Buy, hold and prosper: The power of patient investing

11:00 AM investing, patient, power, prosper No Comments

Business Week | By James K. Glassman, Kiplinger

It's behavior that determines your success or failure as an investor -- not knowledge, skill or luck.

If you ever needed a lesson in the power of patience, let me remind you of a date in recent history: March 9, 2009.

On that day, the Dow Jones Industrial Average ($INDU) closed at a gut-wrenching low of 6,547. Stock prices had been cut in half in just 15 months. General Electric (GE) had plunged from $38 to $7, Cisco Systems (CSCO) from $29 to $14, and Bank of America (BAC) from $43 to $4.

Making money in the stock market is hard not because finding great companies is difficult but because the best and easiest-to-understand strategy for winning is so difficult to adhere to. That strategy can be described in three words: buy and hold.

Five years from that 2009 bottom, the Dow was up roughly 10,000 points to a new record. No, the stock market doesn't always bounce back so dramatically, but it always bounces back.

No matter what the chart followers say, the market does not rise and fall in repeating patterns. If it's down sharply in a three-year stretch, for example, it won't necessarily rise just as sharply over the next three years. The market works on its own time­table, but there are some eternal verities:

Stocks of large U.S. companies have reliably returned about 10 percent annualized over the past two centuries. They should do just as well for the next two.In the short term, the market can be risky -- if we define risk as volatility, or the severity of the ups and downs. In the long term, the market is much, much less risky.Individual companies can vaporize (Enron and Lehman Brothers, to name a couple), but a diversified portfolio protects you from the risk that an individual company will implode and provides a smoother ride. Compounding is enormously powerful. Over long periods, small price gains and dividend payouts mount up (but note that the expenses charged by mutual funds, brokers and other advisers add up, too).

And that's it! That is all you need to know about succeeding in the stock market. Buy a solid, low-cost, diversified mutual fund (or assemble your own diversified port­folio), forget about it for a long time, and you should do well.

As an example, consider Dodge & Cox Stock (DODGX), with an expense ratio of 0.52 percent. Over the past 15 years, a $10,000 investment in Dodge & Cox, a member of the Kiplinger 25, grew to about $40,000. At that rate, in another 15 years it will become $160,000, and in another 15 years it will be $640,000. And that spectacular growth comes from an annualized return of 9.5 percent, roughly the historical norm. Any 30-year-old who can put away $30,000 -- not every year but just once -- has an excellent chance of becoming a millionaire by age 70.

It is behavior that determines investment success or failure -- not knowledge or skill or luck. Benjamin Graham, the Columbia University professor and financier who was Warren Buffett's mentor, wrote: "The investor's chief problem -- and even his worst enemy -- is likely to be himself." What he meant was that people let their emotions get in the way of smart investment moves. They tend to buy when stocks soar and sell when stocks sink.

The selling part is especially dangerous because people want to avoid losing. Richard Thaler and Cass Sunstein write in their book "Nudge" that academic research has found that "losing something makes you twice as miserable as gaining the same thing makes you happy."

They point out that in 1992, participants in retirement plans administered by Vanguard were allocating 58 percent of their assets to stocks. But by 2000, as stocks had quadrupled in value, the proportion rose to 74 percent. Then, as stocks fell sharply over the next two years, the allocation fell to 54 percent. "Their market timing," they write, "was backward." We saw the same phenomenon during the recent cycle, with investors bailing out of stock funds as prices sank and returning only recently, as indexes hit new highs.

The values that help you succeed in the market are the values that Aristotle extolled: moderation, persistence and humility. The question is how to adopt behaviors that fit those values when the minute-by-minute noise of the market is so dramatic. Here's some advice:

Avoid the noise. One way to make yourself get out of bed in the morning without hitting the snooze button is simply to move the alarm clock away from your bed. The investment equivalent is moving stock-price information as far away as you can. Twenty years ago, I told the editor of the Washington Post's business section to quit running pages and pages of stock prices. Stop encouraging readers to check how their shares were doing each morning. The Post did drop the tables, but mainly because readers can now get prices by the second on their computers and smart phones. Don't fall into that habit. Check your holdings once a month or once a quarter.

Think of your holdings not in dollar terms but as investments in great businesses. When GE drops in price, think of the event not in terms of money that you have lost but in terms of someone else's transitory valuation of your little piece of GE. Do you really want to give up a stake in a wonderful company just because others fleetingly believe it is worth less?

