6 Reasons to Revolutionize the Way You Invest

Assets Under Management

Much of the investing world has been hypnotized by the vertigo-inducing roller-coaster ride of crazy cryptocurrencies.

But there’s another financial revolution taking place all around you.

And that is the revolution in exchange-traded funds (ETFs).

Consider this:

Since 2000, ETF assets have grown at an average annual rate of 142%. They currently make up 19% of the market.
Last year, the “BlackRock ETF Pulse Survey” found that 52% of U.S. investors intended to invest in ETFs.
9 in 10 financial advisors also expect to invest in ETFs for client portfolios.

Overall, ETF investors are younger, more engaged and more optimistic about their financial futures than the general investor population.

In short, ETF investors are the future…

Six Ways ETFs Trounce Mutual Funds

The ETF industry has the mutual fund business on the run.

And for good reason…

ETFs offer some massive advantages over mutual funds.

In fact, I have to scratch my head wondering why anyone would want to invest in a mutual fund ever again.

Here are six advantages that make ETFs a no-brainer…

1. ETFs have no investment minimums, front-end loads or early redemption fees.

I won’t mince words here…

The front-end loads and early redemption fees that some mutual funds still charge are a retail investor shakedown.

Contrast that with ETFs…

Since ETFs trade like stocks, you can buy as few or as many shares as you want. And you can buy and sell ETFs when you want, without penalty.

With an ETF, you pay only the cost of the stock commission. Leading brokers like Fidelity and Schwab even offer commission-free ETFs.

2. ETFs offer real-time tracking.

Mutual funds price only once each trading day.

In contrast, ETFs price all day long, just like stocks.

That means ETFs reflect more accurately any sharp moves in the value of an underlying portfolio.

3. ETFs offer real-time trading.

Mutual funds are bought and sold only after the market closes. ETFs are bought and sold whenever the markets are open.

ETFs are flexible and efficient. Mutual funds are old and stodgy.

4. ETFs are transparent.

Mutual funds disclose their holdings once per quarter. Meanwhile, ETFs must report their portfolios on a daily basis.

With ETFs, you always know what you’re buying.

5. ETFs are tax efficient.

Mutual funds generate taxable income as part of the regular process of buying and selling shares. That creates taxable capital gains.

In contrast, ETFs exchange underlying securities in kind for ETF shares – a nontaxable event. That means you pay much lower – if any – taxes on ETF gains.

6. ETFs are cheaper than mutual funds.

And here’s my favorite advantage that ETFs have over mutual funds…

The average mutual fund charges a management fee of 1.13%.

In contrast, the average ETF has an expense ratio of 0.44%.

Put another way, the average mutual fund is a whopping 157% more expensive than the average ETF.

How much impact can high fees have on your returns?

Consider this extreme example…

The Rydex S&P 500 Fund Class C (Nasdaq: RYSYX) charges 2.31% per year to track the S&P 500 Index.

In contrast, the Vanguard S&P 500 ETF (NYSE: VOO) – with an identical strategy – charges only 0.04%.

That means the Rydex S&P 500 fund …read more

Demand the Best of Both Worlds

There are two types of dividend investors out there: yield grabbers and growth groupies. But the most successful dividend income investors I know capture both.

Income-hungry investors aren’t satisfied with receiving a paltry 2% dividend yield.

I don’t blame them! Earning 2% a year doesn’t begin to cover Starbucks’ (Nasdaq: SBUX) 10% price hike on a cup of coffee this year, let alone inflation.

That’s why many investors gravitate toward high-yield dividend stocks. For the sake of this argument, I’ll define high-yield stocks as those with yields greater than 4%.

I call these investors “yield grabbers.” They’re looking to cash a big dividend check right now.

Telecommunication and utility companies, master limited partnerships, and real estate investment trusts often have high yields. They also have slower dividend growth.

These companies and the products or services they provide are often natural monopolies. Some examples of natural monopolies are oil and gas pipelines, telephone lines, and internet connectivity. But often, government regulation or other factors limit profit and dividend growth.

But not all high-yield stocks make good investments. Some of them are downright dangerous.

We call these stocks “yield traps” because the companies are in trouble. They have high debt loads and declining sales, and they cannot afford to keep paying their lofty dividends for long.

Yield trap dividends are unsustainable and make horrible investments. If you invest in these stocks, you’re likely to lose money in two ways. The first is an income hit when the company cuts or eliminates its dividend to preserve cash. The second is a principal hit as the price of the stock continues to fall with the company’s declining business performance.

Yield grabbers must be experts at spotting and steering clear of yield traps if they want to build a lasting dividend income stream.

