The BWFA Advantage

10 The 38.5% drop in the S&P 500 during 2008 and the further drop of 25% by March 9, 2009 have tested the tolerance for risk of individual and institutional investors alike. This has been the worst stock market decline of our generation. It has been a terrifying ride for clients as well as for investment managers. Although the investment professionals at BWFA foresaw an economic downturn, we did not plan for a disaster. However, "bear markets" do not last forever. After the markets bounced 35% off the bottom this spring, one of the sharpest rebounds on record, we sat down to discuss what we learned from the experiences of the last year. Here are some of our observations. We learned that for some of our clients, risk tolerance was biased by many years of excellent market returns. Their actual tolerance for risk was considerably lower. When the markets fell deeply, we encountered a few panic attacks. Clients who experienced the tech bubble burst of 2000-2002 tended to weather this crisis better than newcomers to the equity markets. Clients with larger portfolios generally had fewer concerns than clients with smaller portfolios. Age also played a role, which is understandable. Clients in retirement and drawing on their portfolios were very concerned about the ability of their portfolios to support their lifestyles throughout their retirement years. It was good to see that many clients who are living off their portfolios (in the "distribution" phase) were flexible enough to reduce monthly distributions and cut their living expenses somewhat so their portfolios had time to recover. We were also pleased that some of our clients had the foresight to continue adding funds to their portfolios at the market's bottom. Unfortunately, some clients panicked at the bottom. We were able to dissuade most, but not all, clients from selling in a bear market. So, we have reclassified many of those clients (and even some who did not panic) into lower-risk portfolio models that are more suitable for them. Most of those clients have been quick to concur; hopefully, they sleep better these days. We found that clients who were utilizing financial plans that BWFA had prepared were generally better able to keep their portfolio risk in perspective as stock prices were pounded lower. Their portfolio allocation was based on the degree of risk necessary to accomplish their long-term financial goals, rather than to maximize returns. BWFA's plans assumed that markets would be volatile, so these clients were more willing to view the markets from a longer-term perspective. We did learn, however, that we should do a better job of addressing clients' emotional needs as well as financial needs. One lesson we won't forget is the ease with which clients who managed their own 401(k) investments could move their entire 401(k) plans to cash with the click of a mouse. This is a form of market timing—that is, trying to perfectly "time" your entry and exit from market sectors. But market timing is extraordinarily difficult, since you not only have to time the sale correctly, but you also have to get back in at the right time. When the markets snapped back recently, these portfolios were sitting in cash. Investors need to be well-disciplined; investors can't allow their emotions to control decision-making. One of the reasons BWFA is hired is to take the emotion out of those decisions. We create an asset allocation that matches a client's goals, and then we help the client stick with it. Also, we thought that most people learned their lesson about missing opportunities to exercise stock options back when billions of dollars of stock options at dot-com companies and Enron became worthless almost overnight. Yet, it has happened again. Most stock options that were not exercised are now under water again. Is this a case of tax considerations wagging the tail of making investment decisions? We recommend a disciplined approach of exercising options systematically over time. Those who did not exercise any of their options over the last few years of record stock performance wished they had today. Two final thoughts: Emergency funds should not reside in one's investment portfolio, and bear markets are always followed by bull markets. However, no one rings a bell to tell you when one market ends and the other begins. 1

2009-07-01T13:32:01-04:00

false The 38.5% drop in the S&P 500 during 2008 and the further drop of 25% by March 9, 2009 have tested the tolerance for risk of individual and institutional investors alike. This has been the worst stock market decline of our generation.

false

196

Lessons Learned from the Recent Market Collapse

2009-09-23T22:09:07-04:00

16 Have you heard of equity-indexed annuities (EIAs)? They promote the dual benefits of a guaranteed, minimum return (limited downside) with market returns (upside potential) based on an equity index. On top of that, you can even defer taxes for years until you withdraw funds. For the highly risk-averse investor who doesn't want to miss out on possible stock market gains, an equity-indexed annuity certainly sounds attractive. However, there is no free lunch in investing, and that's especially true with EIAs. These products require considerable research, and they are appropriate only for investors who don't need to withdraw the money during the long life of the contract. They also require careful analysis of the risk of the issuer. And that tax break is great only until you withdraw from the annuity and pay ordinary income taxes on the gains, rather than the lower capital gains tax rates available on other investments. <h2>Equity-Indexed Annuities (EIAs)</h2> EIAs are contracts with insurance companies that are designed to give a low, fixed rate of return, plus the potential for higher growth if a designated stock market index rises. Like many things, the devil is in the details, so let's look at some unique features of indexed annuities: Equity Index. Typically, EIAs use Standard & Poor's Composite Stock Price Index (S&P 500) as their index. This is a widely respected and useful index, but it lacks international diversification that a portfolio should contain. Furthermore, dividend payments from S&P 500 companies play an important role in the performance of the S&P 500 index, but these dividends might not be included in the calculation for crediting the return on the purchased annuity.Without dividends, EIAs often underperform the S&P 500 by one to three percentage points per year. Rate of Participation. You'll never receive the whole market index return with an EIA. For example, if the participation rate is 80% and the index gains 10%, then the interest rate on the index-linked annuity will be 10% multiplied by 0.8, or 8%. Read the fine print, because it might get worse: your participation rate might not be fixed for the term of the annuity. Find out how it will be adjusted. Cap on Interest. Some EIA contracts put a ceiling or cap on the rate of return to an investor. For example, if the cap is 7.5%, then the holder of the annuity in the previous example will get credited with 7.5%, not the 8% indicated by the participation rate. Minimum Rate of Return, or a "Floor" on Interest. Typically, the lowest rate that an EIA can earn is 0%. Administrative Fee. Annuities normally have annual fees of 1.5- 3% (sometimes more), which further reduce the return paid to the investor at the end of the contract. <h2>Are Equity-Linked Annuities Right for You?</h2> In our experience, EIAs are rarely the best option for our clients. If you are thinking about buying one, consider these points: <ul> <li>Can you lock up your funds for 10 years or so? Typically, there are hefty deferred sales charges and a loss of credited interest for accessing your principal prematurely. If you pull out of a contract early, you might get less than you invested.</li> <li>Are you comfortable with the trade-off of accepting potentially significant limits on an equity return, in exchange for downside protection?</li> <li>What other tax-advantaged choices are available to you? If you have not maxed out your IRAs, 401(k)s, etc., then you might want to use those strategies first.</li> <li>Gains in an annuity are taxed as ordinary income at your highest tax rate, not at the lower capital gains rate of other long-term investments.</li> <li>Annuity issuers usually pay concessions of 5-10% to the brokerage firms selling them, so beware of potential conflicts of interest.</li> </ul> Bottom Line: Do your homework, comparison-shop, and seek advice from a Fee-Only advisor before purchasing an annuity. 1

2008-12-20T23:12:15-05:00

false Have you heard of equity-indexed annuities (EIAs)? They promote the dual benefits of a guaranteed, minimum return (limited downside) with market returns (upside potential) based on an equity index. On top of that, you can even defer taxes for years until you withdraw funds. For the highly risk-averse investor who doesn't want to miss out on possible stock market gains, an equity-indexed annuity certainly sounds attractive.

false

186

Equity-Indexed Annuities: Are They Too Good to Be True?

2009-03-17T15:09:27-04:00

11 If a brokerage house fails due to bankruptcy or fraud, the Securities Investor Protection Corporation (SIPC) makes sure that investors who hold their stocks, bonds, and mutual funds at that brokerage house get all of their shares back in a timely manner. Due to recent bankruptcies at banks and financial troubles at brokerage firms, BWFA thought it was time to review the questions, "Is it safe to hold investments at a brokerage firm?" and "What happens to my stocks and bonds if my broker goes bankrupt?" SIPC protects investors by guaranteeing that if securities held by a broker for a client are lost or stolen, SIPC will replace those shares of those securities or their value to the client. However, there is a ceiling of $500,000 per customer account held in each separate capacity (e.g., joint tenant or sole owner), and a limit of $100,000 for claims of uninvested cash balances. Lost or stolen money market funds are covered by the $500,000 ceiling. <h2>Is SIPC Strong Enough?</h2> It's important to understand that SIPC does not "insure" the value of the shares. Share prices go up and down, and SIPC is not protecting investors from poor decisions that they or their advisors make. SIPC is quick to point out that its role is very different from the Federal Deposit Insurance Corporation (FDIC), which does insure deposits at banks. SIPC does not have the word "Insurance" in its name. It's also important to realize that SIPC does not protect commodity futures contracts, currency holdings, or investment contracts (such as limited partnerships) that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933. Even with those limitations, SIPC has a big job. Therefore, BWFA did a little research to find out if SIPC is up to the task. We found that SIPC is a tiny, federally chartered non-profit private organization. It employs just 30 people and has only $1.5 billion in reserves (and the ability to borrow another $2 billion), yet it is committed to protecting shares worth $7 trillion. We called SIPC and spoke with Stephen Harbeck, President, who presented a convincing case that his organization is prepared. First, Harbeck confirmed that the safety of holding shares in a brokerage house has suddenly become an issue of concern to investors. He said that after the California bank IndyMac filed for Chapter 7 bankruptcy protection on Aug. 2, SIPC's small staff was overwhelmed with two calls per minute from investors. Then, Harbeck explained why he thinks SIPC can make sure investors' shares are safe: <ul> <li>Investments held in an investor's account are not subject to creditors' claims in a bankruptcy, such as IndyMac's.</li> <li>"There are five sets of eyes on brokerage firms" to make sure shares do not go missing before SIPC takes over a failed broker. They are internal auditors, external auditors, state regulators, self-regulatory bodies, and the Securities and Exchange Commission. Harbeck did not mention that BWFA provides a sixth set of eyes to protect you!</li> <li>While SIPC gets involved in, on average, eight proceedings a year on behalf of investors who have suffered lost securities, many of them were in the 1970s and 1980s. That number has fallen to just two proceedings in the last two years.</li> </ul> SIPC has been very successful. More than 99 percent of eligible investors making claims to SIPC have recovered their shares. From its creation by Congress in 1970 through December 2007, SIPC advanced $508 million in order to make possible the recovery of $15.7 billion in assets for an estimated 625,000 investors. Furthermore, TD Ameritrade, which is the custodian for investments managed by BWFA, also supplements SIPC coverage with additional private insurance. The insurance provides total coverage up to $150 million per client with a limit of $250 million for all clients of TD Ameritrade. At BWFA, we believe that the combination of SIPC coverage and additional insurance provided by TD Ameritrade gives our investments a high level of confidence and security. 1

2008-10-03T02:10:43-04:00

false If a brokerage house fails due to bankruptcy or fraud, the Securities Investor Protection Corporation (SIPC) makes sure that investors who hold their stocks, bonds, and mutual funds at that brokerage house get all of their shares back in a timely manner. Due to recent bankruptcies at banks and financial troubles at brokerage firms, BWFA thought it was time to review the questions, "Is it safe to hold investments at a brokerage firm?" and "What happens to my stocks and bonds if my broker goes bankrupt?"

false

182

Can Investors Trust Brokerage Firms to Hold Their Securities?

2008-12-20T22:39:53-05:00

1 The expression "catch a falling knife" refers to buying stocks or bonds which have fallen significantly in price, with the hope that they will soon return to their former price. If done well, the buyer nets a handsome profit in a short period of time. The differences between "catching a falling knife" and normal investing are the time frame, the research that goes into the decision, and whether an investor believes that the market is efficient in setting the correct price for a security. To understand the basic difference between "falling knife" investors and long-term investors, we need to remember that the price of a stock is based on the profit investors expect a company to make. All things being equal, a stock's price goes up when the outlook for the company's future profits goes up, and down when the outlook for future profits is not as rosy. The falling knife investor is driven by the lure of quick profits. He has a short time frame in mind, usually about a year. This investor believes that the market's perception of a company (reflected in the company's stock price) is out of line with reality. This investor believes that research experts have overlooked some significant facts that will cause the security to appreciate again fairly soon. More importantly, this investor believes that other investors have overreacted to whatever information made the stock price go down. Finally, this investor believes that the bad news is temporary, and it will not have a lasting effect on the company's finances nor the stock's price. In short, the falling knife investor believes that the market price for this security is wrong. Long-term investors believe differently. They believe that the market is usually "efficient" in that it assigns an appropriate price to the security based on relevant, known information. They reason that, while short-term market "inefficiencies" might exist from time to time, there is no way of distinguishing price movements resulting from random market inefficiencies from movements based on longer-term price trends. Accordingly, they believe that stocks are fairly valued most of the time. Long-term investors are motivated to act based on research published on the company by independent sources. They want to understand the business and investment risks. Falling knife investors don't do much research on the company's actual financial situation or profit outlook. The difference in philosophies came to mind this summer when one of our clients asked me for an opinion about Fannie Mae and Freddie Mac. The stock prices of these two highly respected companies have plummeted by about 90 percent in the past year, as their financial strength unraveled in the wake of the mortgage crisis. Our client asked me if the market was overreacting, and whether Fannie and Freddie were poised for a quick rebound. In other words, our client was looking for a chance to catch a falling knife. I explained that BWFA's investment approach did not focus on identifying market inefficiencies .We look at long-term fundamentals, and we don't try to judge when the market has wildly misjudged a company. Were BWFA to buy Fannie and Freddie on behalf of our clients, it would be because the companies were sensible investments on their merits, rather than because we thought that market sentiment about them would turn around as strongly in their favor as it turned against them in the last year. Everyone would like to make quick profits by investing in companies that have been overly punished by the market. However, the evidence shows that the market is mostly accurate in determining prices, and betting against it is usually not a profitable strategy. At BWFA, we maintain a disciplined, structured approach to investments with a longer-term focus on quality companies. Editor's Note: Two weeks after this article was written, Fannie Mae and Freddie Mac were both taken over by the US Government. Stockholders of both organizations will probably lose the remaining value of their investments. 1

2008-10-03T01:41:54-04:00

false The expression "catch a falling knife" refers to buying stocks or bonds which have fallen significantly in price, with the hope that they will soon return to their former price. If done well, the buyer nets a handsome profit in a short period of time.

false

179

How to Catch a Falling Knife

2008-12-20T22:39:40-05:00

16 Investment advisors today are frequently asked by clients where they can find an investment that has a good return, will maintain principal value, and won't keep anyone up at night worrying about credit quality. Instruments that offer a high dividend or interest payment can provide a cushion in these volatile times. These investments have moved to the front burner in the aftermath of the housing market meltdown and the seemingly relentless rise in energy prices. But where are these investments? You won't find them in the typical places. As of June 2, three-month Treasury bills hover around 2%, six-month CD rates are under 4%, and money-market yields are in between. With these yields, the bottom line is not easy to stomach, especially in a taxable account. Inflation is over 4% annually, so the "real" yield on the six-month CD is basically zero. And this is before Uncle Sam has stepped in and taken his cut of 25% or so of the interest earnings. As an alternative, BWFA has identified three attractive areas for picking up yield in the current market: trust preferreds, special situations, and high-dividend stocks. Trust Preferreds Trust Preferreds are investment-grade stocks that possess fixed-income characteristics. They are publicly traded, and therefore their prices can easily be followed. Typically, they offer yields that are 3% to 4% above U.S. Treasuries. For example, 10-year Treasury notes today yield 3.89%, whereas a recently issued Suntrust Trust Preferred yields 7.85%. Trust Preferreds can be purchased with an investment of as little as $2,500, which makes them very efficient for investors who are not super-wealthy. Many Trust Preferreds offer qualified dividends, so they are taxed at the low rate of 15%, which makes them attractive for taxable accounts. However, it is important to realize that Trust Preferreds are not a "free lunch." They usually have special provisions that require analysis to see if the yield is worth the contingencies that come with it. For example, Trust Preferreds usually have call provisions, like bonds. In other words, if the investor is getting a deal that's too good, the issuer can "call in" the investment. Then a new place must be found to invest your money. Special Situations Sometimes, BWFA's investment committee finds stock issues that offer both high yield and the potential for growth. An example is Allied Capital, a Washington, DC-based firm that provides financing and other services to the U.S. private equity market (specializing in mid-size companies). Allied Capital has either increased or maintained its dividend for each of the past 43 years, through up and down markets. In 2007, Allied Capital paid a dividend of $2.57/share. At today's share price, this is a yield of approximately 13%. But its attractive yield comes with considerable price volatility, so it's not a stock that a short-term buyer would purchase. BWFA also considers publicly traded Master Limited Partnerships. These are typically in the oil-and-gas transport business. By contractual agreement, these partnerships have to pay out quarterly dividends at a fixed percentage of their earnings. Plains All American, which provides a yield in excess of 7% today, is one investment that BWFA finds attractive in today's market. High-Dividend Stocks BWFA is constantly searching for stocks that pay high dividends and offer attractive growth prospects, and we usually place them in the "Growth & Income" portion of clients' portfolios. Because of their relatively higher tax rates they are especially suitable for tax deferred accounts. Sometimes, BWFA finds these stocks when a company has experienced a sharp drop in price, and investors question whether the stock will maintain its dividend. These concerns are weighing heavily on the financial sector, thus opportunities may exist for long-term investors. For example, Bank of America's dividend offers a yield in excess of 7%. Seeking out-of-favor companies is not for the faint of heart, and owning those stocks requires constant monitoring. That's why we make the selections judiciously and watch them carefully. Final Note: Diversification Here is one more point to share. In considering these various investment opportunities, BWFA is always mindful of the principles of diversification. For this reason, we normally limit our investment in a single stock to around 2% of an individual client's total assets. Finally, we manage portfolios to limit exposure to any one industry. 1

2008-07-01T00:00:00-04:00

false Investment advisors today are frequently asked by clients where they can find an investment that has a good return, will maintain principal value, and won't keep anyone up at night worrying about credit quality. Instruments that offer a high dividend or interest payment can provide a cushion in these volatile times. These investments have moved to the front burner in the aftermath of the housing market meltdown and the seemingly relentless rise in energy prices.

175

true

<a href="http://www.bwfa.com/about/wasilewski.asp">Robert Wasilewski</a>, MA

Investment advisors today are frequently asked by clients where they can find an investment that has a good return, will maintain principal value, and won't keep anyone up at night worrying about credit quality. Instruments that offer a high dividend or interest payment can provide a cushion in these volatile times. These investments have moved to the front burner in the aftermath of the housing market meltdown and the seemingly relentless rise in energy prices. But where are these investments? You won't find them in the typical places. As of June 2, three-month Treasury bills hover around 2%, six-month CD rates are under 4%, and money-market yields are in between. With these yields, the bottom line is not easy to stomach, especially in a taxable account. Inflation is over 4% annually, so the "real" yield on the six-month CD is basically zero. And this is before Uncle Sam has stepped in and taken his cut of 25% or so of the interest earnings. As an alternative, BWFA has identified three attractive areas for picking up yield in the current market: trust preferreds, special situations, and high-dividend stocks. Trust Preferreds Trust Preferreds are investment-grade stocks that possess fixed-income characteristics. They are publicly traded, and therefore their prices can easily be followed. Typically, they offer yields that are 3% to 4% above U.S. Treasuries. For example, 10-year Treasury notes today yield 3.89%, whereas a recently issued Suntrust Trust Preferred yields 7.85%. Trust Preferreds can be purchased with an investment of as little as $2,500, which makes them very efficient for investors who are not super-wealthy. Many Trust Preferreds offer qualified dividends, so they are taxed at the low rate of 15%, which makes them attractive for taxable accounts. However, it is important to realize that Trust Preferreds are not a "free lunch." They usually have special provisions that require analysis to see if the yield is worth the contingencies that come with it. For example, Trust Preferreds usually have call provisions, like bonds. In other words, if the investor is getting a deal that's too good, the issuer can "call in" the investment. Then a new place must be found to invest your money. Special Situations Sometimes, BWFA's investment committee finds stock issues that offer both high yield and the potential for growth. An example is Allied Capital, a Washington, DC-based firm that provides financing and other services to the U.S. private equity market (specializing in mid-size companies). Allied Capital has either increased or maintained its dividend for each of the past 43 years, through up and down markets. In 2007, Allied Capital paid a dividend of $2.57/share. At today's share price, this is a yield of approximately 13%. But its attractive yield comes with considerable price volatility, so it's not a stock that a short-term buyer would purchase. BWFA also considers publicly traded Master Limited Partnerships. These are typically in the oil-and-gas transport business. By contractual agreement, these partnerships have to pay out quarterly dividends at a fixed percentage of their earnings. Plains All American, which provides a yield in excess of 7% today, is one investment that BWFA finds attractive in today's market. High-Dividend Stocks BWFA is constantly searching for stocks that pay high dividends and offer attractive growth prospects, and we usually place them in the "Growth & Income" portion of clients' portfolios. Because of their relatively higher tax rates they are especially suitable for tax deferred accounts. Sometimes, BWFA finds these stocks when a company has experienced a sharp drop in price, and investors question whether the stock will maintain its dividend. These concerns are weighing heavily on the financial sector, thus opportunities may exist for long-term investors. For example, Bank of America's dividend offers a yield in excess of 7%. Seeking out-of-favor companies is not for the faint of heart, and owning those stocks requires constant monitoring. That's why we make the selections judiciously and watch them carefully. Final Note: Diversification Here is one more point to share. In considering these various investment opportunities, BWFA is always mindful of the principles of diversification. For this reason, we normally limit our investment in a single stock to around 2% of an individual client's total assets. Finally, we manage portfolios to limit exposure to any one industry.

2008-07-01T00:00:00-04:00

true

265

true

Searching for Mr. Goodyield

2008-09-15T11:19:16-04:00

12 With talk about a recession widespread, investors are naturally concerned about what will happen to their stocks if a recession actually occurs. Is it time to sell stocks to avoid further declines if the economy continues to weaken? Is it a good time to buy stocks cheaply before a recovery raises prices? Should an investor just ride the recession out? To put these questions in perspective, we should look at what stocks have done in the past. A recent study by Ned Davis Research gives us valuable information about how the stock market has responded to the ten recessions since 1945. Davis Research found that the stock market typically hit a new high about six months before a recession officially began. When the economy was in a recession, stocks usually continued to go down for another six months, but then started to recover three to six months before the recession ended. After hitting their low point, stocks tended to lead the economy out of the recession and generally had an exceptionally good year after the recession's low point. The numbers indicate that from the top of the economic cycle to bottom, stocks declined an average of 20%; about half of that loss usually occurred before the recession began. Recessions normally lasted 10 to 11 months. Once the bottom was hit (which is usually when sentiment is at its worst level), the market rallied an average of 32% over the next year. Often, the stock market exits a recession at a level higher than when it entered the recession. Though the pattern outlined above appears simple to understand, it is surprisingly difficult to use effectively. Here are the problems with implementing a market-timing strategy based on trying to track recessions: <ul> <li>We only find out that a recession has begun long after it started. Recessions are officially declared by the National Bureau of Economic Research (NBER) after the economy experiences two consecutive calendar quarters of negative growth, and NBER might not make that declaration for a year after the fact. That's much too late for an investor to use the information. </li> <li>Stocks often go down, but no recession follows. Paul Samuelson, Nobel prize-winning economist, once quipped, "The stock market has forecast nine of the last four recessions." Therefore, we cannot use a decline in stock prices as a perfect predictor that a recession will follow. </li> <li>Each recession and recovery is unique and so is the stock market's reaction. In three of the past four recessions, stocks actually gained ground. In the recession from July 1990 to March 1991, for instance, the S&P 500 rose 2.5%, despite a severe sell-off in the summer of 1990. And in the recession from January to July 1980, stocks climbed nearly 6%. On the other side of the coin, in the last recession, which ended November 2001, stocks continued to fall for 12 months after the recession was officially over.</li> </ul> There are other issues that add complexity to the investment decision. Some stocks do better in recessions than others. Health care and consumer staples typically perform better than average during the beginning of a recession, while financial companies and retail stocks do poorly. Buying a broad basket of stocks might not be the best way to profit in a recession or a recovery. If we knew for sure when a recession would begin, we could sell stocks six months before the recession began and buy them back one year later when the economy was in the middle of the recession. But we don't have that information—and no one else does either. Since we do not know when the recession will occur, BWFA believes that the safest way to invest in stocks is to hold good stocks through recessions. Good stocks might decline during a recession—we've seen very healthy companies lose 40% of their stock price—but recover just fine in the long term. During this economic cycle, BWFA started to reduce our stock holdings in September 2007, which was in advance of the stock market's peak in October. Now economists are speculating whether a recession began in December or is about to begin soon. We are still holding high cash positions in our client accounts, but are beginning to think about what stocks to buy next when we see the stock market making its recovery. 1

2008-04-10T00:00:00-04:00

false

171

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

With talk about a recession widespread, investors are naturally concerned about what will happen to their stocks if a recession actually occurs. Is it time to sell stocks to avoid further declines if the economy continues to weaken? Is it a good time to buy stocks cheaply before a recovery raises prices? Should an investor just ride the recession out? To put these questions in perspective, we should look at what stocks have done in the past. A recent study by Ned Davis Research gives us valuable information about how the stock market has responded to the ten recessions since 1945. Davis Research found that the stock market typically hit a new high about six months before a recession officially began. When the economy was in a recession, stocks usually continued to go down for another six months, but then started to recover three to six months before the recession ended. After hitting their low point, stocks tended to lead the economy out of the recession and generally had an exceptionally good year after the recession's low point. The numbers indicate that from the top of the economic cycle to bottom, stocks declined an average of 20%; about half of that loss usually occurred before the recession began. Recessions normally lasted 10 to 11 months. Once the bottom was hit (which is usually when sentiment is at its worst level), the market rallied an average of 32% over the next year. Often, the stock market exits a recession at a level higher than when it entered the recession. Though the pattern outlined above appears simple to understand, it is surprisingly difficult to use effectively. Here are the problems with implementing a market-timing strategy based on trying to track recessions: <ul> <li>We only find out that a recession has begun long after it started. Recessions are officially declared by the National Bureau of Economic Research (NBER) after the economy experiences two consecutive calendar quarters of negative growth, and NBER might not make that declaration for a year after the fact. That's much too late for an investor to use the information. </li> <li>Stocks often go down, but no recession follows. Paul Samuelson, Nobel prize-winning economist, once quipped, "The stock market has forecast nine of the last four recessions." Therefore, we cannot use a decline in stock prices as a perfect predictor that a recession will follow. </li> <li>Each recession and recovery is unique and so is the stock market's reaction. In three of the past four recessions, stocks actually gained ground. In the recession from July 1990 to March 1991, for instance, the S&P 500 rose 2.5%, despite a severe sell-off in the summer of 1990. And in the recession from January to July 1980, stocks climbed nearly 6%. On the other side of the coin, in the last recession, which ended November 2001, stocks continued to fall for 12 months after the recession was officially over.</li> </ul> There are other issues that add complexity to the investment decision. Some stocks do better in recessions than others. Health care and consumer staples typically perform better than average during the beginning of a recession, while financial companies and retail stocks do poorly. Buying a broad basket of stocks might not be the best way to profit in a recession or a recovery. If we knew for sure when a recession would begin, we could sell stocks six months before the recession began and buy them back one year later when the economy was in the middle of the recession. But we don't have that information—and no one else does either. Since we do not know when the recession will occur, BWFA believes that the safest way to invest in stocks is to hold good stocks through recessions. Good stocks might decline during a recession—we've seen very healthy companies lose 40% of their stock price—but recover just fine in the long term. During this economic cycle, BWFA started to reduce our stock holdings in September 2007, which was in advance of the stock market's peak in October. Now economists are speculating whether a recession began in December or is about to begin soon. We are still holding high cash positions in our client accounts, but are beginning to think about what stocks to buy next when we see the stock market making its recovery.

2008-04-10T00:00:00-04:00

false

261

false

How the Stock Market Responds to a Recession…And What BWFA Is Doing About It

2008-10-12T23:33:22-04:00

16 Like a spreading fungus, the subprime mortgage crisis has gained footholds across the country and has the potential to bring on a recession in the U.S. — undermining an economy that is in most respects fairly robust. The crisis has hurt several sectors of the stock market, created a drag on the economy, and resulted in record numbers of foreclosures. Origin of the Crisis In 2003, as U.S. housing prices and sales were setting records, the Federal Reserve began lowering interest rates to keep the economy humming. Eventually, the Fed reduced short-term rates all the way to the unprecedented level of 1% and kept them there for a year. The stage was set for investors, who were still feeling the pain from the stock market bubble from 2000-2002, to turn to the "safety" of real estate investing. Property valuations went through the roof and sales continued to set records. Houses became ATMs, and American spenders tapped into seemingly bottomless equity. Mortgage bankers and brokers, eager to extend the good times, threw credit standards out the window. No-doc loans, creative payment schemes, and bloated appraisals soon became common. Nonqualified borrowers took on adjustable rate mortgages, attracted by low teaser rates, and the market roared on. Low rates, engineered by the Federal Reserve, set off a desperate scramble for higher yielding short-term investments, especially by institutional investors. These investors looked to Wall Street for alternatives. In response to this new demand, Wall Street began packaging these higher risk subprime mortgages into securities with yields well above those offered on safer investments. Yield hungry hedge funds and other investors snapped up the new securities. Rating agencies waived their approval by giving these securities higher credit ratings than they deserved. For a "tongue-in-cheek" explanation of what happened, go to: <a href="http://www.youtube.com/watch?v=SJ_qK4g6ntM" target="_blank">http://www.youtube.com/watch?v=SJ_qK4g6ntM</a>. In the middle of 2004, the Fed switched its worry meter from deflation to inflation. It began raising short-term rates until it got to 5.25% by early 2006. Not surprisingly, the housing market, which is highly responsive to changes in interest rates, turned 180 degrees. The sellers' market became the buyers' market as houses stayed on the market longer and inventories of unsold houses grew. Subprime borrowers were especially hard hit as variable interest mortgage payments kept getting bigger. As delinquencies and foreclosures rose, the value of securities backed by mortgages fell sharply. As demand for the securities dried up, it became impossible to value the securities, and investors (banks, hedge funds, pension funds, even some money market funds, and others) are being forced to write down the value of the securities on their books. There is no question that the "financial system" has been strained by these events. The good news is that the Federal Reserve and the U.S. Treasury, unlike the 1930s, have the tools to address the problems. Banks are coming together, under Treasury Secretary Henry Paulson to provide a fund for buying the troubled securities. This will prevent banks and others from having to sell these securities at deep discounts, which would place further strain on the financial system. In addition, the Fed has started lowering rates again, which will help the housing market and lessen the pressure on banks to pay higher rates, straining them further. And most recently, the Fed has made it easier for banks to borrow money to meet liquidity needs through an auction process. BWFA's Response Early on, BWFA recognized that the real estate market was overvalued, and sold several of its investments, which were closely tied to the real estate market (primarily REITs). More recently, we queried the managers of our short-term fund selections to ensure that our clients had no direct exposure to these troubled securities. As of this juncture, we do not believe that our clients have any exposure to troubled money market funds which have been prevalent in the news. In addition, some months ago we began raising the cash positions in our client portfolios to the highest level in our firm's history. For clients who are drawing money from their investments (retirement), we did this a while ago; for clients still accumulating assets, our shift has been more recent. This will help in two ways: it will reduce our clients' market exposure, and it should provide cash to take advantage of extremely low valuations in good quality securities which are occurring now. We often say that managing risk is even more important than managing returns for our clients. While we prefer to stay fully invested over the stock market cycles, always seeking strong companies that merit long-term investment, we recognize that the markets are now in a highly unusual situation. We want you to know that we are taking a prudent approach by focusing our attention on market risks, given the current circumstances. 1

2008-01-04T00:00:00-05:00

false

167

true

<a href="http://www.bwfa.com/about/wasilewski.asp">Robert Wasilewski</a>, MA

Like a spreading fungus, the subprime mortgage crisis has gained footholds across the country and has the potential to bring on a recession in the U.S. — undermining an economy that is in most respects fairly robust. The crisis has hurt several sectors of the stock market, created a drag on the economy, and resulted in record numbers of foreclosures. Origin of the Crisis In 2003, as U.S. housing prices and sales were setting records, the Federal Reserve began lowering interest rates to keep the economy humming. Eventually, the Fed reduced short-term rates all the way to the unprecedented level of 1% and kept them there for a year. The stage was set for investors, who were still feeling the pain from the stock market bubble from 2000-2002, to turn to the "safety" of real estate investing. Property valuations went through the roof and sales continued to set records. Houses became ATMs, and American spenders tapped into seemingly bottomless equity. Mortgage bankers and brokers, eager to extend the good times, threw credit standards out the window. No-doc loans, creative payment schemes, and bloated appraisals soon became common. Nonqualified borrowers took on adjustable rate mortgages, attracted by low teaser rates, and the market roared on. Low rates, engineered by the Federal Reserve, set off a desperate scramble for higher yielding short-term investments, especially by institutional investors. These investors looked to Wall Street for alternatives. In response to this new demand, Wall Street began packaging these higher risk subprime mortgages into securities with yields well above those offered on safer investments. Yield hungry hedge funds and other investors snapped up the new securities. Rating agencies waived their approval by giving these securities higher credit ratings than they deserved. For a "tongue-in-cheek" explanation of what happened, go to: <a href="http://www.youtube.com/watch?v=SJ_qK4g6ntM" target="_blank">http://www.youtube.com/watch?v=SJ_qK4g6ntM</a>. In the middle of 2004, the Fed switched its worry meter from deflation to inflation. It began raising short-term rates until it got to 5.25% by early 2006. Not surprisingly, the housing market, which is highly responsive to changes in interest rates, turned 180 degrees. The sellers' market became the buyers' market as houses stayed on the market longer and inventories of unsold houses grew. Subprime borrowers were especially hard hit as variable interest mortgage payments kept getting bigger. As delinquencies and foreclosures rose, the value of securities backed by mortgages fell sharply. As demand for the securities dried up, it became impossible to value the securities, and investors (banks, hedge funds, pension funds, even some money market funds, and others) are being forced to write down the value of the securities on their books. There is no question that the "financial system" has been strained by these events. The good news is that the Federal Reserve and the U.S. Treasury, unlike the 1930s, have the tools to address the problems. Banks are coming together, under Treasury Secretary Henry Paulson to provide a fund for buying the troubled securities. This will prevent banks and others from having to sell these securities at deep discounts, which would place further strain on the financial system. In addition, the Fed has started lowering rates again, which will help the housing market and lessen the pressure on banks to pay higher rates, straining them further. And most recently, the Fed has made it easier for banks to borrow money to meet liquidity needs through an auction process. BWFA's Response Early on, BWFA recognized that the real estate market was overvalued, and sold several of its investments, which were closely tied to the real estate market (primarily REITs). More recently, we queried the managers of our short-term fund selections to ensure that our clients had no direct exposure to these troubled securities. As of this juncture, we do not believe that our clients have any exposure to troubled money market funds which have been prevalent in the news. In addition, some months ago we began raising the cash positions in our client portfolios to the highest level in our firm's history. For clients who are drawing money from their investments (retirement), we did this a while ago; for clients still accumulating assets, our shift has been more recent. This will help in two ways: it will reduce our clients' market exposure, and it should provide cash to take advantage of extremely low valuations in good quality securities which are occurring now. We often say that managing risk is even more important than managing returns for our clients. While we prefer to stay fully invested over the stock market cycles, always seeking strong companies that merit long-term investment, we recognize that the markets are now in a highly unusual situation. We want you to know that we are taking a prudent approach by focusing our attention on market risks, given the current circumstances.

2008-01-04T00:00:00-05:00

false

257

false

The Subprime Mortgage Crisis: What Does It Mean for Your Investments?

2008-09-15T11:19:16-04:00

16 In July, major stock indices reached record levels. For the first time ever, the Dow Jones Industrial Average closed above 14,000. The S&P 500 achieved a record level as well. Subsequently, there has been a sharp downturn in the market. Naturally, clients may wonder whether the record levels meant that stocks were overvalued, and whether this was a factor in the market drop. We believe that stocks were reasonably valued in July, based on usual measures of valuation, and the record levels of July are not the culprit in the current weakness. Stock Valuation Analysts look at many measures to determine whether the market and/or individual stocks are overvalued. This is certainly true at BWFA, where we combine numerous fundamental measures of the overall economy with stock-specific measures. For example, we look at a stock’s price-earnings ratio. Understanding this ratio reveals why the overall indices can reach new highs and yet individual stocks and the overall market can be reasonably valued. Valuing Individual Stocks One common way to value a stock is its price-earnings (P/E) ratio. The P/E ratio measures how much investors are willing to pay for $1 of earnings. Consider General Electric. General Electric earned $2.07 per share over the past 12 months and was recently priced at $37. Its P/E ratio was $37/$2.07, or approximately 18. This is roughly in line with the average P/E of all the stocks in the S&P 500. Given GE’s exceptional prospects in globalized markets, most analysts would argue that GE’s price is not out of line with its earnings prospects. Stocks whose earnings are expected to grow much faster than the overall market will have higher P/Es. For example, a growth stock like Garmin has a P/E ratio of 36, partly because analysts expect earnings to grow by 20% per year for the next five years. On an historical basis, a P/E in the mid 30s is not too high for a company with these earnings expectations. It is important to note that there are pitfalls involved in relying too heavily on the P/E ratio. Most notably, earnings can be “massaged” to make a company look more profitable than it really is. Enron, Worldcom, and others showed that there is considerable leeway in using Generally Accepted Accounting Principles (GAAP) accounting methods to produce a corporation’s bottom-line earnings-per-share figure. Another point to keep in mind is that the earnings number in the P/E ratio can be composed in various ways. Analysts frequently quote the ratio based on the past 12 months’ earnings. Sometimes, however, P/E is quoted in anticipation of next year’s earnings. Sometimes, analysts use two quarters of actual earnings and two quarters of expected earnings to arrive at a P/E ratio. P/E of the Market Even though an individual stock may offer reasonable value, it is possible that a preponderance of high P/E stocks will create an over-valued market. To examine this possibility, BWFA looks at the market-weighted P/E of the indices. From Dec. 31, 1999 to the present, the P/E ratio of the S&P 500 has varied between 17 and 46.50. The average P/E during that time has been 23.44, and the high of 46.50 occurred on Dec. 31, 2001, during the heyday of the dot-com bubble. Today the P/E on the S&P 500 stands at 18.08. Thus, at least on the basis of this single measurement and recent history, the market does not appear to be overvalued. Another use of the P/E ratio as a broad valuation method is to take its reciprocal (E/P) and view it as a “yield.” Doing this with today’s P/E of 18.08 produces an earnings yield of 5.53%. In other words, if you invest $1 in the market, you are expecting earnings of 5.53%. Comparing this yield to the yield on the 10-year U.S. Treasury note of 4.70% is a way to view the attractiveness of equities relative to bonds. At the peak 46.50 P/E ratio, the earnings yield was 2.15%, and a Treasury note yielded 5.07%. Clearly, the broad stock market was overvalued at the time. Bonds offered better yields, and they carried almost no risk of default. Conclusion So how is it possible that broad stock market prices reached record levels, yet the market was reasonably valued? The key is earnings. Earnings have consistently grown at double-digit rates over a protracted period. Thus, although the numerator (Price) in the ratio was hitting new records, the denominator (Earnings) was actually growing more rapidly. With strong earnings by most companies, the market appears not to have been overvalued, even at its peak in July. 1

2007-10-09T00:00:00-04:00

false

161

true

<a href="http://www.bwfa.com/about/wasilewski.asp">Robert Wasilewski</a>, MA

In July, major stock indices reached record levels. For the first time ever, the Dow Jones Industrial Average closed above 14,000. The S&P 500 achieved a record level as well. Subsequently, there has been a sharp downturn in the market. Naturally, clients may wonder whether the record levels meant that stocks were overvalued, and whether this was a factor in the market drop. We believe that stocks were reasonably valued in July, based on usual measures of valuation, and the record levels of July are not the culprit in the current weakness. Stock Valuation Analysts look at many measures to determine whether the market and/or individual stocks are overvalued. This is certainly true at BWFA, where we combine numerous fundamental measures of the overall economy with stock-specific measures. For example, we look at a stock’s price-earnings ratio. Understanding this ratio reveals why the overall indices can reach new highs and yet individual stocks and the overall market can be reasonably valued. Valuing Individual Stocks One common way to value a stock is its price-earnings (P/E) ratio. The P/E ratio measures how much investors are willing to pay for $1 of earnings. Consider General Electric. General Electric earned $2.07 per share over the past 12 months and was recently priced at $37. Its P/E ratio was $37/$2.07, or approximately 18. This is roughly in line with the average P/E of all the stocks in the S&P 500. Given GE’s exceptional prospects in globalized markets, most analysts would argue that GE’s price is not out of line with its earnings prospects. Stocks whose earnings are expected to grow much faster than the overall market will have higher P/Es. For example, a growth stock like Garmin has a P/E ratio of 36, partly because analysts expect earnings to grow by 20% per year for the next five years. On an historical basis, a P/E in the mid 30s is not too high for a company with these earnings expectations. It is important to note that there are pitfalls involved in relying too heavily on the P/E ratio. Most notably, earnings can be “massaged” to make a company look more profitable than it really is. Enron, Worldcom, and others showed that there is considerable leeway in using Generally Accepted Accounting Principles (GAAP) accounting methods to produce a corporation’s bottom-line earnings-per-share figure. Another point to keep in mind is that the earnings number in the P/E ratio can be composed in various ways. Analysts frequently quote the ratio based on the past 12 months’ earnings. Sometimes, however, P/E is quoted in anticipation of next year’s earnings. Sometimes, analysts use two quarters of actual earnings and two quarters of expected earnings to arrive at a P/E ratio. P/E of the Market Even though an individual stock may offer reasonable value, it is possible that a preponderance of high P/E stocks will create an over-valued market. To examine this possibility, BWFA looks at the market-weighted P/E of the indices. From Dec. 31, 1999 to the present, the P/E ratio of the S&P 500 has varied between 17 and 46.50. The average P/E during that time has been 23.44, and the high of 46.50 occurred on Dec. 31, 2001, during the heyday of the dot-com bubble. Today the P/E on the S&P 500 stands at 18.08. Thus, at least on the basis of this single measurement and recent history, the market does not appear to be overvalued. Another use of the P/E ratio as a broad valuation method is to take its reciprocal (E/P) and view it as a “yield.” Doing this with today’s P/E of 18.08 produces an earnings yield of 5.53%. In other words, if you invest $1 in the market, you are expecting earnings of 5.53%. Comparing this yield to the yield on the 10-year U.S. Treasury note of 4.70% is a way to view the attractiveness of equities relative to bonds. At the peak 46.50 P/E ratio, the earnings yield was 2.15%, and a Treasury note yielded 5.07%. Clearly, the broad stock market was overvalued at the time. Bonds offered better yields, and they carried almost no risk of default. Conclusion So how is it possible that broad stock market prices reached record levels, yet the market was reasonably valued? The key is earnings. Earnings have consistently grown at double-digit rates over a protracted period. Thus, although the numerator (Price) in the ratio was hitting new records, the denominator (Earnings) was actually growing more rapidly. With strong earnings by most companies, the market appears not to have been overvalued, even at its peak in July.