For many investors, sitting still is not an option. They have to do something. If you're in that category, I suggest you set up a "fun and games" account, a separate portfolio that represents, say, 5 to 10 percent of your assets and in which you can trade to your heart's content. Compare its results with that of your buy-and-hold portfolio over five or ten years. Chances are high that your emotions and the costs of trading have taken a toll.

Make purchases in the same amount every month or quarter. This technique, known as dollar-cost averaging, forces you to buy more shares when prices drop. Instead of feeling bad about market declines, you may actually feel good because you are picking up more assets at better prices.

Think buy, not sell. Hunt for bargains. The recovery, by the way, is not over. For example, GE trades today at $26, still about one-third below its 2007 high. Cisco sells for under $23, also about one-third off its high. Bank of America is at $16, still down about 70 percent. I recommend them all.

In urging a buy-and-hold strategy, I am not suggesting that you mindlessly keep companies that have gone sour. The reason to sell, however, is not that the price of a stock has declined but that the business has deteriorated and is unlikely to recover -- a key new product has failed, a rival has started a price war, or the new CEO is clueless. If you have chosen stocks well, these events will be rare. And if you are wise, you will err on the side of keeping what you have. If you had done that five years ago, your portfolio would be up, oh, some 200 percent.

James K. Glassman is a visiting fellow at the American Enterprise Institute. His most recent book is "Safety Net." He owns none of the stocks mentioned.

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5 'passive-aggressive' investing tips

12:00 PM investing, passive-aggressive, tips No Comments

Business Week | By David Ning, U.S. News & World Report

Here are five ways an active approach can help even hands-off, index-fund investors squeeze more gains out of their portfolios.

With the S&P 500 ($INX) surging over 30 percent last year, many more people are attracted to passive index fund investing. But even among those who skip the active trading approach, it's possible for investors to be actively involved in implementing a passive investment strategy.

I consider myself a passive investor, but I also actively invest my time to eke out just a bit higher return. Here are a few actions to follow if you want to do the same:

You would think sitting on your hands and doing nothing would be easy, but staying the course is perhaps the hardest thing to do in investing. Your rationale to decrease your stock allocation during a bear market may be solid and reasonable, but the worst time to sell stocks is after their valuations go down.

When the markets turn south, the media will suggest an incredible number of reasons it's the end of the world. Go out of your way to tune out the noise. Turn off your TV if you have to, because it's that important.

Consistently adding money to your portfolio is the key to building wealth. Assuming you wrote down your well-thought-out investment strategy, you need to commit to it by continually putting money away -- even when your investments are not doing well. Investing in poorly performing asset classes might even turn out to be the buying opportunity of your lifetime.

On the other hand, good times tend to tempt many people to spend just a bit more. You might notice your neighbors buying flashy new cars when stocks are flying high. Also, make an effort to stick to your savings plan when your investments are performing well. You only live once, and that's exactly why you need to take care of your future.

The return on an investment isn't the only number that determines how much money you will make from it. You also need to factor in how much tax you will pay on each investment, because different investments are taxed at different rates. It's often a good idea to hold investments with higher tax rates inside your retirement accounts and low-tax investments in taxable accounts to minimize the overall tax rate on your portfolio. Spend some time thinking about the taxes you are likely to pay on each investment, and consider taking action to lower your tax rate.

Asset prices fluctuate, so there are bound to be times when current values are below what you've paid to own a particular asset. Always look to see if it's appropriate to sell an investment at a loss and recognize the capital lost in order to reduce taxes. Just make sure not to trigger the wash sale rule: Avoid buying a substantially identical investment within 30 days of selling it.

Don’t sell investments without thinking through the tax consequences of each action. It’s your after-tax return that will ultimately decide how much spending power you will have in retirement.

Those who take the time to manage their passive investments will reap huge rewards over time. Think about it this way: Putting in a bit of time now to fine-tune your investment strategy could allow you more time off from the 9-to-5 grind later in life, so get into the habit to doing what's right for your investment portfolio.

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3 new ideas about retirement investing

12:31 AM about, ideas, investing, Peacock, Retirement No Comments

Business Week | By Kelly Greene, the Wall Street Journal

Some experts say it is time to rethink the nest egg. Here are three new strategies to your portfolio golden years-to extend, who prefer to have more shares.

Should experts begin, camp to rethink how much keeping people retired.

In general the new think, people more invested in equities, as of some traditional rules of thumb, such as such as subtract someone's age up to 100 to determine a portfolio allocation has suggested is should be. Man, that so much is new and controversial theory to claim that each other you should increase exposure, bearing moves into retirement.

