Tag Archives: stocks

F.A.N.G. Investing Makes Sense – Facebook, Amazon, Netflix, Google

As market volatility reached new highs this week, CNBC began talking about something called “FANG Investing.” Most commentators showed great displeasure in the fact that prior to the recent downturn, high-growth companies such as Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Google ( GOOG , GOOGL ) (FANG) had performed much better than all the major market indices. And in the short burst of recent recovery, these companies again seemed to be doing much better. Coined by “CNBC Mad Money” host Jim Cramer, he felt that FANG investing was bad for investors . Cramer said he preferred seeing a much larger group of companies would go up in value, thus representing a much more stable marketplace. Sound like Wall Street gobbledygook? Good. Because as an individual investor, why should you care about a stable market? What you should care about is your individual investments going up in value. And if yours go up and all others go down, what difference does it make? Most financial advisers today actually confuse investors much more than help them. And nowhere is this more true than when discussing risk. All financial advisers (brokers in the old days) ask how much risk you want as an investor. If you’re smart you say “None.” Why would you want any risk? You want to make money. Only this is the wrong answer, because most investors don’t understand the question – because the financial adviser’s definition of risk is nothing like yours. To a broker, investment risk is this bizarre term called “beta,” created by economists. They defined risk as the degree to which a stock does not move with the market index. If the S&P down 5% and the stock goes down 5%, then they see no difference between the stock and the “market”, so they say it has no risk. If the S&P goes up 3% and the stock goes up 3%, again, no risk. But if a stock trades based on its own investor expectation and does not track the market index, then it is considered “high-beta”, and your broker will say it is “high-risk”. So let’s look at Apple (NASDAQ: AAPL ) over the last 5 years. If you had put all your money into Apple 5 years ago, you would be up over 200% – over 4x. Had you bought the S&P 500 index, you would be up 80%. Clearly, investing in Apple would have been better. But your adviser would say that is “high-risk”. Why? Because Apple did not move with the S&P. It did much better. It is therefore considered high-beta and high-risk. You buy that? Thus, brokers keep advising investors buy funds of various kinds. Because the investors says she wants low risk, they try to make sure her returns mirror the indices. But it begs the question, why don’t you just buy an exchange-traded fund (NYSEMKT: ETF ) that mirrors the S&P or Dow and quit paying those fund fees and broker fees? If their approach is designed to have you do no better than the average, why not stop the fees and invest in those things which will exactly give you the average? Anyway, what individual investors want is high returns. And that has nothing to do with market indices or how a stock moves compares to an index. It has to do with growth. Growth is a wonderful thing. When a company grows, it can write off big mistakes and nobody cares. It can overpay employees, give them free massages and lunches, and nobody cares. It can trade some of its stock for a tiny company – implying that company is worth a vast amount – in order to obtain new products it can push to its customers, and nobody cares. Growth hides a multitude of sins and provides investors with the opportunity for higher valuations. On the other hand, nobody ever cost cut a company into prosperity. Layoffs, killing products, shutting down businesses and selling assets does not create revenue growth. It causes the company to shrink and the valuation to decline. That’s why it involves lower risk to invest in FANG stocks than in those so-called low-risk portfolios. Companies like Facebook, Amazon, Netflix, Google – and Apple, EMC Corp. (NYSE: EMC ), Ultimate Software (NASDAQ: ULTI ), Tesla (NASDAQ: TSLA ) and Qualcomm (QCOMM), just to name a few others – are growing. They are firmly tied to technologies and products that are meeting emerging needs, and they know their customers. They are doing things that increase long-term value. McDonald’s (NYSE: MCD ) was a big winner for investors in the 1960s and 1970s, as fast food exploded with the Baby Boomer generation. But as the market shifted, McDonald’s sold off its investments in trend-linked brands Boston Market and Chipotle (NYSE: CMG ). Now, its revenue has stalled and its value is in decline as it shuts stores and lays off employees. Thirty years ago, General Electric (NYSE: GE ) tied its plans to trends in medical technology, financial services and media, and it grew tremendously, making fortunes for its investors. In the last decade, it has made massive layoffs, shut down businesses and sold off its appliance, financial services and media businesses. The company is now smaller, and its valuation is smaller. Caterpillar (NYSE: CAT ) tied itself to the massive infrastructure growth in Asia and India, and it grew. But as that growth slowed, the company did not move into new businesses, so its revenues stalled. Now, its value is declining as it lays off employees and shuts down business units. Risk is tied to the business and its future expectations, not how a stock moves compared to an index. That’s why investing in high-growth companies tied to trends is actually lower-risk than buying a basket of stocks – even when that basket is an index like the DIA or SPY. Why should you own the low-or no-growth dogs when you don’t have to? How is it lower-risk to invest in a struggling McDonald’s, GE or Caterpillar or some basket that contains them than investing in companies demonstrating tremendous revenue growth? Good fishermen go where the fish are. Literally. Anybody can cast out a line and hope. But good fisherman know where the fish are, and that’s where they invest their bait. As an investor, don’t try to fish the ocean (the index.) Be smart, and put your money where the fish are. Invest in companies that leverage trends, and you’ll lower your risk of investment failure, while opening the door to superior returns.

