Buy, hold and prosper: The power of patient investing

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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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UN report highlights Japan nuclear power plant error

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TOKYO Japan underestimated the risk of tsunamis and required monitor public health and safety of workers to closely following the crisis on the Fukushima Daiichi nuclear power a team of international safety inspectors of the world's largest nuclear disaster said in a preliminary examination since Chernobyl.

The report, an International Atomic Energy Agency (IAEA) team under the leadership of Britain's top nuclear safety official Mike Weightman, highlighted some of the well documented weaknesses, which on the crisis in Fukushima contributed, if the plant, 150 km north of Tokyo, by a massive earthquake and then a tsunami in quick succession was taken on 11 March.

Those start with an error, a tsunami to plan, that would overrun the 19-foot break wall of Fukushima and knock out back-up electrical generators to four reactors, despite several predictions of an agency and operator Tokyo Electric Power Co.'s own scientists of the Government, which is such a danger was.

The IAEA team said Japan's crisis lessons for the nuclear industry around the world offered including, that operators regularly the risks of natural disasters should review and, that should "hardened" emergency response center to be established with accidents.

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"The tsunami risk for multiple sites has been underestimated," the report said three page summary. "Nuclear plant designers and operators should evaluate appropriately and provide protection against the risks of all natural hazards."

The report praised the general response to the disaster, however, say that it had been exemplary.

Story: Excessive radiation for two Fukushima employed?

Goshi Hosono, an advisor of Prime Minister Naoto Kan, accepts the report, marking the first step in the effort by the Japanese authorities to show that the lessons from Fukushima can certainly be applied to its remaining nuclear reactors.

Hosono said that the Government would have to review nuclear regulatory framework.

Playbook "not" work
The IAEA team present the results of a Ministerial Conference on nuclear safety in Vienna on June 20-24.

"We had a textbook, but it didn't work," said Tatsujiro Suzuki, a nuclear expert and Vice-Chairman of the Japan Atomic Energy Commission.

The economic stakes are high. Japan is only 19 of his pre-Fukushima tally 54 reactors working.

Unless local officials that Tokyo has a plan to the other resistant against the kind of blackout that plunged Fukushima in meltdown can be persuaded, more plants offline for maintenance will fall.

In the worst case all could Japan's reactors shut down in mid 2012. That would take 30 percent of the country's power generation and increase the risk of deep in the, close to permanent power rationing, officials say.

The Fukushima accident has forced more than 80,000 residents from their homes and deepening workers raised concerns about the safety operation of nearby children, fighting for the reactors and to stabilize the food supply as radiated from the site of water leaks.

In the report, the IAEA team Japan calls follow up monitoring of workers and the public health.

The crisis has also redirected, attention and resources of the reconstruction after the earthquake and tsunami, about 24,000 people in North Japan Coast killed.

'Very stupid'
Experts who have reviewed the Fukushima incident say, the IAEA report is certainly a starting point in the debate about what to be done in a country nuclear plants where the risks of earthquakes must still be understood.

"There are aspects of the planning for the security of the Fukushima plant, which are very stupid, in retrospect, and show a lack of imagination," said Kim Kearfott, a University of Michigan nuclear safety expert who toured their own this week Japan. "The nuclear industry can do better than this."

As the uranium fuel in the reactor No. 1 Kulissenwechsel started heating towards meltdown on 11 March, Tokyo Electric (Tepco) officials at the failures of the most important safety equipment for the loss of the power of the plant.

Measuring empty of Fukushima to officials in Tokyo monitoring the expected radiation hazard related problem. Complicated software to the expected plume of debris model an explosion of Fukushima had set up rather it with exact dates as gross assumptions.

Early on March 12, officials in the Ministry of education and technology had fixed the glitch and submit the projected radiation show Prime Minister kan, but the data was never released to the public.

In the meantime it was dangerously unclear, which was on the ground in Fukushima. TEPCO of President was in China, the utility of President was grounded in the Western Japan on a personal journey. Sakae Muto, the ranking Tepco official, spent the night of the quake with mayors of small towns in the vicinity of Fukushima, you notice of the accident, rather than the command center accession pressed.