What hangs in the balance: whether 78 million baby boomers can generate substantial enough yields, without to much risk, to create income, that last streams, as long as they do it.

Here are three different approaches that push financial experts that determine that people stronger investment in stock-should be even after you have collected the gold watch.

One of the biggest risks in dealing with investment, is to finance retirement, what risk has called "Sequence of returns". If you retire go and your investment big hit in the early years, you've been doing the money runs, withdrawals, years earlier than suffer if decent are earlier and later through a downturn.

To combat the problem, two researchers recently crunched the numbers and came to the conclusion that in many cases, investors recover their share ownership between 20 and 50 percent at the beginning of the pension and then ramp that, save it to a percentage of a year between 40 and 80 percent in the entire retirement number by phone should be. So leads, for example, a portfolio that starts at 30 per cent in shares and ends at 60% better on average than one that begins and ends with 60 percent shares.

Read more: 4 cheap newspaper stocks that could rebound

"You want to have has the lowest allocation, if your portfolio is greatest, and this will directly before and after retirement," Wade says Peacock, pensions Professor at who did the American College in Bryn Mawr, Pennsylvania, research with Michael Kitces, Director of research which "is Pinnacle Advisory Group in Columbia, MD., if you are particularly susceptible to wealth to lose. Once you switch to retire, one has so much ability to change your plans and make again."

The researchers describe their asset-allocation recommendation, as a "u-shaped glide path," where the stocks begin as a large part of the portfolio, reject, and be raised in the course of time. In the ideal case that researchers say they see integrated asset allocation by target date based their recommendation Fund, retirement dates and times in an attempt, providing investors with their investment objectives on autopilot, allowing their assignments, uses you, Peacock says.

But so far target date funds, best keep a fixed share of wealth in stocks through retirement, and you still a declining share in stocks. "you may have bad results available with a declining glide path into retirement," warns Peacock.

Kitces says: "When I say 'You will invest more in equities later in retirement,' everyone freaks out." But he and Peacock say retirees actual behavior in the past, if more people relied on traditional pensions, corresponds to their findings.

Peacock says people who invested in shares, finance their fixed costs with a combination of pension and social security and other pension payments sometimes much of the rest of its assets. So at the age and the remaining value of this fixed sources of income had gone back effectively, substantially more of their investments in stocks.

Read more: A less stressful way to invest in Asia

For years, many financial experts advised investors retired to weight their portfolios to bonds. Some now argue that the main underlying assumptions behind this recommendation is no longer applicable.

For one thing, says "We are ending a 30-year bull market in bonds," Lisa Shalett, head of the investment and portfolio solutions for Morgan Stanley Wealth Management. On the other hand, the investment horizon for most has extended pensioners from 10, along with the general rise in life expectancy for the US population to 30 years. And finally, the shift from pension plans to 401k retirement has more retirees depending on the investment gains for income.

"Put those three things together, and what he says is, we need a new approach," said Shalett. Bonds can no more than the driving motors in portfolios on counted that are three decades could have.

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Beyond utilities: Investing in airports, toll roads

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| By Roger Nusbaum, TheStreet

Pressured by rising rates, solar energy and a need to upgrade aging infrastructure, utility stocks and ETFs may not be as safe as they once were. Here are some interesting alternatives.

A recent article in The Wall Street Journal discusses how some traders and investors see a coming "death spiral" for what was once considered a safe investment sector: utilities.

The biggest threat comes from solar energy as it becomes economically viable, the article says. But another issue is the sector's need to modernize its infrastructure.

If you agree with this thesis, you may want to look to publicly traded airports and toll roads as interesting investment alternatives.

The Utilities Select Sector SPDR (XLU) was up just 10 percent last year, compared with a whopping 29 percent gain for the S&P 500 Index ($INX). The utilities sector also faces a huge threat from the bond market. Utilities, especially the regulated ones that tend to pay higher dividends, are sensitive to rising interest rates. When rates go up, investors have tended to rotate out of utilities and into bonds because they can get higher yields without having to take on the risk and volatility of owning stocks.

I don't think solar energy poses an immediate threat to utilities, but it will eventually. Rising rates and the need to invest in infrastructure, though, are tangible threats to the sector.

The attributes of the utilities sector -- namely lower volatility and higher yield -- are important ingredients in a diversified equity portfolio, but if the sentiment summed up in the Journal article proves to be correct then investors will need to find stocks with these traits in other industries.