But avoiding yield traps doesn’t guarantee that yield grabbers will have enough to get by in the future.

While higher income today is great, it’s also important to have much higher income tomorrow. Unfortunately, most high-yielding stocks don’t fit that bill.

Typically, high-yielding stocks have slower distribution growth. They raise their dividends just a few percentage points each year. Some high-yield stocks haven’t raised their dividends in years (if ever).

Yield grabbers usually dismiss low-yielding stocks. They often won’t invest in a dividend stock with a yield below 2.5% or 3%.

It’s understandable in some cases.

Low-yielding stocks don’t generate enough income right now for yield grabbers. If you’re in or near retirement and are depending on dividends to pay your everyday bills, a paltry 1% to 2% yield doesn’t cut it.

But here’s the good thing about some lower-yielding stocks…

As the chart shows, they typically grow their dividends at a much faster pace than their high-yield counterparts. Some lower-yielding stocks even double their dividends every single year! This is especially true of new dividend payers.

That’s why growth groupies love them.

You can blame it on the law of small numbers. If the dividend is small to begin with, even a tiny increase will be a big percentage gain.

Let me show you how it works…

A $0.05 raise on a $0.05 …read more

Merry Singles Day! Or, How I Learned to Love the Deal

Mention online shopping and many people will think of Amazon (Nasdaq: AMZN). And that’s perfectly understandable. The online juggernaut has indeed changed the way retail works.

Despite the company’s recent pullback in share price, Amazon still seems unstoppable. But in fact, there is one company that can rival Jeff Bezos’ e-commerce powerhouse: China’s Alibaba (NYSE: BABA), or the Amazon of the Eastern Hemisphere.

Founded in 1999, Alibaba has been enormously successful. It’s so influential, it basically invented its own holiday.

November 11 became Singles Day in China as an anti-Valentine’s Day. It started as an obscure joke holiday for students but became much more in 2009. Since then, Alibaba CEO Jack Ma has turned Singles Day into a global shopping bonanza.

Alibaba alone raked in $30.8 billion this past November 11. That’s triple the $10.6 billion American shoppers spent on last year’s Cyber Monday and Black Friday.

This type of online shopping holiday may remind you of Amazon’s Prime Day… But to put Alibaba’s success into perspective, it beat Amazon’s Prime Day sales in less than 10 minutes.

Here’s why…

Singles Day is more than just a day of good deals on powdered milk and electronics. This year, Alibaba threw a massive gala to celebrate its holiday… and it was bananas.

The gala featured a performance from Mariah Carey, a Cirque du Soleil show, and appearances by ex-supermodel Miranda Kerr and ex-NBA star Allen Iverson. There were also robot waiters mixing cocktails. Oh, and there was a Japanese Beyoncé impersonator. It was glitz… It was glamour… It was more over-the-top than an ‘80s rom-com.

Singles Day has all the pageantry and fun of a holiday. But it was almost completely fabricated by Alibaba. Given the sheer amount of cash the company just raked in from it, I wouldn’t be surprised to see Amazon follow suit with Prime Day celebrations in the future.

Alibaba’s success also alludes to how the growing middle class in Asia is likely to drive sales trends moving forward.

By 2022, the Chinese middle class could number 550 million. That’s more than the total population of the United States, Mexico and Canada combined!

And China is only the first wave of Asia’s growth spurt. The Eastern Hemisphere is picking up momentum and shows no signs of stalling.

India is going through a similar period of economic and population growth. Indonesia, South Korea and Vietnam are in the same boat. Look to markets in East and Southeast Asia to become the driving force behind the global economy over the next few decades.

The explosion of Singles Day is further evidence of the eastward shift of global markets.

In short… the future of retail is here, and it’s beginning to look a lot like Christmas.

Happy holidays,

James

  …read more

What Cheesesteaks Can Tell Us About the Markets

Another election is in the books. And the pollsters proved pretty accurate this go-round, with few surprises from the ballot box.

We were left with two major takeaways from the 2018 midterm elections. One is that Democrats will be in charge of the House in January. The other is that Republicans held on to the Senate. Despite initial hints of a bilateral infrastructure plan in 2019, I’d like to make a bold prediction…

The catchphrase for 2019 will be “partisan divide.”

The Federal Reserve Bank of Philadelphia actually keeps tabs on this sort of thing. Its Partisan Conflict Index tracks political disagreement. It does so by monitoring the rate of newspaper articles printed about political conflict on the federal level.

So why does the Philadelphia fed track this? Its research suggests that with amplified political conflict comes increased financial uncertainty among businesses and households.