2007-10-09T00:00:00-04:00

false

251

false

Did 14,000 on the Dow Mean Stocks Were Overvalued?

2008-09-15T11:19:16-04:00

16 An important issue that sneaks up on people as they approach retirement is how to cope with the hairs that are popping out of strange places. Another one is how to fund retirement from your savings. Living off your "nest egg" is called decumulation. It is this second issue I would like to examine here. Three widely held beliefs about decumulation are: <ul> <li>The decumulation phase can be handled on autopilot.</li> <li>Investing heavily in bonds will produce the income you need.</li> <li>Risk management is not as relevant during decumulation as it was in growing the nest egg.</li> </ul> These assumptions are incorrect, and mismanaging assets during decumulation can cause serious financial surprises. On Autopilot Many retirees built their nest egg on autopilot. They selected some funds within their 401k and then went back to work. A fixed amount came out of each paycheck and was allocated according to their instructions. Although the worry meter rose whenever markets dropped, these periods were actually beneficial because the investor could buy more mutual fund shares at lower dollar prices. As markets rose over recent decades, dollar cost averaging paid off handsomely. Because autopilot worked so well building the nest egg, it is natural to expect it to work well during decumulation. Unfortunately, when markets drop you will have to sell more shares to produce a given monthly withdrawal to meet living expenses. And then there's a smaller nest egg to generate returns in the future. Dollar cost averaging works against you during decumulation. You need a new strategy. Bond Allocations There's a rule of thumb that retirees should have a bond allocation equal to their age (a 70-year-old retiree should be 70% in bonds). For someone retiring this year with a portfolio of bonds that produces $60,000 in interest each year, this appears to be a good income. However, this type of reasoning can be disastrous because retirees today live longer and therefore face a long period of inflation which will dramatically increase their expenses. One way to appreciate the folly of focusing on a fixed income is to talk to today's retirees who are in their mid-eighties. An income of $30,000 per year was viewed as sufficient in 1985. Today it doesn't go far, especially for retirees facing escalating medical costs. The bottom line is retirees need their assets to grow. BWFA's Approach BWFA has developed an optimal strategy for the decumulation phase. This strategy recognizes the need to continue to grow the nest egg even in retirement years through diversified investment in various asset classes and a disciplined approach to managing risk. » Portfolio Structure BWFA structures retiree portfolios so that interest and dividends generate 60%–80% of monthly income needs. This income remains fairly constant even when the portfolio value fluctuates. In addition, a significant portion of the portfolio will be invested for growth so retirees can keep pace with inflation. » Reserve Fund To meet retiree income needs, BWFA establishes a reserve fund that contains at least six months of living expenses. Each month a set amount is transferred to the client's checking account. Every six months, BWFA refills the reserve fund using the accumulated income plus the strategic sale of selected securities in the portfolio. » Individual Equities To fully exploit this strategy, we utilize individual securities whenever possible. Selling shares in a mutual fund amounts to selling the average holding; you sell the good with the bad. We selectively choose what and when to sell, which lessens the debilitating impact of reverse dollar cost averaging described above. » Risk Management Last and perhaps most important is the need to manage risk and use discipline. BWFA uses investment models that specify how much should be invested in various asset classes. The discipline is in keeping each asset class within a target range. For those familiar with the dot-com bust, this is familiar ground. To get the full perspective on our approach to funding your retirement years, contact us for an initial consultation. 1

2007-07-04T00:00:00-04:00

false

156

true

<a href="http://www.bwfa.com/about/wasilewski.asp">Robert Wasilewski</a>, MA

An important issue that sneaks up on people as they approach retirement is how to cope with the hairs that are popping out of strange places. Another one is how to fund retirement from your savings. Living off your "nest egg" is called decumulation. It is this second issue I would like to examine here. Three widely held beliefs about decumulation are: <ul> <li>The decumulation phase can be handled on autopilot.</li> <li>Investing heavily in bonds will produce the income you need.</li> <li>Risk management is not as relevant during decumulation as it was in growing the nest egg.</li> </ul> These assumptions are incorrect, and mismanaging assets during decumulation can cause serious financial surprises. On Autopilot Many retirees built their nest egg on autopilot. They selected some funds within their 401k and then went back to work. A fixed amount came out of each paycheck and was allocated according to their instructions. Although the worry meter rose whenever markets dropped, these periods were actually beneficial because the investor could buy more mutual fund shares at lower dollar prices. As markets rose over recent decades, dollar cost averaging paid off handsomely. Because autopilot worked so well building the nest egg, it is natural to expect it to work well during decumulation. Unfortunately, when markets drop you will have to sell more shares to produce a given monthly withdrawal to meet living expenses. And then there's a smaller nest egg to generate returns in the future. Dollar cost averaging works against you during decumulation. You need a new strategy. Bond Allocations There's a rule of thumb that retirees should have a bond allocation equal to their age (a 70-year-old retiree should be 70% in bonds). For someone retiring this year with a portfolio of bonds that produces $60,000 in interest each year, this appears to be a good income. However, this type of reasoning can be disastrous because retirees today live longer and therefore face a long period of inflation which will dramatically increase their expenses. One way to appreciate the folly of focusing on a fixed income is to talk to today's retirees who are in their mid-eighties. An income of $30,000 per year was viewed as sufficient in 1985. Today it doesn't go far, especially for retirees facing escalating medical costs. The bottom line is retirees need their assets to grow. BWFA's Approach BWFA has developed an optimal strategy for the decumulation phase. This strategy recognizes the need to continue to grow the nest egg even in retirement years through diversified investment in various asset classes and a disciplined approach to managing risk. » Portfolio Structure BWFA structures retiree portfolios so that interest and dividends generate 60%–80% of monthly income needs. This income remains fairly constant even when the portfolio value fluctuates. In addition, a significant portion of the portfolio will be invested for growth so retirees can keep pace with inflation. » Reserve Fund To meet retiree income needs, BWFA establishes a reserve fund that contains at least six months of living expenses. Each month a set amount is transferred to the client's checking account. Every six months, BWFA refills the reserve fund using the accumulated income plus the strategic sale of selected securities in the portfolio. » Individual Equities To fully exploit this strategy, we utilize individual securities whenever possible. Selling shares in a mutual fund amounts to selling the average holding; you sell the good with the bad. We selectively choose what and when to sell, which lessens the debilitating impact of reverse dollar cost averaging described above. » Risk Management Last and perhaps most important is the need to manage risk and use discipline. BWFA uses investment models that specify how much should be invested in various asset classes. The discipline is in keeping each asset class within a target range. For those familiar with the dot-com bust, this is familiar ground. To get the full perspective on our approach to funding your retirement years, contact us for an initial consultation.

2007-07-04T00:00:00-04:00

false

246

false

Decumulation: BWFA's Approach

2008-09-15T11:19:16-04:00

12 Each quarter, we send our investment management clients two reports, the Portfolio Statement and the Portfolio Performance Summary. We have designed these reports to be easier to understand than typical brokerage statements, but they still may be confusing for those not familiar with their terms. We would like to take this opportunity to answer some of the most common questions we get about these quarterly reports. The Portfolio Statement shows you what securities you currently own. The Portfolio Performance Summary tells you what you started with at the beginning of the year, what you have earned on your investments so far, what you have paid in fees, and what your ending balance is. It also calculates your Time Weighted Return, which is the percentage change in your portfolio year to date. We use Time Weighted Return because this is the accepted standard for measuring performance among investors and gives you the most accurate measure of how we are doing as your manager. This calculation isolates the manager's performance from the client's timing of cash flows into or out of the portfolio. Frequently Asked Questions: Does a deposit to an account increase the return shown on the Portfolio Performance Summary? No. The Portfolio Performance Summary shows your deposits or withdrawals, but they are not part of the calculation of your gain or loss. Are investment returns before or after BWFA's investment fees? Investment returns are calculated after our fees have been charged to your accounts and after all trading commissions, paid to TD Ameritrade, have been paid. These expenses are the cost of managing your portfolio, so it is important to incorporate them into your calculation of monthly returns. The Portfolio Performance Summary does not show you the dollar amount of commissions paid for buying or selling securities, but we can provide this information, if requested. Does the "Yield" column on the right hand side of the Portfolio Statement show the rate of return for each security in your account? No. The Portfolio Statement is only a picture of your accounts as of a specified date. It does not show you how the securities in your accounts have done over time. The yield for each security is merely the dividends or interest that a security will pay in a year, divided by the current value of the security. We include this column on the Portfolio Statement to show you how much income your portfolio will earn in the next year, if nothing changes. Is the dollar amount of Realized Gains (Loss) shown on the Portfolio Performance Summary the same as the realized gains I must report on my tax return? No. This report only shows you the realized gains or loss since the beginning of the reporting period. On your tax return, you report the gain or loss since you purchased the security, which is often before the reporting period began. If you want to know how much your taxable realized gains are, please contact us. Why does the percentage return shown on the Portfolio Performance Summary sometimes not equal the dollar amount of gain or loss, divided by the beginning value of the account? This situation occurs when you make large contributions to or withdrawals from your account during a period. An example will help illustrate this effect. Assume that your account had a value of $100 at the beginning of the month and earns 10% during the month, so its month-end value is $110. Then you contribute $1,000 to the account at the start of the second month. For this month, you begin with $1,110, and you earn 1%. Your account balance at the end of the second month is $1,121. The percentage return shown on our Portfolio Performance Report for the two months would be shown as 11.1%, because your return in the first month was 10%, and in the second it was 1%. But the dollar gain is only $21 on the $1,100 you contributed. If you divide $21 by $1,100, you get a return of just 1.9%. From a practical perspective you are interested in your dollar gain of $21, but for judging your investment manager, 11.1% is the meaningful number. It is called "time weighted" return and measures how your investment manager has performed, regardless of how much money he or she is managing for you. Helping you understand how your investments are doing is an important part of our job. Please contact us at any time if you have questions. 1

2007-04-17T00:00:00-04:00

false

150

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

Each quarter, we send our investment management clients two reports, the Portfolio Statement and the Portfolio Performance Summary. We have designed these reports to be easier to understand than typical brokerage statements, but they still may be confusing for those not familiar with their terms. We would like to take this opportunity to answer some of the most common questions we get about these quarterly reports. The Portfolio Statement shows you what securities you currently own. The Portfolio Performance Summary tells you what you started with at the beginning of the year, what you have earned on your investments so far, what you have paid in fees, and what your ending balance is. It also calculates your Time Weighted Return, which is the percentage change in your portfolio year to date. We use Time Weighted Return because this is the accepted standard for measuring performance among investors and gives you the most accurate measure of how we are doing as your manager. This calculation isolates the manager's performance from the client's timing of cash flows into or out of the portfolio. Frequently Asked Questions: Does a deposit to an account increase the return shown on the Portfolio Performance Summary? No. The Portfolio Performance Summary shows your deposits or withdrawals, but they are not part of the calculation of your gain or loss. Are investment returns before or after BWFA's investment fees? Investment returns are calculated after our fees have been charged to your accounts and after all trading commissions, paid to TD Ameritrade, have been paid. These expenses are the cost of managing your portfolio, so it is important to incorporate them into your calculation of monthly returns. The Portfolio Performance Summary does not show you the dollar amount of commissions paid for buying or selling securities, but we can provide this information, if requested. Does the "Yield" column on the right hand side of the Portfolio Statement show the rate of return for each security in your account? No. The Portfolio Statement is only a picture of your accounts as of a specified date. It does not show you how the securities in your accounts have done over time. The yield for each security is merely the dividends or interest that a security will pay in a year, divided by the current value of the security. We include this column on the Portfolio Statement to show you how much income your portfolio will earn in the next year, if nothing changes. Is the dollar amount of Realized Gains (Loss) shown on the Portfolio Performance Summary the same as the realized gains I must report on my tax return? No. This report only shows you the realized gains or loss since the beginning of the reporting period. On your tax return, you report the gain or loss since you purchased the security, which is often before the reporting period began. If you want to know how much your taxable realized gains are, please contact us. Why does the percentage return shown on the Portfolio Performance Summary sometimes not equal the dollar amount of gain or loss, divided by the beginning value of the account? This situation occurs when you make large contributions to or withdrawals from your account during a period. An example will help illustrate this effect. Assume that your account had a value of $100 at the beginning of the month and earns 10% during the month, so its month-end value is $110. Then you contribute $1,000 to the account at the start of the second month. For this month, you begin with $1,110, and you earn 1%. Your account balance at the end of the second month is $1,121. The percentage return shown on our Portfolio Performance Report for the two months would be shown as 11.1%, because your return in the first month was 10%, and in the second it was 1%. But the dollar gain is only $21 on the $1,100 you contributed. If you divide $21 by $1,100, you get a return of just 1.9%. From a practical perspective you are interested in your dollar gain of $21, but for judging your investment manager, 11.1% is the meaningful number. It is called "time weighted" return and measures how your investment manager has performed, regardless of how much money he or she is managing for you. Helping you understand how your investments are doing is an important part of our job. Please contact us at any time if you have questions.

2007-04-17T00:00:00-04:00

false

240

false

Measuring Your Investment Return

2008-09-15T11:19:16-04:00

7 One of the questions we get frequently is "How do you select investments?" In this article, I comment on 12 criteria we use to evaluate potential investments for our clients. <ol> <li>Only Publicly Traded Securities — We want the relative security provided by the regulatory framework that publicly traded securities have to abide by.</li> <li>Operating in Growth Markets — It's simply easier for a company to be successful if it operates in a market that is growing, rather than stable or declining. It means more potential customers, more opportunity, more earnings, and a higher share price.</li> <li>Lots of Products, Suppliers and Customers — Anytime a business relies on "just a few" (products, suppliers or customers), it's inherently more risky. We want to see several products, several suppliers and many customers. There is no room for a "one trick pony."</li> <li>Profits — The company has to be making a profit. New upstarts with good stories are plentiful, but we are not engaged in speculating.</li> <li>Reasonable Price — The stock price has to be below 40 times earnings per share. Investors lose when they pay too much, even for a good company. People were buying Cisco Systems for over 200 times earnings in 2000. We began buying Cisco in November '02, at 30 times earnings.</li> <li>Profit Margins — The profit margin is what's left over after all expenses have been paid. We want the profit margin to be sufficient to fund all or most of a company's growth.</li> <li>Good Management — Management must have demonstrated a record of success. They must clearly articulate their business strategy, against which we can judge progress. We want to see consistency of direction and delivery on promises.</li> <li>Product Appeal — The company's products must have notable appeal over competitors' products. Some companies consistently get it more right than others.</li> <li>Share Buybacks — Share buybacks raise earnings per share and, all things being equal, share price. Companies issuing stock options to employees risk lowering earnings per share if they fail to repurchase shares in an amount equal to the options they give away. We have to look closely at share buybacks.</li> <li>Good Corporate Governance — In recent years, a couple of companies have been setting standards for good governance and rating companies against those standards. We follow the ratings by Institutional Shareholder Services and The Corporate Library. We expect management and members of the board to act in the shareholders' best interests, without exception.</li> <li>Pension Liability — Some companies must contribute a large portion of their earnings to their defined benefit pension plans. These costs can become highly burdensome and detract from a company's growth. Large "unfunded" pension liabilities are a problem.</li> <li>Historical Valuation Ratios — We look at the history of a stock. We compare its historical price to its historical earnings, sales, book value, and cash flow. This gives us a relevant price range for buying or selling the investment.</li> </ol> It's difficult and expensive for individual investors to have the information they need to invest wisely and with confidence. We spend well over 2,000 man-hours and $50,000 per year in research costs. Markets are inherently risky, but you can mitigate much of that risk by doing your homework or using a trusted advisor. 1

2007-01-29T00:00:00-05:00

false

143

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

One of the questions we get frequently is "How do you select investments?" In this article, I comment on 12 criteria we use to evaluate potential investments for our clients. <ol> <li>Only Publicly Traded Securities — We want the relative security provided by the regulatory framework that publicly traded securities have to abide by.</li> <li>Operating in Growth Markets — It's simply easier for a company to be successful if it operates in a market that is growing, rather than stable or declining. It means more potential customers, more opportunity, more earnings, and a higher share price.</li> <li>Lots of Products, Suppliers and Customers — Anytime a business relies on "just a few" (products, suppliers or customers), it's inherently more risky. We want to see several products, several suppliers and many customers. There is no room for a "one trick pony."</li> <li>Profits — The company has to be making a profit. New upstarts with good stories are plentiful, but we are not engaged in speculating.</li> <li>Reasonable Price — The stock price has to be below 40 times earnings per share. Investors lose when they pay too much, even for a good company. People were buying Cisco Systems for over 200 times earnings in 2000. We began buying Cisco in November '02, at 30 times earnings.</li> <li>Profit Margins — The profit margin is what's left over after all expenses have been paid. We want the profit margin to be sufficient to fund all or most of a company's growth.</li> <li>Good Management — Management must have demonstrated a record of success. They must clearly articulate their business strategy, against which we can judge progress. We want to see consistency of direction and delivery on promises.</li> <li>Product Appeal — The company's products must have notable appeal over competitors' products. Some companies consistently get it more right than others.</li> <li>Share Buybacks — Share buybacks raise earnings per share and, all things being equal, share price. Companies issuing stock options to employees risk lowering earnings per share if they fail to repurchase shares in an amount equal to the options they give away. We have to look closely at share buybacks.</li> <li>Good Corporate Governance — In recent years, a couple of companies have been setting standards for good governance and rating companies against those standards. We follow the ratings by Institutional Shareholder Services and The Corporate Library. We expect management and members of the board to act in the shareholders' best interests, without exception.</li> <li>Pension Liability — Some companies must contribute a large portion of their earnings to their defined benefit pension plans. These costs can become highly burdensome and detract from a company's growth. Large "unfunded" pension liabilities are a problem.</li> <li>Historical Valuation Ratios — We look at the history of a stock. We compare its historical price to its historical earnings, sales, book value, and cash flow. This gives us a relevant price range for buying or selling the investment.</li> </ol> It's difficult and expensive for individual investors to have the information they need to invest wisely and with confidence. We spend well over 2,000 man-hours and $50,000 per year in research costs. Markets are inherently risky, but you can mitigate much of that risk by doing your homework or using a trusted advisor.

2007-01-29T00:00:00-05:00

false

232

false

Selecting Investments

2008-09-15T11:19:16-04:00

10 Mutual funds have been around since the 1920s. Since then, they have grown exceedingly popular with the masses. However, high net worth individuals and sophisticated investors continue to choose individual stocks and bonds over mutual funds. Why do they make this choice? People who know a lot about investing know that individual stocks and bonds provide many advantages over mutual funds. Individual securities are often cheaper, more tax efficient, require less idle cash than mutual funds, and can be tailored to meet individual needs for income and growth. Cost The average annual expense for a mutual fund is very high, about 1.4%. This fee does not include sales charges or the costs incurred to trade securities within the fund, which may be quite high given how often most funds buy and sell securities. John Bogal, founder of Vanguard Funds, estimates that the total annual cost is closer to 3%. If you work with an advisor who invests your money in mutual funds, you have to pay the advisor's fee on top of the fund fee, and this can get very expensive. To keep costs low, large investors most often prefer individual stock and bond portfolios. But smaller investors can take advantage of these cost savings as well. (See Individually Managed Portfolios Not Just for the Super Wealthy in our October 2003 newsletter). Tax Efficiency Funds are required to distribute 90% of their realized gains annually (gains from securities sold within the fund during the year). Their unrealized gain (the gain on securities still held) will be distributed to whomever holds the fund when the securities are sold. Every mutual fund has some amount of unrealized gain. If you buy a fund holding IBM, which the fund bought at $40 per share years ago, and IBM is now trading at $85, you are acquiring a portion of the $45 taxable gain per share of IBM the fund owns. This built-in tax liability can increase your taxes. Individual stocks allow for much greater control over your taxes. You will only have to pay taxes on the gains you earn, and you can often sell other securities in the portfolio at a loss to offset some of these gains. You also control the timing of your gains and losses. This enables you to spread a particularly large gain over multiple tax years and delay taxes for a long period of time. Idle Cash Mutual funds must set aside some cash to honor redemptions. Since fund managers cannot anticipate the quantity of redemptions that may be requested, the amount of cash left idle is often quite high, 5-10% or more. Keep in mind you pay the fund fee on all the money you have in the fund, even though not all of it is being invested. With a portfolio of individual securities, the only withdrawals you have to worry about are your own. Since those redemptions are fairly easy to anticipate, you do not have to leave unnecessary cash sitting idle. With more of your money invested, you can achieve greater returns over time. Individually Tailored With a portfolio of mutual funds you often end up with overlap (the same stocks being held by more than one mutual fund that you own) and style drift. Many mutual funds may state their investment style, such as small cap value or large cap growth, but will allow the manager latitude to invest in other asset classes as well. This allows funds to drift away from their stated objective. The result is that your overall portfolio of mutual funds may not have the asset allocation you thought you purchased. This was very prevalent in the late '90s when many fund managers chased technology as they came under pressure to increase fund returns. When technology crashed, investors found out their funds had become too heavily weighted in technology and they got burned. When you invest with individual stocks, you know exactly what you own. Therefore, calculating the percentage of your portfolio that is in small caps or foreign stocks, technology or banking, is easy. This helps you maintain the proper diversification and asset allocation to meet your growth or income needs. From the financial advisor's perspective, mutual funds are far easier to use in managing clients' money. Perhaps that is why so many advisors use them. Using individual stocks in a portfolio requires much more work. BWFA devotes many hours and dollars on independent research to maintain our buy lists. We are constantly making sure the portfolio is suitable to the needs of the client. Why do we do business this way? Just like the large investors of old, we know that portfolios of individual securities offer the best solution for our clients. 1

2007-01-29T00:00:00-05:00

false

146

true

<a href="http://www.bwfa.com/about/ray.asp">Bob Ray</a>, MBA

Mutual funds have been around since the 1920s. Since then, they have grown exceedingly popular with the masses. However, high net worth individuals and sophisticated investors continue to choose individual stocks and bonds over mutual funds. Why do they make this choice? People who know a lot about investing know that individual stocks and bonds provide many advantages over mutual funds. Individual securities are often cheaper, more tax efficient, require less idle cash than mutual funds, and can be tailored to meet individual needs for income and growth. Cost The average annual expense for a mutual fund is very high, about 1.4%. This fee does not include sales charges or the costs incurred to trade securities within the fund, which may be quite high given how often most funds buy and sell securities. John Bogal, founder of Vanguard Funds, estimates that the total annual cost is closer to 3%. If you work with an advisor who invests your money in mutual funds, you have to pay the advisor's fee on top of the fund fee, and this can get very expensive. To keep costs low, large investors most often prefer individual stock and bond portfolios. But smaller investors can take advantage of these cost savings as well. (See Individually Managed Portfolios Not Just for the Super Wealthy in our October 2003 newsletter). Tax Efficiency Funds are required to distribute 90% of their realized gains annually (gains from securities sold within the fund during the year). Their unrealized gain (the gain on securities still held) will be distributed to whomever holds the fund when the securities are sold. Every mutual fund has some amount of unrealized gain. If you buy a fund holding IBM, which the fund bought at $40 per share years ago, and IBM is now trading at $85, you are acquiring a portion of the $45 taxable gain per share of IBM the fund owns. This built-in tax liability can increase your taxes. Individual stocks allow for much greater control over your taxes. You will only have to pay taxes on the gains you earn, and you can often sell other securities in the portfolio at a loss to offset some of these gains. You also control the timing of your gains and losses. This enables you to spread a particularly large gain over multiple tax years and delay taxes for a long period of time. Idle Cash Mutual funds must set aside some cash to honor redemptions. Since fund managers cannot anticipate the quantity of redemptions that may be requested, the amount of cash left idle is often quite high, 5-10% or more. Keep in mind you pay the fund fee on all the money you have in the fund, even though not all of it is being invested. With a portfolio of individual securities, the only withdrawals you have to worry about are your own. Since those redemptions are fairly easy to anticipate, you do not have to leave unnecessary cash sitting idle. With more of your money invested, you can achieve greater returns over time. Individually Tailored With a portfolio of mutual funds you often end up with overlap (the same stocks being held by more than one mutual fund that you own) and style drift. Many mutual funds may state their investment style, such as small cap value or large cap growth, but will allow the manager latitude to invest in other asset classes as well. This allows funds to drift away from their stated objective. The result is that your overall portfolio of mutual funds may not have the asset allocation you thought you purchased. This was very prevalent in the late '90s when many fund managers chased technology as they came under pressure to increase fund returns. When technology crashed, investors found out their funds had become too heavily weighted in technology and they got burned. When you invest with individual stocks, you know exactly what you own. Therefore, calculating the percentage of your portfolio that is in small caps or foreign stocks, technology or banking, is easy. This helps you maintain the proper diversification and asset allocation to meet your growth or income needs. From the financial advisor's perspective, mutual funds are far easier to use in managing clients' money. Perhaps that is why so many advisors use them. Using individual stocks in a portfolio requires much more work. BWFA devotes many hours and dollars on independent research to maintain our buy lists. We are constantly making sure the portfolio is suitable to the needs of the client. Why do we do business this way? Just like the large investors of old, we know that portfolios of individual securities offer the best solution for our clients.

2007-01-29T00:00:00-05:00

false

236

false

Why Large Investors Choose Individual Stocks

2008-09-15T11:19:16-04:00

12 Many people regard the S&P 500 Index as a good measure of how their portfolio is doing. However, an investor with a well balanced and diversified investment portfolio should have outperformed this index over the last five years. That is because the S&P 500 represents just one asset type, "large cap" U.S. stocks, and these stocks have done poorly over the last five years. The accompanying graph of "5-Yr Annualized Total Returns" shows that U.S. large cap stocks have underperformed all other asset classes during the five years ending 1/12/06. A wise investor who built his or her portfolio with many types of investments would have easily beaten the S&P 500 in recent years.<img src="/images/BWFA-investment-chart.jpg" alt="Investment Chart" width="300" border="0" align="right"> So why does the S&P 500 get so much attention? It clearly is the most widely-watched index of the largest U.S. stocks, and is considered to be a bellwether for the U.S. economy. The stocks represented in this index account for over 75% of the value of all stocks in the United States and are selected to include all major businesses. Thus it really is a good proxy for both the general direction of the U.S. stock market and our nation's economy. Due to these characteristics some investors assume the S&P 500 index is a good benchmark for stocks in general. Some investors have gone so far as to dedicate a large portion of their portfolios to S&P 500 index funds (mutual funds that mimic the S&P 500 Index) as a cheap way to buy what they thought was a diversified holding of stocks. Unfortunately, the results over the last five years have left these people sorely disappointed. There are additional factors as to why the S&P 500 may be an even worse yardstick than we think. First, only 400 of the 500 largest companies are actually in the S&P 500 index. The stocks in it are selected by a committee to represent all major business sectors in our country's economy and that selection process can affect the outcome of its performance. Second, the S&P is designed so that the largest companies count the most. The ten largest companies in the index, which include names such as Microsoft, Exxon, and General Electric, account for 19% of the total index value. This means that an index fund that seeks to copy the performance of the S&P does not even give you a well-diversified position in large cap stocks. The wise investor knows that his or her portfolio needs to have additional types of securities. Low interest rates and the real estate boom made Real Estate Investment Trusts (REITs) exceptional performers. Foreign stocks, including both developed markets and emerging markets, went up as the world economy grew. Stocks of small and medium sized U.S. companies did very well as investors recognized the great growth potential of these aggressive companies. Even bonds did well over the past five years until rising interest rates put a damper on them recently. The recent poor performance of large U.S. stocks is not a reason to exclude this asset class from your portfolio. Large cap stocks have done well in the past. They were the best performers for the years 1995 through 1998. In recent years their profits have been rising handsomely, so they may be good bargains at this time. But trying to bet which asset type will perform best next year (market timing) is fraught with danger, because the market is unpredictable. Anytime you put a lot of your investments in one asset type, you increase the chance that you will underachieve the overall market. Only by holding all types of investments can you be certain to hold the best performers year after year and earn the most consistent rate of return. Our recommendation is to keep the S&P 500 in perspective as you listen to the daily update in the news. It is a good indicator for our nation's economy and the general direction of stocks. But you should not use this index as a benchmark for how your investments are doing or how you should be invested. 1

2006-10-17T00:00:00-04:00

false

141

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

Many people regard the S&P 500 Index as a good measure of how their portfolio is doing. However, an investor with a well balanced and diversified investment portfolio should have outperformed this index over the last five years. That is because the S&P 500 represents just one asset type, "large cap" U.S. stocks, and these stocks have done poorly over the last five years. The accompanying graph of "5-Yr Annualized Total Returns" shows that U.S. large cap stocks have underperformed all other asset classes during the five years ending 1/12/06. A wise investor who built his or her portfolio with many types of investments would have easily beaten the S&P 500 in recent years.<img src="/images/BWFA-investment-chart.jpg" alt="Investment Chart" width="300" border="0" align="right"> So why does the S&P 500 get so much attention? It clearly is the most widely-watched index of the largest U.S. stocks, and is considered to be a bellwether for the U.S. economy. The stocks represented in this index account for over 75% of the value of all stocks in the United States and are selected to include all major businesses. Thus it really is a good proxy for both the general direction of the U.S. stock market and our nation's economy. Due to these characteristics some investors assume the S&P 500 index is a good benchmark for stocks in general. Some investors have gone so far as to dedicate a large portion of their portfolios to S&P 500 index funds (mutual funds that mimic the S&P 500 Index) as a cheap way to buy what they thought was a diversified holding of stocks. Unfortunately, the results over the last five years have left these people sorely disappointed. There are additional factors as to why the S&P 500 may be an even worse yardstick than we think. First, only 400 of the 500 largest companies are actually in the S&P 500 index. The stocks in it are selected by a committee to represent all major business sectors in our country's economy and that selection process can affect the outcome of its performance. Second, the S&P is designed so that the largest companies count the most. The ten largest companies in the index, which include names such as Microsoft, Exxon, and General Electric, account for 19% of the total index value. This means that an index fund that seeks to copy the performance of the S&P does not even give you a well-diversified position in large cap stocks. The wise investor knows that his or her portfolio needs to have additional types of securities. Low interest rates and the real estate boom made Real Estate Investment Trusts (REITs) exceptional performers. Foreign stocks, including both developed markets and emerging markets, went up as the world economy grew. Stocks of small and medium sized U.S. companies did very well as investors recognized the great growth potential of these aggressive companies. Even bonds did well over the past five years until rising interest rates put a damper on them recently. The recent poor performance of large U.S. stocks is not a reason to exclude this asset class from your portfolio. Large cap stocks have done well in the past. They were the best performers for the years 1995 through 1998. In recent years their profits have been rising handsomely, so they may be good bargains at this time. But trying to bet which asset type will perform best next year (market timing) is fraught with danger, because the market is unpredictable. Anytime you put a lot of your investments in one asset type, you increase the chance that you will underachieve the overall market. Only by holding all types of investments can you be certain to hold the best performers year after year and earn the most consistent rate of return. Our recommendation is to keep the S&P 500 in perspective as you listen to the daily update in the news. It is a good indicator for our nation's economy and the general direction of stocks. But you should not use this index as a benchmark for how your investments are doing or how you should be invested.

2006-10-17T00:00:00-04:00

false

230

false

Why Diversified Portfolios are Outperforming the S&P 500 Index

2008-09-15T11:19:16-04:00

14 When preparing estate plans, many people believe they must name an institution, such as a bank, as trustee of a trust. Sometimes, naming a professional trustee makes sense, but in many cases it is not necessary. Before you name a trustee make sure you consider the differences. Let's step back and look at the duties a trustee performs. The trustee performs two primary duties: <ol> <li>Legal responsibility to carry out the provisions of the Trust document.</li> <li>Manage the assets of the Trust.</li> </ol> A bank trustee will handle both of these duties. This type of trustee is appropriate if: <ul> <li>You have a trust that is intended to last multiple generations — In this case, an institutional trustee, who will be around for the entire term of the trust, can provide continuity of management.</li> <li>You do not have someone you are confident can oversee the trust — Banks have tremendous experience and competence in managing trusts.</li> <li>There are significant family issues or disputes that require an independent and impartial trustee — You may not want to put an individual in the middle of potential disputes.</li> <li>There is a significant amount of money to manage (greater than $10 million) — Banks will typically manage trusts in an ultra-conservative manner and charge separate annual fees for trustee services, tax services and investment services related to the trust. These factors can erode the value of smaller trusts.</li> </ul> If these situations do not apply, you should consider a trusted friend or family member as Trustee. When you name an individual as trustee, the trustee duties can be divided. The individual carries out the provisions of the trust and an asset manager is hired to keep the assets in the trust properly invested, collect dividends, make income distributions to beneficiaries, etc. This arrangement is appropriate if: <ul> <li>You prefer a trustee who knows your family personally. You may not want your spouse or family member to have to deal with a bank trust department when they need to get money from the trust.</li> <li>You would like the trustee to have some discretion and flexibility in making decisions about the trust property. Banks do not like to have discretion because it opens them up to lawsuits.</li> <li>You have less than $10 million and are concerned about fees. Typically a friend or family member will charge smaller (or no) fees for being the trustee. Therefore, the trust would only incur the costs of the investment management fee.</li> </ul> As with any investment decision, you need to weigh the issues carefully and consider the unique aspects of your personal situation. When it comes to deciding who should manage your trust, in some cases, a bank will be the best trustee; in others a family member makes the most sense. 1

2006-07-22T00:00:00-04:00

false

135

true

<a href="http://www.bwfa.com/about/stinson.asp">Mark Stinson</a>, MBA, CPA

When preparing estate plans, many people believe they must name an institution, such as a bank, as trustee of a trust. Sometimes, naming a professional trustee makes sense, but in many cases it is not necessary. Before you name a trustee make sure you consider the differences. Let's step back and look at the duties a trustee performs. The trustee performs two primary duties: <ol> <li>Legal responsibility to carry out the provisions of the Trust document.</li> <li>Manage the assets of the Trust.</li> </ol> A bank trustee will handle both of these duties. This type of trustee is appropriate if: <ul> <li>You have a trust that is intended to last multiple generations — In this case, an institutional trustee, who will be around for the entire term of the trust, can provide continuity of management.</li> <li>You do not have someone you are confident can oversee the trust — Banks have tremendous experience and competence in managing trusts.</li> <li>There are significant family issues or disputes that require an independent and impartial trustee — You may not want to put an individual in the middle of potential disputes.</li> <li>There is a significant amount of money to manage (greater than $10 million) — Banks will typically manage trusts in an ultra-conservative manner and charge separate annual fees for trustee services, tax services and investment services related to the trust. These factors can erode the value of smaller trusts.</li> </ul> If these situations do not apply, you should consider a trusted friend or family member as Trustee. When you name an individual as trustee, the trustee duties can be divided. The individual carries out the provisions of the trust and an asset manager is hired to keep the assets in the trust properly invested, collect dividends, make income distributions to beneficiaries, etc. This arrangement is appropriate if: <ul> <li>You prefer a trustee who knows your family personally. You may not want your spouse or family member to have to deal with a bank trust department when they need to get money from the trust.</li> <li>You would like the trustee to have some discretion and flexibility in making decisions about the trust property. Banks do not like to have discretion because it opens them up to lawsuits.</li> <li>You have less than $10 million and are concerned about fees. Typically a friend or family member will charge smaller (or no) fees for being the trustee. Therefore, the trust would only incur the costs of the investment management fee.</li> </ul> As with any investment decision, you need to weigh the issues carefully and consider the unique aspects of your personal situation. When it comes to deciding who should manage your trust, in some cases, a bank will be the best trustee; in others a family member makes the most sense.

2006-07-22T00:00:00-04:00

false

224

false

Investing in Trust

2008-09-15T11:19:16-04:00

12 Individual stocks have advantages over other types of investments when it comes to estate planning. They offer a cost effective way to reduce income taxes, can easily be sold if necessary, and offer an effective way to pass on your values to your heirs. Income Taxes Stocks are able to reduce income taxes because their cost basis gets "stepped up" to their value on the date of death. This eliminates capital gains taxes for your heirs. Yes, other types of investments will also receive a stepped up cost basis, but few have the potential to build up large untaxed earnings that will benefit like stocks can. Let's compare stocks with several investment alternatives: <blockquote> Stocks vs. Bonds Bonds earn most of their return from interest that is taxed each year. Therefore, they do not build up large untaxed gains that would benefit from the step up of cost basis. Stocks vs. Annuities Annuities do not get the "Step up" of cost basis that stocks receive. Instead, all of the tax deferred income that has built up in the annuity becomes taxable income to your heirs. Since many people have annuities that have built up earnings for years, that tax can be quite high. Stocks vs. Mutual Funds Since mutual funds distribute their gains to you almost every year, you do not get the big buildup of gains that will benefit from the step up. Instead, more of the gains get taxed each year. Conversely, individual stockholders who sell their losers each year to reduce annual income taxes, and hold the winners for years, can avoid substantial capital gains taxes. </blockquote> Liquidity Real estate also gets the "step up" in cost basis when passing to your heirs and also tends to build up large gains over many years. However, real estate is more difficult and more costly to sell. It may also be difficult to divide up among your heirs. If an estate is short of cash needed to pay expenses and estate taxes, or the heirs want to cash in their separate shares, the estate may be forced to sell a large property at an inopportune time. Comparatively, stocks can be easily and selectively sold to raise the amount of cash needed. Stocks can also be easily divided among multiple heirs without being sold. Cost Life insurance, which is sometimes used as an investment vehicle, also offers a way to avoid income taxes on earnings since death benefits are not subject to income taxes. However, the mortality expenses inside life insurance policies make them an expensive way to invest. Some people mistakenly believe that life insurance benefits will also avoid estate taxes. It is important to note that life insurance benefits, just like stocks, are included in your estate and may be subject to estate taxes. Legacy Planning Stocks can also be an effective tool for legacy planning. If you consider social values a significant factor when choosing investments, stocks can provide a clear message to your family about the issues you value most. Although there are socially responsible mutual funds, such funds can have vague guidelines that do not match the investor's real goals. For example, one gentleman who had a strong interest in labor issues purchased shares in one of the largest socially responsible mutual funds. He was very disappointed to find the fund owned Nike which manufactures its shoes in third world countries paying minimal wages. By selecting specific stocks that meet your standards, you can achieve your goals and make your social values very clear, thereby leaving a legacy for your heirs. 1

2006-04-12T00:00:00-04:00

false

129

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

Individual stocks have advantages over other types of investments when it comes to estate planning. They offer a cost effective way to reduce income taxes, can easily be sold if necessary, and offer an effective way to pass on your values to your heirs. Income Taxes Stocks are able to reduce income taxes because their cost basis gets "stepped up" to their value on the date of death. This eliminates capital gains taxes for your heirs. Yes, other types of investments will also receive a stepped up cost basis, but few have the potential to build up large untaxed earnings that will benefit like stocks can. Let's compare stocks with several investment alternatives: <blockquote> Stocks vs. Bonds Bonds earn most of their return from interest that is taxed each year. Therefore, they do not build up large untaxed gains that would benefit from the step up of cost basis. Stocks vs. Annuities Annuities do not get the "Step up" of cost basis that stocks receive. Instead, all of the tax deferred income that has built up in the annuity becomes taxable income to your heirs. Since many people have annuities that have built up earnings for years, that tax can be quite high. Stocks vs. Mutual Funds Since mutual funds distribute their gains to you almost every year, you do not get the big buildup of gains that will benefit from the step up. Instead, more of the gains get taxed each year. Conversely, individual stockholders who sell their losers each year to reduce annual income taxes, and hold the winners for years, can avoid substantial capital gains taxes. </blockquote> Liquidity Real estate also gets the "step up" in cost basis when passing to your heirs and also tends to build up large gains over many years. However, real estate is more difficult and more costly to sell. It may also be difficult to divide up among your heirs. If an estate is short of cash needed to pay expenses and estate taxes, or the heirs want to cash in their separate shares, the estate may be forced to sell a large property at an inopportune time. Comparatively, stocks can be easily and selectively sold to raise the amount of cash needed. Stocks can also be easily divided among multiple heirs without being sold. Cost Life insurance, which is sometimes used as an investment vehicle, also offers a way to avoid income taxes on earnings since death benefits are not subject to income taxes. However, the mortality expenses inside life insurance policies make them an expensive way to invest. Some people mistakenly believe that life insurance benefits will also avoid estate taxes. It is important to note that life insurance benefits, just like stocks, are included in your estate and may be subject to estate taxes. Legacy Planning Stocks can also be an effective tool for legacy planning. If you consider social values a significant factor when choosing investments, stocks can provide a clear message to your family about the issues you value most. Although there are socially responsible mutual funds, such funds can have vague guidelines that do not match the investor's real goals. For example, one gentleman who had a strong interest in labor issues purchased shares in one of the largest socially responsible mutual funds. He was very disappointed to find the fund owned Nike which manufactures its shoes in third world countries paying minimal wages. By selecting specific stocks that meet your standards, you can achieve your goals and make your social values very clear, thereby leaving a legacy for your heirs.