A couple of smaller segments that fit the bill include toll roads and airports. These are typically not built or operated by publicly traded companies in the U.S., but it is very common for operators in other countries to trade on exchanges. Some of these foreign companies also have American Depositary Receipts (ADRs), which makes it easy for U.S. investors to gain exposure to them.

An example of an airport with many of the attributes of a utility is the Auckland International Airport (ACKDY). It is a relatively large-cap stock on the New Zealand market and is the third largest holding in the iShares MSCI New Zealand Capped ETF (ENZL) with an 8 percent weighting.

The government of New Zealand is forecasting tourism to grow at a compounded annual rate of 4 percent through 2018. That, along with steady GDP growth in the 2.4 to 2.5 percent range, should provide a steady environment for air travel.

From the bottom up, ACKDY has very little debt, a very high profit margin of 40 percent and a yield of 3.4 percent. The stock has a lofty price-to-earnings ratio of 26, but it's likely to continue higher with the New Zealand market. Investors should expect the stock to get hit hard the next time there is a recession, however. After all, it is an airport, and travel volumes decline during recessions.

An example of a publicly traded toll road is China's Jiangsu Expressway (JEXYY). It operates seven toll roads, including multiple roads into Shanghai. There are more than half a dozen publicly traded toll road companies in China, and JEXYY is by far the largest by market cap at $6.2 billion.

Like most of the other toll road companies, the business also includes related services on the road such as gas stations, rest stops and hotels. JEXYY has a trailing yield of 4.7 percent, and its volatility as measured by its beta is only 0.57 (anything less than 1 indicates lower than average volatility).

The second largest Chinese toll road is Zhejiang Expressway (ZHEXY). Like Jiangsu, Zhejiang is located along the ocean and controls multiple roads into Shanghai. ZHEXY yields a slightly higher 5.3 percent, but its 17 percent gain over the last year has trailed JEXYY's 24 percent rise. ZHEXY's beta of 0.66 is also very low.

Consistent with research from ETF provider Emerging Global Advisors, the emerging Chinese middle class is buying cars at a record pace, with 1.93 million purchased in October. That's a 20 percent gain year over year. Many of these first-time car buyers are hitting the highways, and collected tolls reportedly are growing by 9 percent.

Several years ago, Global X filed for a ports and toll road ETF but did not bring it to the market, perhaps because of low demand from its client base. The iShares Emerging Markets Infrastructure ETF (EMIF) comes the closest to being a pure play ETF with 12 percent in toll roads and 10 percent in airports. Its beta is 0.92 and has a trailing yield of 3.11 percent.

Toll roads and airports have been publicly traded for years, but investors may want to pay more attention to them if the prospects are growing dimmer for the U.S. utilities sector.

At the time of publication, Nusbaum owned shares of JEXYY, and many of his firm's clients owned shares of ENZL and EMIF.

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Don't stop investing after retirement

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| By Timothy McCarthy, U.S. News & World Report

If you've made it this far, chances are you'll live longer than average, and an overly conservative portfolio won't cut it. Here are three ways to keep your money growing through retirement, but diversified against risk.

Too many investors think they should switch to overly conservative investing after they retire. Some mistakenly move too large of a portion of their money into fixed-income investments and cash.

It is surprising that so often, people think they will live to the average age of the population, or until around 77 to 80 years. What they don't realize is a key concept called "given or conditional probability." Given that you are already over 60, the reality is that you have a new average life expectancy.

After all, you survived all those wild years of your youth. Hence, if you and your spouse already in your 60s, thinner than me, don't smoke and have no major illness, guess what? At least one of you is more than likely to fly by 90 years old. That means your money has to last for 30 more years!

You need your money to keep growing after you retire. And remember, you don't want to run out of money six months before you pass. You have to make sure your money lasts longer than you.

What's the remedy? It used to be that if you just left your money in the bank and bought some bonds, you could be assured of growing your money at 4 or 5 percent a year. However, those days are long gone, especially when inflation is factored in.

Naturally, you may say to yourself, "I don't want to risk losing my money. After all, I can't make it over again." What can you do to grow your money at an average of 4 to 5 percent a year while keeping your risks low? The secret lies in getting the right asset classes in your portfolio and then leaving it alone.

There is no such thing as a no-risk investment. But a broadly diversified portfolio left alone to grow for decades can allow your money to grow, yet as a whole, be just as safe as money left in the bank. But how do you make sure you get the mixture right?