The plant chief operating officer of Masao Yoshida, ignored to stop an order injection sea water in the reactor No. 1 due to a user request from kan's Office. Experts say that Yoshida made the right call, but say the confusion which highlighted major problems in the early response to the accident.

"It was impossible, that works as it was set up had the system," said Suzuki, who believes that Japan's nuclear industry must now show it manage and contain the most incredible accident at all its remaining nuclear reactors can public confidence to win. ", If they can demonstrate that it will be very difficult."

Others say that Japan must show, that he at the toughest Council critics, including long delayed steps, make independent of the most politically powerful utility industry to its nuclear regulatory agency acts.

"Japanese atomic operations must be updated on the International Council," said Kearfott. "Much of this advice was ignored in the past."

Reuters and the associated press contributed to this report.

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Germany a model for post nuclear power age

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BERLIN?? Germany is determined to show the world how abandoning nuclear energy can be done.

The world's fourth-largest economy stands alone among leading industrialized nations in its decision to stop using nuclear energy because of its inherent risks. It is betting billions on expanding the use of renewable energy to meet power demands instead.

The transition was supposed to happen slowly over the next 25 years, but is now being accelerated in the wake of Japan's Fukushima Dai-ichi nuclear plant disaster, which Chancellor Angela Merkel has called a "catastrophe of apocalyptic dimensions."

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Berlin's decision to take seven of its 17 reactors offline for three months for new safety checks has provided a glimpse into how Germany might wean itself from getting nearly a quarter of its power from atomic energy to none.

And experts say Germany's phase-out provides a good map that countries such as the United States, which use a similar amount of nuclear power, could follow. The German model would not work, however, in countries like France, which relies on nuclear energy for more than 70 percent of its power and has no intention of shifting.

"If we had the winds of Texas or the sun of California, the task here would be even easier," said Felix Matthes of Germany's renowned Institute for Applied Ecology. "Given the great potential in the U.S., it would be feasible there in the long run too, even though it would necessitate huge infrastructure investments."

Nuclear power has been very unpopular in Germany ever since radioactivity from the 1986 Chernobyl disaster drifted across the country. A center-left government a decade ago penned a plan to abandon the technology for good by 2021, but Merkel's government last year amended it to extend the plants' lifetime by an average of 12 years. That plan was put on hold after the March 11 earthquake and tsunami compromised nuclear power plants in Japan, and is being re-evaluated as the safety of all of Germany's nuclear reactors is being rechecked.

Germany currently gets 23 percent of its energy from nuclear power ? about as much as the U.S. Its ambitious plan to shut down its reactors will require at least ?150 billion ($210 billion) investment in alternative energy sources, which experts say will likely lead to higher electricity prices.

Germany now gets 17 percent of its electricity from renewable energies, 13 percent from natural gas and more than 40 percent from coal. The Environment Ministry says in 10 years renewable energy will contribute 40 percent of the country's overall electricity production.

The government has been vague on a total price tag for the transition, but it said last year about ?20 billion ($28 billion) a year will be needed, acknowledging that ?75 billion ($107 billion) alone will be required through 2030 to install offshore wind farms.

The president of Germany's Renewable Energy Association, Dietmar Schuetz, said the government should create a more favorable regulatory environment to help in bringing forward some ?150 billion investment in alternative energy sources this decade by businesses and homeowners.

Last year, German investment in renewable energy topped ?26 billion ($37 billion) and secured 370,000 jobs, the government said.

After taking seven reactors off the grid last week, officials hinted the oldest of them may remain switched off for good, but assured consumers there are no worries about electricity shortages as the country is a net exporter.

"We can guarantee that the lights won't go off in Germany," Environment Ministry spokeswoman Christiane Schwarte said.

Most of the country's leaders now seem determined to swiftly abolish nuclear power, possibly by 2020, and several conservative politicians, including the chancellor, have made a complete U-turn on the issue.

Vice Chancellor Guido Westerwelle said Wednesday "we must learn from Japan" and check the safety of the country's reactors but also make sure viable alternatives are in place.

"It would be the wrong consequence if we turn off the safest atomic reactors in the world, and then buy electricity from less-safe reactors in foreign countries," he told the Passauer Neue Presse newspaper.