2006-04-12T00:00:00-04:00

false

218

false

The Advantages of Owning Stocks in Estate Planning

2008-09-15T11:19:16-04:00

3 Sometimes we forget just how poorly some large, well established companies can be managed. This list reminds us that a "buy and hold" strategy is unwise. There is no substitute for careful selection and continual reevaluation of your investments. The Fifty Worst-Performing Non-Technology S&P 500 Stocks, 1995-2004 <table width="100%" cellpadding="3" cellspacing="0" border="0"> <tr><td> </td><td> </td><td>Company</td><td> </td><td>Industry</td><td> </td><td align="center">% Decline</td><td> </td><td align="center">Time Period</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>1</td><td> </td><td>POLAROID CORP</td><td> </td><td>Photographic Products</td><td> </td><td>-99.980</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>2</td><td> </td><td>WORLDCOM INC-WORLDCOM GROUP</td><td> </td><td>Integrated Telecommunication Services</td><td> </td><td>-99.972</td><td> </td><td>1998-2003</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>3</td><td> </td><td>BETHLEHEM STEEL CORP</td><td> </td><td>Metals & Mining</td><td> </td><td>-99.962</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>4</td><td> </td><td>FRUIT OF THE LOOM LTD -CL A</td><td> </td><td>Apparel, Accessories & Luxury Goods</td><td> </td><td>-99.918</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>5</td><td> </td><td>CONSECO INC</td><td> </td><td>Life & Health Insurance</td><td> </td><td>-99.914</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>6</td><td> </td><td>ENRON CORP</td><td> </td><td>Gas Utilities</td><td> </td><td>-99.902</td><td> </td><td>1998-2003</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>7</td><td> </td><td>LAIDLAW INTERNATIONAL INC</td><td> </td><td>Diversified Commercial Services</td><td> </td><td>-99.853</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>8</td><td> </td><td>JOY GLOBAL INC</td><td> </td><td>Industrial Machinery</td><td> </td><td>-99.820</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>9</td><td> </td><td>US AIRWAYS GROUP INC</td><td> </td><td>Airlines</td><td> </td><td>-99.608</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>10</td><td> </td><td>ARMSTRONG HOLDINGS INC</td><td> </td><td>Building Products</td><td> </td><td>-99.505</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>11</td><td> </td><td>KMART HOLDING CORP</td><td> </td><td>Multi-line Retail</td><td> </td><td>-99.189</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>12</td><td> </td><td>TENNECO AUTOMOTIVE INC</td><td> </td><td>Auto Parts & Equipment</td><td> </td><td>-99.096</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>13</td><td> </td><td>OWENS CORNING</td><td> </td><td>Building Products</td><td> </td><td>-98.815</td><td> </td><td>1998-2003</td><td> </td></tr> <tr><td>14</td><td> </td><td>GRACE (WR)& CO</td><td> </td><td>Specialty Chemicals</td><td> </td><td>-97.563</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>15</td><td> </td><td>ECHO BAY MINES LTD</td><td> </td><td>Gold</td><td> </td><td>-96.341</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>16</td><td> </td><td>SHONEY’S INC</td><td> </td><td>Restaurants</td><td> </td><td>-96.143</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>17</td><td> </td><td>FOSTER WHEELER LTD</td><td> </td><td>Construction & Engineering</td><td> </td><td>-95.714</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>18</td><td> </td><td>CROWN HOLDINGS INC</td><td> </td><td>Metal & Glass Containers</td><td> </td><td>-95.329</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>19</td><td> </td><td>IKON OFFICE SOLUTIONS</td><td> </td><td>Office Services & Supplies</td><td> </td><td>-94.521</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>20</td><td> </td><td>QWEST COMMUNICATION INTL INC</td><td> </td><td>Diversified Telecommunication Services</td><td> </td><td>-93.833</td><td> </td><td>1999-2004</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>21</td><td> </td><td>AT&T CORP</td><td> </td><td>Diversified Telecommunication Services</td><td> </td><td>-92.498</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>22</td><td> </td><td>SERVICE CORP INTERNATIONAL</td><td> </td><td>Health Care Facilities</td><td> </td><td>-92.045</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>23</td><td> </td><td>RITE AID CORP</td><td> </td><td>Drug Retail</td><td> </td><td>-91.660</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>24</td><td> </td><td>WILLIAMS COS INC</td><td> </td><td>Gas Utilities</td><td> </td><td>-90.526</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>25</td><td> </td><td>AMRCORP/DE</td><td> </td><td>Airlines</td><td> </td><td>-89.728</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>26</td><td> </td><td>GOODYEAR TIRE & RUBBER CO</td><td> </td><td>Tires & Rubber</td><td> </td><td>-89.297</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>27</td><td> </td><td>KANSAS CITY SOUTHERN</td><td> </td><td>Road & Rail</td><td> </td><td>-88.121</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>28</td><td> </td><td>MCDERMOTT INTL INC</td><td> </td><td>Construction & Engineering</td><td> </td><td>-88.041</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>29</td><td> </td><td>ALLEGHENY TECHNOLOGIES INC</td><td> </td><td>Steel</td><td> </td><td>-87.961</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>30</td><td> </td><td>PEP BOYS-MANNY MOE & JACK</td><td> </td><td>Specialty Stores</td><td> </td><td>-85.854</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>31</td><td> </td><td>DELTA AIR LINES INC</td><td> </td><td>Airlines</td><td> </td><td>-84.984</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>32</td><td> </td><td>HEALTHSOUTH CORP</td><td> </td><td>Health Care Facilities</td><td> </td><td>-84.865</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>33</td><td> </td><td>MOORE WALLACE INC Office</td><td> </td><td>Services & Supplies</td><td> </td><td>-83.667</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>34</td><td> </td><td>HERCULES INC</td><td> </td><td>Specialty Chemicals</td><td> </td><td>-82.422</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>35</td><td> </td><td>FLEETWOOD ENTERPRISES</td><td> </td><td>Homebuilding</td><td> </td><td>-81.502</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>36</td><td> </td><td>SPRINT PCS GROUP</td><td> </td><td>Wireless Telecommunication Services</td><td> </td><td>-81.346</td><td> </td><td>1999-2004</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>37</td><td> </td><td>WINN-DIXIE STORES INC</td><td> </td><td>Food & Staples Retailing</td><td> </td><td>-80.992</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>38</td><td> </td><td>DUN & BRADSTREET CORP</td><td> </td><td>Publishing</td><td> </td><td>-80.019</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>39</td><td> </td><td>XEROX CORP Office</td><td> </td><td>Services & Supplies</td><td> </td><td>-79.745</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>40</td><td> </td><td>MILACRON INC</td><td> </td><td>Industrial Machinery</td><td> </td><td>-78.338</td><td> </td><td>1998-2003</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>41</td><td> </td><td>PENNEY (JC) CO</td><td> </td><td>Department Stores</td><td> </td><td>-77.165</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>42</td><td> </td><td>INTERPUBLIC GROUP OF COS</td><td> </td><td>Media</td><td> </td><td>-76.771</td><td> </td><td>1999-2004</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>43</td><td> </td><td>DANA CORP</td><td> </td><td>Auto Parts & Equipment</td><td> </td><td>-75.242</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>44</td><td> </td><td>BATTLE MTN GOLD CO</td><td> </td><td>Gold</td><td> </td><td>-74.545</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>45</td><td> </td><td>TIME WARNER INC</td><td> </td><td>Media</td><td> </td><td>-74.366</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>46</td><td> </td><td>PENNZENERGY CO</td><td> </td><td>Integrated Oil & Gas</td><td> </td><td>-73.807</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>47</td><td> </td><td>EL PASO CORP</td><td> </td><td>Oil & Gas</td><td> </td><td>-73.205</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>48</td><td> </td><td>LUBYS INC</td><td> </td><td>Restaurants</td><td> </td><td>-73.034</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>49</td><td> </td><td>UNUMPROVIDENT CORP</td><td> </td><td>Life & Health Insurance</td><td> </td><td>-72.985</td><td> </td><td>1998-2003</td><td> </td></tr> <tr><td>50</td><td> </td><td>HOMESTAKE MINING</td><td> </td><td>Gold</td><td> </td><td>-72.984</td><td> </td><td>1995-2000</td><td> </td></tr> </table> <div style="color:gray;">Data Source: Standard & Poor’s</div> 1

2006-04-12T00:00:00-04:00

BWFA

false

132

true

BWFA

Sometimes we forget just how poorly some large, well established companies can be managed. This list reminds us that a "buy and hold" strategy is unwise. There is no substitute for careful selection and continual reevaluation of your investments. The Fifty Worst-Performing Non-Technology S&P 500 Stocks, 1995-2004 <table width="100%" cellpadding="3" cellspacing="0" border="0"> <tr><td> </td><td> </td><td>Company</td><td> </td><td>Industry</td><td> </td><td align="center">% Decline</td><td> </td><td align="center">Time Period</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>1</td><td> </td><td>POLAROID CORP</td><td> </td><td>Photographic Products</td><td> </td><td>-99.980</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>2</td><td> </td><td>WORLDCOM INC-WORLDCOM GROUP</td><td> </td><td>Integrated Telecommunication Services</td><td> </td><td>-99.972</td><td> </td><td>1998-2003</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>3</td><td> </td><td>BETHLEHEM STEEL CORP</td><td> </td><td>Metals & Mining</td><td> </td><td>-99.962</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>4</td><td> </td><td>FRUIT OF THE LOOM LTD -CL A</td><td> </td><td>Apparel, Accessories & Luxury Goods</td><td> </td><td>-99.918</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>5</td><td> </td><td>CONSECO INC</td><td> </td><td>Life & Health Insurance</td><td> </td><td>-99.914</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>6</td><td> </td><td>ENRON CORP</td><td> </td><td>Gas Utilities</td><td> </td><td>-99.902</td><td> </td><td>1998-2003</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>7</td><td> </td><td>LAIDLAW INTERNATIONAL INC</td><td> </td><td>Diversified Commercial Services</td><td> </td><td>-99.853</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>8</td><td> </td><td>JOY GLOBAL INC</td><td> </td><td>Industrial Machinery</td><td> </td><td>-99.820</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>9</td><td> </td><td>US AIRWAYS GROUP INC</td><td> </td><td>Airlines</td><td> </td><td>-99.608</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>10</td><td> </td><td>ARMSTRONG HOLDINGS INC</td><td> </td><td>Building Products</td><td> </td><td>-99.505</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>11</td><td> </td><td>KMART HOLDING CORP</td><td> </td><td>Multi-line Retail</td><td> </td><td>-99.189</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>12</td><td> </td><td>TENNECO AUTOMOTIVE INC</td><td> </td><td>Auto Parts & Equipment</td><td> </td><td>-99.096</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>13</td><td> </td><td>OWENS CORNING</td><td> </td><td>Building Products</td><td> </td><td>-98.815</td><td> </td><td>1998-2003</td><td> </td></tr> <tr><td>14</td><td> </td><td>GRACE (WR)& CO</td><td> </td><td>Specialty Chemicals</td><td> </td><td>-97.563</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>15</td><td> </td><td>ECHO BAY MINES LTD</td><td> </td><td>Gold</td><td> </td><td>-96.341</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>16</td><td> </td><td>SHONEY’S INC</td><td> </td><td>Restaurants</td><td> </td><td>-96.143</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>17</td><td> </td><td>FOSTER WHEELER LTD</td><td> </td><td>Construction & Engineering</td><td> </td><td>-95.714</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>18</td><td> </td><td>CROWN HOLDINGS INC</td><td> </td><td>Metal & Glass Containers</td><td> </td><td>-95.329</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>19</td><td> </td><td>IKON OFFICE SOLUTIONS</td><td> </td><td>Office Services & Supplies</td><td> </td><td>-94.521</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>20</td><td> </td><td>QWEST COMMUNICATION INTL INC</td><td> </td><td>Diversified Telecommunication Services</td><td> </td><td>-93.833</td><td> </td><td>1999-2004</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>21</td><td> </td><td>AT&T CORP</td><td> </td><td>Diversified Telecommunication Services</td><td> </td><td>-92.498</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>22</td><td> </td><td>SERVICE CORP INTERNATIONAL</td><td> </td><td>Health Care Facilities</td><td> </td><td>-92.045</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>23</td><td> </td><td>RITE AID CORP</td><td> </td><td>Drug Retail</td><td> </td><td>-91.660</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>24</td><td> </td><td>WILLIAMS COS INC</td><td> </td><td>Gas Utilities</td><td> </td><td>-90.526</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>25</td><td> </td><td>AMRCORP/DE</td><td> </td><td>Airlines</td><td> </td><td>-89.728</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>26</td><td> </td><td>GOODYEAR TIRE & RUBBER CO</td><td> </td><td>Tires & Rubber</td><td> </td><td>-89.297</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>27</td><td> </td><td>KANSAS CITY SOUTHERN</td><td> </td><td>Road & Rail</td><td> </td><td>-88.121</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>28</td><td> </td><td>MCDERMOTT INTL INC</td><td> </td><td>Construction & Engineering</td><td> </td><td>-88.041</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>29</td><td> </td><td>ALLEGHENY TECHNOLOGIES INC</td><td> </td><td>Steel</td><td> </td><td>-87.961</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>30</td><td> </td><td>PEP BOYS-MANNY MOE & JACK</td><td> </td><td>Specialty Stores</td><td> </td><td>-85.854</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>31</td><td> </td><td>DELTA AIR LINES INC</td><td> </td><td>Airlines</td><td> </td><td>-84.984</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>32</td><td> </td><td>HEALTHSOUTH CORP</td><td> </td><td>Health Care Facilities</td><td> </td><td>-84.865</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>33</td><td> </td><td>MOORE WALLACE INC Office</td><td> </td><td>Services & Supplies</td><td> </td><td>-83.667</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>34</td><td> </td><td>HERCULES INC</td><td> </td><td>Specialty Chemicals</td><td> </td><td>-82.422</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>35</td><td> </td><td>FLEETWOOD ENTERPRISES</td><td> </td><td>Homebuilding</td><td> </td><td>-81.502</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>36</td><td> </td><td>SPRINT PCS GROUP</td><td> </td><td>Wireless Telecommunication Services</td><td> </td><td>-81.346</td><td> </td><td>1999-2004</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>37</td><td> </td><td>WINN-DIXIE STORES INC</td><td> </td><td>Food & Staples Retailing</td><td> </td><td>-80.992</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>38</td><td> </td><td>DUN & BRADSTREET CORP</td><td> </td><td>Publishing</td><td> </td><td>-80.019</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>39</td><td> </td><td>XEROX CORP Office</td><td> </td><td>Services & Supplies</td><td> </td><td>-79.745</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>40</td><td> </td><td>MILACRON INC</td><td> </td><td>Industrial Machinery</td><td> </td><td>-78.338</td><td> </td><td>1998-2003</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>41</td><td> </td><td>PENNEY (JC) CO</td><td> </td><td>Department Stores</td><td> </td><td>-77.165</td><td> </td><td>1995-2000</td><td> </td></tr> <tr><td>42</td><td> </td><td>INTERPUBLIC GROUP OF COS</td><td> </td><td>Media</td><td> </td><td>-76.771</td><td> </td><td>1999-2004</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>43</td><td> </td><td>DANA CORP</td><td> </td><td>Auto Parts & Equipment</td><td> </td><td>-75.242</td><td> </td><td>1997-2002</td><td> </td></tr> <tr><td>44</td><td> </td><td>BATTLE MTN GOLD CO</td><td> </td><td>Gold</td><td> </td><td>-74.545</td><td> </td><td>1996-2001</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>45</td><td> </td><td>TIME WARNER INC</td><td> </td><td>Media</td><td> </td><td>-74.366</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>46</td><td> </td><td>PENNZENERGY CO</td><td> </td><td>Integrated Oil & Gas</td><td> </td><td>-73.807</td><td> </td><td>1997-2002</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>47</td><td> </td><td>EL PASO CORP</td><td> </td><td>Oil & Gas</td><td> </td><td>-73.205</td><td> </td><td>1999-2004</td><td> </td></tr> <tr><td>48</td><td> </td><td>LUBYS INC</td><td> </td><td>Restaurants</td><td> </td><td>-73.034</td><td> </td><td>1995-2000</td><td> </td></tr> <tr style="background-color: E1E7EA;"><td>49</td><td> </td><td>UNUMPROVIDENT CORP</td><td> </td><td>Life & Health Insurance</td><td> </td><td>-72.985</td><td> </td><td>1998-2003</td><td> </td></tr> <tr><td>50</td><td> </td><td>HOMESTAKE MINING</td><td> </td><td>Gold</td><td> </td><td>-72.984</td><td> </td><td>1995-2000</td><td> </td></tr> </table> <div style="color:gray;">Data Source: Standard & Poor’s</div>

2006-04-12T00:00:00-04:00

false

221

false

Does "Buy and Hold" Really Work?

2008-09-15T11:19:16-04:00

7 Does working with an Investment Advisor mean giving up control of your investments? Not necessarily. At BWFA, our clients are always in control of their investments. But being in control doesn't mean that clients have to do all the tedious work themselves. Just as supervisors don't do all the work that gets done within the departments they supervise, our clients don't have to perform all the tasks necessary to maintain their investments. By delegating some authority to us, our clients, like business managers, get more done and remain in control. In order for this supervisory relationship to work, two things must be present. In business, the supervisor and the employee must first agree on how things will be done. Secondly, they must establish a way to monitor what's happening. The same is true with our clients. First, the Investment Model establishes the "agreement" between the client and BWFA. The purpose of the Model is to allow the client to provide BWFA with directions about how to handle the investments. Strict procedural rules restrict BWFA from taking excessive risks by speculating or making "big bets." Second, clients are able to monitor what's happening through two simple and easy to read reports. 1. The Portfolio Statement shows information about investments at a point in time: the end of each calendar quarter. This statement helps clients confirm that BWFA is following its agreement. It gives clients a consolidated view of all their investments so that they can see exactly what they own and how close they are to the agreed-upon Investment Model. 2. The Performance Summary enables clients to see how their investments have done over a period of time. They can clearly see the money they started with, how much they have added and withdrawn from their accounts, how much income they have earned, how much their assets have appreciated, and what their fees have been. They can see the "net" of these numbers, which is how much they have made, and their percentage return. Like any supervisor, our clients always have access to us if they have questions about what we are doing or how their investments are performing. Clients who invest in mutual funds or who use sub-managers do not get this level of transparency or access to the manager. With our system of investing, clients really do stay in control. At BWFA the rules are: keep it simple, keep costs down, be totally transparent, and avoid surprises. Our clients are always in control; we just work for them. 1

2006-01-23T00:00:00-05:00

false

122

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

Does working with an Investment Advisor mean giving up control of your investments? Not necessarily. At BWFA, our clients are always in control of their investments. But being in control doesn't mean that clients have to do all the tedious work themselves. Just as supervisors don't do all the work that gets done within the departments they supervise, our clients don't have to perform all the tasks necessary to maintain their investments. By delegating some authority to us, our clients, like business managers, get more done and remain in control. In order for this supervisory relationship to work, two things must be present. In business, the supervisor and the employee must first agree on how things will be done. Secondly, they must establish a way to monitor what's happening. The same is true with our clients. First, the Investment Model establishes the "agreement" between the client and BWFA. The purpose of the Model is to allow the client to provide BWFA with directions about how to handle the investments. Strict procedural rules restrict BWFA from taking excessive risks by speculating or making "big bets." Second, clients are able to monitor what's happening through two simple and easy to read reports. 1. The Portfolio Statement shows information about investments at a point in time: the end of each calendar quarter. This statement helps clients confirm that BWFA is following its agreement. It gives clients a consolidated view of all their investments so that they can see exactly what they own and how close they are to the agreed-upon Investment Model. 2. The Performance Summary enables clients to see how their investments have done over a period of time. They can clearly see the money they started with, how much they have added and withdrawn from their accounts, how much income they have earned, how much their assets have appreciated, and what their fees have been. They can see the "net" of these numbers, which is how much they have made, and their percentage return. Like any supervisor, our clients always have access to us if they have questions about what we are doing or how their investments are performing. Clients who invest in mutual funds or who use sub-managers do not get this level of transparency or access to the manager. With our system of investing, clients really do stay in control. At BWFA the rules are: keep it simple, keep costs down, be totally transparent, and avoid surprises. Our clients are always in control; we just work for them.

2006-01-23T00:00:00-05:00

false

211

false

Who Is in Control?

2008-09-15T11:19:16-04:00

12 BWFA invests a piece of almost every client account in foreign stocks and bonds. In this article we give you our point of view about why these securities add value to our client accounts, and how we participate in foreign markets. Foreign securities have three important benefits to our clients: <ul> <li>First - Foreign securities markets are becoming bigger relative to the United States markets. In 1970 the United States represented 66% of the total world stock market capitalization. By 2004 that percentage had decreased to only 45%, and it is expected to continue to decline. With more than half the investment opportunities now abroad, we think it is important for our clients to participate.</li> <li>Second - Foreign securities markets are not perfectly synchronized with U.S. markets. This benefits our clients by adding a category of investments that may grow at a time when U.S. securities may be declining. In seven of the last 20 years, they have been the top performing category of investments as compared with other large categories, such as domestic large stocks, small stocks, long term treasuries, and 30-day treasuries.</li> <li>Third - Foreign securities are denominated in different currencies, which offers our clients another level of diversification. This means that our client portfolios will maintain their value better during periods when the U.S. dollar is weak.</li> </ul> The benefit of mixing foreign and domestic securities is more consistent, less volatile performance for our clients without reducing the long-term return. The current year is a good example of how foreign stocks act differently from U.S. stocks. For the year ending December 31, 2005, the Morgan Stanley Capital International Europe, Australia, and Far East (EAFE) Index, a broad measure of foreign stock markets, was up 10.9%, while the S&P 500 Index was up only 3.0%. As with any investment category, the key is to hold an appropriate balance of foreign securities relative to other asset classes. We do not recommend holding more than 25% in foreign securities because they tend to be more volatile than U.S stocks and bonds. In addition to the currency risk, prices of foreign securities go up and down more, because they are often smaller, their exchanges lack the sophistication and depth of our markets, and they are subject to the whims of large international cash flows. It is not unusual for foreign stocks to swing from being the best performing category of investments to the worst performing category year after year. Since one of our primary goals is to limit risk, we want to hold only a moderate amount of foreign securities. Although we would prefer to own individual foreign securities, we generally use high quality, low cost mutual funds to participate in foreign markets. The necessary information available on foreign companies is difficult to obtain. In addition, we would need reliable information about each country's securities regulations, accounting rules, economic condition, and political risk in order to participate in an intelligent way. Therefore, we choose mutual fund managers who specialize in this field and leave to them the selection of which countries to buy in and which stocks and bonds to buy. We generally prefer to invest in large stocks in industrialized countries with a well established rule of law, such as European states. However, we have taken note of the incredible growth in the Pacific Rim countries and also favor funds with an allocation in that area. Objective studies show that a small allocation (not more than 25%) to foreign securities is beneficial to overall portfolio performance. If BWFA is managing your portfolio, you can be assured that you have appropriate exposure to this important asset class. If we are not managing your portfolio, you should take a look to see if you are missing valuable opportunities in foreign securities. 1

2006-01-23T00:00:00-05:00

false

125

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

BWFA invests a piece of almost every client account in foreign stocks and bonds. In this article we give you our point of view about why these securities add value to our client accounts, and how we participate in foreign markets. Foreign securities have three important benefits to our clients: <ul> <li>First - Foreign securities markets are becoming bigger relative to the United States markets. In 1970 the United States represented 66% of the total world stock market capitalization. By 2004 that percentage had decreased to only 45%, and it is expected to continue to decline. With more than half the investment opportunities now abroad, we think it is important for our clients to participate.</li> <li>Second - Foreign securities markets are not perfectly synchronized with U.S. markets. This benefits our clients by adding a category of investments that may grow at a time when U.S. securities may be declining. In seven of the last 20 years, they have been the top performing category of investments as compared with other large categories, such as domestic large stocks, small stocks, long term treasuries, and 30-day treasuries.</li> <li>Third - Foreign securities are denominated in different currencies, which offers our clients another level of diversification. This means that our client portfolios will maintain their value better during periods when the U.S. dollar is weak.</li> </ul> The benefit of mixing foreign and domestic securities is more consistent, less volatile performance for our clients without reducing the long-term return. The current year is a good example of how foreign stocks act differently from U.S. stocks. For the year ending December 31, 2005, the Morgan Stanley Capital International Europe, Australia, and Far East (EAFE) Index, a broad measure of foreign stock markets, was up 10.9%, while the S&P 500 Index was up only 3.0%. As with any investment category, the key is to hold an appropriate balance of foreign securities relative to other asset classes. We do not recommend holding more than 25% in foreign securities because they tend to be more volatile than U.S stocks and bonds. In addition to the currency risk, prices of foreign securities go up and down more, because they are often smaller, their exchanges lack the sophistication and depth of our markets, and they are subject to the whims of large international cash flows. It is not unusual for foreign stocks to swing from being the best performing category of investments to the worst performing category year after year. Since one of our primary goals is to limit risk, we want to hold only a moderate amount of foreign securities. Although we would prefer to own individual foreign securities, we generally use high quality, low cost mutual funds to participate in foreign markets. The necessary information available on foreign companies is difficult to obtain. In addition, we would need reliable information about each country's securities regulations, accounting rules, economic condition, and political risk in order to participate in an intelligent way. Therefore, we choose mutual fund managers who specialize in this field and leave to them the selection of which countries to buy in and which stocks and bonds to buy. We generally prefer to invest in large stocks in industrialized countries with a well established rule of law, such as European states. However, we have taken note of the incredible growth in the Pacific Rim countries and also favor funds with an allocation in that area. Objective studies show that a small allocation (not more than 25%) to foreign securities is beneficial to overall portfolio performance. If BWFA is managing your portfolio, you can be assured that you have appropriate exposure to this important asset class. If we are not managing your portfolio, you should take a look to see if you are missing valuable opportunities in foreign securities.

2006-01-23T00:00:00-05:00

false

214

false

If You Are Not Investing in Foreign Securities, You Might Be Missing Something

2008-09-15T11:19:16-04:00

12 Mutual funds offer small investors a way to participate in the financial markets. But, in order to earn a fair return, investors need to do their homework. Evidence shows that most investors do poorly because they select inappropriate funds and trade them at the wrong times. To help you avoid this fate, we offer you some pointers for selecting funds and earning a competitive return. <ol> <li> Determine your portfolio strategy first; then select funds to build your portfolio. These funds should provide wide diversification across different categories of stocks, bonds and other securities. Your strategy should consider: a. How long will you hold the investments (that is, how long it will be before you will need the cash), b. How much you will need to draw, and c. How much risk you can tolerate and still sleep at night. Your strategy should not be to find the "hot" fund that had the highest return last year—the one everyone is talking about. Such funds are not likely to remain at the top for long. <li> Stick to your strategy through thick and thin. John Bogel, the founder of Vanguard Mutual Funds, has noted for years that the average investor earns much less than the average mutual fund. The reason for this poor performance is that the average investor buys hot funds when the market is high, then sells when the market is low. The best strategy is not to change course in midstream. <li> Select funds with low costs. Over the long run, the costs of mutual funds add up, and research has shown that expensive funds perform worse than less expensive ones. Make sure your funds are "no-load funds," which have no front-end loads (commissions paid when you buy a fund) or back-end loads (commissions paid when you sell a fund). Make sure the funds' operating expenses are less than 1.4% per year, the average cost of all mutual funds. <li> Pick funds with clear, consistent investment styles that fit your investment strategy. Make sure the fund really owns securities consistent with its stated style. Often the name of a fund gives a poor description of how a fund really invests your money. Watch out for "style drift." Sometimes a fund will start out with one style, but then the types of investments it holds gradually drift to a different style. The Fidelity Magellan Fund was a classic example: it changed from a growth stock fund to a balanced fund holding both stocks and bonds. <li> Select funds from well-established and respected fund families. <li> Select funds that have managers with at least 3 years of tenure. <li> Choose funds that have been in the top 25% of their peer groups over 5 years. If the fund is a small-cap growth stock fund, you should see how its rate of return compares with those of other small-cap growth stock funds. <li> Watch out for high cash balances. Mutual funds often keep cash balances so they will be prepared for investor withdrawals. The problem is that not all of your money is working for you. <li> Avoid funds that have "high turnover rates," which means they buy and sell often. Trading stocks rapidly increases costs and causes more taxable gains in taxable accounts. <li> Minimize portfolio overlap. Often mutual funds buy the same stocks. This means you may not be as diversified as you think you are. <li> Avoid the largest funds: funds over $10 billion. </ol> To gather these facts, do not depend on the prospectus alone. Often the description in the prospectus is purposely vague, which allows the managers to do almost anything they want. Therefore, you should also contact the mutual fund company or look the fund up on <a href="http://www.morningstar.com" target="_blank"> Morningstar.com</a>. Or, you can call BWFA to help you with these decisions. 1

2005-07-13T00:00:00-04:00

false

116

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

Mutual funds offer small investors a way to participate in the financial markets. But, in order to earn a fair return, investors need to do their homework. Evidence shows that most investors do poorly because they select inappropriate funds and trade them at the wrong times. To help you avoid this fate, we offer you some pointers for selecting funds and earning a competitive return. <ol> <li> Determine your portfolio strategy first; then select funds to build your portfolio. These funds should provide wide diversification across different categories of stocks, bonds and other securities. Your strategy should consider: a. How long will you hold the investments (that is, how long it will be before you will need the cash), b. How much you will need to draw, and c. How much risk you can tolerate and still sleep at night. Your strategy should not be to find the “hot” fund that had the highest return last year—the one everyone is talking about. Such funds are not likely to remain at the top for long. <li> Stick to your strategy through thick and thin. John Bogel, the founder of Vanguard Mutual Funds, has noted for years that the average investor earns much less than the average mutual fund. The reason for this poor performance is that the average investor buys hot funds when the market is high, then sells when the market is low. The best strategy is not to change course in midstream. <li> Select funds with low costs. Over the long run, the costs of mutual funds add up, and research has shown that expensive funds perform worse than less expensive ones. Make sure your funds are “no-load funds,” which have no front-end loads (commissions paid when you buy a fund) or back-end loads (commissions paid when you sell a fund). Make sure the funds’ operating expenses are less than 1.4% per year, the average cost of all mutual funds. <li> Pick funds with clear, consistent investment styles that fit your investment strategy. Make sure the fund really owns securities consistent with its stated style. Often the name of a fund gives a poor description of how a fund really invests your money. Watch out for “style drift.” Sometimes a fund will start out with one style, but then the types of investments it holds gradually drift to a different style. The Fidelity Magellan Fund was a classic example: it changed from a growth stock fund to a balanced fund holding both stocks and bonds. <li> Select funds from well-established and respected fund families. <li> Select funds that have managers with at least 3 years of tenure. <li> Choose funds that have been in the top 25% of their peer groups over 5 years. If the fund is a small-cap growth stock fund, you should see how its rate of return compares with those of other small-cap growth stock funds. <li> Watch out for high cash balances. Mutual funds often keep cash balances so they will be prepared for investor withdrawals. The problem is that not all of your money is working for you. <li> Avoid funds that have “high turnover rates,” which means they buy and sell often. Trading stocks rapidly increases costs and causes more taxable gains in taxable accounts. <li> Minimize portfolio overlap. Often mutual funds buy the same stocks. This means you may not be as diversified as you think you are. <li> Avoid the largest funds: funds over $10 billion. </ol> To gather these facts, do not depend on the prospectus alone. Often the description in the prospectus is purposely vague, which allows the managers to do almost anything they want. Therefore, you should also contact the mutual fund company or look the fund up on <a href="http://www.morningstar.com" target="_blank"> Morningstar.com</a>. Or, you can call BWFA to help you with these decisions.

2005-07-13T00:00:00-04:00

false

205

false

How to Select a Mutual Fund

2008-10-13T00:01:57-04:00

7 Fidelity Magellan grew to be the largest mutual fund ever, and has also declined in size more than any other fund. The story of how this came about may help our readers see what went wrong. The Fidelity Magellan Fund started in 1963, and was originally named the Fidelity International Fund. The SEC eventually made Fidelity change the name, because the fund didn't actually own any foreign assets. Peter Lynch began running the fund in 1977 and invested very successfully in growth stocks until he left the fund in 1990. The fund was turned over to Morris Smith, who had a short but successful 2-year run. Jeff Vinik was the next manager in '92 and promptly altered the character of the fund. At the end of 1995, instead of owning growth stocks, Mr. Vinik had invested 32% of the fund's assets in bonds and cash. Mr. Vinik's strategy was not successful, and in 1996 Fidelity replaced Vinik with the current manager, Bob Stansky. Mr. Stansky has also not kept pace with the market, and now the fund is on the lemon list, having under-performed the market over 1, 3, and 5 years. After peaking at $106 billion in early 2000, the famed Fidelity Magellan Fund now stands at about half that value: $55 billion. What happened to $51 billion (equivalent to $175 per US resident) of investors' money? Part of it evaporated in losses; the remainder went elsewhere. Last year, when the market returned about 10%, $9.15 billion left the Magellan Fund. And in 2003, when the market returned a blazing 26%, $2.4 billion left Magellan. In an attempt to stem outflows and improve performance, the fund took aggressive positions in several stocks, including AIG (the big insurance company with serious governance problems) and Viacom, the entertainment company. So far this year, AIG is down 16% and Viacom has lost 8%. When investors flee funds, the funds are forced to sell assets and pass taxable gains on to investors. That hurts, particularly when the funds are also losing value. Very large size is a disadvantage to mutual fund investors. In 1995 the Magellan Fund owned 5% or more of 266 companies! This places a staggering responsibility on the fund and severely limits what a fund manager can do. The fund manager must move very slowly, and quietly, (how quiet can an elephant be?) when you have such a large position in so many large firms. Even small trades or irrelevant comments by anyone connected with the fund about the fund's holdings are quickly reflected in the price of the fund's holdings. <img src="http://www.bwfa.com/images/magellan-fund.jpg" alt="chart"> As Fidelity Magellan illustrates, size oftentimes has little to do with success, and good funds don't necessarily stay that way. Other large funds are subject to these same risks. The important thing for investors to do is learn as much as they can about their investments, or, hire someone who will do it for them. Your investments are too important to you and your family to ignore. 1

2005-07-13T00:00:00-04:00

false

119

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

Fidelity Magellan grew to be the largest mutual fund ever, and has also declined in size more than any other fund. The story of how this came about may help our readers see what went wrong. The Fidelity Magellan Fund started in 1963, and was originally named the Fidelity International Fund. The SEC eventually made Fidelity change the name, because the fund didn’t actually own any foreign assets. Peter Lynch began running the fund in 1977 and invested very successfully in growth stocks until he left the fund in 1990. The fund was turned over to Morris Smith, who had a short but successful 2-year run. Jeff Vinik was the next manager in ‘92 and promptly altered the character of the fund. At the end of 1995, instead of owning growth stocks, Mr. Vinik had invested 32% of the fund’s assets in bonds and cash. Mr. Vinik’s strategy was not successful, and in 1996 Fidelity replaced Vinik with the current manager, Bob Stansky. Mr. Stansky has also not kept pace with the market, and now the fund is on the lemon list, having under-performed the market over 1, 3, and 5 years. After peaking at $106 billion in early 2000, the famed Fidelity Magellan Fund now stands at about half that value: $55 billion. What happened to $51 billion (equivalent to $175 per US resident) of investors’ money? Part of it evaporated in losses; the remainder went elsewhere. Last year, when the market returned about 10%, $9.15 billion left the Magellan Fund. And in 2003, when the market returned a blazing 26%, $2.4 billion left Magellan. In an attempt to stem outflows and improve performance, the fund took aggressive positions in several stocks, including AIG (the big insurance company with serious governance problems) and Viacom, the entertainment company. So far this year, AIG is down 16% and Viacom has lost 8%. When investors flee funds, the funds are forced to sell assets and pass taxable gains on to investors. That hurts, particularly when the funds are also losing value. Very large size is a disadvantage to mutual fund investors. In 1995 the Magellan Fund owned 5% or more of 266 companies! This places a staggering responsibility on the fund and severely limits what a fund manager can do. The fund manager must move very slowly, and quietly, (how quiet can an elephant be?) when you have such a large position in so many large firms. Even small trades or irrelevant comments by anyone connected with the fund about the fund’s holdings are quickly reflected in the price of the fund’s holdings. <img src="http://www.bwfa.com/images/magellan-fund.jpg" alt="chart"> As Fidelity Magellan illustrates, size oftentimes has little to do with success, and good funds don’t necessarily stay that way. Other large funds are subject to these same risks. The important thing for investors to do is learn as much as they can about their investments, or, hire someone who will do it for them. Your investments are too important to you and your family to ignore.

2005-07-13T00:00:00-04:00

false

208

false

Whatever Happened to the Fidelity Magellan Fund?

2008-10-12T23:56:51-04:00

12 This article offers a glimpse at how Social Security "private accounts" might work and what you should do if private accounts become part of the Social Security system. We'll leave the vexing questions regarding whether private accounts are good social policy to the political arena and focus on how private accounts might affect our clients if they come into effect. Participation is optional Most experts think the Bush Administration wants to model private accounts after the plan described in the President's 2002 Commission to Strengthen Social Security. According to this plan, workers who are under 55 would have an option to redirect a portion of their Social Security taxes to private accounts dedicated to their retirement, and to direct how this money is invested. Initially, the limit would be 4% of a worker's salary, up to $1,000. This represents about one third or less of the total 12.4% Social Security tax paid by workers and their employers. The small limit might be expanded in the future. Broad inexpensive index funds Workers would have limited control over how to invest money in their private accounts. They would probably have a short list of broadly diversified index funds, offered by the Social Security Administration but run by private money management firms. The thinking regarding these options is that such funds would limit the possibility of investors making bad mistakes and ruining their retirements. Plus, large index funds are inexpensive to manage. The goal is to keep expenses at a low 0.30%, which would be quite reasonable. However, this will limit investment performance to a mundane level. Break-even rate Workers who contribute to private accounts will receive a proportional reduction in their benefits from the traditional Social Security system. Therefore, in order for workers to benefit from private accounts, they will have to earn a greater rate of return on their contributions. This "break-even" rate will be the annual inflation rate (historically, 3.1%) plus 3% per year. If workers earn more than the break-even rate, they will have a greater retirement income than under the traditional system. If they earn less, they will have a smaller retirement income. Obviously, workers who choose to participate in private accounts need to find investments that are expected to earn more than the break-even rate, and that means stocks. The numbers below show that safe investments, like bonds and treasury bills, are not likely to make the grade. <table width=400 bgcolor="#CCCCCC"> <tr> <td> </td> <td> </td> <td> Annual % Rate (1926 through 2000) </td> </tr> <tr> <td>Inflation</td> <td> </td> <td>3.1%</td> </tr> <tr> <td>Treasury Bills</td> <td> </td> <td>3.8%</td> </tr> <tr> <td>Long-Term Government Bonds </td> <td> </</td> <td>5.3%</td> </tr> <tr> <td>Long-Term Corporate Bonds </td> <td> </</td> <td>5.7%</td> </tr> <tr> <td>Large Cap Stocks</td> <td> </</td> <td>11%</td> </tr> <tr> <td>Small Cap Stocks</td> <td>&nbsp</td> <td>12.4%</td> </tr> </table> We think this means that younger workers (up to age 50) should participate in private accounts. They have the time to withstand the ups and downs of the stock market and thus can tolerate the risk. We note that the average annual return for investors who bought and held stocks for ten-year periods exceeded the average inflation rate over those ten-year periods by at least 3%, in 77% of the cases. Given that only one third or less of a worker's Social Security benefit would be in a private account, the risk of loss is low and the potential for gain is high. Older workers should be careful. The time until they retire is shorter, so their risk is greater. We think that workers who will depend on Social Security for a major portion of their retirement income, and those who are uncomfortable with the stock market, should not participate in private accounts. The certainty of the existing Social Security system and its protection against inflation are too valuable for these people to give up. Older workers with greater retirement resources should consider private accounts. However, we are concerned about protecting them against big drops in the stock market just before their retirement. The proposed plan may force many people to annuitize (lock in) the value of their private accounts at retirement, thus preventing them from waiting for an eventual stock-market recovery. We will be watching this issue closely. 1

2005-04-04T00:00:00-04:00

false

112

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

This article offers a glimpse at how Social Security “private accounts” might work and what you should do if private accounts become part of the Social Security system. We’ll leave the vexing questions regarding whether private accounts are good social policy to the political arena and focus on how private accounts might affect our clients if they come into effect. Participation is optional Most experts think the Bush Administration wants to model private accounts after the plan described in the President’s 2002 Commission to Strengthen Social Security. According to this plan, workers who are under 55 would have an option to redirect a portion of their Social Security taxes to private accounts dedicated to their retirement, and to direct how this money is invested. Initially, the limit would be 4% of a worker’s salary, up to $1,000. This represents about one third or less of the total 12.4% Social Security tax paid by workers and their employers. The small limit might be expanded in the future. Broad inexpensive index funds Workers would have limited control over how to invest money in their private accounts. They would probably have a short list of broadly diversified index funds, offered by the Social Security Administration but run by private money management firms. The thinking regarding these options is that such funds would limit the possibility of investors making bad mistakes and ruining their retirements. Plus, large index funds are inexpensive to manage. The goal is to keep expenses at a low 0.30%, which would be quite reasonable. However, this will limit investment performance to a mundane level. Break-even rate Workers who contribute to private accounts will receive a proportional reduction in their benefits from the traditional Social Security system. Therefore, in order for workers to benefit from private accounts, they will have to earn a greater rate of return on their contributions. This “break-even” rate will be the annual inflation rate (historically, 3.1%) plus 3% per year. If workers earn more than the break-even rate, they will have a greater retirement income than under the traditional system. If they earn less, they will have a smaller retirement income. Obviously, workers who choose to participate in private accounts need to find investments that are expected to earn more than the break-even rate, and that means stocks. The numbers below show that safe investments, like bonds and treasury bills, are not likely to make the grade. <table width=400 bgcolor="#CCCCCC"> <tr> <td> </td> <td> </td> <td> Annual % Rate (1926 through 2000) </td> </tr> <tr> <td>Inflation</td> <td> </td> <td>3.1%</td> </tr> <tr> <td>Treasury Bills</td> <td> </td> <td>3.8%</td> </tr> <tr> <td>Long-Term Government Bonds </td> <td> </</td> <td>5.3%</td> </tr> <tr> <td>Long-Term Corporate Bonds </td> <td> </</td> <td>5.7%</td> </tr> <tr> <td>Large Cap Stocks</td> <td> </</td> <td>11%</td> </tr> <tr> <td>Small Cap Stocks</td> <td>&nbsp</td> <td>12.4%</td> </tr> </table> We think this means that younger workers (up to age 50) should participate in private accounts. They have the time to withstand the ups and downs of the stock market and thus can tolerate the risk. We note that the average annual return for investors who bought and held stocks for ten-year periods exceeded the average inflation rate over those ten-year periods by at least 3%, in 77% of the cases. Given that only one third or less of a worker’s Social Security benefit would be in a private account, the risk of loss is low and the potential for gain is high. Older workers should be careful. The time until they retire is shorter, so their risk is greater. We think that workers who will depend on Social Security for a major portion of their retirement income, and those who are uncomfortable with the stock market, should not participate in private accounts. The certainty of the existing Social Security system and its protection against inflation are too valuable for these people to give up. Older workers with greater retirement resources should consider private accounts. However, we are concerned about protecting them against big drops in the stock market just before their retirement. The proposed plan may force many people to annuitize (lock in) the value of their private accounts at retirement, thus preventing them from waiting for an eventual stock-market recovery. We will be watching this issue closely.

2005-04-04T00:00:00-04:00

false

201

false

What Should You Do If Social Security Offers Private Accounts?