Here are three components to diversifying your portfolio for long-term safety.

Make sure to have small portions of many different asset classes and management styles in your overall portfolio to smooth out the volatility over time. Although much attention is given to trying to pick the best-performing mutual funds, it turns out that better long-term growth at reduced risk comes more from good diversification rather than fund selection.

This mixture of assets should include all levels of equities, large-cap, small-cap, various industries, different styles, both active and passive funds, plus a variety of corporate and government bonds, mixing short and long-term duration. Make sure to include other asset classes like real estate investment trusts and even a dose of a variety of commodities, from timber to gold to oil and gas.

As you age, you will very slowly reduce portions of the higher-volatility asset classes; for instance, larger blue chip stocks with higher dividend yields will replace the small-cap, more volatile growth stocks. Still, the secret is not making too big of a bet on any one asset class or style.

Despite the massive economic improvements of many countries around the world, the news still scares many away from investing overseas. Yet one of the most important ways to decrease your portfolio volatility while increasing your return is to make sure to have a significant minority of your assets invested in highly rated overseas securities.

The reality is that growth in the U.S., Europe and Japan is slowing as our populations age. But the good news is that there is a select group of about 20 countries, including Chile, Poland and Thailand, that have already emerged and will continue to grow at a rate much higher than the "old countries," and yet, as a basket, will be diversified enough to keep your volatility relatively low.

In your retirement years, it is best to stay out of the more "frontier countries" as they remain too volatile. However, the safer portion of the "growth countries," as a whole, could actually turn out to be safer than just investing in the U.S. It's fine to have the majority of your money in the U.S. in the 21st century, but it is no longer wise to have your entire core portion invested in only one country.

Of all the diversification techniques you can employ, time, by far, is the most powerful. Indeed, we have seen again how much patience matters. In the crash of 2008, if you only took out enough money that you would need to live on, for instance, one-thirtieth of all your money, then you would have only suffered a loss on that small portion. And after only five years, the various markets have recovered. Thus, only taking each year what you need to live on is critical.

Of course, you may slowly reduce first from the more growth-oriented volatile asset classes as you age, but remember, at least a significant portion of your money needs to keep growing even into your 80s.

What should your non-cash portfolio look like when you're 72?

Naturally, every person is different. Needing to spend money sooner for your own unique reasons alone can alter these percentages dramatically. Thus, a range of suggested portfolio weightings is much more helpful. The portfolio below is stated in wide ranges because as you age, you will want to move to the lower percentages of investment in these classes and more into cash and short-term funds. Just remember to do it slowly -- only a little movement each year.

Sample recommendation for a 72-year-old person:

U.S. equities: 15 to 30 percentInternational equities (including growth countries): 5 to 10 percentFixed income, U.S. government and corporate bonds: 40 to 55 percentFixed income, international bonds: 5 to 15 percentReal estate investment trust funds (REITs): 3 to 8 percentA mixture of commodities: 2 to 4 percent
Understandably, people will have their personal prejudices against certain investments. However, it is critical not to totally ignore any category. Having zero money invested overseas, for instance, actually adds risk to your portfolio.

For many people, their home is one of their most important assets. But remember, you have high concentration and liquidity risk in your house investment, so it is best to make sure you have a solid investment portfolio in financial assets as well.

The above portfolio structure will help ensure that no matter how long you live, you won't be a financial burden on your family.

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Is dividend investing doomed?

9:30 AM dividend, doomed, investing No Comments

| By Jeff Reeves, MarketWatch

It's time investors stopped worshiping at the altar of dividend stocks, and started weighing whether they are truly as low-risk as they used to be.

I like juicy yields as much as the next guy, since I personally lean towards buy-and-hold investing for the long-term with reinvested dividends.

But frankly, the constant drum-beating around the power of dividend payers gets on my nerves.

It's about time investors stopped worshiping at the altar of dividend stocks, and start thinking seriously about the relative risk of dividend stocks -- and more importantly, whether this particular corner of the equities market is truly as low-risk and income-rich as it used to be.

The appeal of dividends is undeniable, especially in this low-rate environment where there simply aren't any interest-bearing assets. And it's undeniable that many retired Americans are in a financial situation where income via reliable dividend payers makes a lot of sense.

But if you need proof of just how fashionable -- or darn near bubble-like -- income investing is, just consider that the newly created Retirement Income Certified Professional is the hottest designation for financial advisors in the 87-year history of the American College of Financial Services.