How Do You Manage Risk?

By Andy Hyer That is the question that has been top of mind for many investors over the past several weeks as the markets have done their best imitation of the Twisted Colossus at 6-Flags. As it relates to our family of separately managed accounts, the answer really differs by portfolio. Here is the overview of the approach to risk management for our 7 Systematic Relative Strength portfolios: Aggressive Owns 20-25 U.S. mid and large cap stocks. Buys stocks out of the top decile of our ranks, and sells them when they fall out of the top quartile of our ranks. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Core Owns 20-25 U.S. mid and large cap stocks. Buys stocks out of the top quartile of our ranks, and sells them when they fall out of the top half of our ranks. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Growth Owns up to 25 U.S. mid and large cap stocks. Buys highly ranked stocks, and sells when they fall out of the top half of our ranks or have sufficient trend or technical attribute deterioration. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Can raise up to 50% cash as dictated by market conditions. International Owns 30-40 small, mid, and large cap ADRs from both developed and emerging markets. Buys stocks out of the top quartile of our ranks, and sells them when they fall out of the top half of our ranks. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Balanced Owns 20-25 U.S. mid and large cap stocks and U.S. Treasurys in an approximately 60% equities / 40 % fixed income weight. Buys stocks out of the top quartile of our ranks, and sells them when they fall out of the top half of our ranks. Fixed income exposure to intermediate U.S. Treasurys. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Global Macro Owns 10 ETFs from a broad range of asset classes, including U.S. equities, International equities, Inverse equities, Currencies, Commodities, Real Estate, and Fixed Income. No minimum constraints in asset class exposure, so that if an asset class is weak, it is possible for us to have zero exposure to that asset class. Strict buy and sell discipline based on relative strength. Tactical Fixed Income Owns 2-6 Fixed Income ETFs from a broad range of sectors of Fixed Income, including U.S. Treasurys, TIPs, Corporate Bonds, Emerging Market Bonds, High Yield, and Convertible Bonds. 40% of the portfolio will always remain invested in some form of U.S. Treasurys (Short-Term, Long-Term or TIPs). Strict buy and sell discipline based on relative strength. The chart below is based on Dorsey Wright’s opinion of the likely relationship between volatility and return in each of the different strategies over a long period of time. The actual results may differ from these expectations. Greater volatility may result in greater gains and greater losses. (click to enlarge) Life is full of trade-offs, and the financial markets are no different. Good results are likely to be achieved when a caring financial advisor takes the time to understand their clients’ needs and risk tolerance, and then to build the right allocation for that client. For those advisors using our SMAs as part of that allocation, they will find that these 7 portfolios have very different approaches to risk management. All of them employ some form of risk management. Even the fully invested portfolios are managing risk through individual position management (i.e., cutting them back when they become too large a percentage of the portfolio, or completely selling them when dictated by relative strength rank) and through sector exposure. Others, like “Growth”, can raise up to 50% cash to seek to mitigate some of the downside risk. “Balanced” benefits from the time-tested benefits of combining equities and fixed income. “Global Macro” is our “go anywhere” portfolio that can completely shift away from weak asset classes if needed. Share this article with a colleague