But Schuetz insists that "we can replace nuclear energy even before 2020 with renewable energies, producing affordable and ecologically sound electricity."

But someone will have to foot the bill.

"Consumers must be prepared for significantly higher electricity prices in the future," said Wolfgang Franz, head of the government's independent economic advisory body. Merkel last week also warned that tougher safety rules for the remaining nuclear power plants "would certainly mean that electricity gets more expensive."

The German utilities' BDEW lobby group said long-term price effects could not be determined until the government spells out its nuclear reduction plans. Matthes' institute says phasing out nuclear power by 2020 is feasible by better capacity management and investment that would only lead to a price increase of 0.5 cents per kilowatt-hour.

In Germany, the producers of renewable energy ? be it solar panels on a homeowner's rooftop or a farm of wind mills ? are paid above-market prices to make sure their investment breaks even, financed by a 3.5 cents per kilowatt-hour tax paid by all electricity customers.

For a typical German family of four who pay about ?1,000 ($1,420) a year to use about 4,500 kilowatt-hours, the tax amounts to ?157 ($223).

The tax produced ?8.2 billion ($11.7 billion) in Germany in 2010 and it is expected to top ?13.5 billion ($19.2 billion) this year. The program ? which has been copied by other countries and several U.S. states such as California ? is the backbone of the country's transition toward renewable energies.

"Our ideas work. Exiting the nuclear age would also be possible in a country like the U.S.," Schuetz said.

Another factor likely to drive up electricity prices is that relying on renewable energies requires a huge investment in the electricity grid to cope with more decentralized and less reliable sources of power. Economy Minister Rainer Bruederle just announced legislation to speed up grid construction but gave no cost estimate.

And even if non-nuclear power is more expensive, Germans seeing images daily of Japan's crippled Fukushima nuclear complex seem willing to pay the higher price.

Ralph Kampwirth, spokesman for Lichtblick AG, Germany's biggest utility offering electricity exclusively from renewable sources, said since the Fukushima disaster it has been getting nearly three times more new clients than normal, up from 300 to more than 800 per day, despite prices slightly above average.

Sticking with nuclear power would also have its costs and require public funds.

The only two new nuclear reactors currently under construction in Europe, in France and in Finland, both have been plagued by long delays and seen costs virtually doubling, to around ?4 billion ($5.7 billion) and ?5.3 billion ($7.5 billion) respectively.

The disposal of spent nuclear fuel is also a costly problem, but it has no set price tag in Germany because the government has failed to find a sustainable solution.

Story: U.S. storage sites overfilled with spent nuclear fuel

Many decades-old reactors are highly profitable as their initial cost has been written off, but they now face higher costs as regulators push for safety upgrades in the wake of the Fukushima disaster. One of the most pressing ? and costly ? requirements is likely to be a mandatory upgrade to reinforce all nuclear power plants' outer shell to withstand a crash of a commercial airliner.

Utility EnBW pulled the plug for good on one reactor temporarily shut down by the government because the new requirements made operating it "no longer economically viable."

But even if Germany abandons nuclear energy, some of Europe's 143 nuclear reactors will still sit right on its borders.

Since France and other nations are firmly committed to nuclear power, shutting down all reactors across Europe won't happen, but Merkel is now pushing for common safety standards. The topic will be discussed at the European Union summit in Brussels on Thursday and Friday.

Merkel said the 27-nation bloc, which has standardized "the size of apples or the shape of bananas," needs joint standards for nuclear power plants.

"Everybody in Europe would be equally affected by an accident at a nuclear power plant in Europe," Merkel said.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Fears grow as Japan parts supply, power is missing

2:42 AM Fears, Japan, missing, parts, power, supply No Comments

MADRID/PARIS - from Apple Inc.'s new iPad, Chevrolet the global manufacturing supply chain and the impact of the earthquake pick-ups, concern is spreading down in Japan's last week.

Plant turnarounds of Japan after the earthquake, tsunami and nuclear crisis threaten supplies of everything from semiconductors, auto parts for manufacturers around the world.

Even where operate factories in Japan, power outages, shortage of fuel and raw materials and ruptured logistics mean that products and parts face get delays to customers.