When fee-based advisors are clamoring to be experts in a given discipline in order to get in front of more customers, that tells you something.

The popularity of dividend stocks over the last few years is obvious, and has resulted in a seismic shift in valuations for this once-sleepy sector.

As Mebane Faber of Cambria Investment Management recently pointed out, dividend stocks that normally trade at a deep discount to the broader market are now trading for a significant premium. Consider that in 1997, the price-to-earnings ratio (P/E) of defensive sectors characterized by dividend payers was sometimes as much as 40 percent below the relative P/E of the broader market . . . but in 2013, defensive dividend payers are trading for a 20 percent premium.

So much for low-risk investments if you're paying a higher relative earnings multiple than the other stocks on Wall Street.

Interestingly enough, despite this expansion in valuation multiples, there has been a simultaneous contraction in dividend payout rations. Every dividend investor knows this -- with dividends going from about three-quarters of corporate profits around World War II to about 50 percent in the 1970s and 1980s to roughly 30 percent after the damage of the Great Recession.

There are a host of items to blame for this trend. There's the rise of tech stocks like Apple (AAPL) and Cisco (CSCO) and Oracle (ORCL) that make up a large part of the S&P 500 Index ($INX) now, but up until recently haven't paid a dime . . . and remain miserly with their payout ratios even after instituting a dividend. There's also the general sense that corporations are hoarding their profits instead of distributing money to shareholders, with non-financial stocks now sitting on over $1.5 trillion in cash and investments.

But any way you slice it, dividends aren't what they used to be as a share of the profits.

Josh Brown over at The Reformed Broker shared a Merrill Lynch tidbit recently that pointed out the change in beta across market sectors. And surprisingly, the beta -- roughly translated as "volatility" to those who don't know their Wall Street Greek -- of historically low-risk sectors like telecoms, staples and utilities has been on the rise. On the other hand, historically cyclical and volatile sectors like materials and financials are seeing their beta readings fall.

In plain English, this means that what you thought of as sleepy stocks are now supercharged -- with the ability to deliver big outperformance or underperformance, depending on the environment.

And forget about beta -- what about alpha, or the ability to move in opposite of the broader indexes instead of marching in the same direction? Consider 2011, where the broader S&P index and the Utilities SPDR ETF (XLU) put up 14 percent returns in calendar 2011. Or more recently in the last three months, where supposedly bulletproof blue-chips AT&T (T) and Procter & Gamble (PG) have been fighting just to break even while the broader S&P 500 is sitting on almost 3.5 percent gains.

Not exactly your grandad's slow-and-steady dividend stocks, eh?

Income is nice, but if you are exposing yourself to massive capital risk in dividend stocks then perhaps you need to reconsider your definition of low-risk investing.

These are uncomfortable realities of dividend investing in the wake of the financial crisis, as well as the harsh truth of what it's like to seek income under the yoke of a Federal Reserve funds rate that is effectively zero.

The volatility is up, the dividends are down and investors are paying a premium for this risky combination.

But what are the alternatives? Even if inflation remains low enough for the meager returns on Treasurys and corporate bonds to keep pace with inflation, that's cold comfort for those investors who still need to grow their funds instead of just bleed them down to live off of.

And furthermore, even if you are comfortable with 0.9 percent in a "high yield" CD, a good investment portfolio is always diversified to have some equity exposure -- and like it or not, dividend-paying blue-chips remains the go-to asset of choice.

It is obviously an overreaction to say we are witnessing the death of dividend investing, since we will always have corporations that deliver cash back to shareholders in some manner and there will always be a place for these stocks in a good investing portfolio.

But it is not too crazy to posit that we could be witnessing the end of low-risk dividend investing.

Because even if companies keep dishing out the dividends, unless the premium paid on income stocks or the low payout ratios begin to reverse course, this corner of Wall Street has dramatically changed over the past few decades.

And certainly not for the better.

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Twitter IPO is investing at its worst

8:30 AM investing, IPO, Twitter, worst No Comments

| By Howard Gold, MarketWatch

The buzz over Twitter's IPO reflects investors' very worst instincts -- putting too many eggs in one basket, following the herd and getting caught up in the euphoria of the moment.

Wall Street is all a-twitter over the initial public offering of Twitter (TWTR).

The shares opened at an astonishing $45.10 a share Thursday. The IPO was priced way above initial indications at $26 a share. The offering was massively oversubscribed, with buying interest at maybe 10 times the number of shares.