2008-10-13T00:07:49-04:00

10 Most investors pay scant attention to portfolio risk management. In this article we discuss the importance of risk management, and how we handle portfolio risk for the investment management clients of BWFA. In the 1990's, as the value of their investment portfolios rose sharply, most investors ignored the risk in their portfolios. The more risk that you took (e.g., investing in Internet startups), the higher the returns. Most investors did not correlate the outsized returns with excessive portfolio risk at the time, but most would now understand the significance, having watched their stocks lose 50% (or more) of their value in 2000-2002. Before the downturn in 2000-2002 most investors thought an S&P 500 Index fund provided them with all the diversification they needed. They learned differently, as large capitalization growth stocks declined 45% over the three years, and $100 became $55. Managing risk is kind of like driving over the speed limit. You don't think of the consequences until it is too late. Professional money managers have long recognized the importance of risk management. Studies show conclusively that most of the long term return investors earn is based on how their assets are allocated, as opposed to market timing or success with hot stocks. It's the discipline of sticking to an appropriate risk profile that pays dividends. It's not sexy but it works. So what is an appropriate risk profile? Model Portfolios The appropriate amount of risk in each client's portfolio varies by client. Clearly, a 35 year old with a steady job can tolerate a higher degree of market volatility (risk) than a 65 year old living off of portfolio income. But if each client is different, how do we manage the risk of each client's investments in a large firm? One of the ways is by using Model Portfolios. In the early 1990's we developed seven model portfolios. Each Model has a different mix of assets with different risk characteristics. We then matched a model to each of our clients based on their income needs, net worth, age, goals, and our judgment of their willingness to accept risk. The seven models are: Aggressive Growth, Capital Appreciation, Conservative Growth, Growth and Income, Income and Growth, Income, and Maximum Income. By monitoring the actual mix in a client's portfolio against their assigned Model, we can more easily maintain the risk profile appropriate for each client. Our reports are arranged so clients can monitor what's going on, and see if we are following their Model. The Models Versus The Market Before we began using our Models we did extensive testing to ensure the models would meet the expected risk/return profile. However, we know that so-called "back-testing" is theoretical, and not the same as real-time investing under actual market conditions with real money and every day influences - like investor/client behavior. A more accurate way to determine if our approach of using Models works is to look back over a full market cycle—the last 8 years—to see how our Models held up under actual conditions. We are confident that clients who do this will be very satisfied with their investment results over this period.* Individual investors often fail because they lack the information necessary to make good decisions, but also because they don't have the discipline and detachment necessary to manage their investments. The tremendous growth in our business is evidence that investors have reached the conclusion that it pays big dividends to have a professional investment manager handle their money. * Investment performance of individual client accounts can vary considerably due to differences in withdrawal rates, specific investments, investment model and restrictions. 1

2005-01-07T00:00:00-05:00

false

108

true

<a href="http://www.bwfa.com/about/ray.asp">Bob Ray</a>, MBA

Most investors pay scant attention to portfolio risk management. In this article we discuss the importance of risk management, and how we handle portfolio risk for the investment management clients of BWFA. In the 1990’s, as the value of their investment portfolios rose sharply, most investors ignored the risk in their portfolios. The more risk that you took (e.g., investing in Internet startups), the higher the returns. Most investors did not correlate the outsized returns with excessive portfolio risk at the time, but most would now understand the significance, having watched their stocks lose 50% (or more) of their value in 2000-2002. Before the downturn in 2000-2002 most investors thought an S&P 500 Index fund provided them with all the diversification they needed. They learned differently, as large capitalization growth stocks declined 45% over the three years, and $100 became $55. Managing risk is kind of like driving over the speed limit. You don’t think of the consequences until it is too late. Professional money managers have long recognized the importance of risk management. Studies show conclusively that most of the long term return investors earn is based on how their assets are allocated, as opposed to market timing or success with hot stocks. It’s the discipline of sticking to an appropriate risk profile that pays dividends. It’s not sexy but it works. So what is an appropriate risk profile? Model Portfolios The appropriate amount of risk in each client’s portfolio varies by client. Clearly, a 35 year old with a steady job can tolerate a higher degree of market volatility (risk) than a 65 year old living off of portfolio income. But if each client is different, how do we manage the risk of each client’s investments in a large firm? One of the ways is by using Model Portfolios. In the early 1990’s we developed seven model portfolios. Each Model has a different mix of assets with different risk characteristics. We then matched a model to each of our clients based on their income needs, net worth, age, goals, and our judgment of their willingness to accept risk. The seven models are: Aggressive Growth, Capital Appreciation, Conservative Growth, Growth and Income, Income and Growth, Income, and Maximum Income. By monitoring the actual mix in a client’s portfolio against their assigned Model, we can more easily maintain the risk profile appropriate for each client. Our reports are arranged so clients can monitor what’s going on, and see if we are following their Model. The Models Versus The Market Before we began using our Models we did extensive testing to ensure the models would meet the expected risk/return profile. However, we know that so-called “back-testing” is theoretical, and not the same as real-time investing under actual market conditions with real money and every day influences - like investor/client behavior. A more accurate way to determine if our approach of using Models works is to look back over a full market cycle – the last 8 years - to see how our Models held up under actual conditions. We are confident that clients who do this will be very satisfied with their investment results over this period.* Individual investors often fail because they lack the information necessary to make good decisions, but also because they don’t have the discipline and detachment necessary to manage their investments. The tremendous growth in our business is evidence that investors have reached the conclusion that it pays big dividends to have a professional investment manager handle their money. * Investment performance of individual client accounts can vary considerably due to differences in withdrawal rates, specific investments, investment model and restrictions.

2005-01-07T00:00:00-05:00

false

197

false

BWFA’s Model Portfolios: Risk Management that Pays Dividends

BWFA's Model Portfolios: Risk Management that Pays Dividends

2008-10-13T00:16:52-04:00

12 The biggest risk mutual fund investors face in earning a decent return may be their own behavior. A recent study by Dalbar, a financial industry research group, examined real investor returns over a nineteen-year period. It concluded that, “Investment return is far more dependent on investor behavior than fund performance.” Comparative returns show that the results of this “behavior” are truly threatening to the average investor’s portfolio. Average Annual Return for period January, 1984 to December, 2002 <ul> <li align=right>S&P500 Index …………………… 12.2% <li align=right>Average equity fund investor... 2.6% <li align=right>Long-term corporate bond index … 11.3% <li align=right>Average bond investor ……………. 4.2% <li align=right>Inflation …………… 3.1% </ul> You would think that investment returns below the inflation rate would be as bad as it could get, but the real results are probably worse. This study did not even consider the high commission costs caused by rapid buying and selling of mutual funds, nor did it consider the tax impact of selling funds held for short periods of time. And many investors did trade mutual funds rapidly. The average holding period for a stock fund was only 29.5 months, while the average holding period for fixed income funds was only slightly longer, 34.3 months. This is despite all of the attempts by the mutual fund companies, and the financial profession as a whole, to encourage investors to hold funds for the long haul. The discrepancy in returns between the average investor and the indexes is easy to explain. The study found that investors continuously make the mistake of trying to “time the market” by buying funds when their performance is hot, then selling these funds when their performance inevitably turns down. The result is that investors do exactly the wrong thing, buying high and selling low. A secondary cause for this underperformance of the average investor compared to the indexes is certainly the high cost of mutual funds (which is why we recommend that our larger clients use individual securities). But if we assume mutual funds cost an average of 2% per year, then mutual fund expenses still would only account for a small part of the discrepancy. Given these dismal numbers, what should the average investor do? The study offered one approach. It noted that mutual fund investors who bought and held their funds did the best. Therefore, the results of this study suggest that, if you want to invest in mutual funds, you have to be able to resist the urge to meddle. Otherwise, turn over the reigns of your portfolio to a professional investment advisor. The larger your investments, the more important it is to use a professional. 1

2004-10-18T00:00:00-04:00

false

103

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

The biggest risk mutual fund investors face in earning a decent return may be their own behavior. A recent study by Dalbar, a financial industry research group, examined real investor returns over a nineteen-year period. It concluded that, “Investment return is far more dependent on investor behavior than fund performance.” Comparative returns show that the results of this “behavior” are truly threatening to the average investor’s portfolio. Average Annual Return for period January, 1984 to December, 2002 <ul> <li align=right>S&P500 Index …………………… 12.2% <li align=right>Average equity fund investor... 2.6% <li align=right>Long-term corporate bond index … 11.3% <li align=right>Average bond investor ……………. 4.2% <li align=right>Inflation …………… 3.1% </ul> You would think that investment returns below the inflation rate would be as bad as it could get, but the real results are probably worse. This study did not even consider the high commission costs caused by rapid buying and selling of mutual funds, nor did it consider the tax impact of selling funds held for short periods of time. And many investors did trade mutual funds rapidly. The average holding period for a stock fund was only 29.5 months, while the average holding period for fixed income funds was only slightly longer, 34.3 months. This is despite all of the attempts by the mutual fund companies, and the financial profession as a whole, to encourage investors to hold funds for the long haul. The discrepancy in returns between the average investor and the indexes is easy to explain. The study found that investors continuously make the mistake of trying to “time the market” by buying funds when their performance is hot, then selling these funds when their performance inevitably turns down. The result is that investors do exactly the wrong thing, buying high and selling low. A secondary cause for this underperformance of the average investor compared to the indexes is certainly the high cost of mutual funds (which is why we recommend that our larger clients use individual securities). But if we assume mutual funds cost an average of 2% per year, then mutual fund expenses still would only account for a small part of the discrepancy. Given these dismal numbers, what should the average investor do? The study offered one approach. It noted that mutual fund investors who bought and held their funds did the best. Therefore, the results of this study suggest that, if you want to invest in mutual funds, you have to be able to resist the urge to meddle. Otherwise, turn over the reigns of your portfolio to a professional investment advisor. The larger your investments, the more important it is to use a professional.

2004-10-18T00:00:00-04:00

false

192

false

Investor Behavior Hurts Investment Returns

2008-09-15T11:19:15-04:00

12 Conventional wisdom says that investors should determine the percentage of their portfolio they invest in stocks by subtracting their age from 100. The rest of their portfolio should be spread between bonds and cash. According to this wisdom, a 30-year-old investor will have 70 percent of his assets in stocks and 30 percent in bonds and cash, and a 65-year-old investor will hold only 35 percent in stocks and the rest in bonds and cash. This approach, which is used by many individuals and old fashioned defined benefit retirement plans, emphasizes reducing investment risk and producing enough bond interest to pay benefit checks when workers retire. However, it has a problem. The interest earned on bonds and cash is not enough to support a comfortable lifestyle for the average retiree today. The facts are that: _ Investment-grade bonds have averaged only 5.7% annual return over the last 70 years and are currently earning even less. After fees and expenses, the return can be quite small. And worse yet, money market funds are currently paying almost nothing. _ Retirees need to plan on their money lasting a long time. A person who retires at 62 today may be alive and well in 35 years and still have bills to pay. _ Inflation erodes the real value of the rate of return over time. Even a moderate inflation rate can cut the real earnings rate in half, so that 5.7% becomes less than 3%. _ Very few people have saved enough in their retirement accounts that they could support their lifestyle throughout retirement if they earned so little on their investments. When we prepare a financial plan, we assume that a retiree will earn at least 6% per year on their investments after all fees and expenses. You would need to be truly rich or extremely frugal to live on a portfolio predominantly invested in bonds if you retired today. Our Approach We think retirees should strive to earn a higher rate of return by holding more stocks and fewer bonds so that they can afford a comfortable retirement. We think that with reasonable safeguards a retiree can hold 60% to 70% of their portfolio in stocks, and be able to ride out the ups and downs of the stock market. We note: _ Over the same 70-year period as noted above, stocks have earned an average annual rate of return of 11%. _ Only nine times in the last 74 years has the stock market been down over a five-year period. (Four of those were during the Great Depression and two were in the last three years.) _ Not since 1939 has the market been down for a 10-year holding period. But what about the short term? Safeguards must be in place because investors retiring today cannot tolerate three to five years of negative returns while “living off of their investments.” After five years of living off of their principal, they would have little money left to grow back once the stock market finally turned around. To protect against this problem, we make sure that retirees do not need to draw heavily on their principals. We do this by making sure that 60% to 80% of the money retirees draws from their accounts comes from income earned in the form of interest and dividends. To earn this income, we invest in bonds, preferred stocks, stocks with higher-than average dividends and real estate investment trusts, all of which have high yields. This approach allows the principal to ride through the troughs and the retiree to enjoy the long term advantages of stocks over bonds. 1

2004-07-09T00:00:00-04:00

false

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

Conventional wisdom says that investors should determine the percentage of their portfolio they invest in stocks by subtracting their age from 100. The rest of their portfolio should be spread between bonds and cash. According to this wisdom, a 30-year-old investor will have 70 percent of his assets in stocks and 30 percent in bonds and cash, and a 65-year-old investor will hold only 35 percent in stocks and the rest in bonds and cash. This approach, which is used by many individuals and old fashioned defined benefit retirement plans, emphasizes reducing investment risk and producing enough bond interest to pay benefit checks when workers retire. However, it has a problem. The interest earned on bonds and cash is not enough to support a comfortable lifestyle for the average retiree today. The facts are that: _ Investment-grade bonds have averaged only 5.7% annual return over the last 70 years and are currently earning even less. After fees and expenses, the return can be quite small. And worse yet, money market funds are currently paying almost nothing. _ Retirees need to plan on their money lasting a long time. A person who retires at 62 today may be alive and well in 35 years and still have bills to pay. _ Inflation erodes the real value of the rate of return over time. Even a moderate inflation rate can cut the real earnings rate in half, so that 5.7% becomes less than 3%. _ Very few people have saved enough in their retirement accounts that they could support their lifestyle throughout retirement if they earned so little on their investments. When we prepare a financial plan, we assume that a retiree will earn at least 6% per year on their investments after all fees and expenses. You would need to be truly rich or extremely frugal to live on a portfolio predominantly invested in bonds if you retired today. Our Approach We think retirees should strive to earn a higher rate of return by holding more stocks and fewer bonds so that they can afford a comfortable retirement. We think that with reasonable safeguards a retiree can hold 60% to 70% of their portfolio in stocks, and be able to ride out the ups and downs of the stock market. We note: _ Over the same 70-year period as noted above, stocks have earned an average annual rate of return of 11%. _ Only nine times in the last 74 years has the stock market been down over a five-year period. (Four of those were during the Great Depression and two were in the last three years.) _ Not since 1939 has the market been down for a 10-year holding period. But what about the short term? Safeguards must be in place because investors retiring today cannot tolerate three to five years of negative returns while “living off of their investments.” After five years of living off of their principal, they would have little money left to grow back once the stock market finally turned around. To protect against this problem, we make sure that retirees do not need to draw heavily on their principals. We do this by making sure that 60% to 80% of the money retirees draws from their accounts comes from income earned in the form of interest and dividends. To earn this income, we invest in bonds, preferred stocks, stocks with higher-than average dividends and real estate investment trusts, all of which have high yields. This approach allows the principal to ride through the troughs and the retiree to enjoy the long term advantages of stocks over bonds.

2004-07-09T00:00:00-04:00

false

188

false

Now That You Have Retired, How Much of Your Portfolio Should You Invest in Bonds?

2008-09-15T11:19:15-04:00

10 Most investors view bonds as safe securities providing a fixed income until maturity. Especially after experiencing dramatic losses in the stock market, investors may look to bonds to provide a safe haven from the volatility of stocks. But the truth is a portfolio of bonds can be nearly as risky as stocks, and is certainly more risky than a blended portfolio of stocks and bonds. Why Bonds Can Be Risky One rule of investing is that as interest rates rise, the price of a bond falls. This is known as interest rate risk. To see this, imagine that you purchase a bond paying 6% and interest rates go up to 7%. Your bond is now less valuable in the marketplace. You may be asking yourself, "But, what if I hold my bond until maturity?" It is true that you will recoup your principal at maturity, but you will still have suffered years of portfolio value fluctuation and be locked into an interest rate below current market rates. Bonds Are Especially Risky When Interest Rates Are Low When interest rates are at their lowest, the potential for volatility in bonds is at its highest. This was demonstrated dramatically last summer. Interest rates had hit forty-year lows. Then investors became concerned that the Federal Reserve Bank would raise interest rates in response to strong economic growth. As a result, intermediate-term bonds lost 10% of their value in just two months. Fears faded last fall as economic growth slowed slightly and bonds recouped half of their losses. But, bonds were hit again in the second quarter of this year as inflation picked up and economic growth continued. Yields on intermediate-term bonds rose by 1.125%, and bonds lost another 9% of their value. Bonds Still Have a Place in Diversified Portfolios We include bonds as part of our conservative models for a reason. Over long periods of time, bonds do reduce the volatility or risk in a portfolio without substantially reducing the expected return. This is because bonds historically return about 5% to 6%, and have a low correlation to equities, meaning the prices of stocks and bonds often move in opposite directions. As interest rates rise due to strong economic growth, equities usually outperform bonds. But, when economic growth declines and stocks suffer, bonds are usually stellar performers. An allocation to bonds over the last three years would certainly have reduced overall portfolio risk. The Lehman Brothers Aggregate Bond Index returned 7.44% over the last three years while the S&P 500 Index returned -3.34%. We expect that interest rates will continue to rise over the next few years. In this environment, bonds alone could be just as volatile as stocks. However, when included in moderate amounts in diversified portfolios, bonds will serve their intended purpose of reducing the overall volatility of the portfolio and helping to meet the required income needs of our clients. 1

2004-07-09T00:00:00-04:00

false

101

true

<a href="http://www.bwfa.com/about/ray.asp">Bob Ray</a>, MBA

Most investors view bonds as safe securities providing a fixed income until maturity. Especially after experiencing dramatic losses in the stock market, investors may look to bonds to provide a safe haven from the volatility of stocks. But the truth is a portfolio of bonds can be nearly as risky as stocks, and is certainly more risky than a blended portfolio of stocks and bonds. Why Bonds Can Be Risky One rule of investing is that as interest rates rise, the price of a bond falls. This is known as interest rate risk. To see this, imagine that you purchase a bond paying 6% and interest rates go up to 7%. Your bond is now less valuable in the marketplace. You may be asking yourself, “But, what if I hold my bond until maturity?” It is true that you will recoup your principal at maturity, but you will still have suffered years of portfolio value fluctuation and be locked into an interest rate below current market rates. Bonds Are Especially Risky When Interest Rates Are Low When interest rates are at their lowest, the potential for volatility in bonds is at its highest. This was demonstrated dramatically last summer. Interest rates had hit forty-year lows. Then investors became concerned that the Federal Reserve Bank would raise interest rates in response to strong economic growth. As a result, intermediate-term bonds lost 10% of their value in just two months. Fears faded last fall as economic growth slowed slightly and bonds recouped half of their losses. But, bonds were hit again in the second quarter of this year as inflation picked up and economic growth continued. Yields on intermediate-term bonds rose by 1.125%, and bonds lost another 9% of their value. Bonds Still Have a Place in Diversified Portfolios We include bonds as part of our conservative models for a reason. Over long periods of time, bonds do reduce the volatility or risk in a portfolio without substantially reducing the expected return. This is because bonds historically return about 5% to 6%, and have a low correlation to equities, meaning the prices of stocks and bonds often move in opposite directions. As interest rates rise due to strong economic growth, equities usually outperform bonds. But, when economic growth declines and stocks suffer, bonds are usually stellar performers. An allocation to bonds over the last three years would certainly have reduced overall portfolio risk. The Lehman Brothers Aggregate Bond Index returned 7.44% over the last three years while the S&P 500 Index returned -3.34%. We expect that interest rates will continue to rise over the next few years. In this environment, bonds alone could be just as volatile as stocks. However, when included in moderate amounts in diversified portfolios, bonds will serve their intended purpose of reducing the overall volatility of the portfolio and helping to meet the required income needs of our clients.

2004-07-09T00:00:00-04:00

false

190

false

Bonds Are No Safe Haven

2009-01-22T21:23:07-05:00

12 Congress recently passed a bill reducing taxes on dividends from a maximum ordinary income rate of 35% to no more than 15%. This is great news for investors, especially those needing income from their portfolios. We believe the market has not fully recognized the benefit of this tax change, and high-dividend-paying stocks will continue to do well as people realize the comparative advantage of these investments. However, hidden in the fine print of the Jobs and Growth Tax Relief Reconciliation Act of 2003 were many exceptions to the lower rate. They complicated the rules in ways that will make investing and filing taxes even more confusing than before. Here is a quick list of the major types of “dividends” that will not qualify for the new 15% tax rate and what you should do about them: - “Payments in lieu of dividends” (PILs) This is an exception that may really surprise investors, because few people know what PILs are. Basically, an investor may receive a PIL when they have a margin account and their broker lends stocks held in their account to another party. Since this other party now holds the stock, they get the actual dividend. The party that borrowed the stock gives the original investor a “payment in lieu of” that dividend to make up for the money rightfully earned. Since the PIL is taxed at a higher rate than the dividend, there is a problem. For 2003, the IRS has said it will not enforce the higher tax on PILs because brokerage houses were unprepared to report them correctly. However, in future years the IRS is likely to enforce it. BWFA clients need not worry about PILs, because we have addressed this problem with TD Waterhouse, and Waterhouse has promised to reimburse any of our clients who owe additional taxes due to PILs. Investors who have margin accounts at other brokers should inquire whether they will be reimbursed for higher taxes. Not all brokers have made this promise. - Dividends on stocks held less than 61 days This one should not be an issue for BWFA clients because we never buy a stock with the intention of selling it in less than two months. However, it will increase the bookkeeping necessary for investors who want to ensure their dividends will qualify for the 15% rate. - Dividends on money market funds and bond mutual funds The IRS considers these dividends interest income (not dividends) passed through from the bonds held inside these funds. Where possible, it would be preferable to hold such funds in retirement accounts. - Dividends on preferred stocks The new 15% tax rate is supposed to reduce the double taxation of dividends, first on the corporation’s tax return, then on the investor’s tax return. For some preferred stocks the corporation can deduct these dividends as an expense and not pay taxes on that income. Therefore, the new law does not give an investor a break on these dividends. Again, it is preferable to hold such securities in your retirement account. - Dividends on Real Estate Investment Trusts (REITs) Like dividends on preferred stocks, dividends on REITs have not been taxed at the corporate level and are subject to full tax rates at the individual level. Therefore, REITs are also best held in your retirement accounts. - Dividends on foreign stocks that are not actively traded on U.S. stock markets For most investors, this problem will occur on dividends paid by foreign stock mutual funds. Since such funds rarely pay much in dividends, it is not an important issue. 1

2004-04-13T00:00:00-04:00

false

true

<a href="http://www.bwfa.com/about/williams.asp">Rob Williams</a>, CFP™

Congress recently passed a bill reducing taxes on dividends from a maximum ordinary income rate of 35% to no more than 15%. This is great news for investors, especially those needing income from their portfolios. We believe the market has not fully recognized the benefit of this tax change, and high-dividend-paying stocks will continue to do well as people realize the comparative advantage of these investments. However, hidden in the fine print of the Jobs and Growth Tax Relief Reconciliation Act of 2003 were many exceptions to the lower rate. They complicated the rules in ways that will make investing and filing taxes even more confusing than before. Here is a quick list of the major types of “dividends” that will not qualify for the new 15% tax rate and what you should do about them: - “Payments in lieu of dividends” (PILs) This is an exception that may really surprise investors, because few people know what PILs are. Basically, an investor may receive a PIL when they have a margin account and their broker lends stocks held in their account to another party. Since this other party now holds the stock, they get the actual dividend. The party that borrowed the stock gives the original investor a “payment in lieu of” that dividend to make up for the money rightfully earned. Since the PIL is taxed at a higher rate than the dividend, there is a problem. For 2003, the IRS has said it will not enforce the higher tax on PILs because brokerage houses were unprepared to report them correctly. However, in future years the IRS is likely to enforce it. BWFA clients need not worry about PILs, because we have addressed this problem with TD Waterhouse, and Waterhouse has promised to reimburse any of our clients who owe additional taxes due to PILs. Investors who have margin accounts at other brokers should inquire whether they will be reimbursed for higher taxes. Not all brokers have made this promise. - Dividends on stocks held less than 61 days This one should not be an issue for BWFA clients because we never buy a stock with the intention of selling it in less than two months. However, it will increase the bookkeeping necessary for investors who want to ensure their dividends will qualify for the 15% rate. - Dividends on money market funds and bond mutual funds The IRS considers these dividends interest income (not dividends) passed through from the bonds held inside these funds. Where possible, it would be preferable to hold such funds in retirement accounts. - Dividends on preferred stocks The new 15% tax rate is supposed to reduce the double taxation of dividends, first on the corporation’s tax return, then on the investor’s tax return. For some preferred stocks the corporation can deduct these dividends as an expense and not pay taxes on that income. Therefore, the new law does not give an investor a break on these dividends. Again, it is preferable to hold such securities in your retirement account. - Dividends on Real Estate Investment Trusts (REITs) Like dividends on preferred stocks, dividends on REITs have not been taxed at the corporate level and are subject to full tax rates at the individual level. Therefore, REITs are also best held in your retirement accounts. - Dividends on foreign stocks that are not actively traded on U.S. stock markets For most investors, this problem will occur on dividends paid by foreign stock mutual funds. Since such funds rarely pay much in dividends, it is not an important issue.

2004-04-13T00:00:00-04:00

false

184

false

Beware! Not All Dividends Are Created Equal

2008-09-15T11:19:15-04:00

7 Before deciding which investments are best for you, you should look closely at the new tax law, which lowered the rate you pay on dividends and capital gains to 15%. This law has provided investors with some really significant opportunities to improve their wealth. Whereas many investors might have previously favored investing in bonds to meet their income needs, our research shows that most investors would be served far better by investing in certain types of dividend-paying stocks. Consider these facts ... 1. Bond interest is taxed at a higher (ordinary) federal tax rate than dividends, so you give up more of the money your investments produce when you buy bonds. 2. Dividend-paying companies frequently increase the amount of dividends they pay, while bond interest is never increased. Effectively, with the right dividend-paying stocks, you can get a �raise� each year of retirement. 3. With bonds, your strategy should always be to hold to maturity, because they are too expensive to buy and then sell. In any case, you face the possibility that you will be left holding bonds paying lower interest at a time when rates are rising. No such lock-in period exists with dividends, leaving you with more flexibility. 4. When interest rates decline (when the economy slows down), bonds which were issued at higher interest rates when the economy was booming are �called� (paid off), leaving you with the problem of reinvesting at lower rates, effectively taking a �pay cut.� Dividends are usually left unchanged during these same events. Because of the differences in tax rates and considering the effect of normal dividend increases, our research shows that an investor can end up with significantly more money by investing in high-dividend stocks rather than bonds over a 20-year period. As Table 1 shows, an investor that buys a stock paying a 3% dividend and appreciating 3% a year will end up with 28% more money than an investor who buys a bond paying 6% a year. Even though the total returns are the same � 6% in each case � the dividend investor comes out ahead simply due to the difference in tax treatment of the two types of investments. If the stock�s dividend is also increasing by 3% a year, as shown in Table 2, then the investor ends up with 55% more after 20 years. Investors should understand the financial advantages and risks of a portfolio of secure, high-dividend-paying stocks before committing their investment dollars. Our work with retirees over the last 15 years has shown that most people who are retiring today simply cannot afford the lifestyles they want if a significant portion of their investments is in bonds. Having an advisor who can structure and maintain your investments properly will go a long way toward making your retirement what you desire. <img src="http://www.bwfa.com/images/2004-01tables.gif" width="480" border="0" align="right" alt="tables"> 1

2004-01-14T00:00:00-05:00

false

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

Before deciding which investments are best for you, you should look closely at the new tax law, which lowered the rate you pay on dividends and capital gains to 15%. This law has provided investors with some really significant opportunities to improve their wealth. Whereas many investors might have previously favored investing in bonds to meet their income needs, our research shows that most investors would be served far better by investing in certain types of dividend-paying stocks. Consider these facts ... 1. Bond interest is taxed at a higher (ordinary) federal tax rate than dividends, so you give up more of the money your investments produce when you buy bonds. 2. Dividend-paying companies frequently increase the amount of dividends they pay, while bond interest is never increased. Effectively, with the right dividend-paying stocks, you can get a “raise” each year of retirement. 3. With bonds, your strategy should always be to hold to maturity, because they are too expensive to buy and then sell. In any case, you face the possibility that you will be left holding bonds paying lower interest at a time when rates are rising. No such lock-in period exists with dividends, leaving you with more flexibility. 4. When interest rates decline (when the economy slows down), bonds which were issued at higher interest rates when the economy was booming are “called” (paid off), leaving you with the problem of reinvesting at lower rates, effectively taking a “pay cut.” Dividends are usually left unchanged during these same events. Because of the differences in tax rates and considering the effect of normal dividend increases, our research shows that an investor can end up with significantly more money by investing in high-dividend stocks rather than bonds over a 20-year period. As Table 1 shows, an investor that buys a stock paying a 3% dividend and appreciating 3% a year will end up with 28% more money than an investor who buys a bond paying 6% a year. Even though the total returns are the same — 6% in each case — the dividend investor comes out ahead simply due to the difference in tax treatment of the two types of investments. If the stock’s dividend is also increasing by 3% a year, as shown in Table 2, then the investor ends up with 55% more after 20 years. Investors should understand the financial advantages and risks of a portfolio of secure, high-dividend-paying stocks before committing their investment dollars. Our work with retirees over the last 15 years has shown that most people who are retiring today simply cannot afford the lifestyles they want if a significant portion of their investments is in bonds. Having an advisor who can structure and maintain your investments properly will go a long way toward making your retirement what you desire. <img src="http://www.bwfa.com/images/2004-01tables.gif" width="480" border="0" align="right" alt="tables">

2004-01-14T00:00:00-05:00

false

181

false

Be Smart — Buy the Right Kind of Investment Return

2008-10-13T00:26:41-04:00

7 The time when investors should worry most about their investments is when their friends, market pundits, and the maid are most vocal about how great the market is. (Think March 2000 at the height of the Internet bubble). And the time when investors have the greatest opportunity is when these same people are negative about the market, and insist, �it�s not yet time to go back in.� (Think March 2003 before the postwar market rally). At no time has this pattern been truer and more evident than over these last 3 years. A �healthy� market requires that not everyone agree. And fortunately, that�s what we seem to have now. There are about as many positive outlooks as there are negative. The September 2 issue of the Wall Street Journal reported that Thomas McManus, who forecasts the stock market for Banc of America Securities, is feeling upbeat going into the last stretch of the year. He says stocks could rise another 5%-10% before the year ends. But Richard Bernstein of Merrill Lynch sees a chilly autumn, saying stocks are so overpriced that they could fall as much as 14% during the next year. These views are typical of what we read about. (We also note that both of these experienced analysts rightly saw stocks as overpriced during the bubble, which gives them some credibility.) What has many analysts concerned is that we are in the most worrisome period of the year: September and October. September is the month when stocks have historically done their worst. This period is known as the �confession� period, when companies who have not met their quarterly earnings targets issue warnings and cause stock prices to go down. October is the month that has seen the most crashes. But October has seen significant rallies as well, sometimes marking the beginning of the �Santa Claus Rally.� The rally this year has been dizzying. And some say it�s been too fast, with stock prices outpacing earnings growth by a wide margin. (Stock prices are ultimately a function of a company�s earnings.) The S&P now trades at about 19 times earnings, compared with its average of around 13. And the NASDAQ index has jumped 61% since its low, while earnings are up only 7%-15%. This would indicate to us that much of the good news is already priced into stocks, and gains from this point will likely be much slower. Real earnings growth has been in the 7%-8% range, and we would expect to see this sort of total return in stocks in a healthy economic climate. And lately, we have seen data that has indicated a stronger economic recovery than was forecast. The revised estimate of second quarter GDP was 3.1%, up from 2.4%, and the Chicago purchasing managers� index for August was 58.9, up sharply from the consensus forecast of 54, and up from 55.9 in July. (Above 50 indicates expansion activity.) Consumer and business spending is up, and disposable income, helped by tax cuts, posted its biggest gain in over a year. Improvements in employment and job growth, which have been the weak links in the recovery thus far, should be the final confirmation of a recovery. So what�s the most likely near-term scenario? We see an uncomfortable October followed by additional small gains (2%-3%) to the end of the year. Gains for the full year in the growth stock portion of our clients portfolios could be quite impressive, perhaps close to 20%. 1

2003-10-01T00:00:00-04:00

false

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

The time when investors should worry most about their investments is when their friends, market pundits, and the maid are most vocal about how great the market is. (Think March 2000 at the height of the Internet bubble). And the time when investors have the greatest opportunity is when these same people are negative about the market, and insist, “it’s not yet time to go back in.” (Think March 2003 before the postwar market rally). At no time has this pattern been truer and more evident than over these last 3 years. A “healthy” market requires that not everyone agree. And fortunately, that’s what we seem to have now. There are about as many positive outlooks as there are negative. The September 2 issue of the Wall Street Journal reported that Thomas McManus, who forecasts the stock market for Banc of America Securities, is feeling upbeat going into the last stretch of the year. He says stocks could rise another 5%-10% before the year ends. But Richard Bernstein of Merrill Lynch sees a chilly autumn, saying stocks are so overpriced that they could fall as much as 14% during the next year. These views are typical of what we read about. (We also note that both of these experienced analysts rightly saw stocks as overpriced during the bubble, which gives them some credibility.) What has many analysts concerned is that we are in the most worrisome period of the year: September and October. September is the month when stocks have historically done their worst. This period is known as the “confession” period, when companies who have not met their quarterly earnings targets issue warnings and cause stock prices to go down. October is the month that has seen the most crashes. But October has seen significant rallies as well, sometimes marking the beginning of the “Santa Claus Rally.” The rally this year has been dizzying. And some say it’s been too fast, with stock prices outpacing earnings growth by a wide margin. (Stock prices are ultimately a function of a company’s earnings.) The S&P now trades at about 19 times earnings, compared with its average of around 13. And the NASDAQ index has jumped 61% since its low, while earnings are up only 7%-15%. This would indicate to us that much of the good news is already priced into stocks, and gains from this point will likely be much slower. Real earnings growth has been in the 7%-8% range, and we would expect to see this sort of total return in stocks in a healthy economic climate. And lately, we have seen data that has indicated a stronger economic recovery than was forecast. The revised estimate of second quarter GDP was 3.1%, up from 2.4%, and the Chicago purchasing managers’ index for August was 58.9, up sharply from the consensus forecast of 54, and up from 55.9 in July. (Above 50 indicates expansion activity.) Consumer and business spending is up, and disposable income, helped by tax cuts, posted its biggest gain in over a year. Improvements in employment and job growth, which have been the weak links in the recovery thus far, should be the final confirmation of a recovery. So what’s the most likely near-term scenario? We see an uncomfortable October followed by additional small gains (2%-3%) to the end of the year. Gains for the full year in the growth stock portion of our clients portfolios could be quite impressive, perhaps close to 20%.

2003-10-01T00:00:00-04:00

false

172

false

What’s Next? The Outlook for Investments

What's Next?

2008-10-13T00:56:33-04:00

10 Those of us who are older than our money remember the days when money managers required at least $1,000,000 before they would attempt to construct an individually managed portfolio of stocks and bonds for a client. The rest of us were left to manage on our own using a stockbroker or buying mutual funds. In fact, mutual funds were created to serve the bulk of investors not served by the money managers. Although mutual funds served this market fairly well, they could not provide the many advantages that individually managed portfolios offer: <ul><li>Lower fees <li>Lower taxes <li>Less idle cash <li>Portfolios tailored to meet individual income, growth, and risk requirements <li>Professional asset allocation, ongoing oversight, and timely rebalancing</ul> Fortunately, today many more people are able to take advantage of the benefits of individually managed portfolios. Technological advances have brought tremendous efficiencies to the business of money management, lowering costs and allowing managers to work profitably with portfolios much smaller than $1,000,000. One of the most important technological changes has been the replacement of the physical delivery of securities with electronic delivery or “book entry” systems. Under the old system, Wall Street firms had a lock on the investment business because physical delivery of securities required a presence on Wall Street. The new book entry systems facilitated the emergence of independent custodians such as TD Waterhouse and Charles Schwab not tied to the large brokerage houses on Wall Street. Independent custodians effectively unbundled research, trading, and custodial services and helped reduce total costs to all market participants. As a result, money managers no longer need to trade through the large Wall Street firms in return for research, delivery and custodial services. And they no longer need to pay their prices. Trading commissions that used to cost an investor $500 to $700 per trade have been whittled down to $25 or less. Technological advances have also brought greater efficiencies and lower costs to the front office management of investment portfolios. With powerful PCs, new software, and the Internet, money managers have unparalleled access to news, data, real-time pricing, and instant credit research. This allows managers to monitor large numbers of securities without needing trading rooms staffed by hundreds of professional traders. In addition, electronic downloads of client portfolios into sophisticated management systems allows for real-time decision making at a fraction of the cost of 20 years ago. At BWFA, we can construct individual portfolios for clients starting at $300,000. This minimum is set by both cost and diversification considerations. Modern portfolio theory suggests that a minimum of 40 stocks is needed to provide proper diversification. Buying more than 40 stocks tends to drive costs up without a corresponding decrease in risk. In addition, we believe the cost of a trade should not exceed .5%-1% of the value of the trade. Assuming transaction costs of $25 a trade, and $5,000 minimum purchase amounts for each stock to keep the cost at .5%, we can purchase 40 securities with a portfolio of $300,000. This means that many more investors than ever before can acquire individually managed portfolios of stocks and bonds. And they can do so at far less than the cost of using mutual funds. Ongoing management fees of mutual funds average 1.42%. Despite advances in technology, mutual funds have not lowered these costs over the years. In fact, the average management fee for equity funds recently reached an all-time high of 1.6%. Experts, including Morningstar and the famed John Bogel of the Vanguard Group, have estimated the true cost of mutual funds at closer to 3% when you include other factors such as trading costs, the effect of uninvested money to honor redemptions, and higher tax consequences. At BWFA, we charge .75%-1.25% to construct and manage a portfolio of individual securities customized to your needs. These fees properly reflect the reduction in costs brought about by technology. Tremendous advancements in technology have been good news for investors. Today we can offer many investors all the advantages of individually managed portfolios, including lower costs, lower taxes, and portfolios tailored to your individual needs. If you have $300,000 or more to invest, you should take a look at what an individually managed portfolio could offer you. By historical standards, these are truly bargain times in which to hire a professional money manager. 1

2003-10-01T00:00:00-04:00

false

true

<a href="http://www.bwfa.com/about/ray.asp">Bob Ray</a>, MBA

Those of us who are older than our money remember the days when money managers required at least $1,000,000 before they would attempt to construct an individually managed portfolio of stocks and bonds for a client. The rest of us were left to manage on our own using a stockbroker or buying mutual funds. In fact, mutual funds were created to serve the bulk of investors not served by the money managers. Although mutual funds served this market fairly well, they could not provide the many advantages that individually managed portfolios offer: <ul><li>Lower fees <li>Lower taxes <li>Less idle cash <li>Portfolios tailored to meet individual income, growth, and risk requirements <li>Professional asset allocation, ongoing oversight, and timely rebalancing</ul> Fortunately, today many more people are able to take advantage of the benefits of individually managed portfolios. Technological advances have brought tremendous efficiencies to the business of money management, lowering costs and allowing managers to work profitably with portfolios much smaller than $1,000,000. One of the most important technological changes has been the replacement of the physical delivery of securities with electronic delivery or “book entry” systems. Under the old system, Wall Street firms had a lock on the investment business because physical delivery of securities required a presence on Wall Street. The new book entry systems facilitated the emergence of independent custodians such as TD Waterhouse and Charles Schwab not tied to the large brokerage houses on Wall Street. Independent custodians effectively unbundled research, trading, and custodial services and helped reduce total costs to all market participants. As a result, money managers no longer need to trade through the large Wall Street firms in return for research, delivery and custodial services. And they no longer need to pay their prices. Trading commissions that used to cost an investor $500 to $700 per trade have been whittled down to $25 or less. Technological advances have also brought greater efficiencies and lower costs to the front office management of investment portfolios. With powerful PCs, new software, and the Internet, money managers have unparalleled access to news, data, real-time pricing, and instant credit research. This allows managers to monitor large numbers of securities without needing trading rooms staffed by hundreds of professional traders. In addition, electronic downloads of client portfolios into sophisticated management systems allows for real-time decision making at a fraction of the cost of 20 years ago. At BWFA, we can construct individual portfolios for clients starting at $300,000. This minimum is set by both cost and diversification considerations. Modern portfolio theory suggests that a minimum of 40 stocks is needed to provide proper diversification. Buying more than 40 stocks tends to drive costs up without a corresponding decrease in risk. In addition, we believe the cost of a trade should not exceed .5%-1% of the value of the trade. Assuming transaction costs of $25 a trade, and $5,000 minimum purchase amounts for each stock to keep the cost at .5%, we can purchase 40 securities with a portfolio of $300,000. This means that many more investors than ever before can acquire individually managed portfolios of stocks and bonds. And they can do so at far less than the cost of using mutual funds. Ongoing management fees of mutual funds average 1.42%. Despite advances in technology, mutual funds have not lowered these costs over the years. In fact, the average management fee for equity funds recently reached an all-time high of 1.6%. Experts, including Morningstar and the famed John Bogel of the Vanguard Group, have estimated the true cost of mutual funds at closer to 3% when you include other factors such as trading costs, the effect of uninvested money to honor redemptions, and higher tax consequences. At BWFA, we charge .75%-1.25% to construct and manage a portfolio of individual securities customized to your needs. These fees properly reflect the reduction in costs brought about by technology. Tremendous advancements in technology have been good news for investors. Today we can offer many investors all the advantages of individually managed portfolios, including lower costs, lower taxes, and portfolios tailored to your individual needs. If you have $300,000 or more to invest, you should take a look at what an individually managed portfolio could offer you. By historical standards, these are truly bargain times in which to hire a professional money manager.