Guide To China Yuan ETF Investing

The month of August 2015 can find a place in history solely because of China’s yuan devaluation by about 2%. The step, taken on August 11, shook the global markets and almost all asset classes as the Chinese currency yuan posted the largest single-day decline since the historical devaluation in 1994 , after the country arranged its official and market rates in a line. Notably, the Chinese authorities follow a trading band around the official reference rate it sets each day for the value of the yuan against the dollar. The Chinese central bank defended its currency intervention ‘as a free-market reform’, but the move was criticized by U.S. lawmakers and viewed as a mean of taking undue favor in exports. Global experts had apprehended a currency war in the near future, especially among the Asian tigers and true to their fears; Vietnam has already widened its currency band from 2% to 3% to stay competitive on the export market. A slew of discouraging economic data from China has been blamed for weakening yuan. Its exports plunged 8.3% year over year in July, falling widely short of analysts’ expectation of 1.5% decline and deteriorating from the 2.8% drop-off recorded in June. Protracted slowdown in its manufacturing sector and a 24-year low economic growth in 2014 made this devaluation a targeted step to boost a sagging economy, as per several market experts. Impact Per Bloomberg , China’s foreign-exchange reserves are likely to see a $40 billion plunge per month. Not only this, a Bloomberg survey expects the currency to fall 1.6% to 6.5% against the greenback for the balance of 2015. Also, to restrain the incessant flight, the Chinese central bank is expected to intervene at regular intervals over the next three months. This move will be to ensure that the currency is stable and will be allowed to devalue within the specified range since an acute plunge in yuan would deteriorate the already worse case of a capital flight. Yet to be a Reserve Currency If this is not enough, the International Monetary Fund put its decision of using Chinese yuan as a reserve currency on hold for a year post this evaluation episode. Analysts believe that yuan will find it hard to make an entry into the basket of reserve currencies, presently formed by the dollar, yen, euro and the pound, unless it can move and trade freely. Future Move More Market Oriented The Chinese government announced that the renminbi’s central parity rate will follow the previous day’s closing spot rates more closely from now onward. This indicates China’s intent to make its currency more market driven. As a result, a section of analysts believe that the actual motive behind this currency move was to prepare yuan as a reserve currency. As stated earlier, the Chinese central bank assured the market that it would promptly intervene into the currency market if depreciation crosses the 3% mark. Options to Play In this backdrop, investors might be worried of investing in Chinese yuan as it is hard to get a handle on the currency’s future returns in one way or another. Though the future movements in yuan could be both ways, yuan-based investments should be closely watched before thronging the space in quest of alternative currency exposure. While Chinese stocks are too risky at this time owing to overvaluation concerns and excessive government interference, Chinese yuan ETFs could be a low risk choice. But great caution needs to be exercised to play this arena. WisdomTree Dreyfus Chinese Yuan Fund (NYSEARCA: CYB ) The most popular Chinese yuan fund is CYB from WisdomTree. The product invests in short-term, investment grade instruments in order to be reflective of both money market rates in China available to foreign investors, and changes in the value of the yuan against the dollar. The product charges investors 45 basis points a year but sees decent average volumes of 50,000 shares a day on AUM of over $93 million. The fund currently has a Zacks ETF Rank #3 (Hold) with a low risk outlook. In the last 10 days (as of August 20, 2015), the fund lost about 4.2% and is down 2.2% so far this year. Market Vectors-Chinese Renminbi/USD ETN (NYSEARCA: CNY ) For investors seeking an ETN way to target the Chinese currency, CNY is the right option. This product tracks the S&P Chinese Renminbi Total Return Index which looks to track the performance of the Chinese currency against the U.S. dollar, by rolling three-month non-deliverable currency forward contracts. The fee is a bit higher at 55 basis points a year while volume comes in below 5,000 shares a day, suggesting wide bid ask spread and ever-increasing total costs. The product is down 2% so far this year and lost over 6.7% in the last 10 days (as of August 20, 2015). The ETN currently has a Zacks ETF Rank #3. CurrencyShares Chinese Renminbi Trust (NYSEARCA: FXCH ) This product looks to track the price of the Chinese Renminbi net of Trust expenses. The product has amassed about $7.7 million in assets while it sees weak volumes of around 1,000 shares a day, suggesting a wide bid ask spread. On the positive side, the ETF has the lowest expense ratio at just 40 basis points a year in the Chinese currency ETF space. The fund has lost 2.3% this year and retreated 2.4% in the last 10 days (as of August 20, 2015). This fund also carries a Zacks ETF Rank #3. Original Post