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Honda Motor Co, said on Friday, it had expanded halt production in Japan, where it's more than one-fifth of the cars for another three days to next Wednesday.

And in a sign that European manufacturers are also starting feel the squeeze, automaker Renault and Opel warned, she would have to reduce production.

Opel, the European arm of General Motors, a 24-hour production stop for next Monday called and an eight-hour stop Spain, due to the lack of an electronic item, which had come not from Japan next Friday at the plant in Zaragoza. Trade unions say that about 2,400 cars will not be during the suspension.

Renault said it would output at the plant in Busan, South Korea, 15 to 20 percent after interruptions in Japanese provides that concern mainly the Renault owned Samsung SM7. The factory produces usually 20 000 vehicles per month.

A Renault spokesman said "Production per cent, according to 3000 of less cars, should be around 15 to 20". "We hope that a solution be found quickly."

Japan's grip on the global electronics supply chain caused concern. The world's third largest economy exported 7.2 trillion yen ($ 91.3 billion) worth of electronic parts in the last year according to Mirae asset securities.

"Should the crisis Japan be extended, I expect a lack of electronic parts in the second quarter," James song said analyst at Daewoo securities, realizing Japan provides 57% of the worldwide wafer, used in mobile phones, cameras and other electronic devices to the chips.

Apple can IOS bottlenecks of the key parts for his newly released 2, according to research firm IHS iSuppli face.

Some parts of the new version of the popular iPad Tablet PC be music and video on the device from Japan, including the battery and flash memory to store used.

Toshiba Corp., one of the companies that the NAND flash memory in the iPad 2, IHS used iSuppli's research produced just close a flash memory device in Japan and warned that there could be difficulties getting raw materials.

Memory chip industry Tracker DRAMeXchange said that there was a panic increase in NAND flash spot prices and a 5 to 15 percent increase in the contract had seen average sales price. It said the earthquake expected worldwide NAND flash to reduce supply by up to 4 percent in the second quarter of the amount of available memory.

Goldman Sachs warned potential bottlenecks in the delivery of silicon wafers, conductive film in LCD circuits used and resin for connecting chips with Boards--products of Japanese companies such as Shin-ETSU and divisions of Sony, Hitachi, and Mitsubishi.

In France, the head of a small electronics firm, which aims, with Apple Tablet market compete by cheap devices for emerging markets, warned against a domino effect on China.

"We have can be some of our Chinese partners in the country exposed to direct suppliers in Japan but," said ARCHOS Chief Executive Henri Crohas.

Japan's top automakers such as Toyota Motor Co., and Nissan Motor Co fighting issue in the midst of a shortage of parts, work, and makes to restart.

GM said it temporarily a pickup truck plant in Louisiana, would idle, where it builds models, due to parts of the Chevrolet Colorado and GMC Canyon.

"As all global automakers, we are the events in Japan still closely to determine which lead the effects," GM said in a statement on Thursday.

North American Edition is likely be affected, unless again their plants revive and send parts for 10 days, Wolfe racial & co analyst Tim Denoyer said Japanese suppliers in a note.

Japanese company Jamco which makes galleys for the long-awaited Boeing 787 Dreamliner, said face could it delays due to the tight gasoline supply.

Airline industry body IATA said Japan produced 3 to 4 percent of the global jet fuel supply and part of this capacity was warned lost. "This restriction to supply could lead higher jet fuel prices," he said.

Lufthansa Cargo, moving, electronics, liquid crystals for flat-screen displays and Pharma from Japan, said that it be forced perhaps some cancel flights next week.

"The booking situation from Germany is good and Japan, it is always still pretty well," said a spokesman. "But it is slowly getting that production in Japan is."

Denmark's Novo Nordisk, the world's largest insulin manufacturer, has suffered disturbance in the Koriyama plant, where only 10 percent of the normal 100-member staff still on site. Novo said it continues to insulin of Koriyama send and distribution centers were well equipped.

GlaxoSmithKline said its drug factory in Imaichi smaller losses suffered had and was expecting that it soon resume action, but the company. In the same area, the situation at a plant in Utsunomiya was Switzerland Roche evaluation, which had suspended production and would examine problems of supply chain. It said that was not affected by serious damage.

Copyright 2011 Thomson Reuters.

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