2003-10-01T00:00:00-04:00

false

174

false

Individually Managed Portfolios Not Just for the Super Wealthy

2008-09-15T11:19:15-04:00

9 If you are outraged by the recent scandals on Wall Street, you have good reason to be. Along with you, many Americans who watched their fortunes rise and fall with the stock market bubble of the late 90’s are dismayed to learn that the major brokerage houses where they entrusted their money contributed significantly to their losses. Ten of the largest Wall Street firms, including Morgan Stanley, Merrill Lynch and Smith Barney, have agreed to pay a record $1.4 billion to settle government charges of fraud. The allegations center on ways these firms took unfair advantage of their retail clients in order to generate fees from their large commercial clients. Wall Street Deception The SEC’s litigation release, dated April 28, 2003, has revealed that Morgan Stanley and others were compensating research analysts based on the degree to which they helped win investment banking business for the firm. In addition, when soliciting investment banking business, the firm implicitly suggested that analysts would provide favorable ratings of the prospective client’s stock. These arrangements encouraged the firm’s research analysts to tout the stocks the firm was offering to the public, regardless of the stocks’ merits. Internal e-mails revealed that analysts were privately trashing the very stocks for which they were giving strong buy recommendations. The same SEC release also showed that Morgan Stanley and others paid other brokerage firms to publish positive research reports on stocks Morgan Stanley was issuing to the public. These so-called “research guarantees” helped hype the stocks and drive up the prices retail investors paid for these stocks. Is Change Coming? Many retail investors who trusted the buy recommendations coming from these firms are now feeling duped. Will the settlement provide any consolation, and, more importantly, will it cause much needed change in the industry? Likely, no. Phillip Purcell, the CEO of Morgan Stanley, was quoted in the Washington Post on May 1, 2003 as saying “I don’t see anything in the settlement that will concern the retail investor about Morgan Stanley.” This comment prompted William Donaldson, the Chairman of the Securities and Exchange Commission, to accuse Mr. Purcell of displaying “a troubling lack of contrition.” The reforms, which are intended to reduce conflicts of interest, only go as far as relocating research and investment banking departments in different offices and creating separate legal and administrative staffs. These reforms may have little effect on a firm’s desire to keep a corporate client happy with a favorable analyst recommendation. An Alternative Fortunately, as an investor, you do have other options. You can choose to work with an independent, fee-only advisor who is not tied to the conflicts of interest inherent in these large brokerage firms. When you work with a fee-only advisor, neither the advisor nor any related party ever receives compensation contingent on the purchase or sale of a stock or any other financial product. This ensures the advisor has only your best interests in mind. If you are interested in learning more about fee-only advisors or would like a list of advisors in your area, you can contact the National Association of Personal Financial Advisors (NAPFA) at 1-800-366-2732 or on the Web at www.NAPFA.org. NAPFA does more than any other professional organization to ensure the competency of its members, and to steer consumers to experienced, fee-only financial professionals who can provide the independent financial advice consumers are looking for. 1

2003-07-01T00:00:00-04:00

Kimberly Anderson, CFP™

false

true

<a href="http://www.bwfa.com/about/anderson.asp">Kimberly Anderson, CFP™</a>

If you are outraged by the recent scandals on Wall Street, you have good reason to be. Along with you, many Americans who watched their fortunes rise and fall with the stock market bubble of the late 90’s are dismayed to learn that the major brokerage houses where they entrusted their money contributed significantly to their losses. Ten of the largest Wall Street firms, including Morgan Stanley, Merrill Lynch and Smith Barney, have agreed to pay a record $1.4 billion to settle government charges of fraud. The allegations center on ways these firms took unfair advantage of their retail clients in order to generate fees from their large commercial clients. Wall Street Deception The SEC’s litigation release, dated April 28, 2003, has revealed that Morgan Stanley and others were compensating research analysts based on the degree to which they helped win investment banking business for the firm. In addition, when soliciting investment banking business, the firm implicitly suggested that analysts would provide favorable ratings of the prospective client’s stock. These arrangements encouraged the firm’s research analysts to tout the stocks the firm was offering to the public, regardless of the stocks’ merits. Internal e-mails revealed that analysts were privately trashing the very stocks for which they were giving strong buy recommendations. The same SEC release also showed that Morgan Stanley and others paid other brokerage firms to publish positive research reports on stocks Morgan Stanley was issuing to the public. These so-called “research guarantees” helped hype the stocks and drive up the prices retail investors paid for these stocks. Is Change Coming? Many retail investors who trusted the buy recommendations coming from these firms are now feeling duped. Will the settlement provide any consolation, and, more importantly, will it cause much needed change in the industry? Likely, no. Phillip Purcell, the CEO of Morgan Stanley, was quoted in the Washington Post on May 1, 2003 as saying “I don’t see anything in the settlement that will concern the retail investor about Morgan Stanley.” This comment prompted William Donaldson, the Chairman of the Securities and Exchange Commission, to accuse Mr. Purcell of displaying “a troubling lack of contrition.” The reforms, which are intended to reduce conflicts of interest, only go as far as relocating research and investment banking departments in different offices and creating separate legal and administrative staffs. These reforms may have little effect on a firm’s desire to keep a corporate client happy with a favorable analyst recommendation. An Alternative Fortunately, as an investor, you do have other options. You can choose to work with an independent, fee-only advisor who is not tied to the conflicts of interest inherent in these large brokerage firms. When you work with a fee-only advisor, neither the advisor nor any related party ever receives compensation contingent on the purchase or sale of a stock or any other financial product. This ensures the advisor has only your best interests in mind. If you are interested in learning more about fee-only advisors or would like a list of advisors in your area, you can contact the National Association of Personal Financial Advisors (NAPFA) at 1-800-366-2732 or on the Web at www.NAPFA.org. NAPFA does more than any other professional organization to ensure the competency of its members, and to steer consumers to experienced, fee-only financial professionals who can provide the independent financial advice consumers are looking for.

2003-07-01T00:00:00-04:00

false

170

false

Whom Can You Trust?

2008-09-15T11:19:15-04:00

10 Investors who rode the performance wave of technology stocks in the late 90’s only to see the bubble burst in March of 2000 are probably wondering whether or not real estate is the next bubble. Real estate has not quite achieved the returns of tech stocks, but many homes in the Baltimore-Washington region have jumped 25% in the last three years and vacation homes in prime markets have doubled in the last five years. So the comparisons are not without merit. The performance has been terrific, but does this mean we are in a bubble? If so, how can we take advantage of current real estate values? Is Real Estate Really Overvalued? Stock experts in the 90’s claimed that there was no bubble. As tech stocks ran up in value, analysts abandoned traditional methods of profitability analysis, because these firms had no current profits. Instead, they tried to substitute measures that would predict future profitability. Federal Reserve Bank Chairman Alan Greenspan viewed this as “irrational exuberance.” Mr. Greenspan’s comments were early, but he was right nonetheless. As for real estate, Mr. Greenspan pointed out in congressional testimony last summer that investors cannot buy and sell real estate as efficiently as they can stocks and bonds. So it’s harder for bubbles to occur in real estate. History supports this notion. According to Fannie Mae, the nation’s largest residential real estate investor, annual home prices, on a national basis, have not declined since the Great Depression. However, regional downturns have occurred, such as in the oil patch of the early 80’s, the rust belt in the mid-80’s, and California and New England in the early 90’s. The first two events occurred due to regional recessions; the last occurred due to overbuilding. Economists do not expect either a national or regional recession. Since there is a low inventory of homes for sale in the Baltimore-Washington area, one would assume that housing is not overbuilt. So the conditions for a bubble do not appear to exist. Donna Barkman of Coldwell Banker in Ellicott City says that conditions have been right for a boom in real estate. She points out that there is very little land for sale and a low inventory of homes. In addition, low interest rates have allowed people to buy more expensive new homes while maintaining similar mortgage payments. She says that the market is not as strong today as six months ago due to the uncertainty surrounding the war. But she feels that buyers will be ready later in the spring. As rates rise, buyers may have more negotiating room, but she doesn’t see housing prices retreating. Conditions have been even better for vacation real estate. Properties on the Atlantic Coast have appreciated between 50% and 100% in the last ten years. This price appreciation was first fed by strong demographics as baby boomers entered their retirement years. The strong stock market and the quick profits from technology stocks helped turbocharge values. Then low interest rates fueled the market in the last few years. Tim Rhodes of Coldwell Banker in Bethany Beach, Delaware points to the low supply of high-end homes near the beach and strong demand holding prices firm. However, further back from the beach, new housing starts have increased the available supply. A weak economy could lead to falling prices in this area. Realistically, the declines in the equity markets to date and the inevitable rise in interest rates will rein in the real estate market. Already we are seeing weakness in new home sales on a national basis. However, strong demographics and moderate economic growth reduce the likelihood of a substantial decline in real estate values. Here at BWFA, we are not in the housing bubble camp absent a deep recession. But we are a nation at war and in these turbulent times a recession cannot be ruled out. Should We Take Advantage of the Real Estate Boom? BWFA is a strong proponent of diversification of assets and we are constantly rebalancing client portfolios to reduce concentrations in sectors that have performed well recently and allocating the funds to sectors that have underperformed. Should our clients trim their real estate holdings and allocate the funds to the equity markets? In theory, yes. There are circumstances where it might make sense to trim our exposure to this sector. Homeowners who are looking to downsize as they enter retirement might want to do so now to ensure they sell in a strong market. Investors in vacation properties may also feel that locking in capital gains that could be used against capital losses in the stock market would allow for the efficient transfer between asset sectors. But, for most of us, our primary residences and vacation homes are more than investments. They fulfill a primary need for shelter, and we have emotional attachments not found in the stock markets. We are not prepared to trade them for short-term financial gains. In addition, real estate has historically been an excellent hedge against inflation. For most of us, simply holding our real estate is the best course of action. 1

2003-04-25T00:00:00-04:00

false

true

<a href="http://www.bwfa.com/about/ray.asp">Bob Ray</a>, MBA

Investors who rode the performance wave of technology stocks in the late 90’s only to see the bubble burst in March of 2000 are probably wondering whether or not real estate is the next bubble. Real estate has not quite achieved the returns of tech stocks, but many homes in the Baltimore-Washington region have jumped 25% in the last three years and vacation homes in prime markets have doubled in the last five years. So the comparisons are not without merit. The performance has been terrific, but does this mean we are in a bubble? If so, how can we take advantage of current real estate values? Is Real Estate Really Overvalued? Stock experts in the 90’s claimed that there was no bubble. As tech stocks ran up in value, analysts abandoned traditional methods of profitability analysis, because these firms had no current profits. Instead, they tried to substitute measures that would predict future profitability. Federal Reserve Bank Chairman Alan Greenspan viewed this as “irrational exuberance.” Mr. Greenspan’s comments were early, but he was right nonetheless. As for real estate, Mr. Greenspan pointed out in congressional testimony last summer that investors cannot buy and sell real estate as efficiently as they can stocks and bonds. So it’s harder for bubbles to occur in real estate. History supports this notion. According to Fannie Mae, the nation’s largest residential real estate investor, annual home prices, on a national basis, have not declined since the Great Depression. However, regional downturns have occurred, such as in the oil patch of the early 80’s, the rust belt in the mid-80’s, and California and New England in the early 90’s. The first two events occurred due to regional recessions; the last occurred due to overbuilding. Economists do not expect either a national or regional recession. Since there is a low inventory of homes for sale in the Baltimore-Washington area, one would assume that housing is not overbuilt. So the conditions for a bubble do not appear to exist. Donna Barkman of Coldwell Banker in Ellicott City says that conditions have been right for a boom in real estate. She points out that there is very little land for sale and a low inventory of homes. In addition, low interest rates have allowed people to buy more expensive new homes while maintaining similar mortgage payments. She says that the market is not as strong today as six months ago due to the uncertainty surrounding the war. But she feels that buyers will be ready later in the spring. As rates rise, buyers may have more negotiating room, but she doesn’t see housing prices retreating. Conditions have been even better for vacation real estate. Properties on the Atlantic Coast have appreciated between 50% and 100% in the last ten years. This price appreciation was first fed by strong demographics as baby boomers entered their retirement years. The strong stock market and the quick profits from technology stocks helped turbocharge values. Then low interest rates fueled the market in the last few years. Tim Rhodes of Coldwell Banker in Bethany Beach, Delaware points to the low supply of high-end homes near the beach and strong demand holding prices firm. However, further back from the beach, new housing starts have increased the available supply. A weak economy could lead to falling prices in this area. Realistically, the declines in the equity markets to date and the inevitable rise in interest rates will rein in the real estate market. Already we are seeing weakness in new home sales on a national basis. However, strong demographics and moderate economic growth reduce the likelihood of a substantial decline in real estate values. Here at BWFA, we are not in the housing bubble camp absent a deep recession. But we are a nation at war and in these turbulent times a recession cannot be ruled out. Should We Take Advantage of the Real Estate Boom? BWFA is a strong proponent of diversification of assets and we are constantly rebalancing client portfolios to reduce concentrations in sectors that have performed well recently and allocating the funds to sectors that have underperformed. Should our clients trim their real estate holdings and allocate the funds to the equity markets? In theory, yes. There are circumstances where it might make sense to trim our exposure to this sector. Homeowners who are looking to downsize as they enter retirement might want to do so now to ensure they sell in a strong market. Investors in vacation properties may also feel that locking in capital gains that could be used against capital losses in the stock market would allow for the efficient transfer between asset sectors. But, for most of us, our primary residences and vacation homes are more than investments. They fulfill a primary need for shelter, and we have emotional attachments not found in the stock markets. We are not prepared to trade them for short-term financial gains. In addition, real estate has historically been an excellent hedge against inflation. For most of us, simply holding our real estate is the best course of action.

2003-04-25T00:00:00-04:00

false

166

false

Is Real Estate the Next Bubble?

2008-09-15T11:19:15-04:00

7 Many independent investment professionals and academicians have observed that mutual fund investors consistently buy when markets are at their peak and sell when markets are at their bottoms. We can see that observation is true by watching the net flow of money into and out of particular types of mutual funds. While this tendency to buy high and sell low is true of all different types of investors (bond fund investors, growth fund investors, value investors, muni bond investors, etc.), the data in this article is specifically about stock (equity) investors. If this pattern is really true, shouldn't we be able to watch what the majority of investors do, and then just do the opposite? As we have all observed, this is easier said than done. Virtually all investors are euphoric at the top and scared at the bottom. At the bottom, investor attitudes are such that there is very little confidence that things will change anytime soon and, therefore, no impetus to invest. Investor's Business Daily, in their August 27, 2002 edition, included a table which listed the 11 months with the highest monthly outflow of money from stock mutual funds. With the help of Bloomberg and Lotus, we were able to identify the market returns during the 12 months following the months with the largest outflows. The expanded table appears below. <img src="http://www.bwfa.com/images/fall-2002-withdrawals_table.jpg" align="left" border=0 hspace="5" vspace="5"> The table is ranked by �As a % of Total,� where �Total� is the value of all money invested in stock mutual funds. In October 1987, for example, investors withdrew $7.45 billion from stock funds, which was 3.17% of the value invested in all stock funds. You can see that, on a percentage basis, that was about twice as much as investors pulled in the next highest period�July 2002. The next column over shows what happened in the 12 months following the largest money outflows. In October 1987, for example, the table shows that investors who didn't sell earned a 9.08% return. As a matter of fact, except for the markets of the last two years, investors have always made money in the year following the months of large outflows. We also note that investors tend to withdraw more money in the month of August. August is listed in the chart 4 out of 11 times, or about 1/3 of the time. This is not an accident, since August also has the lowest trading volume of the year. Lower activity generally means lower equity prices. Of course, we don't know what is going to happen in the next 12 months. But we can observe that money flows out of equity funds and several other indicators of market sentiment are clearly pointed in the right direction. <img src="http://www.bwfa.com/images/fall-2002-stock.jpg" align="left" border=0 hspace="5" vspace="5"> 1

2002-10-01T00:00:00-04:00

false

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

Many independent investment professionals and academicians have observed that mutual fund investors consistently buy when markets are at their peak and sell when markets are at their bottoms. We can see that observation is true by watching the net flow of money into and out of particular types of mutual funds. While this tendency to buy high and sell low is true of all different types of investors (bond fund investors, growth fund investors, value investors, muni bond investors, etc.), the data in this article is specifically about stock (equity) investors. If this pattern is really true, shouldn’t we be able to watch what the majority of investors do, and then just do the opposite? As we have all observed, this is easier said than done. Virtually all investors are euphoric at the top and scared at the bottom. At the bottom, investor attitudes are such that there is very little confidence that things will change anytime soon and, therefore, no impetus to invest. Investor’s Business Daily, in their August 27, 2002 edition, included a table which listed the 11 months with the highest monthly outflow of money from stock mutual funds. With the help of Bloomberg and Lotus, we were able to identify the market returns during the 12 months following the months with the largest outflows. The expanded table appears below. <img src="http://www.bwfa.com/images/fall-2002-withdrawals_table.jpg" align="left" border=0 hspace="5" vspace="5"> The table is ranked by “As a % of Total,” where “Total” is the value of all money invested in stock mutual funds. In October 1987, for example, investors withdrew $7.45 billion from stock funds, which was 3.17% of the value invested in all stock funds. You can see that, on a percentage basis, that was about twice as much as investors pulled in the next highest period—July 2002. The next column over shows what happened in the 12 months following the largest money outflows. In October 1987, for example, the table shows that investors who didn’t sell earned a 9.08% return. As a matter of fact, except for the markets of the last two years, investors have always made money in the year following the months of large outflows. We also note that investors tend to withdraw more money in the month of August. August is listed in the chart 4 out of 11 times, or about 1/3 of the time. This is not an accident, since August also has the lowest trading volume of the year. Lower activity generally means lower equity prices. Of course, we don’t know what is going to happen in the next 12 months. But we can observe that money flows out of equity funds and several other indicators of market sentiment are clearly pointed in the right direction. <img src="http://www.bwfa.com/images/fall-2002-stock.jpg" align="left" border=0 hspace="5" vspace="5">

2002-10-01T00:00:00-04:00

false

157

false

Buying High & Selling Low? That’s What Investors Seem To Do

Buying High & Selling Low? That's What Investors Seem To Do

2008-10-13T01:00:19-04:00

8 Phoenix, Aug. 27 (Bloomberg) -- Five years ago, Don Burns and his wife, Gerry, sank $160,000 of retirement money into municipal bonds sold to build the Oaks at Medina nursing home in Medina, Ohio. Three years later, the home defaulted, leaving the Burnses with $2,000 of their investment. The Phoenix retirees say they didn't see a prospectus, a financial statement or pricing information. They say their broker, Mike Weidt of Parker/Hunter Inc. in Pittsburgh, assured them municipal bonds were safe. The couple never suspected they could lose most of their principal. ‘‘Who would think that a nursing home would go bankrupt?'' says Gerry Burns, 70. ‘‘I've worked in a few, and I never saw a bed empty.'' Weidt declined to comment, as did Parker/Hunter Senior Vice President Jay Yard. With the Standard & Poor's 500 Index at a five-year low, investors are scooping up municipal bonds, attracted by steady payments of tax-exempt interest and the perception of low risk. Issuers sold a record $160.2 billion of munis in the first half of 2002. Private investors owned $572.9 billion of the bonds at the end of March, a 33 percent rise in six years and a 7.5 percent rise from a year ago. Mutual funds hold $610.8 billion, a surge of 46 percent since 1996 and 8.9 percent in the past year. Banks, insurance companies, pension funds and securities brokers hold another $450 billion, according to the U.S. Federal Reserve Board. Investors who view municipal bonds as a sanctuary from this year's 12 percent drop in the Dow Jones Industrial Average may instead find themselves in a dark corner of the U.S. financial markets, where the rules that govern equity investing don't apply. Inadequate Disclosure Unlike public companies, muni bond issuers – typically states and city governments -- aren't required to file quarterly financial statements with the U.S. Securities and Exchange Commission or reveal information about their ability to make interest and principal payments. About 40 percent of issuers provide inadequate disclosure, according to a May study by the National Federation of Municipal Analysts, which represents big institutional investors. Pricing is largely at the discretion of the dealer that buys and sells the bonds. Some prices aren't published until a week after a trade. Regulation and enforcement efforts trail other markets. The municipal bond market is worse than the Wild West,'' says Kevin Olson, 41, founder of MunicipalBonds.com, one of the few Web sites that offer free price data to individual investors. ‘‘There are laws and rules in the securities markets, but none seem to directly apply to the municipal bond market. There is no cavalry that will come to your rescue.'' Issuers and Underwriters Olson says issuers and underwriters are preventing investors from making sound decisions by denying them timely information on prices and financial performance. Among the offenders are big Wall Street brokerages, he says. So far this year, Citigroup Inc.'s Salomon Smith Barney; UBS PaineWebber; Lehman Brothers Inc.; Merrill Lynch & Co.; and Bear, Stearns & Co. have handled 51 percent of all muni deals. They're poised to capture the bulk of the $4 billion in fees generated from new issues, which are on target to exceed $200 billion in 2002, according to Thomson Financial, which tracks muni sales. The bond boom is a turnaround from the stock market's glory years, which had relegated munis to a financial backwater. In November 2000, Prudential Securities Inc. shut its municipal department. In April 2001, Merrill Lynch fired 29 muni bond investment bankers, a third of its investment banking staff. Now, as demand wanes for initial public offerings and merger advice, munis are one of Wall Street's bright spots. U.S. securities firms have cut 45,300 jobs in the past 12 months, according to the Bureau of Labor Statistics; they've spared their muni teams. One Sales Person Bear Stearns added one institutional sales person in munis, even as it fired 1,200 workers company wide, according to spokesman Russell Sherman. Daniel Keating, Bear Stearns's senior managing director and head of public finance, says disclosure in the muni market has never been better. Investors can get price information that wasn't available four years ago, and rule makers are pressing to release data more quickly. ''The system's great,'' says Keating, who adds that disclosure requirements for corporate bond trades just went into effect July 1. Bond issuers say investors must bear some responsibility when they buy munis. Level of Disclosure ''If they don't like the level of disclosure, they need to take their money and put it into something where they like the disclosure,'' says Tom Glaser, vice chairman of the debt committee of the Government Finance Officers Association, a group of bond issuers. Glaser, who's also finance chief of Cook County, Illinois, says that in the past six years, he recalls four times when investors requested information beyond what the county, which includes Chicago, provided on its $1.8 billion of bonds. Some of the big U.S. mutual funds side with investors in seeking better disclosure. In 1983, they created the 1,000-member National Federation of Municipal Analysts trade group that comprises muni fund analysts and ratings companies. Ranked by total fund assets, Vanguard Group Inc., Franklin Advisors Inc., American Express Financial Corp., Scudder Asset Management and Fidelity Management & Research run the five largest municipal bond funds. Analysts at some of these funds say they face a constant battle to get issuers to provide useful information in a timely way. Always Late ''Financial reports are always late,'' says Philip Condon, co manager of the $4.9 billion Scudder Managed Municipal Bond Fund. ''We prefer to buy issues where we don't have to wait three or four months to get financial reports.'' Mutual funds, like individual investors, can get caught holding municipal bonds of questionable value. When Denver's Colorado Ocean Journey Aquarium defaulted on $57 million of bonds in July 2001 because of low attendance, Putnam Investments was holding more than two-thirds of the bonds in its portfolio, according to Bloomberg data. Putnam is awaiting the outcome of the aquarium's case in bankruptcy court to learn how much of investors' money it will get back. In the U.S. stock market, the SEC requires that public companies file financial reports and disseminate news that could affect their financial health. The SEC enforces the regulations. That doesn't happen with munis. The SEC can't require disclosure. Disclosure Rules The Securities Act of 1933 and the Securities Exchange Act of 1934, which set out filing and disclosure rules for public companies after the 1929 stock market crash, exclude municipalities from such reporting. ''The SEC can do little in terms of direct regulation,'' says Paul Maco, former director of the SEC Office of Municipal Securities and now a partner at the law firm of Vinson & Elkins LLP in Washington, D.C. Scrutiny of the muni market falls short in another area. The 15-member Municipal Securities Rulemaking Board, which makes the rules that govern munis, is run by the dealers and issuers it oversees. The MSRB has no enforcement power. Bush Signs Law The setup is similar to that of the Financial Accounting Standards Board, which makes rules on accounting practices yet has no authority to police auditors. U.S. Representative Billy Tauzin, the Louisiana Republican who chairs the House Energy and Commerce Committee, is questioning FASB's effectiveness after audit failures at Enron Corp., Global Crossing Ltd. and WorldCom Inc. On July 30, President George W. Bush signed into law tougher rules to police the accounting industry. The SEC plans to appoint a five-member board that will set standards for accountants and review their audits. The SEC and the National Association of Securities Dealers get involved in the muni market in cases in which they suspect fraud. Munis get a low priority. The NASD Web site lists about 280 instances in which it has taken enforcement action involving sales of municipal bonds since 1996 -- about 1/10 of its 2,561 actions in other markets. At the SEC, 67, or 4.4 percent, of the agency's 1,513 enforcement cases in the past three years involved the sale of municipal bonds. ''I don't think there is any real regulation of the municipal market,'' says Steve Watson, who was with both the SEC and the NASD before becoming a securities lawyer in Dallas. Haphazard muni trading and pricing systems contribute to the market's murkiness. No Central Exchange Unlike most stocks, munis don't trade on a central exchange. About $9.5 billion of the securities change hands each day via traders who phone each other armed with lists of bonds they're either offering or trying to buy. Real-time quotes, common in the stock market, don't exist. The MSRB discloses prices for actively traded bonds -- about 50 percent of the total -- the next day. For others, it releases prices a week after they trade. Dealers can price munis any way they want -- as long as the price falls into what the MSRB deems ''fair and reasonable,'' an expression the board says it doesn't quantify. Dealers can use their discretion in the markups they pay themselves for trades, and they aren't required to tell investors how much they earn. Insiders Know ''Insiders know what these bonds are worth, but no one else does,'' says Larry Greene, a former NASD supervisor who became a critic of the agency after working there 25 years. Olson wants to change the system. He set up his Web site in his apartment in San Francisco's Marina district to provide investors with daily pricing information and to point out markups he says are excessive. Olson's role as self-appointed watchdog comes after 10 years on the West Coast municipal bond trading desks of Bank of America Securities, Sutro & Co. and PaineWebber. During his tenure, the only pricing data available was from a firm's own trades, he says. Olson puts the daily MSRB price reports online. Then he flags dealers' markups, known as spreads, that exceed 4 percent of the bond's face value. Bonds generally sell in $5,000 denominations, and so a 1 percent markup -- or one point, as traders call it -- equals $50. Normal muni markups range from 1 point to 3.5 points, same as for corporate bonds, the Bond Market Association says. U.S. Treasury note markups are typically less than a point. I'm Going to Get Ripped Off Muni bond markups often exceed accepted practices. On Aug. 5, Olson's Web site listed 38 bonds with markups of more than 4 points among the more than 2,000 that traded at least three times that day. The highest spread was 10.655 points. Stephen de Vore, a New York attorney, was so worried that markups would cut into his profit, that he opted not to buy munis this year. De Vore, 39, says he talked to dealers and decided that paying $100 on a $5,000 trade was too much. ''If the buying and selling is opaque to me, I'm going to get ripped off,'' he says. In addition to markups, prices can vary widely for the same bond. On June 8, 2001, Olson found that most investors were paying 99-101 cents on the dollar for Broward County, Florida, school board bonds. That same day, one dealer -- pricing reports don't say who -- paid about 25 cents. That means the dealer could have tripled its investment if it sold at the market price, while the seller sold the bond for 74 percent less than it was worth. Staple of Finance Municipal bonds have been a staple of finance since the Middle Ages, when Italian city-states sold securities. In the early 1800s, New York sold bonds secured by taxes on salt to build the 363-mile Erie Canal, one of the first big American public works projects. When the U.S. imposed an income tax in 1913, states and cities gained a tax exemption for interest that investors earned on municipal bonds. Local governments expanded munis' uses from the financing of roads and water systems to the funding of public housing, sports stadiums and economic development. As the market grew, investors began to seek greater transparency. In 1993, Arthur Levitt, then SEC chairman and a current Bloomberg LP board member, called for more disclosure. He cited the lack of official statements and investors' difficulty in figuring out whether prices were fair. Orange County The MSRB and the SEC pushed harder for change after 1994, when Orange County, California, filed the largest municipal bankruptcy in U.S. history. The collapse threw the county's bonds into default and cost investors millions of dollars. The county lost $1.7 billion on its investments in derivative securities, which are financial obligations derived from debt or equity securities, commodities or currencies. Private investors and mutual funds said they didn't know about the risky investments, which lost value when interest rates rose. In November 1996, California Superior Court Judge Stephen Czuleger sentenced County Treasurer Robert Citron to a year in prison for fraud in his handling of the investments. Long after the debacle, muni investors still get burned. On one day -- Oct. 13, 2000 -- shares of Heartland Advisors Inc.'s Heartland High-Yield Municipal Bond Fund tumbled 69 percent and shares of its Heartland Short Duration High-Yield Municipal Fund dropped 44 percent, when Heartland wrote down the value of the bonds because many of them were approaching default. Face Value Heartland had been carrying the bonds on its books at face value. The firm settled investors' class-action lawsuit in July 2002, agreeing to pay $14 million in cash. Getting a price for a municipal bond isn't as easy as finding a stock quote or a Treasury bond price in the newspaper or going to the Edgar Web site for SEC filings. After Orange County, the MSRB began requiring that securities dealers report every trade -- including price and transaction size -- to the board at the end of the day. It began making the data public in 1998. Investors can download daily at no charge a report from the MSRB's Web site. Finding what they need is tougher: Some of the reports are 400 pages. As a stock investor, 70-year-old Merrill Peacock says he had enough knowledge to do his own research. When he retired in 1997, the former construction worker wanted to keep his principal and earn tax-exempt interest. He began buying munis and says he trusted his broker, Dane Stephen Faber, because he didn't know where else to look. Preserve My Principal ''I gave my broker $25,000 and told him I wanted tax-free bonds and to preserve my principal,'' says Peacock, who lives in Lucerne, California. Peacock says that from January 1998 to December 1999, he poured a total of $200,000 into munis on the advice of Faber, who was at Smith Culver Investments in San Francisco and then at First Securities USA's Incline Village, Nevada, office. Peacock says Faber recommended almost $36,000 of bonds sold by the Marineland Foundation, which ran an aquarium in Florida. A month later, Peacock got a notice from Marineland's trustee saying the attraction had failed to maintain required reserves and was in default. On March 9, 2001, Peacock sold his bonds for $5,350, or 12 cents on the dollar, racking up a $30,623 loss. All told, he says, he lost $53,000 on munis. Faber declined to comment, citing a threat of legal action. ''I have a lengthy laundry list of comments I would like to make,'' Faber says. Unsuitable Investments In March 1996, the NASD disciplined Faber for recommending unsuitable investments for a customer's needs, according to agency records. In May, the NASD fined him $35,000 for making improper price predictions and assurances of success, the records show. Faber is appealing. Even though Peacock's nephew is Craig Barrett, chief executive of Intel Corp., Peacock doesn't own a computer, says his attorney, Paul Jess of Sonoma, California. For stocks, Peacock could monitor prices in the newspaper, watch financial news shows and get research reports from his broker. Jess says Peacock knew that the bonds he bought didn't have the highest rating; he didn't know a municipal bond investment could lose money. ''Brokers who engage in municipal transactions don't want to make it visible,'' Jess says. One trader says that he and his counterparts bear responsibility for troubles like Peacock's if they advise clients to buy high-risk bonds. Little Old Ladies ''If you're selling junk bonds to little old ladies and get caught, you should get screwed,'' says Dennis Beezley, a vice president at Glen Rauch Securities Inc. in New York. MSRB Executive Director Christopher Taylor says the board is making headway in the disclosure of pricing data. Within two years, it expects to be reporting prices every 15 minutes. The MSRB also set up seven databases to handle documents from municipal bond issuers: Bloomberg Municipal Repository, DPC Data Inc., FT Interactive Data, Municipal Advisory Council of Michigan, Municipal Advisory Council of Texas, Ohio Municipal Advisory Council and Standard & Poor's J. J. Kenny Repository. ''The board has made significant improvement in what's available to the public,'' says MSRB chairman Howard Marsh, who also runs Salomon Smith Barney's muni division. Even so, investors must pay as much as $25 for the reports. With equities, they can tap the SEC's Edgar system for free via the Internet. Kmart Quest More disclosure might have helped Michael Schroeder, who manages $400 million in muni investments at Naples, Florida-based Wasmer Schroeder & Co. In January 2002, as Kmart Corp. faced bankruptcy, Schroeder sought information about industrial revenue bonds for which the retailer had guaranteed repayment. City governments sell the bonds to finance development such as new stores, to attract jobs or to gain tax revenue. A retailer like Kmart gets the proceeds and guarantees repayment of the bonds at a lower interest rate than it would receive in the corporate market. Kmart refused to provide data on specific stores, so Schroeder, whose company held five of the issues, says he called a hundred store managers to compile sales information. Initially, they complied, until Kmart made them stop doing so. ''Small and infrequent issuers are just horrible about providing information,'' says Schroeder. ‘‘They need to learn to disclose things as they happen, not six months later in the footnote of a financial statement.'' Specific Stores Kmart doesn't disclose sales on specific stores, says Jack Ferry, Kmart spokesman. So far, Schroeder says, he's recovered his company's investment in four of the five issues. Levitt and his SEC successor, Harvey Pitt, support the MSRB plan for 15-minute pricing and improved financial disclosure. On May 25, Pitt told the Bond Market Association that the municipal bond market is farther along than the corporate bond market on disclosure issues. ''But it has yet to achieve the ultimate goal of transparency: real-time reporting of transactions,'' he said. Muni investors may not get much help from the SEC. The agency has its hands full, with the fallout from another self- regulated industry: accounting. Collapse of Enron The SEC is investigating the collapse of Enron and the $7.18 billion accounting fraud at WorldCom. It assisted in the U.S. Justice Department's case against Enron's auditor, Arthur Andersen LLP. ''I don't know how much effort the SEC will really put into the municipal bond market now, because they are so distracted by corporate governance,'' Schroeder says. For Don and Gerry Burns, the dangers of the muni market proved as devastating as buying stock in Enron, Global Crossing or WorldCom. The Oaks at Medina nursing home that sold them their bonds had a fire during construction, and occupancy increased more slowly than the offering documents had projected. If the Burnses had read an official statement, they might have learned they were buying Series C securities. Series Cs were subordinate to $29.5 million of Series A and B bonds, meaning that they were last to get paid. In December, the Burnses sold their bonds for a penny on the dollar. ''We took a pretty good bath,'' Don Burns says. They probably won't be the last, as more equity investors flee declining stocks and wade into the murky market for municipal bonds. 2002-08-27 00:15 (New York) 1

2002-09-01T00:00:00-04:00

(Published in the September issue of Bloomberg Markets)

false

true

(Published in the September issue of Bloomberg Markets)

Phoenix, Aug. 27 (Bloomberg) -- Five years ago, Don Burns and his wife, Gerry, sank $160,000 of retirement money into municipal bonds sold to build the Oaks at Medina nursing home in Medina, Ohio. Three years later, the home defaulted, leaving the Burnses with $2,000 of their investment. The Phoenix retirees say they didn't see a prospectus, a financial statement or pricing information. They say their broker, Mike Weidt of Parker/Hunter Inc. in Pittsburgh, assured them municipal bonds were safe. The couple never suspected they could lose most of their principal. ‘‘Who would think that a nursing home would go bankrupt?'' says Gerry Burns, 70. ‘‘I've worked in a few, and I never saw a bed empty.'' Weidt declined to comment, as did Parker/Hunter Senior Vice President Jay Yard. With the Standard & Poor's 500 Index at a five-year low, investors are scooping up municipal bonds, attracted by steady payments of tax-exempt interest and the perception of low risk. Issuers sold a record $160.2 billion of munis in the first half of 2002. Private investors owned $572.9 billion of the bonds at the end of March, a 33 percent rise in six years and a 7.5 percent rise from a year ago. Mutual funds hold $610.8 billion, a surge of 46 percent since 1996 and 8.9 percent in the past year. Banks, insurance companies, pension funds and securities brokers hold another $450 billion, according to the U.S. Federal Reserve Board. Investors who view municipal bonds as a sanctuary from this year's 12 percent drop in the Dow Jones Industrial Average may instead find themselves in a dark corner of the U.S. financial markets, where the rules that govern equity investing don't apply. Inadequate Disclosure Unlike public companies, muni bond issuers – typically states and city governments -- aren't required to file quarterly financial statements with the U.S. Securities and Exchange Commission or reveal information about their ability to make interest and principal payments. About 40 percent of issuers provide inadequate disclosure, according to a May study by the National Federation of Municipal Analysts, which represents big institutional investors. Pricing is largely at the discretion of the dealer that buys and sells the bonds. Some prices aren't published until a week after a trade. Regulation and enforcement efforts trail other markets. The municipal bond market is worse than the Wild West,'' says Kevin Olson, 41, founder of MunicipalBonds.com, one of the few Web sites that offer free price data to individual investors. ‘‘There are laws and rules in the securities markets, but none seem to directly apply to the municipal bond market. There is no cavalry that will come to your rescue.'' Issuers and Underwriters Olson says issuers and underwriters are preventing investors from making sound decisions by denying them timely information on prices and financial performance. Among the offenders are big Wall Street brokerages, he says. So far this year, Citigroup Inc.'s Salomon Smith Barney; UBS PaineWebber; Lehman Brothers Inc.; Merrill Lynch & Co.; and Bear, Stearns & Co. have handled 51 percent of all muni deals. They're poised to capture the bulk of the $4 billion in fees generated from new issues, which are on target to exceed $200 billion in 2002, according to Thomson Financial, which tracks muni sales. The bond boom is a turnaround from the stock market's glory years, which had relegated munis to a financial backwater. In November 2000, Prudential Securities Inc. shut its municipal department. In April 2001, Merrill Lynch fired 29 muni bond investment bankers, a third of its investment banking staff. Now, as demand wanes for initial public offerings and merger advice, munis are one of Wall Street's bright spots. U.S. securities firms have cut 45,300 jobs in the past 12 months, according to the Bureau of Labor Statistics; they've spared their muni teams. One Sales Person Bear Stearns added one institutional sales person in munis, even as it fired 1,200 workers company wide, according to spokesman Russell Sherman. Daniel Keating, Bear Stearns's senior managing director and head of public finance, says disclosure in the muni market has never been better. Investors can get price information that wasn't available four years ago, and rule makers are pressing to release data more quickly. ''The system's great,'' says Keating, who adds that disclosure requirements for corporate bond trades just went into effect July 1. Bond issuers say investors must bear some responsibility when they buy munis. Level of Disclosure ''If they don't like the level of disclosure, they need to take their money and put it into something where they like the disclosure,'' says Tom Glaser, vice chairman of the debt committee of the Government Finance Officers Association, a group of bond issuers. Glaser, who's also finance chief of Cook County, Illinois, says that in the past six years, he recalls four times when investors requested information beyond what the county, which includes Chicago, provided on its $1.8 billion of bonds. Some of the big U.S. mutual funds side with investors in seeking better disclosure. In 1983, they created the 1,000-member National Federation of Municipal Analysts trade group that comprises muni fund analysts and ratings companies. Ranked by total fund assets, Vanguard Group Inc., Franklin Advisors Inc., American Express Financial Corp., Scudder Asset Management and Fidelity Management & Research run the five largest municipal bond funds. Analysts at some of these funds say they face a constant battle to get issuers to provide useful information in a timely way. Always Late ''Financial reports are always late,'' says Philip Condon, co manager of the $4.9 billion Scudder Managed Municipal Bond Fund. ''We prefer to buy issues where we don't have to wait three or four months to get financial reports.'' Mutual funds, like individual investors, can get caught holding municipal bonds of questionable value. When Denver's Colorado Ocean Journey Aquarium defaulted on $57 million of bonds in July 2001 because of low attendance, Putnam Investments was holding more than two-thirds of the bonds in its portfolio, according to Bloomberg data. Putnam is awaiting the outcome of the aquarium's case in bankruptcy court to learn how much of investors' money it will get back. In the U.S. stock market, the SEC requires that public companies file financial reports and disseminate news that could affect their financial health. The SEC enforces the regulations. That doesn't happen with munis. The SEC can't require disclosure. Disclosure Rules The Securities Act of 1933 and the Securities Exchange Act of 1934, which set out filing and disclosure rules for public companies after the 1929 stock market crash, exclude municipalities from such reporting. ''The SEC can do little in terms of direct regulation,'' says Paul Maco, former director of the SEC Office of Municipal Securities and now a partner at the law firm of Vinson & Elkins LLP in Washington, D.C. Scrutiny of the muni market falls short in another area. The 15-member Municipal Securities Rulemaking Board, which makes the rules that govern munis, is run by the dealers and issuers it oversees. The MSRB has no enforcement power. Bush Signs Law The setup is similar to that of the Financial Accounting Standards Board, which makes rules on accounting practices yet has no authority to police auditors. U.S. Representative Billy Tauzin, the Louisiana Republican who chairs the House Energy and Commerce Committee, is questioning FASB's effectiveness after audit failures at Enron Corp., Global Crossing Ltd. and WorldCom Inc. On July 30, President George W. Bush signed into law tougher rules to police the accounting industry. The SEC plans to appoint a five-member board that will set standards for accountants and review their audits. The SEC and the National Association of Securities Dealers get involved in the muni market in cases in which they suspect fraud. Munis get a low priority. The NASD Web site lists about 280 instances in which it has taken enforcement action involving sales of municipal bonds since 1996 -- about 1/10 of its 2,561 actions in other markets. At the SEC, 67, or 4.4 percent, of the agency's 1,513 enforcement cases in the past three years involved the sale of municipal bonds. ''I don't think there is any real regulation of the municipal market,'' says Steve Watson, who was with both the SEC and the NASD before becoming a securities lawyer in Dallas. Haphazard muni trading and pricing systems contribute to the market's murkiness. No Central Exchange Unlike most stocks, munis don't trade on a central exchange. About $9.5 billion of the securities change hands each day via traders who phone each other armed with lists of bonds they're either offering or trying to buy. Real-time quotes, common in the stock market, don't exist. The MSRB discloses prices for actively traded bonds -- about 50 percent of the total -- the next day. For others, it releases prices a week after they trade. Dealers can price munis any way they want -- as long as the price falls into what the MSRB deems ''fair and reasonable,'' an expression the board says it doesn't quantify. Dealers can use their discretion in the markups they pay themselves for trades, and they aren't required to tell investors how much they earn. Insiders Know ''Insiders know what these bonds are worth, but no one else does,'' says Larry Greene, a former NASD supervisor who became a critic of the agency after working there 25 years. Olson wants to change the system. He set up his Web site in his apartment in San Francisco's Marina district to provide investors with daily pricing information and to point out markups he says are excessive. Olson's role as self-appointed watchdog comes after 10 years on the West Coast municipal bond trading desks of Bank of America Securities, Sutro & Co. and PaineWebber. During his tenure, the only pricing data available was from a firm's own trades, he says. Olson puts the daily MSRB price reports online. Then he flags dealers' markups, known as spreads, that exceed 4 percent of the bond's face value. Bonds generally sell in $5,000 denominations, and so a 1 percent markup -- or one point, as traders call it -- equals $50. Normal muni markups range from 1 point to 3.5 points, same as for corporate bonds, the Bond Market Association says. U.S. Treasury note markups are typically less than a point. I'm Going to Get Ripped Off Muni bond markups often exceed accepted practices. On Aug. 5, Olson's Web site listed 38 bonds with markups of more than 4 points among the more than 2,000 that traded at least three times that day. The highest spread was 10.655 points. Stephen de Vore, a New York attorney, was so worried that markups would cut into his profit, that he opted not to buy munis this year. De Vore, 39, says he talked to dealers and decided that paying $100 on a $5,000 trade was too much. ''If the buying and selling is opaque to me, I'm going to get ripped off,'' he says. In addition to markups, prices can vary widely for the same bond. On June 8, 2001, Olson found that most investors were paying 99-101 cents on the dollar for Broward County, Florida, school board bonds. That same day, one dealer -- pricing reports don't say who -- paid about 25 cents. That means the dealer could have tripled its investment if it sold at the market price, while the seller sold the bond for 74 percent less than it was worth. Staple of Finance Municipal bonds have been a staple of finance since the Middle Ages, when Italian city-states sold securities. In the early 1800s, New York sold bonds secured by taxes on salt to build the 363-mile Erie Canal, one of the first big American public works projects. When the U.S. imposed an income tax in 1913, states and cities gained a tax exemption for interest that investors earned on municipal bonds. Local governments expanded munis' uses from the financing of roads and water systems to the funding of public housing, sports stadiums and economic development. As the market grew, investors began to seek greater transparency. In 1993, Arthur Levitt, then SEC chairman and a current Bloomberg LP board member, called for more disclosure. He cited the lack of official statements and investors' difficulty in figuring out whether prices were fair. Orange County The MSRB and the SEC pushed harder for change after 1994, when Orange County, California, filed the largest municipal bankruptcy in U.S. history. The collapse threw the county's bonds into default and cost investors millions of dollars. The county lost $1.7 billion on its investments in derivative securities, which are financial obligations derived from debt or equity securities, commodities or currencies. Private investors and mutual funds said they didn't know about the risky investments, which lost value when interest rates rose. In November 1996, California Superior Court Judge Stephen Czuleger sentenced County Treasurer Robert Citron to a year in prison for fraud in his handling of the investments. Long after the debacle, muni investors still get burned. On one day -- Oct. 13, 2000 -- shares of Heartland Advisors Inc.'s Heartland High-Yield Municipal Bond Fund tumbled 69 percent and shares of its Heartland Short Duration High-Yield Municipal Fund dropped 44 percent, when Heartland wrote down the value of the bonds because many of them were approaching default. Face Value Heartland had been carrying the bonds on its books at face value. The firm settled investors' class-action lawsuit in July 2002, agreeing to pay $14 million in cash. Getting a price for a municipal bond isn't as easy as finding a stock quote or a Treasury bond price in the newspaper or going to the Edgar Web site for SEC filings. After Orange County, the MSRB began requiring that securities dealers report every trade -- including price and transaction size -- to the board at the end of the day. It began making the data public in 1998. Investors can download daily at no charge a report from the MSRB's Web site. Finding what they need is tougher: Some of the reports are 400 pages. As a stock investor, 70-year-old Merrill Peacock says he had enough knowledge to do his own research. When he retired in 1997, the former construction worker wanted to keep his principal and earn tax-exempt interest. He began buying munis and says he trusted his broker, Dane Stephen Faber, because he didn't know where else to look. Preserve My Principal ''I gave my broker $25,000 and told him I wanted tax-free bonds and to preserve my principal,'' says Peacock, who lives in Lucerne, California. Peacock says that from January 1998 to December 1999, he poured a total of $200,000 into munis on the advice of Faber, who was at Smith Culver Investments in San Francisco and then at First Securities USA's Incline Village, Nevada, office. Peacock says Faber recommended almost $36,000 of bonds sold by the Marineland Foundation, which ran an aquarium in Florida. A month later, Peacock got a notice from Marineland's trustee saying the attraction had failed to maintain required reserves and was in default. On March 9, 2001, Peacock sold his bonds for $5,350, or 12 cents on the dollar, racking up a $30,623 loss. All told, he says, he lost $53,000 on munis. Faber declined to comment, citing a threat of legal action. ''I have a lengthy laundry list of comments I would like to make,'' Faber says. Unsuitable Investments In March 1996, the NASD disciplined Faber for recommending unsuitable investments for a customer's needs, according to agency records. In May, the NASD fined him $35,000 for making improper price predictions and assurances of success, the records show. Faber is appealing. Even though Peacock's nephew is Craig Barrett, chief executive of Intel Corp., Peacock doesn't own a computer, says his attorney, Paul Jess of Sonoma, California. For stocks, Peacock could monitor prices in the newspaper, watch financial news shows and get research reports from his broker. Jess says Peacock knew that the bonds he bought didn't have the highest rating; he didn't know a municipal bond investment could lose money. ''Brokers who engage in municipal transactions don't want to make it visible,'' Jess says. One trader says that he and his counterparts bear responsibility for troubles like Peacock's if they advise clients to buy high-risk bonds. Little Old Ladies ''If you're selling junk bonds to little old ladies and get caught, you should get screwed,'' says Dennis Beezley, a vice president at Glen Rauch Securities Inc. in New York. MSRB Executive Director Christopher Taylor says the board is making headway in the disclosure of pricing data. Within two years, it expects to be reporting prices every 15 minutes. The MSRB also set up seven databases to handle documents from municipal bond issuers: Bloomberg Municipal Repository, DPC Data Inc., FT Interactive Data, Municipal Advisory Council of Michigan, Municipal Advisory Council of Texas, Ohio Municipal Advisory Council and Standard & Poor's J. J. Kenny Repository. ''The board has made significant improvement in what's available to the public,'' says MSRB chairman Howard Marsh, who also runs Salomon Smith Barney's muni division. Even so, investors must pay as much as $25 for the reports. With equities, they can tap the SEC's Edgar system for free via the Internet. Kmart Quest More disclosure might have helped Michael Schroeder, who manages $400 million in muni investments at Naples, Florida-based Wasmer Schroeder & Co. In January 2002, as Kmart Corp. faced bankruptcy, Schroeder sought information about industrial revenue bonds for which the retailer had guaranteed repayment. City governments sell the bonds to finance development such as new stores, to attract jobs or to gain tax revenue. A retailer like Kmart gets the proceeds and guarantees repayment of the bonds at a lower interest rate than it would receive in the corporate market. Kmart refused to provide data on specific stores, so Schroeder, whose company held five of the issues, says he called a hundred store managers to compile sales information. Initially, they complied, until Kmart made them stop doing so. ''Small and infrequent issuers are just horrible about providing information,'' says Schroeder. ‘‘They need to learn to disclose things as they happen, not six months later in the footnote of a financial statement.'' Specific Stores Kmart doesn't disclose sales on specific stores, says Jack Ferry, Kmart spokesman. So far, Schroeder says, he's recovered his company's investment in four of the five issues. Levitt and his SEC successor, Harvey Pitt, support the MSRB plan for 15-minute pricing and improved financial disclosure. On May 25, Pitt told the Bond Market Association that the municipal bond market is farther along than the corporate bond market on disclosure issues. ''But it has yet to achieve the ultimate goal of transparency: real-time reporting of transactions,'' he said. Muni investors may not get much help from the SEC. The agency has its hands full, with the fallout from another self- regulated industry: accounting. Collapse of Enron The SEC is investigating the collapse of Enron and the $7.18 billion accounting fraud at WorldCom. It assisted in the U.S. Justice Department's case against Enron's auditor, Arthur Andersen LLP. ''I don't know how much effort the SEC will really put into the municipal bond market now, because they are so distracted by corporate governance,'' Schroeder says. For Don and Gerry Burns, the dangers of the muni market proved as devastating as buying stock in Enron, Global Crossing or WorldCom. The Oaks at Medina nursing home that sold them their bonds had a fire during construction, and occupancy increased more slowly than the offering documents had projected. If the Burnses had read an official statement, they might have learned they were buying Series C securities. Series Cs were subordinate to $29.5 million of Series A and B bonds, meaning that they were last to get paid. In December, the Burnses sold their bonds for a penny on the dollar. ''We took a pretty good bath,'' Don Burns says. They probably won't be the last, as more equity investors flee declining stocks and wade into the murky market for municipal bonds. 2002-08-27 00:15 (New York)