And amid the tsunami of media coverage -- much of it discerning and critical -- some individual investors are trying to get a piece of the dream. If you're one of them, I have one word of advice: don't.

Not that Twitter is a bad company; it has a lot of potential, though it's far from realizing it.

Nor do I think this IPO will rip off investors the way last year's Facebook (FB) fiasco did; Twitter, the underwriters and the New York Stock Exchange have made a big effort to prevent that.

And unlike Facebook, whose IPO let big shareholders cash out big time, Twitter has dedicated the offering's proceeds to "general corporate purposes, including working capital, operating expenses and capital expenditures…[and possibly] to acquire businesses, products, services or technologies," according to its S1 offering statement.

In short, the Twitter IPO is doing what IPOs are supposed to do: raise money to grow the company and establish a public market for its shares. And it comes after an earlier wave of social-networking stocks have racked up huge gains.

But it's not your job to help Twitter raise capital or to help institutions make quick profits on their Twitter shares.

In fact, the buzz over the Twitter IPO reflects investors' very worst instincts -- putting too many eggs in one basket, following the herd, and getting caught up in the euphoria of the moment.

First of all, buying any individual stock is problematic, unless you're investing a small part of a widely diversified portfolio. And I have a sneaking suspicion that's not the case with people clamoring to buy Twitter.

We've all seen what market risk can do to our portfolios; Twitter adds risk on steroids, as the 32 pages of risk factors in its prospectus spell out. (How many prospective Twitter investors have actually read that document? Very few, I'd guess.)

And buying an individual stock at an IPO or immediately afterward is particularly dicey. Twitter just completed a "roadshow" in which its executives and underwriters pitched the offering to big mutual funds, pension funds, etc. These are closed-door meetings for the big-money crowd, no media allowed. You're not invited, either.

At those meetings, Twitter's bankers reportedly shared internal projections about revenues and operating earnings with the assembled money managers -- projections I couldn't find in the aforementioned offering statement.

That's not unusual at IPO roadshows. But it points to a certain, ahem, informational advantage for the big institutions. Based on that information, some of them passed on the deal. Those who did buy in got shares for less than you'll pay when Twitter starts trading.

In response to my inquiries, Twitter's spokesman referred me to the New York Stock Exchange, while underwriter Morgan Stanley (MS) declined comment. Lead underwriter Goldman Sachs (GS) didn't get back to me.

Twitter's IPO also comes amid a wave of enthusiasm, even irrational exuberance, for Internet and social-networking stocks reminiscent of the late 1990s. Facebook is up about a third from its first-day closing price. LinkedIn (LNKD), which went public a year earlier with much less fanfare, has risen more than 130 percent.

On Monday The Wall Street Journal reported that October was "the busiest month for U.S.-listed IPOs since 2007" and that "investors increasingly are willing to roll the dice . . ." Sixty-one percent of these companies lost money in the 12 months before the IPO, according to IPO expert Jay Ritter of the University of Florida — "the highest percentage since 2000." Roll the dice, indeed.

Twitter lost $69.3 million in the first half of 2013 and may not make money for another couple of years. USA Today reported that Twitter's bankers told roadshow attendees the company could take in $1.24 billion in revenue and $200 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2015. That's EBITDA, not net earnings. And those are projections, nothing more.

The IPO price valued Twitter at $18.1 billion, including shares likely to be issued to employees. But at Thursday's opening, Twitter's market capitalization was above $30 billion. So, investors are valuing Twitter at 25 times estimated 2015 revenues and at more than 150 times projected 2015 EBITDA. That's not nosebleed territory; it's like hanging on to the wing of a Boeing (BA) Dreamliner.

Is it any surprise Max Wolff of ZT Wealth called Twitter's profit-free IPO "an emotional event, not a fundamental event"?

If you still must buy Twitter stock, then use no more than 5 percent of your equity money and wait a few months. These stocks eventually sell off: Facebook fell to $18 a share last September from its $38 IPO price. It has traded close to $55 recently.

Or better yet, buy an ETF like the FirstTrust US IPO Index (FPX), which invests in top-performing IPOs and has a good long-term track record. (I own a small amount in my IRA.)

But whatever you do, don't let your emotions get the better of you. Don't buy Twitter stock now. Please.

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8 wise-guy rules for investing

8:00 AM investing, rules, wiseguy No Comments

| By Michael Brush, MSN Money

If you've been scared away from stocks, new highs in the market might very well tempt you to jump back in. We've tapped the wisdom of proven investors like Buffett and Bogle to help you get in the game.