The Philly fed (Phed?) contends that political uncertainty leads to slowed economic activity with reduced consumer spending and business investment.

An easy-to-follow (albeit slightly ridiculous) example is if legislative hostility prompts people to sock money away in a savings account instead of using it to buy something like cheesesteaks from the classic Philly institution Pat’s King of Steaks. Pat’s, in turn, buys less Cheez Whiz. And the share price of Kraft Heinz (Nasdaq: KHC) takes a hit. Behold the power of uncertainty.

That’s not to say that markets – and cheesesteak sales – are headed south just because of a partisan clash. Investors have all but ignored political bickering the past couple of years. But it couldn’t hurt to hedge your bets now that a partisan divide is on the horizon… just in case consumer spending and the markets slow down.

The best part? You can still make out even if the market keeps up a bullish pace.

Meet Your New Best Friend, Put Selling

The mere mention of options is enough to make most casual investors head for the hills. But not all options are created equal. And this one is about as safe as it gets. Here’s how it works.

Take one of the blue chip stocks in your portfolio. Search for a put option with an expiration date about a year out and with a strike price 20% below the current value of that stock. So for a stock trading at $125, look for a strike price near $100. (A strike price is the price at which shares of an underlying stock can be sold by the option buyer.)

From there, place a sell order for that option and collect the income. It’s a strategy that is exceptionally low-risk and straightforward… But it’s not without a downside.

You are selling something… and on the other side of that transaction is a buyer.

What they’ve bought from you is the right to sell you shares of that company at the strike price if the stock’s price drops below it. In that case, you would have to buy those shares at the strike price.

If you’re using this strategy on stocks you already hold – and presumably like – …read more

Are the Markets More Rational Than the Average Bear?

Investors were spooked through most of October. At one point, the year’s market gains were entirely erased. Now, despite signals of recovery, a degree of caution is to be expected.

The darling FAANG stocks took it especially hard last month. Amazon (Nasdaq: AMZN) had almost $120 billion wiped off its trillion-dollar market cap in a matter of days. And shares in Google parent company Alphabet (Nasdaq: GOOG) fell sharply after a mixed third quarter earnings report.

Even a rosy third quarter earnings report couldn’t protect Netflix (Nasdaq: NFLX) from the bloodletting. The media company saw a 30% drop in share price over two weeks before starting to recover.

General volatility and net declines have a lot of people worried that other people aren’t worried enough… which raises the question: Are we headed for a lasting downturn, or was a trick-or-treating bull merely wearing a bear costume?

Historical analysis suggests that October’s sell-off created more of a buying opportunity than a cause for concern. This week’s chart shows the top 10 draw-downs in the S&P 500 over the last 65 years… one of which we just experienced.

Of the nine others, all but one resulted in a rebound… an indication that the big sell-offs were more symptomatic of a market correction than a harbinger of a bear market. (For clarity, run-of-the-mill corrections are defined as market draw-downs between 10% and 19%, and a bear market is defined as an equity draw-down of 20% or more over an extended period of time.)

What, Me? Worry?

After hitting its peak on September 20, the S&P 500 fell 7.8% over the following 35 days. By contrast, bear markets don’t usually come with much foreshadowing. For instance, the 2007 sell-off that ushered in the global financial crisis started with a mere 5% fall, which doesn’t even crack the top 10 draw-downs list.

Nonetheless, when October’s dust settled, the S&P had lost $1.9 trillion… making it the worst loss the index has experienced since September 2011.

October has a reputation for being a notoriously volatile month. But it’s important to keep the reeling market in perspective.

There were eight trading days last month where the S&P closed either up or down by a full percent or more, bringing the year’s total to 44. The average is 50 per year, according to analysis by Plante Moran Financial Advisors…  so October put us on track for a perfectly normal year.

That report also points out that equity markets undergo an annual 10% market correction more often than not. And despite intrayear volatility, three-quarters of the time, a correction leads to new, annual highs.

The current bull market cycle will eventually turn. It’s inevitable. But indications still point to a strong fourth quarter… even if there are a couple bumps in the road.

So if you’re in the market for the long haul, a correction shouldn’t mean anything to you other than a buying opportunity. After all, one man’s trailing stops are another man’s bargain.

Good investing,

Matthew …read more

Take a Look “Inside”

Insider trading doesn’t have a great connotation.

Martha Stewart (or M. Diddy, as she was known in the slammer) and current halfway house resident (and former Enron CEO) Jeff Skilling are the usual suspects that come to mind. They’re seen as slimy and dishonest for making money on inside information.