2002-09-01T00:00:00-04:00

false

154

false

Municipal Bond Investors Flee Stocks and Find Bigger Perils The Perils of The Municipal Bond Market

2008-09-15T11:19:15-04:00

7 Over these past two and a half years, we have gotten a good taste of the psychological difficulties of investing. Market uptrends have consistently followed periods of downtrends, again and again. For example, in the four-month period between May 21, 2001 and September 21, 2001, the S&P 500, the leading index of large stocks, lost over 26% in value. But in the next six months, the S&P jumped over 19%. The short duration and wide extremes of these movements demonstrate the futility of trying to guess what is going to happen over the short term. Some years ago, I heard John Bogle, founder and leader of the Vanguard Group of mutual funds for some 25 years, speak to a group of investors. He said, "The problem is not the financial markets, it's the behavior of individual investors." He went on to say that the performance of most Vanguard funds was fine, but that the firm's research showed that the performance of the participants in the various Vanguard funds was pretty bad. He then demonstrated to us, an audience of rather savvy investors and professionals at an annual conference, how investors consistently poured money into the funds when markets were near the top, and just as consistently sold, or "cashed out of," funds when market prices were near the bottom. The data was clear and convincing: individual investors' reactions to the ups and downs of the market contributed to their own poor performance. Why is it so hard for most investors to avoid this behavior? Perhaps it is because we are less comfortable in the role of business owner than in that of employee. Consider this concept: Most of us enjoy fairly secure jobs, receiving a predictable income stream from our employers. Our employers, however, are not so lucky. Many of them are subject to influences most of us are only minimally aware of - unpredictable revenue streams, large unanticipated expenses, a competitive environment that changes constantly, product obsolescence, changing demand patterns, and many more variables. We hardly ever stop to think about how well our employers are "shielding" us from the effects of our free market economy's ups and downs. Not, that is, until we become owners of stocks. What we begin to experience once we own stocks is what our employers live with every day - the full impact of economic trends coupled with the fears and greed of other investors. As owners of equity securities, we are stepping out from behind the shield someone else (namely, our employer) provides for us and participating directly in our free marketplace, coming face to face with its inherent risks. We feel the anxiety that accompanies this participation whenever we see stock prices rise or fall. And sometimes it is pretty unpleasant. But...enough of the difficult side of being a business owner...Let's get back to the more lucrative side of stock ownership!! We at BWFA have confidence that the uptrend which began in mid-September 2001 is continuing. The economic numbers are increasingly positive and point to a solid rebound. The market, however, has decided to follow the beat of a different drum for the moment. We do not expect this to continue for long; rather we anticipate positive returns in 2002. 1

2002-08-15T00:00:00-04:00

false

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

Over these past two and a half years, we have gotten a good taste of the psychological difficulties of investing. Market uptrends have consistently followed periods of downtrends, again and again. For example, in the four-month period between May 21, 2001 and September 21, 2001, the S&P 500, the leading index of large stocks, lost over 26% in value. But in the next six months, the S&P jumped over 19%. The short duration and wide extremes of these movements demonstrate the futility of trying to guess what is going to happen over the short term. Some years ago, I heard John Bogle, founder and leader of the Vanguard Group of mutual funds for some 25 years, speak to a group of investors. He said, "The problem is not the financial markets, it's the behavior of individual investors." He went on to say that the performance of most Vanguard funds was fine, but that the firm's research showed that the performance of the participants in the various Vanguard funds was pretty bad. He then demonstrated to us, an audience of rather savvy investors and professionals at an annual conference, how investors consistently poured money into the funds when markets were near the top, and just as consistently sold, or "cashed out of," funds when market prices were near the bottom. The data was clear and convincing: individual investors' reactions to the ups and downs of the market contributed to their own poor performance. Why is it so hard for most investors to avoid this behavior? Perhaps it is because we are less comfortable in the role of business owner than in that of employee. Consider this concept: Most of us enjoy fairly secure jobs, receiving a predictable income stream from our employers. Our employers, however, are not so lucky. Many of them are subject to influences most of us are only minimally aware of - unpredictable revenue streams, large unanticipated expenses, a competitive environment that changes constantly, product obsolescence, changing demand patterns, and many more variables. We hardly ever stop to think about how well our employers are "shielding" us from the effects of our free market economy's ups and downs. Not, that is, until we become owners of stocks. What we begin to experience once we own stocks is what our employers live with every day - the full impact of economic trends coupled with the fears and greed of other investors. As owners of equity securities, we are stepping out from behind the shield someone else (namely, our employer) provides for us and participating directly in our free marketplace, coming face to face with its inherent risks. We feel the anxiety that accompanies this participation whenever we see stock prices rise or fall. And sometimes it is pretty unpleasant. But...enough of the difficult side of being a business owner...Let's get back to the more lucrative side of stock ownership!! We at BWFA have confidence that the uptrend which began in mid-September 2001 is continuing. The economic numbers are increasingly positive and point to a solid rebound. The market, however, has decided to follow the beat of a different drum for the moment. We do not expect this to continue for long; rather we anticipate positive returns in 2002.

2002-08-15T00:00:00-04:00

false

152

false

Stepping from Behind the Shield

2008-09-15T11:19:15-04:00

7 One of the most important steps in successful investing is distinguishing meaningful trends from overpriced hype, fads, and “noise” in the marketplace. In this newsletter, we note that one of the more significant changes going on is how goods are bought and sold. In the paragraphs below, we have identified issues related to this theme which we have incorporated into our “investment attitude”. As always, we appreciate any feedback you might have on our observations. We can’t ignore Microsoft because of the enormous impact they have in technology and our economy. Microsoft’s new Windows XP will matter most in 2002. It’s a vital phase in Microsoft’s plan to weave all of its products into the fabric of the Internet. How they do this is likely to provide an important model for how billions of dollars in annual software sales occur. Note the clear parallel here with Gateway: increase profit margins by cutting out retail stores, many of whom rely on software sales. <img src="http://www.bwfa.com/images/numbers.jpg" align="left" border=0 hspace="5" vspace="5">Microsoft’s Passport service is also worth watching. It is a Net-wide identification system and could make Microsoft the gatekeeper to trillions of dollars of electronic commerce transactions. Consumers and businesses will demand more secure payment systems (see below) as activity expands. In this regard, we note that AOL reported that Internet sales were $11 billion in the fourth quarter alone, up 72% over last year. Computer security is hot. Heading the list of concerns are massive security flaws in software which allowed thieves to see users’ credit card numbers and other flaws which allowed remote users to take control of computers. Ongoing threats of viruses and potential massive disruption to Internet communications by terrorists are also issues which will impact the way investment dollars flow and the way consumers and businesses interact. The Liberty Alliance is an important development which will take shape in 2002. It includes a host of major companies AOL Time Warner, Bank of America, Sony, General Motors, United Airlines, RealNetworks, eBay, Nokia, Vodafone, American Express, and more who have joined forces to form an alternative .NET work. Their primary concern is that Microsoft may end up handling their e-commerce transactions. How this works if it works will have a variety of long-term implications for how we are connected to one another and how business is done. Ongoing Microsoft litigation will continue to impact the business/investment landscape. Nine states have refused to settle with Microsoft in its antitrust case. While a corporate breakup is off the table, Microsoft could still be saddled with penalties that will cost it billions and dampen its competitive ferocity. People want net music. While Napster is effectively disabled, users can still get free music from companies like BearShare and Audio Galaxy. In 2002, we’ll find out if they want Net music enough to pay for it. A host of Net music services with names like EMusic, Pressplay, Rhapsody, and RealOne hope to collect monthly fees for digital music. But none of these services offer the versatility of the old Napster system. The coming year promises the continuing gigahertz chase between chipmakers Intel and Advanced Micro Devices, as they continue to develop the new 64-bit chip. Early reports suggest Intel’s next version of Itanium will be powerful enough to propel Intel into new markets: high-end scientific desktops and top-of-the-line mainframe computers. It’ll also spell a major competitive threat to Sun Microsystems, whose UltraSPARC computers currently dominate the 64-bit market. Amazon.com's next profit report in January may help to foretell the future of e-commerce. For months now, Amazon.com has been forecasting its first quarterly profit number for the quarter ending in December. Analysts disagree and are projecting a .04 to .08 cents per share loss. But analysts have been wrong (they have overestimated losses) in five of the last six quarters. AOL has the opportunity to make its merger with Time Warner really pay off big by integrating Time Warner's high-speed cable and content (movies and music) services with its existing Internet services. It could pull this off in 2002, and this would open a whole new chapter in home entertainment and how we do business. The proposed merger of Compaq and Hewlett Packard is worth watching. If the merger doesn’t collapse, it would produce the second largest computer company behind IBM. The new company will need to find a new way of doing business (which neither of them individually has been able to do so far) to compete in the low-margin PC arena against Gateway and Dell. Everyone will be watching for the creative new approaches these companies might bring to the table in 2002. I have often thought of how helpful it would be to be able to pay for an independent, objective service which would tell me what to pay attention to, so I could ignore the noise. That way, I’d have more time to fish. 1

2002-02-03T00:00:00-05:00

false

true

<a href="http://www.bwfa.com/invest/birdsong.asp">Saxon Birdsong</a>, MBA

One of the most important steps in successful investing is distinguishing meaningful trends from overpriced hype, fads, and “noise” in the marketplace. In this newsletter, we note that one of the more significant changes going on is how goods are bought and sold. In the paragraphs below, we have identified issues related to this theme which we have incorporated into our “investment attitude”. As always, we appreciate any feedback you might have on our observations. We can’t ignore Microsoft because of the enormous impact they have in technology and our economy. Microsoft’s new Windows XP will matter most in 2002. It’s a vital phase in Microsoft’s plan to weave all of its products into the fabric of the Internet. How they do this is likely to provide an important model for how billions of dollars in annual software sales occur. Note the clear parallel here with Gateway: increase profit margins by cutting out retail stores, many of whom rely on software sales. <img src="http://www.bwfa.com/images/numbers.jpg" align="left" border=0 hspace="5" vspace="5">Microsoft’s Passport service is also worth watching. It is a Net-wide identification system and could make Microsoft the gatekeeper to trillions of dollars of electronic commerce transactions. Consumers and businesses will demand more secure payment systems (see below) as activity expands. In this regard, we note that AOL reported that Internet sales were $11 billion in the fourth quarter alone, up 72% over last year. Computer security is hot. Heading the list of concerns are massive security flaws in software which allowed thieves to see users’ credit card numbers and other flaws which allowed remote users to take control of computers. Ongoing threats of viruses and potential massive disruption to Internet communications by terrorists are also issues which will impact the way investment dollars flow and the way consumers and businesses interact. The Liberty Alliance is an important development which will take shape in 2002. It includes a host of major companies AOL Time Warner, Bank of America, Sony, General Motors, United Airlines, RealNetworks, eBay, Nokia, Vodafone, American Express, and more who have joined forces to form an alternative .NET work. Their primary concern is that Microsoft may end up handling their e-commerce transactions. How this works if it works will have a variety of long-term implications for how we are connected to one another and how business is done. Ongoing Microsoft litigation will continue to impact the business/investment landscape. Nine states have refused to settle with Microsoft in its antitrust case. While a corporate breakup is off the table, Microsoft could still be saddled with penalties that will cost it billions and dampen its competitive ferocity. People want net music. While Napster is effectively disabled, users can still get free music from companies like BearShare and Audio Galaxy. In 2002, we’ll find out if they want Net music enough to pay for it. A host of Net music services with names like EMusic, Pressplay, Rhapsody, and RealOne hope to collect monthly fees for digital music. But none of these services offer the versatility of the old Napster system. The coming year promises the continuing gigahertz chase between chipmakers Intel and Advanced Micro Devices, as they continue to develop the new 64-bit chip. Early reports suggest Intel’s next version of Itanium will be powerful enough to propel Intel into new markets: high-end scientific desktops and top-of-the-line mainframe computers. It’ll also spell a major competitive threat to Sun Microsystems, whose UltraSPARC computers currently dominate the 64-bit market. Amazon.com's next profit report in January may help to foretell the future of e-commerce. For months now, Amazon.com has been forecasting its first quarterly profit number for the quarter ending in December. Analysts disagree and are projecting a .04 to .08 cents per share loss. But analysts have been wrong (they have overestimated losses) in five of the last six quarters. AOL has the opportunity to make its merger with Time Warner really pay off big by integrating Time Warner's high-speed cable and content (movies and music) services with its existing Internet services. It could pull this off in 2002, and this would open a whole new chapter in home entertainment and how we do business. The proposed merger of Compaq and Hewlett Packard is worth watching. If the merger doesn’t collapse, it would produce the second largest computer company behind IBM. The new company will need to find a new way of doing business (which neither of them individually has been able to do so far) to compete in the low-margin PC arena against Gateway and Dell. Everyone will be watching for the creative new approaches these companies might bring to the table in 2002. I have often thought of how helpful it would be to be able to pay for an independent, objective service which would tell me what to pay attention to, so I could ignore the noise. That way, I’d have more time to fish.

2002-01-31T00:00:00-05:00

2002-02-03T00:00:00-05:00

false

147

false

What to Watch in 2002 Trends in How We Acquire Goods

2008-09-15T11:19:15-04:00

1 Market analysts use various quantitative measurements to assess where the market is and where it might be going. While none of these measurements is accurate all the time, one of them has gained wide support among analysts, and even some support from Federal Reserve officials. In this article I will try to explain how many analysts view whether the equity markets are overvalued or undervalued. According to an article dated August 25, 1997 in Barron's, Ed Yardeni, then economist at Deutsche Morgan Grenfell, said that Alan Greenspan at one time instructed his staff to devise a model to help him gauge the stock market. Yardeni says he found the model buried in the Fed's semiannual monetary report to Congress. The model is simple, and compares the current yield on the 10-year Treasury note with the earnings yield on stocks. The earnings yield is the inverse of the P/E ratio.<img src="http://www.bwfa.com/images/invest/10-2001-im-chart.jpg" align="left" border=0 hspace="5" vspace="5"> The model works like this: Calculate the earnings yield on stocks. (Earnings yield on stocks = Total of next 12 months of earnings per share of all companies in the S&P 500/S&P 500 Index.) Then compare the yield on 10-Year Treasury with the earnings yield on stocks (yield on Treasury/earnings yield on stocks) - 1 Now let's supply some real numbers, and see what the model says. The mean estimate for the earnings of companies in the S&P 500 in the coming 12 months provided by Zack's Investment Research is $55.37/share. The S&P Index stands at 1007.77. The earnings yield is therefore 5.49% ($55.37/1007.77). The reciprocal (1/.0549) is the P/E of the S&P 500, 18.21 (a bit high by historical standards). Using data from the same day (9/24), Bloomberg tells us that the current yield on the 10-year Treasury was 4.69%. Applying the numbers we get (4.69/5.49) - 1 = - 14.1. The formula is telling us that stocks are undervalued relative to bonds by 14.1%. To see if any of this makes sense, it would be good to look at the results of these calculations over a period of years. As you can see, over the past 10 years the relationship between stock earnings and bond yields has bottomed out at its current level just four times. Does this really mean that stock prices are going to go up? No, but it does tell us that the current relationship between bond yields and stock earnings is uncommon. Several things could happen to change the relationship and bring it back into the "normal" range:<img src="http://www.bwfa.com/images/invest/10-2001-im-table.jpg" align="left" border=0 hspace="5" vspace="5"> So, of the four possibilities, two appear more likely. It therefore seems that we might see money flowing back into stocks rather soon. 1

2001-11-02T00:00:00-05:00

false

true

Saxon Birdsong, MBA

Market analysts use various quantitative measurements to assess where the market is and where it might be going. While none of these measurements is accurate all the time, one of them has gained wide support among analysts, and even some support from Federal Reserve officials. In this article I will try to explain how many analysts view whether the equity markets are overvalued or undervalued. According to an article dated August 25, 1997 in Barron's, Ed Yardeni, then economist at Deutsche Morgan Grenfell, said that Alan Greenspan at one time instructed his staff to devise a model to help him gauge the stock market. Yardeni says he found the model buried in the Fed's semiannual monetary report to Congress. The model is simple, and compares the current yield on the 10-year Treasury note with the earnings yield on stocks. The earnings yield is the inverse of the P/E ratio.<img src="http://www.bwfa.com/images/invest/10-2001-im-chart.jpg" align="left" border=0 hspace="5" vspace="5"> The model works like this: Calculate the earnings yield on stocks. (Earnings yield on stocks = Total of next 12 months of earnings per share of all companies in the S&P 500/S&P 500 Index.) Then compare the yield on 10-Year Treasury with the earnings yield on stocks (yield on Treasury/earnings yield on stocks) - 1 Now let's supply some real numbers, and see what the model says. The mean estimate for the earnings of companies in the S&P 500 in the coming 12 months provided by Zack's Investment Research is $55.37/share. The S&P Index stands at 1007.77. The earnings yield is therefore 5.49% ($55.37/1007.77). The reciprocal (1/.0549) is the P/E of the S&P 500, 18.21 (a bit high by historical standards). Using data from the same day (9/24), Bloomberg tells us that the current yield on the 10-year Treasury was 4.69%. Applying the numbers we get (4.69/5.49) - 1 = - 14.1. The formula is telling us that stocks are undervalued relative to bonds by 14.1%. To see if any of this makes sense, it would be good to look at the results of these calculations over a period of years. As you can see, over the past 10 years the relationship between stock earnings and bond yields has bottomed out at its current level just four times. Does this really mean that stock prices are going to go up? No, but it does tell us that the current relationship between bond yields and stock earnings is uncommon. Several things could happen to change the relationship and bring it back into the "normal" range:<img src="http://www.bwfa.com/images/invest/10-2001-im-table.jpg" align="left" border=0 hspace="5" vspace="5"> So, of the four possibilities, two appear more likely. It therefore seems that we might see money flowing back into stocks rather soon.

2001-10-01T00:00:00-04:00

2001-11-02T00:00:00-05:00

false

143

false

Determining if Markets Are Overvalued or Undervalued: The Fed Model

2008-09-15T11:19:15-04:00

3 Section 529 College Savings Plans allow parents and grandparents to set aside significant amounts of money for the higher education expenses of their children and grandchildren. They were authorized by a 1997 federal bill but are run by the individual states. Money contributed to a 529 plan grows tax-free and is never subject to state or federal income tax if used for qualified higher education expenses.. In mid-July, the state of Maryland announced that T. Rowe Price will manage its new 529 plan. The plan, which will begin operation this fall, will offer 10 different investment options. While it is open to investors in all states, Maryland residents will receive an added benefit —the opportunity to deduct as much as $2,500 for contributions to each account under the plan. These deductions can be carried forward for 10 years if necessary to use them up and offset one’s Maryland income tax liability. For a more detailed explanation of 529 plans and their benefits, see my recent article on the WorldWIT Web site at <a href="http://www.worldwit.org/simon_says/simonsays062101.html" target="_blank">Simon Says</a>. How can BWFA help me with a 529 plan? Because every state has either established a plan or expects to launch a plan in the near future, choosing the plan that is right for you can be a complex and confusing task. <img src="http://www.bwfa.com/images/college_money.jpg" align="left"> Plans vary in a number of ways, and the best plan for you will depend upon numerous factors, including your planning horizon, risk tolerance, state of residence, tax sensitivity, and overall savings needs. Even more significantly, your BWFA advisor can guide you in integrating a 529 plan with your current college, retirement, and estate planning goals. Funds within a 529 plan are not subject to estate taxes and (if used for qualified education expenses) are exempt from federal and state income tax as well. Parents, and even more so grandparents, now have an opportunity to transfer sizable funds to children and grandchildren in an extremely tax efficient manner. Call today to set up a 529 consultation. We’re excited about this new planning vehicle and ready to help you make the most of it! 1

2001-08-24T00:00:00-04:00

BWFA

false

true

BWFA

Section 529 College Savings Plans allow parents and grandparents to set aside significant amounts of money for the higher education expenses of their children and grandchildren. They were authorized by a 1997 federal bill but are run by the individual states. Money contributed to a 529 plan grows tax-free and is never subject to state or federal income tax if used for qualified higher education expenses.. In mid-July, the state of Maryland announced that T. Rowe Price will manage its new 529 plan. The plan, which will begin operation this fall, will offer 10 different investment options. While it is open to investors in all states, Maryland residents will receive an added benefit —the opportunity to deduct as much as $2,500 for contributions to each account under the plan. These deductions can be carried forward for 10 years if necessary to use them up and offset one’s Maryland income tax liability. For a more detailed explanation of 529 plans and their benefits, see my recent article on the WorldWIT Web site at <a href="http://www.worldwit.org/simon_says/simonsays062101.html" target="_blank">Simon Says</a>. How can BWFA help me with a 529 plan? Because every state has either established a plan or expects to launch a plan in the near future, choosing the plan that is right for you can be a complex and confusing task. <img src="http://www.bwfa.com/images/college_money.jpg" align="left"> Plans vary in a number of ways, and the best plan for you will depend upon numerous factors, including your planning horizon, risk tolerance, state of residence, tax sensitivity, and overall savings needs. Even more significantly, your BWFA advisor can guide you in integrating a 529 plan with your current college, retirement, and estate planning goals. Funds within a 529 plan are not subject to estate taxes and (if used for qualified education expenses) are exempt from federal and state income tax as well. Parents, and even more so grandparents, now have an opportunity to transfer sizable funds to children and grandchildren in an extremely tax efficient manner. Call today to set up a 529 consultation. We’re excited about this new planning vehicle and ready to help you make the most of it!

2001-08-01T00:00:00-04:00

2001-08-24T00:00:00-04:00

false

133

false

College Savings with Tax Deductions

2008-09-15T11:19:15-04:00

1 We believe that it is important for investors to understand how and how much they are paying for investment advisory services. In many cases, the fees investors pay are deliberately obscured, and hidden from view. It is in this regard that we want to explain two important and highly significant trends which will impact investors’ decisions for investment advisory services. The first change is the push by large brokerage houses to sell investors on the use of individually managed accounts rather than the brokerage’s own mutual funds; and the second is how investors are being asked to pay for their brokerage fees. <img src="http://www.bwfa.com/images/BEWARE.jpg" align="left">While these two things - separate accounts and changes in brokerage fees - are very much related, the relationship will not be apparent to most investors. Individually managed accounts differ from mutual funds in that the managed account investor actually owns the individual securities chosen by the money manager rather than owning an interest in a large investment pool through a publicly traded mutual fund. Individually managed accounts have distinct advantages over mutual funds. Mostly, the advantages include <ol><li> being able to invest all of your money without holding some cash on the side to honor redemptions, <li> being able to control your tax liability, <li> qualifying for reductions in fees when you have over $500 thousand or $1 million invested, <li> knowing which investments you own, <li>tailoring your investments to accomplish your goals more precisely, and <li> managing your income stream better. </ol> An article in the August 6, 2001 edition of The Wall Street Journal (which we are enclosing with this newsletter) described how investors increasingly prefer individually managed accounts over mutual funds, pointing out that assets in individually managed accounts grew at 20% in 2000 while assets in mutual funds declined -2.3%. The article also points out that for years, Merrill Lynch focused its representatives on promoting its mutual funds - but not any more. Along with other large brokerage houses, Merrill is now making a big push for separately managed accounts. And in addition, Merrill is following the trend at other large brokerage houses to change its fees from transaction based commissions to fees based on asset values. To understand how these two trends are related, it is necessary to note the decline in brokerage fees in recent years. Instead of paying $100-$200 to trade a stock, thanks to technology and competition, investors can now easily trade stocks at fees ranging from $10-$25. This dramatic reduction in fees caused an important source of revenue for brokerage houses to dry up, and they needed to replace it. Hence the shift from commissions to asset based fees. But just changing from sales commissions to asset fees wouldn’t do it for Merrill. Charging asset fees on accounts which were already heavily invested in their mutual funds would have represented such a severe conflict in interest that the SEC would not have been able to overlook it. Without changing the way it was doing business Merrill would be collecting three fees; <ol><li> a fee for underwriting the stock of the corporation it has as an investment banking client, <li> a fee for managing the mutual fund the stock might be held in (the normal way mutual funds get their fees), and <li> a fee based on the market value of its mutual funds held in its investors accounts. </ol>In effect, Merrill would be getting paid once by the corporate client and twice by the retail client. So, to remove some of this conflict, Merrill had to redirect its clients from mutual funds to individually managed accounts. While Merrill and others will have declining revenue in their mutual funds, they will make up for it by charging their newly converted individually managed accounts. The article points out that, after discounts, the average managed account fee is still 1.8% of assets. But clients of brokerage houses must still come to grips with the inherent conflict of interest present in the brokerage business - raising cash for their corporate clients by underwriting their stocks and simultaneously investing their retail clients in the same stocks. The only way an investor can be sure that an advisor is serving their best interests is if the advisor’s sole source of revenue is from its clients. For a hint as to who provides this service, call 410-461-3900. 1

2001-08-24T00:00:00-04:00

false

true

Saxon Birdsong, MBA

We believe that it is important for investors to understand how and how much they are paying for investment advisory services. In many cases, the fees investors pay are deliberately obscured, and hidden from view. It is in this regard that we want to explain two important and highly significant trends which will impact investors’ decisions for investment advisory services. The first change is the push by large brokerage houses to sell investors on the use of individually managed accounts rather than the brokerage’s own mutual funds; and the second is how investors are being asked to pay for their brokerage fees. <img src="http://www.bwfa.com/images/BEWARE.jpg" align="left">While these two things - separate accounts and changes in brokerage fees - are very much related, the relationship will not be apparent to most investors. Individually managed accounts differ from mutual funds in that the managed account investor actually owns the individual securities chosen by the money manager rather than owning an interest in a large investment pool through a publicly traded mutual fund. Individually managed accounts have distinct advantages over mutual funds. Mostly, the advantages include <ol><li> being able to invest all of your money without holding some cash on the side to honor redemptions, <li> being able to control your tax liability, <li> qualifying for reductions in fees when you have over $500 thousand or $1 million invested, <li> knowing which investments you own, <li>tailoring your investments to accomplish your goals more precisely, and <li> managing your income stream better. </ol> An article in the August 6, 2001 edition of The Wall Street Journal (which we are enclosing with this newsletter) described how investors increasingly prefer individually managed accounts over mutual funds, pointing out that assets in individually managed accounts grew at 20% in 2000 while assets in mutual funds declined -2.3%. The article also points out that for years, Merrill Lynch focused its representatives on promoting its mutual funds - but not any more. Along with other large brokerage houses, Merrill is now making a big push for separately managed accounts. And in addition, Merrill is following the trend at other large brokerage houses to change its fees from transaction based commissions to fees based on asset values. To understand how these two trends are related, it is necessary to note the decline in brokerage fees in recent years. Instead of paying $100-$200 to trade a stock, thanks to technology and competition, investors can now easily trade stocks at fees ranging from $10-$25. This dramatic reduction in fees caused an important source of revenue for brokerage houses to dry up, and they needed to replace it. Hence the shift from commissions to asset based fees. But just changing from sales commissions to asset fees wouldn’t do it for Merrill. Charging asset fees on accounts which were already heavily invested in their mutual funds would have represented such a severe conflict in interest that the SEC would not have been able to overlook it. Without changing the way it was doing business Merrill would be collecting three fees; <ol><li> a fee for underwriting the stock of the corporation it has as an investment banking client, <li> a fee for managing the mutual fund the stock might be held in (the normal way mutual funds get their fees), and <li> a fee based on the market value of its mutual funds held in its investors accounts. </ol>In effect, Merrill would be getting paid once by the corporate client and twice by the retail client. So, to remove some of this conflict, Merrill had to redirect its clients from mutual funds to individually managed accounts. While Merrill and others will have declining revenue in their mutual funds, they will make up for it by charging their newly converted individually managed accounts. The article points out that, after discounts, the average managed account fee is still 1.8% of assets. But clients of brokerage houses must still come to grips with the inherent conflict of interest present in the brokerage business - raising cash for their corporate clients by underwriting their stocks and simultaneously investing their retail clients in the same stocks. The only way an investor can be sure that an advisor is serving their best interests is if the advisor’s sole source of revenue is from its clients. For a hint as to who provides this service, call 410-461-3900.

2001-08-01T00:00:00-04:00

2001-08-24T00:00:00-04:00

false

136

false

Beware: Brokers Offer New Program

2008-09-15T11:19:15-04:00

1 As we all know, the performance of the stock market has been pretty bad lately. The S&P 500 was down about 10% last year and down another 12% in the first quarter of this year. In times like these, it's particularly important to keep the proper perspective in order to avoid making significant missteps. This kind of performance is rather unusual. In fact, when we look at the record, over the last 40 years the market (as measured by the S&P 500 index) has had a negative return for the full year only 11 times. And over the same 40-year period there have only been 9 (out of 160) times that the market has had a loss of 10% or more during a quarter. So, clearly, what we have seen recently is unusual. It might also be useful to see what happened in previous periods when the market behaved similarly. In the chart below, each of the quarterly periods where the market had a negative return of 10% or more is identified in the left-most column. In the next column to the right is the percent return for that quarter. In the next two columns you can see where the market was exactly one year later. <table align="center" cellspacing="0" cellpadding="5" border="1"> <tr bgcolor="#D900D9"> <td align="center" valign="top" class="largeSubBody">Losing Quarter</td> <td align="center" valign="top" class="largeSubBody">Percent Down</td> <td align="center" valign="top" class="largeSubBody">1 Year Later</td> <td align="center" valign="top" class="largeSubBody">1-Year Return</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">6/29/62</td> <td align="center" valign="top" class="regularSubBody">-21.28%</td> <td align="center" valign="top" class="regularSubBody">6/28/63</td> <td align="center" valign="top" class="regularSubBody">26.70%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">6/20/70</td> <td align="center" valign="top" class="regularSubBody">-18.87%</td> <td align="center" valign="top" class="regularSubBody">6/30/71</td> <td align="center" valign="top" class="regularSubBody">37.10%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">12/31/73</td> <td align="center" valign="top" class="regularSubBody">-10.03%</td> <td align="center" valign="top" class="regularSubBody">12/31/74</td> <td align="center" valign="top" class="regularSubBody">-29.72%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">9/30/74</td> <td align="center" valign="top" class="regularSubBody">-26.12%</td> <td align="center" valign="top" class="regularSubBody">9/30/75</td> <td align="center" valign="top" class="regularSubBody">31.1%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">9/30/75</td> <td align="center" valign="top" class="regularSubBody">-11.89%</td> <td align="center" valign="top" class="regularSubBody">9/30/76</td> <td align="center" valign="top" class="regularSubBody">25.48%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">9/30/81</td> <td align="center" valign="top" class="regularSubBody">-11.45%</td> <td align="center" valign="top" class="regularSubBody">9/30/82</td> <td align="center" valign="top" class="regularSubBody">3.65%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">12/31/87</td> <td align="center" valign="top" class="regularSubBody">-23.23%</td> <td align="center" valign="top" class="regularSubBody">12/30/88</td> <td align="center" valign="top" class="regularSubBody">12.40%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">9/28/90</td> <td align="center" valign="top" class="regularSubBody">-14.52%</td> <td align="center" valign="top" class="regularSubBody">9/30/91</td> <td align="center" valign="top" class="regularSubBody">26.73%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">9/30/98</td> <td align="center" valign="top" class="regularSubBody">-10.30%</td> <td align="center" valign="top" class="regularSubBody">9/30/99</td> <td align="center" valign="top" class="regularSubBody">26.12%</td> </tr> </table> As you can see, there was only one quarterly period where the loss was greater than 10% and the market didn't follow with a gain one year later. In all but two years it was a substantial gain. Investor's Business Daily has another way of looking at how fast markets turn. Their chart illustrates that if you missed being in the market on the 30 days which had the highest gains over the last 10 years, your gain would have been reduced from 14.8% to just 4.3%. And, finally, we should note that, as of April 23, the NASDAQ index has gained 33% over just the last 11 trading sessions. Wow!! So, as we can clearly see, markets typically move swiftly and decisively in both directions, and it is impossible to tell when a change in direction will occur. Trying to outguess what the market is going to do is hazardous to your investments, and investors who flee the markets or don't practice sound diversification strategies will probably be disappointed. Staying fully invested is clearly the safest course of action and the best road to good returns. 1

2001-04-01T00:00:00-05:00

false

true

Saxon Birdsong, MBA

As we all know, the performance of the stock market has been pretty bad lately. The S&P 500 was down about 10% last year and down another 12% in the first quarter of this year. In times like these, it's particularly important to keep the proper perspective in order to avoid making significant missteps. This kind of performance is rather unusual. In fact, when we look at the record, over the last 40 years the market (as measured by the S&P 500 index) has had a negative return for the full year only 11 times. And over the same 40-year period there have only been 9 (out of 160) times that the market has had a loss of 10% or more during a quarter. So, clearly, what we have seen recently is unusual. It might also be useful to see what happened in previous periods when the market behaved similarly. In the chart below, each of the quarterly periods where the market had a negative return of 10% or more is identified in the left-most column. In the next column to the right is the percent return for that quarter. In the next two columns you can see where the market was exactly one year later. <table align="center" cellspacing="0" cellpadding="5" border="1"> <tr bgcolor="#D900D9"> <td align="center" valign="top" class="largeSubBody">Losing Quarter</td> <td align="center" valign="top" class="largeSubBody">Percent Down</td> <td align="center" valign="top" class="largeSubBody">1 Year Later</td> <td align="center" valign="top" class="largeSubBody">1-Year Return</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">6/29/62</td> <td align="center" valign="top" class="regularSubBody">-21.28%</td> <td align="center" valign="top" class="regularSubBody">6/28/63</td> <td align="center" valign="top" class="regularSubBody">26.70%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">6/20/70</td> <td align="center" valign="top" class="regularSubBody">-18.87%</td> <td align="center" valign="top" class="regularSubBody">6/30/71</td> <td align="center" valign="top" class="regularSubBody">37.10%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">12/31/73</td> <td align="center" valign="top" class="regularSubBody">-10.03%</td> <td align="center" valign="top" class="regularSubBody">12/31/74</td> <td align="center" valign="top" class="regularSubBody">-29.72%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">9/30/74</td> <td align="center" valign="top" class="regularSubBody">-26.12%</td> <td align="center" valign="top" class="regularSubBody">9/30/75</td> <td align="center" valign="top" class="regularSubBody">31.1%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">9/30/75</td> <td align="center" valign="top" class="regularSubBody">-11.89%</td> <td align="center" valign="top" class="regularSubBody">9/30/76</td> <td align="center" valign="top" class="regularSubBody">25.48%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">9/30/81</td> <td align="center" valign="top" class="regularSubBody">-11.45%</td> <td align="center" valign="top" class="regularSubBody">9/30/82</td> <td align="center" valign="top" class="regularSubBody">3.65%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">12/31/87</td> <td align="center" valign="top" class="regularSubBody">-23.23%</td> <td align="center" valign="top" class="regularSubBody">12/30/88</td> <td align="center" valign="top" class="regularSubBody">12.40%</td> </tr> <tr bgcolor="#c0c0c0"> <td align="center" valign="top" class="regularSubBody">9/28/90</td> <td align="center" valign="top" class="regularSubBody">-14.52%</td> <td align="center" valign="top" class="regularSubBody">9/30/91</td> <td align="center" valign="top" class="regularSubBody">26.73%</td> </tr> <tr> <td align="center" valign="top" class="regularSubBody">9/30/98</td> <td align="center" valign="top" class="regularSubBody">-10.30%</td> <td align="center" valign="top" class="regularSubBody">9/30/99</td> <td align="center" valign="top" class="regularSubBody">26.12%</td> </tr> </table> As you can see, there was only one quarterly period where the loss was greater than 10% and the market didn't follow with a gain one year later. In all but two years it was a substantial gain. Investor's Business Daily has another way of looking at how fast markets turn. Their chart illustrates that if you missed being in the market on the 30 days which had the highest gains over the last 10 years, your gain would have been reduced from 14.8% to just 4.3%. And, finally, we should note that, as of April 23, the NASDAQ index has gained 33% over just the last 11 trading sessions. Wow!! So, as we can clearly see, markets typically move swiftly and decisively in both directions, and it is impossible to tell when a change in direction will occur. Trying to outguess what the market is going to do is hazardous to your investments, and investors who flee the markets or don't practice sound diversification strategies will probably be disappointed. Staying fully invested is clearly the safest course of action and the best road to good returns.

