, mortgage lending services, trust and investment services, and consumer finance loans. It serves customers and conducts its business from about 130 financial centers in South Carolina, North Carolina, and Georgia. South State ($2 billion market cap) is a smallish mid-cap growth stock that gets strong interest from my Martin Zweig-based model. It likes the firm’s long-term EPS growth (17%) and long-term sales growth (22%). It also likes that recent EPS growth has been even better, coming in at 38% in the most recent quarter (vs. the year-ago quarter). Alaska Air Group, Inc. (NYSE: ALK ) : Actually based in Washington state, Alaska Air is the parent of Alaska Airlines and Horizon Air Industries, which with partner regional airlines serve 90 locations in the US, Canada, and Mexico. The smallish large-cap or big mid-cap, depending on how you look at it ($10 billion market cap) is a favorite of my Lynch model, in part because of its stellar 40% long-term EPS growth rate. Shares trade for 14.4 times earnings, making for a strong 0.41 PEG ratio. Alaska Air also has a very reasonable 34% debt/equity ratio. MYR Group (NASDAQ: MYRG ) : This small-cap specialty contractor ($571 million market cap) serves the electrical infrastructure market throughout the US and Canada. The Zweig strategy likes that it has grown earnings per share at a 27% pace and sales at a 24% pace over the long term, and that both EPS and sales growth accelerated last quarter. It also likes MYR’s 0% debt/equity ratio. Chicago Bridge & Iron Company N.V. (NYSE: CBI ) : Based in The Netherlands, CBI is involved in engineering, procurement and construction services for customers in the energy and natural resource industries. The $4.7 billion market cap mid-cap was founded more than a century ago in Chicago as a bridge designer and builder. The model I base on the writings of hedge fund guru Joel Greenblatt is particularly high on CBI as a value play. Greenblatt’s approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes CBI’s 16.7% earnings yield (Greenblatt uses earnings before interest and taxes divided by enterprise value for that) and 177% ROC (EBIT/tangible capital employed), which combine to make the stock the most attractive in the entire U.S. market right now, according to this approach. CBI’s 24% long-term EPS growth rate and bargain priced 0.32 PEG ratio also help it earn strong interest from my Lynch-based model.

5 Huge Advantages You Have Over Professional Investors

Summary 5 ways you are better than the Wall Street pros. Why you should ignore what the pros are doing. How to take advantage of your advantages. “Don’t bother. The professionals are better than you and they know something you don’t.” Really? There’s some truth to that, but there’s plenty of lies mixed in that short statement too. And it’s easy to dismiss yourself or come up with excuses for why you can’t do it. Here are five to get things started. 5 Common Excuses That Investors Believe The market definitely knows more than me. I’m not smart enough to invest on my own and build wealth. I always miss out on the best opportunities. I can’t beat the computer trading that the market uses. I don’t know where or how to start. Sure there’s some validity to each excuse above. But investing is unique because anyone can be a good investor. The Uniqueness of the Stock Market Outside of the stock market, it’s a good idea to find a professional to solve a problem instead of trying to do it yourself or asking the average Joe next door. Need a kidney transplant? Find a surgeon. Not Ms. Traci, your old biology teacher. But the investment industry is one of the very few where you don’t need any qualification, practice, skill or even knowledge to be involved in the markets. The entry criteria is zero, which is why so many people lose money, throw their hands in the air and forever condemn the stock market as a rigged gambling machine. But choose your direction wisely from the get-go (value investing for you and me), build a good framework based on good guidance, quality investment books and investing resources, and it’s easy to do well. Ignore all the talking heads using jargon or the people who talk about much money they are raking in. All they want to do is make you feel dumb and gloat about how smart they are. But what if you continue to disbelieve, or you know people who continue to doubt that investing successfully on your own is possible? You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ. – Warren Buffett If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor. – Warren Buffett Here are 5 advantages small investors hold over professionals that you must take advantage of. 1. As a Small Investor You Are Able to Choose Your Expertise When you are investing as an individual, you are free to choose whatever specialty you like. You can choose whatever stock to invest in. Large. Small. Biotech. Miners. Safety. Whatever. You can even choose to focus and become an expert in a few industries that excite you or take a broader approach. On the other hand, professionals are paid to focus on certain fields or investing strategies. If you get sick of an industry, just move onto your next interest. Professionals don’t have this luxury of choosing their strengths. As a small investor, you are agile and can go to different market caps, sectors, and even buy some odd lots for a quick turnover. 2. You Can Go Against the Grain Professional investors follow the herd. It’s better to be incorrect with the herd and maintain job security instead of sticking your neck out and getting fired if the investment doesn’t work out. You don’t have a boss obsessed with profits breathing down your neck with another younger guy waiting in line to take your job. You’re free to take a contrarian approach like the good ol’ net net strategy or concentrating on Buffett type stocks. The pros will start investing in an “uncertain” stock, sector or country once it starts to rebound – when the best time to invest has already passed. 3. You Are Not Judged Monthly, Quarterly or Yearly Not being obsessed with beating the market is one of the biggest advantages you have. Because the pros have clients and upper management demanding results, the only thing they can do is chase hot stocks, hot trends and buy and sell quickly so as not to “look” left out. Ignoring short term results and focusing on the big picture will put you in a position to succeed. The once bad Golden State Warriors didn’t win the NBA championship by flipping players every time something didn’t work out. They had a long term team building strategy that paid off in the end. Being able to sacrifice short term results to compound long term wealth is a huge advantage. 4. You Can Afford to Be Patient Can’t find a company to invest in? That’s ok because you can hold cash and wait for the right opportunity. Nobody is going to say anything because you hold 30% of your portfolio in cash. You also put yourself in the best position to succeed by buying depressed securities and playing the waiting game. Professionals on the other hand are risk-averse as they can’t afford to lose their client’s money. This leads to following the herd and mediocre returns. 5. It’s Cheaper You don’t need a room full of computers, computerized trading system software or instant access to information. You don’t have to pay people for insider “tips”. With all the high frequency trading going on, the long term value investing approach saves you money on commissions, taxes and other fees. Take Advantage of Your Advantages There’s no reason to play the same game as the professionals. In Malcolm Gladwell’s book David and Goliath , it covers how the “disadvantaged” overcome the expected winners. An important observation was that if David (the small investor) tries to take on Goliath (Wall Street professionals) within the same set of rules, the winner is always Goliath. However, by not playing by the same system and expectations, David is able to defeat Goliath. In other words, as a small investor, do what the big boys can’t to beat them at their own game. In 2008, Buffett bet that a low cost index fund will outperform a fund of hedge funds. Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses. The result at the start of 2015? The S&P500 up 63.5% and the hedge fund up around 19.6%. The takeaway? It’s only in the stock market where the average Joe can have such a strong advantage over the professionals. Make the most out of your advantages. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

Shoot and Score with ‘Smart’ Basketball

Tech columnist Ed Baig took to the court to test a new “smart basketball” equipped with nine sensors that communicate with an iPhone or iPad via Bluetooth wireless technology. The 94Fifty basketball and associated iOS app, made by InfoMotion Sports Technologies, tracks performance by measuring speed and pressure applied to the ball. It also coaches aspiring hoops stars with voice feedback. Users can work on drills or challenge other players. “My two small kids were engaged, and they were excited when they improved their scores,” Baig reports.