With the Dow Jones Industrial Average ($INDU) hitting new highs, you might be tempted to jump back into stocks after years of hiding out -- or to buy stocks for the first time ever.

But after all the turmoil we've seen in recent years, you no doubt have some doubts. Should you trust this rally this time? Are you already too late because markets always crash? What stocks, if any, are safe to own?

Well, you're in luck. I've tapped into the wisdom of eight market elders with a collective 480 years of investing wisdom and the battle scars to prove it. These stock market wise guys have learned great lessons from their mistakes, and stuck with the game to post far more wins than losses lately.

Their key message: It's ok to jump in, even now at a high point, as long as you follow some basic rules. They also shared some of their favorite stocks right now, including IBM (IBM), Wells Fargo (WFC), Citigroup (C), Intel (INTC) and eight more.

My wise guys are at least 70, and started investing as early as 1928. So they've seen it all -- enough scams, crashes, and bull and bear markets to make you weep. They didn't let that keep them from making money, and neither should you.

Here are eight key lessons from these market wise guys.

Few market wise guys possess as much sagacity as Warren Buffett. To find the most relevant wisdom from the Oracle of Omaha, I consulted his latest letter to investors in his company, Berkshire Hathaway (BRK.B).

Michael Brush

Buffett's key lesson: Sure there's lingering paranoia about stocks and the economy, but jump in anyway. Just follow a few caveats.

His reasoning: There have been reasons to worry about the U.S. economy for as long as there's been a country. But the economy has kept going, and stocks have followed. It's a big mistake to try to "dance in and out" of the market, says Buffett, who is 82. "American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance," he says.

Those caveats? There will always be pullbacks, so go in with a long-term view of, I'd say, at least 5-10 years, if not Buffett's favorite holding period, which is "forever." I personally would not be surprised at all to see a pullback now, following the strength since last fall, but you never know for sure.

When you buy, stick with high-quality companies with solid management, high profit margins and protective moats that keep competitors out -- all well-known Buffett measures.

Examples? Buffett added to big positions IBM and Wells Fargo last year. Lately Berkshire has been buying DaVita (DVA). As the second-largest dialysis provider in the world and part of a duopoly, DaVita has a protective moat and pricing power, two qualities Buffett likes. It also benefits from increasing obesity and the aging of the population. Both are linked to diabetes and create a rising need for dialysis.

Aside from brazenly defying the odds by still hitting the office at the age of 107, value investor Irving Kahn is a natural maverick in another way. In his first trade, he bet against a copper stock during one of the biggest bull markets in history in 1928. He made money on the bet.

Most newbies prefer the perceived "safety" of joining the crowd. But as Kahn, his early mentor Ben Graham, and most value investors know very well, the big rewards come from being a contrarian. Just be prepared to stay calm, and consider buying more, when a contrarian play inevitably moves against you, advises Kahn.

True to form, Kahn Brothers Group, where Irving Kahn is chairman, owns many contrarian value plays. One is Citigroup. Kahn Brothers bought it below the current price, when the fears about the big banks were higher. But at $47, Citigroup still trades below book value, the theoretical liquidation value of a company. It just passed the government's "stress test" for financial strength and has announced plans to begin buying back stock.

Kahn also likes the New York Times (NYT), a true contrarian play, given the widespread negativity about newspapers. The New York Times has staunched the bleeding in print subscription sales, and its online subscription model holds potential. Plus it has a powerful brand, and a "hidden asset" in the form of an option to buy the half of the office building it leases in New York at about one fourth of its true value. Interestingly, Buffett has been snapping up newspapers across the country for the past 15 months.

It's best to bet on great companies which look cheap because of temporary problems that have alienated investors obsessed with near-term results, says value investing great Marty Whitman, 88, in his most recent letter to shareholders.

In the fourth quarter last year, chip makers Intel and Nvidia (NVDA) both fit the bill, so his fund initiated positions. Both stocks are cheap because of fears about weak PC sales and concerns about the economy.

But Intel is a leader in the chip space, and it sells chips used in servers where data center growth has been driving strong demand. It should benefit from a computer upgrade cycle driven by Windows 8 operating system, and sales of "ultra book" notebook computers. It pays at 4.2% dividend.

NVIDIA is a leader in graphics chips, where demand should stay strong because of ongoing growth in digital content, and computer-assisted design. It is also a play on mobile computing growth because its chips for these devices use the popular power-saving technology. It's financially solid, with $3.7 billion in net cash.

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