2001-04-01T00:00:00-05:00

false

130

false

Probability of Gains Within the Year Is High

2008-09-15T11:19:15-04:00

1 This month, we thought you would like to know a little about the technology we use to do what we do. One of the most important sources of investment information for us comes from Bloomberg. Bloomberg, one of the most respected names in the investment community, provides financial news and information to professional investment managers. It is hard to overstate the extent to which the investment community relies on Bloomberg's services: Virtually all of the major brokerage and investment firms subscribe to the Bloomberg service, but few smaller firms are willing to spend the money necessary to install and maintain the service. In fact, out of 2,500 independent advisors served by TD Waterhouse (the deep discount broker we use to execute your trades), only 2 use the Bloomberg service; we are one of them. <img src="http://www.bwfa.com/archive/invarticles/bloomberg.jpg" width="216" height="213" border="0" align="right" alt="Bloomberg service delivery hardware.">As you can see from the photo, the Bloomberg service is delivered on four monitor screens displayed by its own computer. Unlike other providers of financial and market information, Bloomberg brings together all the relevant information needed to analyze an investment objectively. We can look at extensive company descriptions and history, income and cash flow statements, balance sheets, insider trading activity, analyst reports, SEC filings, sophisticated quantitative analysis screens, earnings estimates, buying and selling activity by existing holders and institutions, industry reports, up-to-the-minute, company-specific news and much, much more. The design offers literally hundreds of different functions and ways someone can study an investment. Time and time again we have seen how Bloomberg improves our investment decision-making and how our clients benefit from our having this service. But at a steep $30,000 per year, it is little wonder that most smaller firms don't have the service. Our firm also needs complex tools to manage our services to you. We must maintain an incredible amount of information and history on each of our clients and on the work we do for them, including tax information, investment information, and financial/retirement/estate planning information. While you might want to know how your portfolio is doing on any given day, we need to know all about cash distributions from investment accounts, estimated tax payments, required minimum distributions and IRA elections, maturity and call dates, income yields on portfolios, investment models, taxable gains and losses year-to-date, carryover losses, and many, many other things about your situation. No software yet exists that adequately consolidates tax, client, investment, and planning information. The reason, of course, is that the market for such software is small - not that many firms provide integrated, coordinated financial services. Accordingly, each firm is left to build its own solution. Some years ago, we selected Lotus Notes as the software on which to build our client and company information systems. While we still have separate portfolio management, tax and financial planning systems to perform these specialized functions, our customized version of Lotus Notes consolidates information so that we can serve our clients better and run our business more efficiently. Our customized version of Lotus Notes provides a centralized on-line log of client contact so that anyone in the company can pick up an activity where someone else has left off, track whatever projects or services we are doing or have done for a client, set up a calendar to make sure things happen when they should (like transfers of securities, gifts or monthly distributions of funds), create collaborative databases so that several people in the company can look at an issue concerning an individual client simultaneously, even from outside the office. Our significant investment in technology enables us to have immediate access to the high quality investment research and client information we require, so that we can provide you with the very best personal financial services.   1

2000-12-01T00:00:00-05:00

false

true

Saxon Birdsong, MBA

This month, we thought you would like to know a little about the technology we use to do what we do. One of the most important sources of investment information for us comes from Bloomberg. Bloomberg, one of the most respected names in the investment community, provides financial news and information to professional investment managers. It is hard to overstate the extent to which the investment community relies on Bloomberg's services: Virtually all of the major brokerage and investment firms subscribe to the Bloomberg service, but few smaller firms are willing to spend the money necessary to install and maintain the service. In fact, out of 2,500 independent advisors served by TD Waterhouse (the deep discount broker we use to execute your trades), only 2 use the Bloomberg service; we are one of them. <img src="http://www.bwfa.com/archive/invarticles/bloomberg.jpg" width="216" height="213" border="0" align="right" alt="Bloomberg service delivery hardware.">As you can see from the photo, the Bloomberg service is delivered on four monitor screens displayed by its own computer. Unlike other providers of financial and market information, Bloomberg brings together all the relevant information needed to analyze an investment objectively. We can look at extensive company descriptions and history, income and cash flow statements, balance sheets, insider trading activity, analyst reports, SEC filings, sophisticated quantitative analysis screens, earnings estimates, buying and selling activity by existing holders and institutions, industry reports, up-to-the-minute, company-specific news and much, much more. The design offers literally hundreds of different functions and ways someone can study an investment. Time and time again we have seen how Bloomberg improves our investment decision-making and how our clients benefit from our having this service. But at a steep $30,000 per year, it is little wonder that most smaller firms don't have the service. Our firm also needs complex tools to manage our services to you. We must maintain an incredible amount of information and history on each of our clients and on the work we do for them, including tax information, investment information, and financial/retirement/estate planning information. While you might want to know how your portfolio is doing on any given day, we need to know all about cash distributions from investment accounts, estimated tax payments, required minimum distributions and IRA elections, maturity and call dates, income yields on portfolios, investment models, taxable gains and losses year-to-date, carryover losses, and many, many other things about your situation. No software yet exists that adequately consolidates tax, client, investment, and planning information. The reason, of course, is that the market for such software is small - not that many firms provide integrated, coordinated financial services. Accordingly, each firm is left to build its own solution. Some years ago, we selected Lotus Notes as the software on which to build our client and company information systems. While we still have separate portfolio management, tax and financial planning systems to perform these specialized functions, our customized version of Lotus Notes consolidates information so that we can serve our clients better and run our business more efficiently. Our customized version of Lotus Notes provides a centralized on-line log of client contact so that anyone in the company can pick up an activity where someone else has left off, track whatever projects or services we are doing or have done for a client, set up a calendar to make sure things happen when they should (like transfers of securities, gifts or monthly distributions of funds), create collaborative databases so that several people in the company can look at an issue concerning an individual client simultaneously, even from outside the office. Our significant investment in technology enables us to have immediate access to the high quality investment research and client information we require, so that we can provide you with the very best personal financial services.

2000-12-01T00:00:00-05:00

2000-12-01T15:42:15-05:00

false

2001-05-09T08:01:23-04:00

The Tools We Use

2008-09-15T11:19:15-04:00

1 This year nearly 2000 financial advisors paid an average of $900 to attend Charles Schwab Institutional's (CSI) annual conference. The main topic of the conference was Schwab's new service, called Managed Account Connection (MAC). The MAC service provides advisors a way to offer their clients individually managed accounts (the kind BWFA already offers). Mutual fund companies, mostly competitors to the MAC service, paid $6,000 each for a booth at the CSI annual conference, hoping with their efforts to turn back the rising tide of interest in their most threatening competitor, individual stock accounts. Due to growing dissatisfaction with commingled accounts, many professional advisors are interested in the MAC program. Many investors who use commingled accounts will show losses on their funds and big capital gains tax liabilities in 1998-99, because funds were forced to sell stock (in August and September when the market dropped) in order to meet redemptions. More fundamentally, competent advisors are increasingly aware that commingled accounts 1) have too much money in one pot and move markets unfavorably whenever they buy or sell; 2) are tax-insensitive; 3) commonly force new investors to buy someone else's capital gain; 4) are expensive, in light of the service they deliver; and 5) lack some highly desirable features of individually managed accounts. Investor's who use commingled accounts and those who use individually managed accounts do get some of the same service. For example, they get professional investment selection, custodial accounting and partial year-end tax reporting. But the similarity stops there. Investors who use individually managed accounts might also get lower taxes through tax-wise trading, lower expenses, individualized portfolio performance reporting, tailored tax reporting, have more of their money invested in the market at any given time (funds routinely hold cash in reserve to meet redemptions), have the portfolio manager available to answer questions personally, and get individualized accommodations for certain "investor preferences." Investor preferences can include raising cash for clients to meet unexpected expense needs with minimal impact on taxes through the use of margin, through offsetting gains and losses, or other techniques. Individual accounts can also avoid investments in specific securities (such as tobacco, managed health care companies, etc.), integrate major planned expenses into the investment plan (college, new beach house, etc.), or buy and hold specific investments at a client's request. And finally, when it comes to implementing an estate plan, individually managed accounts have distinct advantages over commingled accounts. These advantages come from the ability to control your income stream, avoid capital gains taxes entirely, and increase your tax deductions to lower your income taxes while living. Commingled accounts make use of these planning techniques difficult or impossible, whereas individually managed accounts can save you significant dollars. Seasoned financial advisors have begun to realize that individually managed accounts offer their clients significant advantages and value over commingled accounts. This is why more and more advisors are trying to develop a way of offering them to their clients. BWFA came to this conclusion several years ago, and made the required investment in our business so that we could offer individually managed accounts to our clients, with all of the attendant benefits. As you can see from the table below, individually managed accounts, like those at BWFA, offer significant benefits over investments in commingled accounts. Anyone using funds or using advisors who use commingled accounts to implement investment plans should carefully consider the benefits and value they are receiving compared to an individually managed account. <table width="95%" align="center"> <tr> <td colspan="3" align="center" valign="middle" >"No Contest" Comparison of Commingled and Individually Managed Accounts <hr align="CENTER" size="1" width="100%" color="Black" noshade> </td> </tr> <tr align="center" valign="middle" > <td>Type of Service/Account </td> <td>Commingled Account </td> <td>Individually Managed </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="80%" color="Black" noshade>Professionally Directed Investments </td> <td><hr align="CENTER" size="1" width="80%" color="Black" noshade>Yes </td> <td><hr align="CENTER" size="1" width="80%" color="Black" noshade>Yes </td> </tr> <tr align="left" valign="top" > <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Tax Accounting </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Partial (no cost basis or gains/loss reporting) </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Full (income, cost basis, gains/losses) </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Investment Accounting </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Partial (at the asset level, not account level) </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Full (at the combined account level) </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>On-call portfolio manager </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Integrated Tax Management </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No, tax insensitive </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes, both buying and selling </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Avoid specific investments </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Include specific investments </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Managed to meet unplanned expenses </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Integrate planned expenses into investment plan </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Estate planning advantages </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade> </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade> </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade> </td> </tr> </table> 1

1999-12-01T00:00:00-05:00

false

true

Saxon Birdsong, MBA

This year nearly 2000 financial advisors paid an average of $900 to attend Charles Schwab Institutional's (CSI) annual conference. The main topic of the conference was Schwab's new service, called Managed Account Connection (MAC). The MAC service provides advisors a way to offer their clients individually managed accounts (the kind BWFA already offers). Mutual fund companies, mostly competitors to the MAC service, paid $6,000 each for a booth at the CSI annual conference, hoping with their efforts to turn back the rising tide of interest in their most threatening competitor, individual stock accounts. Due to growing dissatisfaction with commingled accounts, many professional advisors are interested in the MAC program. Many investors who use commingled accounts will show losses on their funds and big capital gains tax liabilities in 1998-99, because funds were forced to sell stock (in August and September when the market dropped) in order to meet redemptions. More fundamentally, competent advisors are increasingly aware that commingled accounts 1) have too much money in one pot and move markets unfavorably whenever they buy or sell; 2) are tax-insensitive; 3) commonly force new investors to buy someone else's capital gain; 4) are expensive, in light of the service they deliver; and 5) lack some highly desirable features of individually managed accounts. Investor's who use commingled accounts and those who use individually managed accounts do get some of the same service. For example, they get professional investment selection, custodial accounting and partial year-end tax reporting. But the similarity stops there. Investors who use individually managed accounts might also get lower taxes through tax-wise trading, lower expenses, individualized portfolio performance reporting, tailored tax reporting, have more of their money invested in the market at any given time (funds routinely hold cash in reserve to meet redemptions), have the portfolio manager available to answer questions personally, and get individualized accommodations for certain "investor preferences." Investor preferences can include raising cash for clients to meet unexpected expense needs with minimal impact on taxes through the use of margin, through offsetting gains and losses, or other techniques. Individual accounts can also avoid investments in specific securities (such as tobacco, managed health care companies, etc.), integrate major planned expenses into the investment plan (college, new beach house, etc.), or buy and hold specific investments at a client's request. And finally, when it comes to implementing an estate plan, individually managed accounts have distinct advantages over commingled accounts. These advantages come from the ability to control your income stream, avoid capital gains taxes entirely, and increase your tax deductions to lower your income taxes while living. Commingled accounts make use of these planning techniques difficult or impossible, whereas individually managed accounts can save you significant dollars. Seasoned financial advisors have begun to realize that individually managed accounts offer their clients significant advantages and value over commingled accounts. This is why more and more advisors are trying to develop a way of offering them to their clients. BWFA came to this conclusion several years ago, and made the required investment in our business so that we could offer individually managed accounts to our clients, with all of the attendant benefits. As you can see from the table below, individually managed accounts, like those at BWFA, offer significant benefits over investments in commingled accounts. Anyone using funds or using advisors who use commingled accounts to implement investment plans should carefully consider the benefits and value they are receiving compared to an individually managed account. <table width="95%" align="center"> <tr> <td colspan="3" align="center" valign="middle" >"No Contest" Comparison of Commingled and Individually Managed Accounts <hr align="CENTER" size="1" width="100%" color="Black" noshade> </td> </tr> <tr align="center" valign="middle" > <td>Type of Service/Account </td> <td>Commingled Account </td> <td>Individually Managed </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="80%" color="Black" noshade>Professionally Directed Investments </td> <td><hr align="CENTER" size="1" width="80%" color="Black" noshade>Yes </td> <td><hr align="CENTER" size="1" width="80%" color="Black" noshade>Yes </td> </tr> <tr align="left" valign="top" > <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Tax Accounting </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Partial (no cost basis or gains/loss reporting) </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Full (income, cost basis, gains/losses) </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Investment Accounting </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Partial (at the asset level, not account level) </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Full (at the combined account level) </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>On-call portfolio manager </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Integrated Tax Management </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No, tax insensitive </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes, both buying and selling </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Avoid specific investments </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Include specific investments </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Managed to meet unplanned expenses </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Integrate planned expenses into investment plan </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Estate planning advantages </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>No </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade>Yes </td> </tr> <tr align="left" valign="top"> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade> </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade> </td> <td><hr align="CENTER" size="1" width="100%" color="silver" noshade> </td> </tr> </table>

1999-12-01T00:00:00-05:00

false

Individual vs. Commingled Accounts? No Contest!

2008-09-15T11:19:15-04:00

1 In this quarter's newsletter I am skipping the usual "educational" character of our investment articles, and will instead give you some news about investment performance so far this year. The Wall Street Journal (10/1/99) reports that the average stock fund lost 6.16% during the third quarter, and has a 4.41% total return so far this year (9/30/99). The same article also points out that the average stock has fallen 20% from its high. The New York Times (10/3/99) reports that the median year-to-date return for domestic general stock funds was 3.3%, and the median return for bond funds was -1.3%. International stock funds have returned 12.7% so far this year. Over these past four years many money managers have been under pressure from their clients to abandon their disciplines in favor of trying to keep pace with the S&P 500 index - an index driven by 25 large growth stocks. As most of you know, while our performance has been excellent during this same four-year period, our strategy of creating and managing diversified portfolios has put us at a disadvantage relative to the S&P 500 index. However, this year has been decidedly different. While the S&P and the average mutual fund's performance have lagged, our performance has soared. The average YTD return of our clients (those who have been with us for more than 1 year) was 9.61% - more than twice as high as the average equity mutual fund. If we weight our returns by the size of our clients' portfolios (size weighted), returns have averaged 8.32% (smaller accounts did a little better than larger accounts). What makes these figures amazingly good is that many of our larger portfolios are conservatively structured to provide income for our clients, and we would expect performance for these clients to be lower than the performance of equity funds, not higher. In addition, our performance numbers and averages include some "non-performing" assets (old limited partnerships, life insurance policies, etc.) which our clients hold in their portfolios, which places a drag on our performance numbers. Obviously, not all of our clients achieved these same results. This was a period where our allocation to aggressive stocks and international funds really paid off. However, since our more conservatively managed clients do not own as many of these types of assets, their performance might have been below the average. Using the data from the WSJ and The New York Times, we can estimate the return of the average "balanced" (50% equity, 50% fixed income) mutual fund holder at 1.55% (50% x 4.4% + 50% x -1.3% = 1.55%). This is very close to Value Line's report on the average YTD return for balanced funds, which is 1.18%. We are pleased to note that 39% of our clients who have been with us for more than one year had double-digit returns exceeding 10%, and 91% had returns exceeding the rate of the average balanced fund (>1.55%). Of the nine clients which did not achieve the "average balanced fund return," six were smaller accounts holding mutual funds, and unique situations affected the remaining three clients. Obviously, we are very pleased with these results and we hope you are too. Of course, prior investment results are no guarantee of future results. We continue to believe that the key to successful investing is to follow a discipline based on substance rather than the ever-present noise in the marketplace.   1

1999-10-01T00:00:00-04:00

false

true

Saxon Birdsong, MBA

In this quarter's newsletter I am skipping the usual "educational" character of our investment articles, and will instead give you some news about investment performance so far this year. The Wall Street Journal (10/1/99) reports that the average stock fund lost 6.16% during the third quarter, and has a 4.41% total return so far this year (9/30/99). The same article also points out that the average stock has fallen 20% from its high. The New York Times (10/3/99) reports that the median year-to-date return for domestic general stock funds was 3.3%, and the median return for bond funds was -1.3%. International stock funds have returned 12.7% so far this year. Over these past four years many money managers have been under pressure from their clients to abandon their disciplines in favor of trying to keep pace with the S&P 500 index - an index driven by 25 large growth stocks. As most of you know, while our performance has been excellent during this same four-year period, our strategy of creating and managing diversified portfolios has put us at a disadvantage relative to the S&P 500 index. However, this year has been decidedly different. While the S&P and the average mutual fund's performance have lagged, our performance has soared. The average YTD return of our clients (those who have been with us for more than 1 year) was 9.61% - more than twice as high as the average equity mutual fund. If we weight our returns by the size of our clients' portfolios (size weighted), returns have averaged 8.32% (smaller accounts did a little better than larger accounts). What makes these figures amazingly good is that many of our larger portfolios are conservatively structured to provide income for our clients, and we would expect performance for these clients to be lower than the performance of equity funds, not higher. In addition, our performance numbers and averages include some "non-performing" assets (old limited partnerships, life insurance policies, etc.) which our clients hold in their portfolios, which places a drag on our performance numbers. Obviously, not all of our clients achieved these same results. This was a period where our allocation to aggressive stocks and international funds really paid off. However, since our more conservatively managed clients do not own as many of these types of assets, their performance might have been below the average. Using the data from the WSJ and The New York Times, we can estimate the return of the average "balanced" (50% equity, 50% fixed income) mutual fund holder at 1.55% (50% x 4.4% + 50% x -1.3% = 1.55%). This is very close to Value Line's report on the average YTD return for balanced funds, which is 1.18%. We are pleased to note that 39% of our clients who have been with us for more than one year had double-digit returns exceeding 10%, and 91% had returns exceeding the rate of the average balanced fund (>1.55%). Of the nine clients which did not achieve the "average balanced fund return," six were smaller accounts holding mutual funds, and unique situations affected the remaining three clients. Obviously, we are very pleased with these results and we hope you are too. Of course, prior investment results are no guarantee of future results. We continue to believe that the key to successful investing is to follow a discipline based on substance rather than the ever-present noise in the marketplace.

1999-10-01T00:00:00-04:00

false

Yeah, Yeah, Yeah. What About Investment Performance?

2008-09-15T11:19:15-04:00

1 After we have completed the planning process, determined income and growth requirements, organized distributions, quantified attitudes toward risk, and settled on an appropriate investment model, we then have to select investments and buy them. We use two types of analysis in making our buy and sell decisions: fundamental analysis and technical analysis. The fundamental analysis focuses on a company's income statement, balance sheet and cash flows, and identifies the investments we would like to own. The technical analysis focuses on price movements and identifies the point at which we will buy or sell an investment. To illustrate the process, here are four very different, recent examples: Roper Industries (ROP), British Steel (BST), Cadence Design (CDN), and Identix (IDX). ROP - We first identified ROP back in May '98 from one of our research services, Marketscope. After our analysis, we concluded that ROP was engaged in a highly profitable business, had great cash flow, a superb balance sheet, valuable patent protection, a large market and weak competition. Their revenue growth rate was in the 20%+ range for many years, margins were high (50%) and profitability was continuing to grow (all part of our fundamental analysis). However, the stock was too expensive at that time. In June, the stock began to decline from a high of $34 and P/E of close to 30, and by October it was selling for $15. It declined because 20% of its annual sales are to the large Russian utility company, Gazprom, and investors feared that ROP's profitability would be negatively impacted by the Russian situation. After talking with their treasurer, we discovered that ROP/Gazprom had obtained bank guarantees (LOC's-Letters of Credit), which would ensure payments to ROP by Gazprom. Based on these facts, chart patterns, and positive cash flow into the stock (technical analysis), we purchased $500,000 of ROP on 9/22/98 at about $17/shr. for our clients. We recently sold ROP at $34, after determining that the stock was fully valued. Our clients' profit on ROP will pay their investment management fees for 1-2 years. BST - Searching for income producing investments in our Value Line service, we noted that BST was trading down in price, which put the dividend at about 11% of its market price (11% yield). Our analysis concluded that the strength of the British pound was adversely affecting their sales and profits, and hence the price of their stock. We further noted the strength of their balance sheet (only 13% debt), strong cash flows, and that their profits were plenty sufficient to cover their dividend payment. Our assessment was that the British pound would eventually decline (perhaps due to the new euro currency), thereby enabling the company to increase sales, and the stock price would rise. In the meantime, we would continue to collect 11% income on our investment to help our clients fund their retirement. We still own the stock, and it has appreciated from a low of $15 to $26 after a buyout offer. It is still yielding almost 9%. We are comfortable with our decision to hold BST until it is bought out. CDN - Research by Standard and Poor's indicated that CDN was a great buy, with all of the features we look for in a stock. We bought it in our more aggressive accounts on 3/30/99 for about $26/shr., and as late as 4/5/99 analysts were issuing buy ratings when the stock was selling at $27/shr. On 4/21/99, CDN announced their earnings, which were very good, but issued a warning about temporarily slowing growth in their markets. On that date, the stock fell $9. CDN is now selling at 13 9/16, and we are watching the charts for indications of strength, so that we can "average down" (i.e., buy more in accounts that own it, lowering the average price per share) on the stock. We believe that CDN has a great future. IDX - Our Special Situations service recently identified IDX as "especially recommended." I first saw the stock years ago, when one of our new clients came in with it, and have been tracking it ever since. After reading the analyst's report, I was excited about this stock, and recently put together a buy list to purchase $500,000 of IDX for our clients. IDX is in the biometrics identification business, which uses fingerprints and other human features to provide access authorization to PC's, ATM's, door locks, etc. IDX is a leader in a vast market. Fundamentals looked good, but research on our Bloomberg news service indicated that large amounts of insider selling has been taking place in recent weeks. Among those selling was the current IDX President, who had sold all of his shares in the last few days at $11/shr. We canceled our plans to buy the stock, and it is now selling at $9. We avoided a potential problem, but we will continue to track IDX for a while. We hope this article has provided some insight on our investment decision discipline, and the steps we need to go through to make intelligent investment decisions.   1

1999-07-01T00:00:00-04:00

false

true

Saxon Birdsong, MBA

After we have completed the planning process, determined income and growth requirements, organized distributions, quantified attitudes toward risk, and settled on an appropriate investment model, we then have to select investments and buy them. We use two types of analysis in making our buy and sell decisions: fundamental analysis and technical analysis. The fundamental analysis focuses on a company's income statement, balance sheet and cash flows, and identifies the investments we would like to own. The technical analysis focuses on price movements and identifies the point at which we will buy or sell an investment. To illustrate the process, here are four very different, recent examples: Roper Industries (ROP), British Steel (BST), Cadence Design (CDN), and Identix (IDX). ROP - We first identified ROP back in May '98 from one of our research services, Marketscope. After our analysis, we concluded that ROP was engaged in a highly profitable business, had great cash flow, a superb balance sheet, valuable patent protection, a large market and weak competition. Their revenue growth rate was in the 20%+ range for many years, margins were high (50%) and profitability was continuing to grow (all part of our fundamental analysis). However, the stock was too expensive at that time. In June, the stock began to decline from a high of $34 and P/E of close to 30, and by October it was selling for $15. It declined because 20% of its annual sales are to the large Russian utility company, Gazprom, and investors feared that ROP's profitability would be negatively impacted by the Russian situation. After talking with their treasurer, we discovered that ROP/Gazprom had obtained bank guarantees (LOC's-Letters of Credit), which would ensure payments to ROP by Gazprom. Based on these facts, chart patterns, and positive cash flow into the stock (technical analysis), we purchased $500,000 of ROP on 9/22/98 at about $17/shr. for our clients. We recently sold ROP at $34, after determining that the stock was fully valued. Our clients' profit on ROP will pay their investment management fees for 1-2 years. BST - Searching for income producing investments in our Value Line service, we noted that BST was trading down in price, which put the dividend at about 11% of its market price (11% yield). Our analysis concluded that the strength of the British pound was adversely affecting their sales and profits, and hence the price of their stock. We further noted the strength of their balance sheet (only 13% debt), strong cash flows, and that their profits were plenty sufficient to cover their dividend payment. Our assessment was that the British pound would eventually decline (perhaps due to the new euro currency), thereby enabling the company to increase sales, and the stock price would rise. In the meantime, we would continue to collect 11% income on our investment to help our clients fund their retirement. We still own the stock, and it has appreciated from a low of $15 to $26 after a buyout offer. It is still yielding almost 9%. We are comfortable with our decision to hold BST until it is bought out. CDN - Research by Standard and Poor's indicated that CDN was a great buy, with all of the features we look for in a stock. We bought it in our more aggressive accounts on 3/30/99 for about $26/shr., and as late as 4/5/99 analysts were issuing buy ratings when the stock was selling at $27/shr. On 4/21/99, CDN announced their earnings, which were very good, but issued a warning about temporarily slowing growth in their markets. On that date, the stock fell $9. CDN is now selling at 13 9/16, and we are watching the charts for indications of strength, so that we can "average down" (i.e., buy more in accounts that own it, lowering the average price per share) on the stock. We believe that CDN has a great future. IDX - Our Special Situations service recently identified IDX as "especially recommended." I first saw the stock years ago, when one of our new clients came in with it, and have been tracking it ever since. After reading the analyst's report, I was excited about this stock, and recently put together a buy list to purchase $500,000 of IDX for our clients. IDX is in the biometrics identification business, which uses fingerprints and other human features to provide access authorization to PC's, ATM's, door locks, etc. IDX is a leader in a vast market. Fundamentals looked good, but research on our Bloomberg news service indicated that large amounts of insider selling has been taking place in recent weeks. Among those selling was the current IDX President, who had sold all of his shares in the last few days at $11/shr. We canceled our plans to buy the stock, and it is now selling at $9. We avoided a potential problem, but we will continue to track IDX for a while. We hope this article has provided some insight on our investment decision discipline, and the steps we need to go through to make intelligent investment decisions.

1999-07-01T00:00:00-04:00

false

The Buy/Sell Decision Process

2008-09-15T11:19:15-04:00

1 Barron's, the highly respected financial weekly, last week stated that "Financial planners who manage money for clients are proving to be a fair weather lot." The article was making the observation that a growing number of money managers (mostly those new to the field) are abandoning their investment disciplines in favor of chasing current investment fads. This trend is occurring because many of them are under fire from their clients for not earning portfolio returns which their clients think they should have earned because of all the media hype about the market. In this article we want to get past the hype and shed some light on what's really been happening in the markets by focusing on two recent trends. The first trend is misleading market indices. Over the past few years the market has favored a particular type of investment – large capitalization growth stocks. Virtually all other segments of the market – small stocks, mid-capitalization stocks, foreign investments, real estate related investments and "value" oriented investments – have all done poorly compared to large growth stocks. If an investor's portfolio was not concentrated in a relatively few number of large growth stocks, it is a virtual certainty that their portfolios under-performed the popular indexes in recent years. Some examples (using 1998) will illustrate this: <ul> <li> The S&P 500 Index returned 26.7% in 1998, but 42% of the stocks in the index had negative returns; 51% of Nasdaq stocks had negative returns and 53% of all stocks listed on the New York exchange had negative returns.</li> <li>The median stock in the leading index was up just 4.4%</li> <li>29% of stocks on the New York exchange lost 20% or more</li> <li>58% of stocks listed on the Nasdaq closed the year more than 20% below their highs</li> <li>Investments in any type of investment linked to real estate declined in value by 22%</li> <li>87% of the return in the S&P 500 came from just 50 stocks</li> </ul> It's clear from this information that the popular indexes do not necessarily represent what the general market is doing. Quite the contrary; because of the way these indexes are constructed they can severely misrepresent what the general market is doing. While these variations between the "average" stock and the indexes are nearly unprecedented, not seen since the early '70s, they are just another temporary trend. So why is this a problem? Because investor perceptions are influenced by the media. Due to time constraints the media deals in "sound bites," breathlessly reporting index performance to fill the time between commercials. This can lead some investors to feel that they are "missing the bandwagon." The second trend which has been shaping investor's perceptions in recent months: the Internet stock craze. To illustrate, recently a Fox Channel 5 newscaster reported: "Just to show you how well local stocks have performed, AOL was less than $70 a share a year ago, and now it's $130." Is this really representative of how local stocks have performed? Of course not. Note that AOL is trading at 629 times earnings; of the 32 million shares which traded on 3/30, less that 5% came from institutions (so called "smart money"); and AOL's profit comes from charging its customers two times the going rate for Internet service. While AOL may continue to trade at its current lofty price, we see no compelling reason for buying the stock based on any objective assessment of risk and potential return. Or, how about Amazon.com (AMZN) selling at a whopping 123 times negative earnings. If you divide the company's market value by its employees (256) you get $70 million per employee - a highly irrational valuation. This is over 111 times IBM's ratio of .63 million per employee. Or, consider that AMZN sells $1.2 billion a year worth of books, and total book sales in the US is only $12 billion. Even if AMZN sold every single book published in the US they would still not be profitable, based on their current cost structure. Even if they are successful with their new "auction" strategy to sell everything over the Internet, in our opinion it will still be a long time before they show profits. Rational investors should consider these facts over the hype. Our priority here at BWFA is to construct and maintain portfolios which accomplish our client's goals at an acceptable level of market risk. And this mandates holding a diversified portfolio. Our own large cap growth stocks (IBM, SGP, PFE, SUNW, LU, BK, JNJ, etc.) have all done considerably better than the indexes. But we have not concentrated our client's investments in this sector, because we know that this is neither disciplined nor prudent, no matter what fad happens to be in vogue among greedy day traders or the media.    1

1999-04-01T00:00:00-05:00

false

true

Saxon Birdsong, MBA

Barron's, the highly respected financial weekly, last week stated that "Financial planners who manage money for clients are proving to be a fair weather lot." The article was making the observation that a growing number of money managers (mostly those new to the field) are abandoning their investment disciplines in favor of chasing current investment fads. This trend is occurring because many of them are under fire from their clients for not earning portfolio returns which their clients think they should have earned because of all the media hype about the market. In this article we want to get past the hype and shed some light on what's really been happening in the markets by focusing on two recent trends. The first trend is misleading market indices. Over the past few years the market has favored a particular type of investment – large capitalization growth stocks. Virtually all other segments of the market – small stocks, mid-capitalization stocks, foreign investments, real estate related investments and "value" oriented investments – have all done poorly compared to large growth stocks. If an investor's portfolio was not concentrated in a relatively few number of large growth stocks, it is a virtual certainty that their portfolios under-performed the popular indexes in recent years. Some examples (using 1998) will illustrate this: <ul> <li> The S&P 500 Index returned 26.7% in 1998, but 42% of the stocks in the index had negative returns; 51% of Nasdaq stocks had negative returns and 53% of all stocks listed on the New York exchange had negative returns.</li> <li>The median stock in the leading index was up just 4.4%</li> <li>29% of stocks on the New York exchange lost 20% or more</li> <li>58% of stocks listed on the Nasdaq closed the year more than 20% below their highs</li> <li>Investments in any type of investment linked to real estate declined in value by 22%</li> <li>87% of the return in the S&P 500 came from just 50 stocks</li> </ul> It's clear from this information that the popular indexes do not necessarily represent what the general market is doing. Quite the contrary; because of the way these indexes are constructed they can severely misrepresent what the general market is doing. While these variations between the "average" stock and the indexes are nearly unprecedented, not seen since the early '70s, they are just another temporary trend. So why is this a problem? Because investor perceptions are influenced by the media. Due to time constraints the media deals in "sound bites," breathlessly reporting index performance to fill the time between commercials. This can lead some investors to feel that they are "missing the bandwagon." The second trend which has been shaping investor's perceptions in recent months: the Internet stock craze. To illustrate, recently a Fox Channel 5 newscaster reported: "Just to show you how well local stocks have performed, AOL was less than $70 a share a year ago, and now it's $130." Is this really representative of how local stocks have performed? Of course not. Note that AOL is trading at 629 times earnings; of the 32 million shares which traded on 3/30, less that 5% came from institutions (so called "smart money"); and AOL's profit comes from charging its customers two times the going rate for Internet service. While AOL may continue to trade at its current lofty price, we see no compelling reason for buying the stock based on any objective assessment of risk and potential return. Or, how about Amazon.com (AMZN) selling at a whopping 123 times negative earnings. If you divide the company's market value by its employees (256) you get $70 million per employee - a highly irrational valuation. This is over 111 times IBM's ratio of .63 million per employee. Or, consider that AMZN sells $1.2 billion a year worth of books, and total book sales in the US is only $12 billion. Even if AMZN sold every single book published in the US they would still not be profitable, based on their current cost structure. Even if they are successful with their new "auction" strategy to sell everything over the Internet, in our opinion it will still be a long time before they show profits. Rational investors should consider these facts over the hype. Our priority here at BWFA is to construct and maintain portfolios which accomplish our client's goals at an acceptable level of market risk. And this mandates holding a diversified portfolio. Our own large cap growth stocks (IBM, SGP, PFE, SUNW, LU, BK, JNJ, etc.) have all done considerably better than the indexes. But we have not concentrated our client's investments in this sector, because we know that this is neither disciplined nor prudent, no matter what fad happens to be in vogue among greedy day traders or the media.

1999-04-01T00:00:00-05:00

false

Investor Perception vs. Investment Performance

2008-09-15T11:19:15-04:00

1 Understanding dividends is important to understanding your investments. With dividend rates at an all-time low, some investors are worried that the markets are poised for a severe pull-back. In this article we examine dividend trends and offer our opinion about the importance of low dividend yields. Firms have two basic choices for what to do with their earnings; pay them out to shareholders in the form of dividends, or spend (reinvest) them on activities or projects which will ultimately cause the price of their stock to go up (capital appreciation). Which choice they make is the subject of corporate finance, but their choice affects all their investors. Historically, dividends have been an important component of investment returns on stocks. In fact, a whopping 41.5% of the investment return provided by stocks since 1926 has been attributable to dividends. Total return (10.9% average annual since 1926) is provided by the combination of income (from dividends, 4.5%) and capital appreciation (increasing stock prices, 6.4%). In addition, dividend yield (annual dividend/market price) has been among the most consistent predictor of where the market is likely to go - up or down. Whenever the dividend yield has fallen to about 2.3%, the market has almost always experienced a dramatic price decline. In recent years dividend yields have been in a secular (OK, long term) decline, as market prices have risen, and dividend increases have failed to keep pace. The dividend yield for the market as a whole now stands at about 1.6%, so it is appropriate for us to question if this fact is significant. In 1976 Fischer Black wrote an article which questioned why corporations pay dividends at all:<ul> <li>A company that pays no dividends is more attractive than one that does, especially if capital gains tax rates are lower than ordinary income rates (as they are now).</li> <li>There are better ways for a firm to enhance shareholder value; buy back stock, or, replace common stock with bonds to get deductible interest expense (dividends are not deductible by the firm).</li> <li>Not paying dividends is a low-cost source of capital for the firm.</li> </ul> We concur with Mr. Black, and it may be that investors are gaining a sophisticated enough understanding of corporate finance to accept the basic truth of these arguments. Investors would make more money if corporations used the funds available to pay dividends for any of these other purposes. Stocks are in a constant tug-of-war with bonds to see which can offer investors the best combination of risk/return, so it is natural to ask about the relationship of dividends and interest rates. With a current dividend yield of 1.6% from stocks and 20-year bond rates at 6.1%, it is implied that investors are expecting capital appreciation of at least 4.5% from stocks (6.1%-1.6%). Of course, stocks have more price volatility (risk) than bonds, so investors should get a risk premium for investing in stocks - perhaps 50% of bond yields, or 3% additional. Thus, as a benchmark, if investors can get a total return of 9.1% from stocks (1.6% + 4.5% + 3%), then they should prefer stocks over bonds. In addition, since the capital gains rate is lower than the rate investors will pay on income from bonds (in taxable accounts), then stocks offer tax advantages as well. Our view is that it is time to shift the dividend paradigm; dividend yields are no longer the accurate predictor of overvalued markets that they once were. We applaud actions taken by corporations to utilize their earnings more productively for investors. As long as corporate profit growth remains reasonably strong and interest rates remain relatively low, the fact that dividend yields are historically low is of little significance.   1

1998-12-01T00:00:00-05:00

false

true

Saxon Birdsong, MBA

Understanding dividends is important to understanding your investments. With dividend rates at an all-time low, some investors are worried that the markets are poised for a severe pull-back. In this article we examine dividend trends and offer our opinion about the importance of low dividend yields. Firms have two basic choices for what to do with their earnings; pay them out to shareholders in the form of dividends, or spend (reinvest) them on activities or projects which will ultimately cause the price of their stock to go up (capital appreciation). Which choice they make is the subject of corporate finance, but their choice affects all their investors. Historically, dividends have been an important component of investment returns on stocks. In fact, a whopping 41.5% of the investment return provided by stocks since 1926 has been attributable to dividends. Total return (10.9% average annual since 1926) is provided by the combination of income (from dividends, 4.5%) and capital appreciation (increasing stock prices, 6.4%). In addition, dividend yield (annual dividend/market price) has been among the most consistent predictor of where the market is likely to go - up or down. Whenever the dividend yield has fallen to about 2.3%, the market has almost always experienced a dramatic price decline. In recent years dividend yields have been in a secular (OK, long term) decline, as market prices have risen, and dividend increases have failed to keep pace. The dividend yield for the market as a whole now stands at about 1.6%, so it is appropriate for us to question if this fact is significant. In 1976 Fischer Black wrote an article which questioned why corporations pay dividends at all:<ul> <li>A company that pays no dividends is more attractive than one that does, especially if capital gains tax rates are lower than ordinary income rates (as they are now).</li> <li>There are better ways for a firm to enhance shareholder value; buy back stock, or, replace common stock with bonds to get deductible interest expense (dividends are not deductible by the firm).</li> <li>Not paying dividends is a low-cost source of capital for the firm.</li> </ul> We concur with Mr. Black, and it may be that investors are gaining a sophisticated enough understanding of corporate finance to accept the basic truth of these arguments. Investors would make more money if corporations used the funds available to pay dividends for any of these other purposes. Stocks are in a constant tug-of-war with bonds to see which can offer investors the best combination of risk/return, so it is natural to ask about the relationship of dividends and interest rates. With a current dividend yield of 1.6% from stocks and 20-year bond rates at 6.1%, it is implied that investors are expecting capital appreciation of at least 4.5% from stocks (6.1%-1.6%). Of course, stocks have more price volatility (risk) than bonds, so investors should get a risk premium for investing in stocks - perhaps 50% of bond yields, or 3% additional. Thus, as a benchmark, if investors can get a total return of 9.1% from stocks (1.6% + 4.5% + 3%), then they should prefer stocks over bonds. In addition, since the capital gains rate is lower than the rate investors will pay on income from bonds (in taxable accounts), then stocks offer tax advantages as well. Our view is that it is time to shift the dividend paradigm; dividend yields are no longer the accurate predictor of overvalued markets that they once were. We applaud actions taken by corporations to utilize their earnings more productively for investors. As long as corporate profit growth remains reasonably strong and interest rates remain relatively low, the fact that dividend yields are historically low is of little significance.

1998-12-01T00:00:00-05:00

false

Are Low Dividend Yields Important?

2008-09-15T11:19:15-04:00

1 Confidence in the markets has been undermined by political uncertainties, ongoing international turmoil, and persistent concern over declining growth in corporate earnings. But most of all, the concern has been over the market itself. The strategy of buying on dips has been replaced with selling into market rallies. Attempts to buy value stocks and to average down by buying more when the price falls, so far, look like mistakes. It's not easy to hold the course, and harder still to step in at this point. The weak September-October season for stocks is at hand, Asia and Latin America continue to place a drag on our economy and financial markets, and the President's problems seem to grow like a cancer. By mid-October we will be seeing the release of 3rd quarter corporate profits, and in the last three months of the year we are facing the tax selling pressure. In recent weeks we have taken this pause in the market to strengthen our portfolios and capture tax losses to offset capital gains. Opportunities appear to be in oils, REITs and regional banks, with utilities showing considerable strength. We are focusing on strong companies with good earnings records which are selling at reasonable prices. The bright spot on the horizon is declining interest rates. As I write this, the bell weather 30 year Treasury bond is at 5.13%; its lowest level since 1965. When rates fall, stocks become more attractive than bonds. And most market watchers feel that Mr. Greenspan will lower rates at the Fed meeting on September 29th. We do not believe that the Fed can continue to defend its position on rising inflation in view of the economic evidence. More importantly, the Fed will find its position increasingly difficult to defend politically, because high US rates are pulling money out of countries which are already suffering a severe liquidity crisis - which will eventually damage our own economy. The bad news is that this sentiment is probably already reflected in the prices of both bonds and stocks. For now, we see the market continuing in a highly volatile trading range of 7500 to 8200 on the Dow. While this is considerably off its July 20th high of 9368, we expect the year to close in positive territory, above the 7908 level at the end of 1997. There is other good news too. Markets are not nearly as risky as they were. The pause will allow corporate earnings to catch up to stock prices, and much of the "hot air" has been let out of some high quality, overvalued stocks. Coke, which sold at $89 and a P/E of 62, now sells at $56 (37% decline) with a P/E of 36. Gillette, which sold at $62 with a P/E of 49 now sells at $38 (21% decline) with a P/E of 30. And GE which sold at $97 with a P/E of 37, now sells at 83 (14% decline) with a P/E of 32. The average decline from the high is in the range of 40%. We still have the Berkshire Hathaways, the Compaqs, the Microsofts (selling at a P/Es of 39, 43.5, and 68, respectively), and many other high quality stocks selling at inflated prices, but that's more the exception than the rule. And some more good news. As some of you will recall, we follow an investor sentiment indicator called the Put/Call ratio (see previous article on our web site), which is a measurement of how investors feel about the market. When sentiment is overly negative, indicated by a ratio above .75, the market usually experiences a quick move down in the next few days, followed by an advance over the next several months. On 8/21/98 (Dow 8693) the ratio hit 1.022, its 3rd highest reading since 1985. Ten days later (8/31) the market hit its low of 7539, and has since trended upward. This pattern is consistent with the historical predictions indicated by this measurement, and tends to confirm that we are near a market bottom. 1

1998-09-01T00:00:00-04:00

false

true

Saxon Birdsong, MBA

Confidence in the markets has been undermined by political uncertainties, ongoing international turmoil, and persistent concern over declining growth in corporate earnings. But most of all, the concern has been over the market itself. The strategy of buying on dips has been replaced with selling into market rallies. Attempts to buy value stocks and to average down by buying more when the price falls, so far, look like mistakes. It's not easy to hold the course, and harder still to step in at this point. The weak September-October season for stocks is at hand, Asia and Latin America continue to place a drag on our economy and financial markets, and the President's problems seem to grow like a cancer. By mid-October we will be seeing the release of 3rd quarter corporate profits, and in the last three months of the year we are facing the tax selling pressure. In recent weeks we have taken this pause in the market to strengthen our portfolios and capture tax losses to offset capital gains. Opportunities appear to be in oils, REITs and regional banks, with utilities showing considerable strength. We are focusing on strong companies with good earnings records which are selling at reasonable prices. The bright spot on the horizon is declining interest rates. As I write this, the bell weather 30 year Treasury bond is at 5.13%; its lowest level since 1965. When rates fall, stocks become more attractive than bonds. And most market watchers feel that Mr. Greenspan will lower rates at the Fed meeting on September 29th. We do not believe that the Fed can continue to defend its position on rising inflation in view of the economic evidence. More importantly, the Fed will find its position increasingly difficult to defend politically, because high US rates are pulling money out of countries which are already suffering a severe liquidity crisis - which will eventually damage our own economy. The bad news is that this sentiment is probably already reflected in the prices of both bonds and stocks. For now, we see the market continuing in a highly volatile trading range of 7500 to 8200 on the Dow. While this is considerably off its July 20th high of 9368, we expect the year to close in positive territory, above the 7908 level at the end of 1997. There is other good news too. Markets are not nearly as risky as they were. The pause will allow corporate earnings to catch up to stock prices, and much of the "hot air" has been let out of some high quality, overvalued stocks. Coke, which sold at $89 and a P/E of 62, now sells at $56 (37% decline) with a P/E of 36. Gillette, which sold at $62 with a P/E of 49 now sells at $38 (21% decline) with a P/E of 30. And GE which sold at $97 with a P/E of 37, now sells at 83 (14% decline) with a P/E of 32. The average decline from the high is in the range of 40%. We still have the Berkshire Hathaways, the Compaqs, the Microsofts (selling at a P/Es of 39, 43.5, and 68, respectively), and many other high quality stocks selling at inflated prices, but that's more the exception than the rule. And some more good news. As some of you will recall, we follow an investor sentiment indicator called the Put/Call ratio (see previous article on our web site), which is a measurement of how investors feel about the market. When sentiment is overly negative, indicated by a ratio above .75, the market usually experiences a quick move down in the next few days, followed by an advance over the next several months. On 8/21/98 (Dow 8693) the ratio hit 1.022, its 3rd highest reading since 1985. Ten days later (8/31) the market hit its low of 7539, and has since trended upward. This pattern is consistent with the historical predictions indicated by this measurement, and tends to confirm that we are near a market bottom.

1998-09-01T00:00:00-04:00

false

A Trading Range Ahead

2008-09-15T11:19:15-04:00

1 We frequently write in our newsletter about indicators we follow to give us some clue as to where the market may be going. The Advance/Decline ratio is another such indicator, and measures the strength of the stock market. It’s been behaving rather badly lately. The A/D indicator is simply the number of stocks going up in price divided by the number of stocks going down in price on a particular day. When the number of stocks going up is larger than the number going down, breadth is said to be positive, and when declining stocks outnumber advancing stocks, breadth is negative. An A/D ratio above 1 indicates that advancing stocks outnumber declining stocks, and a ratio of .5 means that decliners outnumber advancers by 2:1. Recently, breadth has been unusually negative. For the week of June 8, the ratio was .59, with 1121 stocks advancing and 1907 declining. In fact, the trend since the 2nd week in April has been negative, signaling general weakness in the market. In the May 4th issue of Barron’s, Peter Eliades writes about his study, “Sign of the Bear”, and develops some interesting data using the A/D ratio. He found that when the market experiences at least 21, but no more than 27 consecutive days, with the A/D ratio between .65 and 1.95, the market may be headed for a downturn. In fact, in over 70 years of data there have been only 6 times when the A/D ratio did this; the last one occurring on April 6th. After each of the five signals preceding April 6th the market has topped, and then declined significantly. We combined Elizdes’ study with another study done by Cherney of Standard & Poors, and developed the following information:  <table align="center" width="90%" cellspacing="2" cellpadding="2" border="0"> <tr> <td colspan="3" width="16%" align="left" style="border-right: thin solid"> <div align="center">Time after Signal to:</div> </td> <td rowspan="2" width="44%" align="center" style="border-bottom: medium solid"> <div align="center">Subsequent decline in Dow Jones Industrial Average (to bottom)</div> </td> </tr> <tr> <td width="120" align="left" style="border-bottom: medium solid">Signal Date</td> <td width="19%" align="center" style="border-bottom: medium solid">Market Top</td> <td align="center" style="border-bottom: medium solid" style="border-right: thin solid">% Gain to Top</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">7/19/29</td> <td width="19%" align="center" style="border-bottom: thin solid">7 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">10.42%</td> <td width="44%" align="center" style="border-bottom: thin solid">-9.5%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">12/8/61</td> <td width="19%" align="center" style="border-bottom: thin solid">1 Week</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">.92%</td> <td width="44%" align="center" style="border-bottom: thin solid">-29.1%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">1/25/66</td> <td width="19%" align="center" style="border-bottom: thin solid">2 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">.35%</td> <td width="44%" align="center" style="border-bottom: thin solid">-26.5%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">10/17/68</td> <td width="19%" align="center" style="border-bottom: thin solid">7 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">2.74%</td> <td width="44%" align="center" style="border-bottom: thin solid">-36.9%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">12/6/72</td> <td width="19%" align="center" style="border-bottom: thin solid">5 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">2.35%</td> <td width="44%" align="center" style="border-bottom: thin solid">-46.5%</td> </tr> <tr> <td width="120" align="left">4/6/98</td> <td width="19%" align="center">5 Weeks??</td> <td align="center" style="border-right: thin solid">2%??</td> <td width="44%" align="center">-6.30%??</td> </tr> </table>  You can see that the market tops ranged from the very first week after the signal to as much as the 7th week after the signal. As of this writing we are 10 weeks after the 4/6/98 signal. The market high since the latest signal was 9211.84, which was reached on 5/13, in the 5th the market (Dow) has declined 583 points, or 6.3% (as of 6/15/98). Thus, unlike so many other historical measures of market tops which have been broken, the accuracy of this indicator seems, so far, to be intact. However, we should also note that 5 of the 6 signals were closely associated with Federal Reserve action to increase short term interest rates, which almost always has a negative effect on stocks. And based on Alan Greenspan’s recent report to Congress, it looks like the Fed will not be taking any action for a while. That makes us feel pretty good. While we continue to be bullish over the longer term, we do expect increasing price volatility in the financial markets. Of most concern in this regard is the potential for rising labor costs, which would deepen the wound in corporate profits and spur action by the Fed to raise rates. Specifically, we will be watching the labor strike at GM as an indication of what may be coming. If labor is successful in increasing its share of profits and we see rising labor costs spreading, we would be inclined to take some profits and move some funds out of the market. On a more positive note, we like the federal budget surplus and continuing inflows of money into the markets. We think these are good reasons to maintain our current investment posture. 1

1998-06-01T00:00:00-04:00

false

true

Saxon Birdsong, MBA

We frequently write in our newsletter about indicators we follow to give us some clue as to where the market may be going. The Advance/Decline ratio is another such indicator, and measures the strength of the stock market. It’s been behaving rather badly lately. The A/D indicator is simply the number of stocks going up in price divided by the number of stocks going down in price on a particular day. When the number of stocks going up is larger than the number going down, breadth is said to be positive, and when declining stocks outnumber advancing stocks, breadth is negative. An A/D ratio above 1 indicates that advancing stocks outnumber declining stocks, and a ratio of .5 means that decliners outnumber advancers by 2:1. Recently, breadth has been unusually negative. For the week of June 8, the ratio was .59, with 1121 stocks advancing and 1907 declining. In fact, the trend since the 2nd week in April has been negative, signaling general weakness in the market. In the May 4th issue of Barron’s, Peter Eliades writes about his study, “Sign of the Bear”, and develops some interesting data using the A/D ratio. He found that when the market experiences at least 21, but no more than 27 consecutive days, with the A/D ratio between .65 and 1.95, the market may be headed for a downturn. In fact, in over 70 years of data there have been only 6 times when the A/D ratio did this; the last one occurring on April 6th. After each of the five signals preceding April 6th the market has topped, and then declined significantly. We combined Elizdes’ study with another study done by Cherney of Standard & Poors, and developed the following information:  <table align="center" width="90%" cellspacing="2" cellpadding="2" border="0"> <tr> <td colspan="3" width="16%" align="left" style="border-right: thin solid"> <div align="center">Time after Signal to:</div> </td> <td rowspan="2" width="44%" align="center" style="border-bottom: medium solid"> <div align="center">Subsequent decline in Dow Jones Industrial Average (to bottom)</div> </td> </tr> <tr> <td width="120" align="left" style="border-bottom: medium solid">Signal Date</td> <td width="19%" align="center" style="border-bottom: medium solid">Market Top</td> <td align="center" style="border-bottom: medium solid" style="border-right: thin solid">% Gain to Top</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">7/19/29</td> <td width="19%" align="center" style="border-bottom: thin solid">7 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">10.42%</td> <td width="44%" align="center" style="border-bottom: thin solid">-9.5%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">12/8/61</td> <td width="19%" align="center" style="border-bottom: thin solid">1 Week</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">.92%</td> <td width="44%" align="center" style="border-bottom: thin solid">-29.1%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">1/25/66</td> <td width="19%" align="center" style="border-bottom: thin solid">2 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">.35%</td> <td width="44%" align="center" style="border-bottom: thin solid">-26.5%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">10/17/68</td> <td width="19%" align="center" style="border-bottom: thin solid">7 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">2.74%</td> <td width="44%" align="center" style="border-bottom: thin solid">-36.9%</td> </tr> <tr> <td width="120" align="left" style="border-bottom: thin solid">12/6/72</td> <td width="19%" align="center" style="border-bottom: thin solid">5 Weeks</td> <td align="center" style="border-bottom: thin solid" style="border-right: thin solid">2.35%</td> <td width="44%" align="center" style="border-bottom: thin solid">-46.5%</td> </tr> <tr> <td width="120" align="left">4/6/98</td> <td width="19%" align="center">5 Weeks??</td> <td align="center" style="border-right: thin solid">2%??</td> <td width="44%" align="center">-6.30%??</td> </tr> </table>  You can see that the market tops ranged from the very first week after the signal to as much as the 7th week after the signal. As of this writing we are 10 weeks after the 4/6/98 signal. The market high since the latest signal was 9211.84, which was reached on 5/13, in the 5th the market (Dow) has declined 583 points, or 6.3% (as of 6/15/98). Thus, unlike so many other historical measures of market tops which have been broken, the accuracy of this indicator seems, so far, to be intact. However, we should also note that 5 of the 6 signals were closely associated with Federal Reserve action to increase short term interest rates, which almost always has a negative effect on stocks. And based on Alan Greenspan’s recent report to Congress, it looks like the Fed will not be taking any action for a while. That makes us feel pretty good. While we continue to be bullish over the longer term, we do expect increasing price volatility in the financial markets. Of most concern in this regard is the potential for rising labor costs, which would deepen the wound in corporate profits and spur action by the Fed to raise rates. Specifically, we will be watching the labor strike at GM as an indication of what may be coming. If labor is successful in increasing its share of profits and we see rising labor costs spreading, we would be inclined to take some profits and move some funds out of the market. On a more positive note, we like the federal budget surplus and continuing inflows of money into the markets. We think these are good reasons to maintain our current investment posture.

1998-06-01T00:00:00-04:00

false

Sign of the Bear?

2008-09-15T11:19:15-04:00

1 We watch a variety of statistics to help us evaluate risk in the market, and the best times to be buying and selling securities. In the last newsletter we focused on dividend yield as an indicator of a market ready to retreat, and concluded that it no longer appears to be a good one. (Read the <a href="yields.htm">old article</a>, if you care to.) In this newsletter we will focus on another indicator, which has a good record of predicting up markets - the Put/Call ratio. To understand the ratio, it may be helpful to provide some background for some of our readers. Without going into a lot of detail about how puts and calls work, note that puts and calls give their owners the right to buy or sell a security at a stated price. Calls are purchased usually by speculators who believe that the market is going to go up, and puts are purchased by those who believe that the market is going to go down. An investor will buy calls or puts on a security rather than purchasing the security outright, because they can control a larger number of shares for the same amount of money (leverage). There are usually more total call contracts outstanding than put contracts; therefore, the put/call ratio is usually less than 50%. A high ratio of 75% means that there are 75 put contracts outstanding for every 100 call contracts. There have been only 11 times since 1985 that the ratio was above 75%. Historically, a higher ratio (the more puts outstanding relative to calls) signals a market bottom; a good time to buy or hold, but not a good time to sell. Just how good is this indicator at identifying a rising market? Let's look at the record since 1985: <table border="0" cellspacing="1" width="100%"> <tr> <td width="100%" style="border-bottom: thin solid rgb(0,0,0)"><table border="0" cellspacing="1" width="100%"> <tr> <td width="100%" align="center" style="border-bottom: thin solid rgb(0,0,0)">One Year After Put/Call Ratio > 75%, S&p 500 Data</td> </tr> <tr> <td width="100%" align="center"><table border="0" cellspacing="1" width="100%"> <tr> <td width="120" align="center" style="border-bottom: thin solid rgb(128,128,128)">Put/Call Ratio</td> <td width="120" align="center" style="border-bottom: thin solid rgb(128,128,128)">Signal Date</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">One Year Gain (%)</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">Days After Signal</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">Worst % Loss During Year at Low Point</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">Days After Signal</td> </tr> <tr> <td width="120" align="center">136.2%</td> <td width="120" align="center">12/03/87</td> <td width="17%" align="center">23.23</td> <td width="17%" align="center">224</td> <td width="17%" align="center">-0.57</td> <td width="17%" align="center">1</td> </tr> <tr> <td width="120" align="center">75.1%</td> <td width="120" align="center">10/10/90</td> <td width="17%" align="center">26.34</td> <td width="17%" align="center">223</td> <td width="17%" align="center">-1.64</td> <td width="17%" align="center">1</td> </tr> <tr> <td width="120" align="center">78.6%</td> <td width="120" align="center">1/08/91</td> <td width="17%" align="center">33.17</td> <td width="17%" align="center">250</td> <td width="17%" align="center">-1.08</td> <td width="17%" align="center">1</td> </tr> <tr> <td width="120" align="center">78.8%</td> <td width="120" align="center">10/05/94</td> <td width="17%" align="center">28.27</td> <td width="17%" align="center">242</td> <td width="17%" align="center">-1.78</td> <td width="17%" align="center">45</td> </tr> <tr> <td width="120" align="center">82.5%</td> <td width="120" align="center">7/15/96</td> <td width="17%" align="center">45.09</td> <td width="17%" align="center">248</td> <td width="17%" align="center">-0.5</td> <td width="17%" align="center">7</td> </tr> </table> </td> </tr> </table> </td> </tr> </table> The table seems to confirm that a put/call ratio is a good indicator of when the market may be oversold, and on its way up. Every time the ratio has been above 75% since 1985, the market has ended higher after a year. According to the table, it took 220 days or more to reach the high and there was a small percentage drop during the year, often right after the signal was reached. The most recent reading above 75% (actual reading was 85.5%) was on 12/19/97 when the market closed at 946. If these same relationships hold true, then we can expect a low over the remaining 9 months of around 930 (an 11.3% decline from where we were at the end of February), and expect another year of good returns. We should note however, that this is not the only indicator we use at BWFA. Since estimates of corporate profit growth, upon which the price of stocks is ultimately based, are in the range of 7% for 1998, we believe that more modest growth in stock prices seems to be most probable.   1

1998-04-01T00:00:00-05:00

false

true

Saxon Birdsong, MBA

We watch a variety of statistics to help us evaluate risk in the market, and the best times to be buying and selling securities. In the last newsletter we focused on dividend yield as an indicator of a market ready to retreat, and concluded that it no longer appears to be a good one. (Read the <a href="yields.htm">old article</a>, if you care to.) In this newsletter we will focus on another indicator, which has a good record of predicting up markets - the Put/Call ratio. To understand the ratio, it may be helpful to provide some background for some of our readers. Without going into a lot of detail about how puts and calls work, note that puts and calls give their owners the right to buy or sell a security at a stated price. Calls are purchased usually by speculators who believe that the market is going to go up, and puts are purchased by those who believe that the market is going to go down. An investor will buy calls or puts on a security rather than purchasing the security outright, because they can control a larger number of shares for the same amount of money (leverage). There are usually more total call contracts outstanding than put contracts; therefore, the put/call ratio is usually less than 50%. A high ratio of 75% means that there are 75 put contracts outstanding for every 100 call contracts. There have been only 11 times since 1985 that the ratio was above 75%. Historically, a higher ratio (the more puts outstanding relative to calls) signals a market bottom; a good time to buy or hold, but not a good time to sell. Just how good is this indicator at identifying a rising market? Let's look at the record since 1985: <table border="0" cellspacing="1" width="100%"> <tr> <td width="100%" style="border-bottom: thin solid rgb(0,0,0)"><table border="0" cellspacing="1" width="100%"> <tr> <td width="100%" align="center" style="border-bottom: thin solid rgb(0,0,0)">One Year After Put/Call Ratio > 75%, S&p 500 Data</td> </tr> <tr> <td width="100%" align="center"><table border="0" cellspacing="1" width="100%"> <tr> <td width="120" align="center" style="border-bottom: thin solid rgb(128,128,128)">Put/Call Ratio</td> <td width="120" align="center" style="border-bottom: thin solid rgb(128,128,128)">Signal Date</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">One Year Gain (%)</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">Days After Signal</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">Worst % Loss During Year at Low Point</td> <td width="17%" align="center" style="border-bottom: thin solid rgb(128,128,128)">Days After Signal</td> </tr> <tr> <td width="120" align="center">136.2%</td> <td width="120" align="center">12/03/87</td> <td width="17%" align="center">23.23</td> <td width="17%" align="center">224</td> <td width="17%" align="center">-0.57</td> <td width="17%" align="center">1</td> </tr> <tr> <td width="120" align="center">75.1%</td> <td width="120" align="center">10/10/90</td> <td width="17%" align="center">26.34</td> <td width="17%" align="center">223</td> <td width="17%" align="center">-1.64</td> <td width="17%" align="center">1</td> </tr> <tr> <td width="120" align="center">78.6%</td> <td width="120" align="center">1/08/91</td> <td width="17%" align="center">33.17</td> <td width="17%" align="center">250</td> <td width="17%" align="center">-1.08</td> <td width="17%" align="center">1</td> </tr> <tr> <td width="120" align="center">78.8%</td> <td width="120" align="center">10/05/94</td> <td width="17%" align="center">28.27</td> <td width="17%" align="center">242</td> <td width="17%" align="center">-1.78</td> <td width="17%" align="center">45</td> </tr> <tr> <td width="120" align="center">82.5%</td> <td width="120" align="center">7/15/96</td> <td width="17%" align="center">45.09</td> <td width="17%" align="center">248</td> <td width="17%" align="center">-0.5</td> <td width="17%" align="center">7</td> </tr> </table> </td> </tr> </table> </td> </tr> </table> The table seems to confirm that a put/call ratio is a good indicator of when the market may be oversold, and on its way up. Every time the ratio has been above 75% since 1985, the market has ended higher after a year. According to the table, it took 220 days or more to reach the high and there was a small percentage drop during the year, often right after the signal was reached. The most recent reading above 75% (actual reading was 85.5%) was on 12/19/97 when the market closed at 946. If these same relationships hold true, then we can expect a low over the remaining 9 months of around 930 (an 11.3% decline from where we were at the end of February), and expect another year of good returns. We should note however, that this is not the only indicator we use at BWFA. Since estimates of corporate profit growth, upon which the price of stocks is ultimately based, are in the range of 7% for 1998, we believe that more modest growth in stock prices seems to be most probable.

1998-04-01T00:00:00-05:00

false

Which Way is the Market Headed? And How Can We Tell?

2008-09-15T11:19:15-04:00

1 The other day my partners suggested that I write about the "fun" of investing. It was right after a 12-hour, 100-point "down day" in the market. Since I tend to take my job seriously, it was hard for me to embrace the idea of "investing and fun!" But, after a good night's sleep, I began to see it more clearly. My client and friend Jim G. is really into baseball. As a matter of fact, Jim is the only one I know who can name (off the top of his head, no less) the seven (count them, 7) ways a player can get to first base without a hit. Jim spends a lot of time watching and going to games, reading the scores, discussing salaries, and prognosticating on the outcome of the season. Baseball is a joy for Jim. What my partners were telling me was that Jim and I are alike. Only our passions are different. Without going into complicated analogies, it does seem that Jim's interest in baseball is similar to the interest many of us find in investing. Undeniably, there is excitement in strategizing, analyzing, searching out, and discovering possibilities. While the outcome is uncertain, our (Jim's and my) opinions are based on hours of research and a lot of work. Neither of us has to be very smart to do what we do, we just have to spend a lot of time doing it. (Funny, I tell my 9 year old son Jacob the same thing about his homework.) Jim doesn't get paid for the hours he spends obsessing about baseball, poring over stats and listening to the "experts" evaluate the possible outcomes. (Come to think of it, I didn't get paid for doing a similar thing with investments early in my career!) The point is, for Jim and me, it's not about getting paid, it's about doing what we enjoy. What we enjoy, we do well. Jim has a keen understanding of the fine points of the game of baseball, seeing things that I do not. He recognizes great plays, mistakes, and opportunities that I miss. His predictive skills and judgment are based on his knowledge and experience about baseball. Similarly, my studies of financials and analyst reports give me insights into which management teams are posed to succeed in the next few years. Clearly, there is a serious aspect of dealing with other people's money. Having so many people place their trust in you to do the right thing when you're not always sure of what's right is a huge responsibility. But the seriousness of it should not preclude the fun of it. Even in the sanctity of church, my parish priest still tells the best jokes. I know that Jim had a tough time when the O's had a difficult September. But he may not know that September has historically been the worst month of the year for investment performance. Sometimes it's difficult for Jim and me to keep a long-term perspective, when the O's are losing, and we have 100-200+ point down days, as we had this month. But it doesn't keep us from enjoying the success of the teams we follow.   1

1997-10-01T00:00:00-04:00

false

true

Saxon Birdsong, MBA

The other day my partners suggested that I write about the "fun" of investing. It was right after a 12-hour, 100-point "down day" in the market. Since I tend to take my job seriously, it was hard for me to embrace the idea of "investing and fun!" But, after a good night's sleep, I began to see it more clearly. My client and friend Jim G. is really into baseball. As a matter of fact, Jim is the only one I know who can name (off the top of his head, no less) the seven (count them, 7) ways a player can get to first base without a hit. Jim spends a lot of time watching and going to games, reading the scores, discussing salaries, and prognosticating on the outcome of the season. Baseball is a joy for Jim. What my partners were telling me was that Jim and I are alike. Only our passions are different. Without going into complicated analogies, it does seem that Jim's interest in baseball is similar to the interest many of us find in investing. Undeniably, there is excitement in strategizing, analyzing, searching out, and discovering possibilities. While the outcome is uncertain, our (Jim's and my) opinions are based on hours of research and a lot of work. Neither of us has to be very smart to do what we do, we just have to spend a lot of time doing it. (Funny, I tell my 9 year old son Jacob the same thing about his homework.) Jim doesn't get paid for the hours he spends obsessing about baseball, poring over stats and listening to the "experts" evaluate the possible outcomes. (Come to think of it, I didn't get paid for doing a similar thing with investments early in my career!) The point is, for Jim and me, it's not about getting paid, it's about doing what we enjoy. What we enjoy, we do well. Jim has a keen understanding of the fine points of the game of baseball, seeing things that I do not. He recognizes great plays, mistakes, and opportunities that I miss. His predictive skills and judgment are based on his knowledge and experience about baseball. Similarly, my studies of financials and analyst reports give me insights into which management teams are posed to succeed in the next few years. Clearly, there is a serious aspect of dealing with other people's money. Having so many people place their trust in you to do the right thing when you're not always sure of what's right is a huge responsibility. But the seriousness of it should not preclude the fun of it. Even in the sanctity of church, my parish priest still tells the best jokes. I know that Jim had a tough time when the O's had a difficult September. But he may not know that September has historically been the worst month of the year for investment performance. Sometimes it's difficult for Jim and me to keep a long-term perspective, when the O's are losing, and we have 100-200+ point down days, as we had this month. But it doesn't keep us from enjoying the success of the teams we follow.

1997-10-01T00:00:00-04:00

false

The Third Dimension of Investing

2008-09-15T11:19:15-04:00

1 There are many methodologies to make money in the financial markets, including Value Investing, Market Timing, Fundamental Investing, Momentum Investing, Asset Allocation and Technical Investing. Each has its own methods and "rules" for selecting specific investments and managing investment portfolios. All of these styles have been shown to work as long as they are followed with discipline and consistency. Our style is called long-term investing. As long-term investors we have a bias toward companies whose long term prospects look favorable. We favor companies whose products are generally superior, whose financial resources are sufficient to fund research, marketing and innovation. We choose companies who clearly articulate their strategy, and who have a very large market for their products. We want companies that show good profit margins on their products, are "admired" by their competitors, and have decisive, innovative management. Over time we have refined our style to incorporate certain aspects of other styles. We do charting (technical analysis) to identify entry and exit points for stocks we would like to won or sell, we utilize valuation models (value style investing) to identify pricing inefficiencies (underpriced and overpriced stocks) in the market, and we look closely at the financial aspects of companies we are considering buying for our clients (fundamental analysis). In essence, we find companies with a clearly articulated strategy, and then we monitor the progress of these companies to see how it is working. If we determine, based on news sources, analysts reports, etc., that their strategy is not working, we sell the stock. In order to make our style work for you, we add specific issues and objectives to the mix through the use of portfolio models. Each account is assigned a model, which helps to define the risk and return characteristics which are suitable to each client - aggressive growth, capital appreciation, conservative growth, income, etc. We use different proportions of different types of securities to blend our style with clients objectives in a specific way. Our models keep us from drifting too far in any direction - either too aggressive or too conservative. In summary, long term investing refers to the discipline we use to select, monitor, and determine when to sell securities. Our model portfolios then help us make sure that we are accepting only the level of risk we need to, in order to generate a good return and meet your goals. Long term investing requires more patience and discipline than many other forms of investing. There may not be the excitement and immediacy of the rewards provided by more aggressive styles. However, we use this method, because it allows us to succeed in meeting your objectives in many, changing environments. Remember the fable of the hare and the tortoise? In it Aesop was trying to point out that those who see life as a sprint come in second to the more sure and steady performer. Our style works best for our clients. We know how to do it and it has worked well. Our data shows clearly that the longer a client is with us, the better their investment results. To us, long-term investment success is more likely to go to the sure-footed marathoner than to the exciting sprinter. And we want all of you to be winners in your investments.   1

1997-07-01T00:00:00-04:00

false

true

Saxon Birdsong, MBA

There are many methodologies to make money in the financial markets, including Value Investing, Market Timing, Fundamental Investing, Momentum Investing, Asset Allocation and Technical Investing. Each has its own methods and "rules" for selecting specific investments and managing investment portfolios. All of these styles have been shown to work as long as they are followed with discipline and consistency. Our style is called long-term investing. As long-term investors we have a bias toward companies whose long term prospects look favorable. We favor companies whose products are generally superior, whose financial resources are sufficient to fund research, marketing and innovation. We choose companies who clearly articulate their strategy, and who have a very large market for their products. We want companies that show good profit margins on their products, are "admired" by their competitors, and have decisive, innovative management. Over time we have refined our style to incorporate certain aspects of other styles. We do charting (technical analysis) to identify entry and exit points for stocks we would like to won or sell, we utilize valuation models (value style investing) to identify pricing inefficiencies (underpriced and overpriced stocks) in the market, and we look closely at the financial aspects of companies we are considering buying for our clients (fundamental analysis). In essence, we find companies with a clearly articulated strategy, and then we monitor the progress of these companies to see how it is working. If we determine, based on news sources, analysts reports, etc., that their strategy is not working, we sell the stock. In order to make our style work for you, we add specific issues and objectives to the mix through the use of portfolio models. Each account is assigned a model, which helps to define the risk and return characteristics which are suitable to each client - aggressive growth, capital appreciation, conservative growth, income, etc. We use different proportions of different types of securities to blend our style with clients objectives in a specific way. Our models keep us from drifting too far in any direction - either too aggressive or too conservative. In summary, long term investing refers to the discipline we use to select, monitor, and determine when to sell securities. Our model portfolios then help us make sure that we are accepting only the level of risk we need to, in order to generate a good return and meet your goals. Long term investing requires more patience and discipline than many other forms of investing. There may not be the excitement and immediacy of the rewards provided by more aggressive styles. However, we use this method, because it allows us to succeed in meeting your objectives in many, changing environments. Remember the fable of the hare and the tortoise? In it Aesop was trying to point out that those who see life as a sprint come in second to the more sure and steady performer. Our style works best for our clients. We know how to do it and it has worked well. Our data shows clearly that the longer a client is with us, the better their investment results. To us, long-term investment success is more likely to go to the sure-footed marathoner than to the exciting sprinter. And we want all of you to be winners in your investments.

1997-07-01T00:00:00-04:00

false

It's a Marathon - Not a Sprint

2008-09-15T11:19:15-04:00

1 The title of this article is a quote from a highly respected investment professional, Martin Whitman, whom I met at a recent investment conference in Cancun. Whitman's comments obviously concerned the risk in a market as overvalued as this one. Surely, many of our clients are concerned about these lofty levels, and this article will provide some information about our attitude toward the market and our strategy for your investments. If we were to sell out of the market because we feel it is susceptible to a downturn, we would be practicing an investment strategy know as "market timing." Of course, if we were to sell, we would also have to make a decision about when to repurchase. Two decisions are required, not just one. Market timers rely on a system of indicators to tell them when to sell and when to buy into the market. There have been many studies done on market timing. Researchers have concluded that forecasts about where the market is going would have to be extremely accurate for market timing to work. We would have to be: <ul> <li>80% accurate in a bull (up) market and 50% accurate in a bear (down) market, or </li> <li>70% accurate in a bull market and 80% accurate in a bear market, or </li> <li>60% accurate in a bull market and 90% accurate in a bear market. </li> </ul> Much of the problem with market timing is the way the market itself behaves. A large percentage of the total gain in a bull market tends to occur very rapidly at the beginning of a market recovery; secondly, it is extremely hard to determine when you are in (or about to emerge from) a bear market. To illustrate, a study by Trinity Investment Management Corp shows that: <ul> <li>60% of the gain in the typical 41 month bull market cycle occurs in only 8 months, and </li> <li>3 to 4 months out of 10 are "up" months in a bear market. </li> </ul> Researchers have this to say this about trying to time the market: "The evidence on investment managers' success with market timing is impressive - and overwhelmingly negative. There are tremendous natural odds working against them, and the risks of trying to time the market outweigh the rewards. There is probably no situation where caveat emptor is more apropos for the portfolio owner than in interviewing prospective market timing managers." On the other hand, if we saw certain "real" forces at work, we would decrease our exposure to equity investments. However, we do not see strong evidence which would indicate that we are on the precipice of a prolonged bear market - interest rates are relatively low and stable; prices, wages and inflation are not a problem; and corporate earnings continue to be good. In the long run, the U.S. lead in many fields (finance, technology, medicine and drugs, etc.) and growing worldwide consumer markets in which to sell our products (China and Asia, eastern Europe, and Latin America) suggest to us that we should continue our course for the time being. Furthermore, we note that the 50 largest stocks in the S&P 500 accounted for more than half of the increase in the index, and the remaining 450 stocks rose an average of less than 10% in 1996. Obviously the major gains which are receiving all the press coverage were concentrated in a few large stocks. (The S&P 500 is a weighted index, and is more affected by the price movement in large stocks). In the words of Charles Ellis: "The real opportunity to achieve superior results is not in scrambling to outperform the market, but in establishing and adhering to appropriate investment policies over the long term - policies that position the portfolio to benefit from riding with the main long-term forces in the market." (Ellis, Investment Policy, pp. 22-23) This is good advice, which we will continue to follow.   1

1997-04-02T00:00:00-05:00

false

true

Saxon Birdsong, MBA

The title of this article is a quote from a highly respected investment professional, Martin Whitman, whom I met at a recent investment conference in Cancun. Whitman's comments obviously concerned the risk in a market as overvalued as this one. Surely, many of our clients are concerned about these lofty levels, and this article will provide some information about our attitude toward the market and our strategy for your investments. If we were to sell out of the market because we feel it is susceptible to a downturn, we would be practicing an investment strategy know as "market timing." Of course, if we were to sell, we would also have to make a decision about when to repurchase. Two decisions are required, not just one. Market timers rely on a system of indicators to tell them when to sell and when to buy into the market. There have been many studies done on market timing. Researchers have concluded that forecasts about where the market is going would have to be extremely accurate for market timing to work. We would have to be: <ul> <li>80% accurate in a bull (up) market and 50% accurate in a bear (down) market, or </li> <li>70% accurate in a bull market and 80% accurate in a bear market, or </li> <li>60% accurate in a bull market and 90% accurate in a bear market. </li> </ul> Much of the problem with market timing is the way the market itself behaves. A large percentage of the total gain in a bull market tends to occur very rapidly at the beginning of a market recovery; secondly, it is extremely hard to determine when you are in (or about to emerge from) a bear market. To illustrate, a study by Trinity Investment Management Corp shows that: <ul> <li>60% of the gain in the typical 41 month bull market cycle occurs in only 8 months, and </li> <li>3 to 4 months out of 10 are "up" months in a bear market. </li> </ul> Researchers have this to say this about trying to time the market: "The evidence on investment managers' success with market timing is impressive - and overwhelmingly negative. There are tremendous natural odds working against them, and the risks of trying to time the market outweigh the rewards. There is probably no situation where caveat emptor is more apropos for the portfolio owner than in interviewing prospective market timing managers." On the other hand, if we saw certain "real" forces at work, we would decrease our exposure to equity investments. However, we do not see strong evidence which would indicate that we are on the precipice of a prolonged bear market - interest rates are relatively low and stable; prices, wages and inflation are not a problem; and corporate earnings continue to be good. In the long run, the U.S. lead in many fields (finance, technology, medicine and drugs, etc.) and growing worldwide consumer markets in which to sell our products (China and Asia, eastern Europe, and Latin America) suggest to us that we should continue our course for the time being. Furthermore, we note that the 50 largest stocks in the S&P 500 accounted for more than half of the increase in the index, and the remaining 450 stocks rose an average of less than 10% in 1996. Obviously the major gains which are receiving all the press coverage were concentrated in a few large stocks. (The S&P 500 is a weighted index, and is more affected by the price movement in large stocks). In the words of Charles Ellis: "The real opportunity to achieve superior results is not in scrambling to outperform the market, but in establishing and adhering to appropriate investment policies over the long term - policies that position the portfolio to benefit from riding with the main long-term forces in the market." (Ellis, Investment Policy, pp. 22-23) This is good advice, which we will continue to follow.

1997-04-02T00:00:00-05:00

false

"I Can't Remember A Time I Wasn't Scared"

2008-09-15T11:19:15-04:00

1 In spite of the love affair that the press has with the mutual fund industry, fueled by huge amounts of advertising money thrown at the media to extol their virtues, it's time to understand some significant facts about them, and the disadvantages of owning them for anyone who has over $300,000 to invest.. 1. Mutual funds are expensive. Although the industry claimed that the increase in dollars in mutual funds would allow fees to come down, they didn't. Why are there more mutual funds than stocks - because funds are enormously profitable for their sponsors. Be aware that expenses incurred to purchase securities in the funds (which may be considerable, due to very high "turnover" rates) are not included in the expense numbers published by the funds. They are more expensive than they appear to be. 2. They are interested in their performance, not yours. There is considerable pressure in the fund industry to achieve short term investment results, and the press (fueled by advertising dollars from the funds) is largely responsible for focusing investor attention on short term results. This leads to a high level of short term buying and selling, driving up expenses and driving down long term investment results. 3. You are buying a tax liability when you buy a fund. Funds are required to distribute 90% of their realized gains annually (gains from securities they actually sold during the year). Their unrealized gain (the gain on securities they haven't sold yet) will be distributed to fund holders when they do actually sell securities with gains. The holders at the time of the sale will pay tax at that time. Unrealized gains in some funds are in excess of 30% of the value of each unit you buy. The Vanguard S&P 500 index fund has a 24% unrealized gain. Would you prefer to own IBM at $145 per share with or without a 30% tax liability? Also, returns published by the funds don't consider the high tax effect of the way they are managed. 4. Funds have high "turnover" rates, which lower long-term after-tax investment performance. Estimates are that "turnover" (buying and selling of securities within the fund) average in excess of 50% industry wide. This means that within two years, every security in the fund will be sold, and replaced with another security. A large number of funds have turnover rates in excess of 100% annually (short-term performance orientation). Aside from lowering long run investment results, this practice increases your taxes in taxable accounts. 5. Mutual fund managers are forced to buy high and sell low. Have you ever wondered why 85% of the educated and highly competent stock fund managers fail to beat the market each year. It's because they are always swimming against the tide. It's the curse of their success. They are forced to sell in a down market (to meet redemptions), and they have to buy in an overpriced market when money flows into their funds, whether or not they want to. This is a formula for poor results. Mutual funds have significant advantages for investors with $300,000 or less. They also make sense for certain niche securities, like high yielding bonds and foreign securities. The problem, as we see it, is that they have been "oversold" to many investors who are far better served by having a portfolio of individual stocks managed in an intelligent fashion. Individually managed portfolios are tailored to suit the needs of individual investors, not the needs of fund companies.   1

1997-04-01T00:00:00-05:00

false

true

Saxon Birdsong, MBA

In spite of the love affair that the press has with the mutual fund industry, fueled by huge amounts of advertising money thrown at the media to extol their virtues, it's time to understand some significant facts about them, and the disadvantages of owning them for anyone who has over $300,000 to invest.. 1. Mutual funds are expensive. Although the industry claimed that the increase in dollars in mutual funds would allow fees to come down, they didn't. Why are there more mutual funds than stocks - because funds are enormously profitable for their sponsors. Be aware that expenses incurred to purchase securities in the funds (which may be considerable, due to very high "turnover" rates) are not included in the expense numbers published by the funds. They are more expensive than they appear to be. 2. They are interested in their performance, not yours. There is considerable pressure in the fund industry to achieve short term investment results, and the press (fueled by advertising dollars from the funds) is largely responsible for focusing investor attention on short term results. This leads to a high level of short term buying and selling, driving up expenses and driving down long term investment results. 3. You are buying a tax liability when you buy a fund. Funds are required to distribute 90% of their realized gains annually (gains from securities they actually sold during the year). Their unrealized gain (the gain on securities they haven't sold yet) will be distributed to fund holders when they do actually sell securities with gains. The holders at the time of the sale will pay tax at that time. Unrealized gains in some funds are in excess of 30% of the value of each unit you buy. The Vanguard S&P 500 index fund has a 24% unrealized gain. Would you prefer to own IBM at $145 per share with or without a 30% tax liability? Also, returns published by the funds don't consider the high tax effect of the way they are managed. 4. Funds have high "turnover" rates, which lower long-term after-tax investment performance. Estimates are that "turnover" (buying and selling of securities within the fund) average in excess of 50% industry wide. This means that within two years, every security in the fund will be sold, and replaced with another security. A large number of funds have turnover rates in excess of 100% annually (short-term performance orientation). Aside from lowering long run investment results, this practice increases your taxes in taxable accounts. 5. Mutual fund managers are forced to buy high and sell low. Have you ever wondered why 85% of the educated and highly competent stock fund managers fail to beat the market each year. It's because they are always swimming against the tide. It's the curse of their success. They are forced to sell in a down market (to meet redemptions), and they have to buy in an overpriced market when money flows into their funds, whether or not they want to. This is a formula for poor results. Mutual funds have significant advantages for investors with $300,000 or less. They also make sense for certain niche securities, like high yielding bonds and foreign securities. The problem, as we see it, is that they have been "oversold" to many investors who are far better served by having a portfolio of individual stocks managed in an intelligent fashion. Individually managed portfolios are tailored to suit the needs of individual investors, not the needs of fund companies.

1997-04-01T00:00:00-05:00

false

The Case Against Mutual Funds

2008-09-15T11:19:15-04:00