But in reality, anytime a CEO, board member or management-level employee of a corporation buys shares of the company he or she works for, they’re often buying on information not yet widely known to the public. And contrary to popular belief, it isn’t (usually) a crime.

When an insider changes their holdings in a company – that is to say, whenever they buy or sell any associated stocks, bonds or options – they must file a simple, two-page document (called a Form 4) with the Securities and Exchange Commission (SEC). This form is kept in a massive database on the SEC’s website for anyone to see.

The SEC database can be a treasure trove of useful information for the savvy investor because it hints at secrets the general public isn’t privy to.

Think about it… If a CEO buys 10,000 shares of the company she runs right before an earnings announcement, we can make a pretty informed prediction about the direction that stock is heading.

That CEO knows something most investors don’t… And that information is a very valuable commodity. It’s about as close to looking into a crystal ball as you can get. (We’re still working out the bugs in our crystal ball technology here at Investment U.)

With hundreds of Form 4 filings every day, it’s a nightmare to weed through and find valuable information. (If it were easy, everybody’d be doing it, right?)

There are some exchange-traded funds (ETFs) that do the heavy lifting for you, however. Take the Direxion All Cap Insider Sentiment ETF (NYSE: KNOW), for example. This fund’s index uses public information about the trading activity of companies’ directors and officers to pick 100 stocks from the S&P Composite 1500 Index.

While there’s more to it than that, it’s essentially a down-and-dirty way to follow the “smart money” in the stock market. And as you can see in the chart above, it’s outperforming the broader markets by almost 18%.

To help put this strategy into perspective and explain why this ETF is performing so well, a joint study by Harvard and Columbia universities found that insiders routinely make market-beating returns.

Another study from the University of Michigan concluded that insider purchases have “abnormal returns.” And a study by the Wharton School of Business determined, “Investors can reap ‘exceptional’ profits by imitating insiders.”

While trading ETFs is a perfectly acceptable way to follow the smart money, there’s an even better way.

The Oxford Club’s very own Chief Investment Strategist Alexander Green tracks the best of the best when it comes to insiders. He’s even found 272 elite insiders with literally perfect trading records. Collectively, they’ve logged 917 trades… with not one loss among them.

Subscribers to …read more

Take a Look “Inside”

Insider trading doesn’t have a great connotation.

Martha Stewart (or M. Diddy, as she was known in the slammer) and current halfway house resident (and former Enron CEO) Jeff Skilling are the usual suspects that come to mind. They’re seen as slimy and dishonest for making money on inside information.

But in reality, anytime a CEO, board member or management-level employee of a corporation buys shares of the company he or she works for, they’re often buying on information not yet widely known to the public. And contrary to popular belief, it isn’t (usually) a crime.

When an insider changes their holdings in a company – that is to say, whenever they buy or sell any associated stocks, bonds or options – they must file a simple, two-page document (called a Form 4) with the Securities and Exchange Commission (SEC). This form is kept in a massive database on the SEC’s website for anyone to see.

The SEC database can be a treasure trove of useful information for the savvy investor because it hints at secrets the general public isn’t privy to.

Think about it… If a CEO buys 10,000 shares of the company she runs right before an earnings announcement, we can make a pretty informed prediction about the direction that stock is heading.

That CEO knows something most investors don’t… And that information is a very valuable commodity. It’s about as close to looking into a crystal ball as you can get. (We’re still working out the bugs in our crystal ball technology here at Investment U.)

With hundreds of Form 4 filings every day, it’s a nightmare to weed through and find valuable information. (If it were easy, everybody’d be doing it, right?)

There are some exchange-traded funds (ETFs) that do the heavy lifting for you, however. Take the Direxion All Cap Insider Sentiment ETF (NYSE: KNOW), for example. This fund’s index uses public information about the trading activity of companies’ directors and officers to pick 100 stocks from the S&P Composite 1500 Index.

While there’s more to it than that, it’s essentially a down-and-dirty way to follow the “smart money” in the stock market. And as you can see in the chart above, it’s outperforming the broader markets by almost 18%.

To help put this strategy into perspective and explain why this ETF is performing so well, a joint study by Harvard and Columbia universities found that insiders routinely make market-beating returns.

Another study from the University of Michigan concluded that insider purchases have “abnormal returns.” And a study by the Wharton School of Business determined, “Investors can reap ‘exceptional’ profits by imitating insiders.”

While trading ETFs is a perfectly acceptable way to follow the smart money, there’s an even better way.

The Oxford Club’s very own Chief Investment Strategist Alexander Green tracks the best of the best when it comes to insiders. He’s even found 272 elite insiders with literally perfect trading records. Collectively, they’ve logged 917 trades… with not one loss among them.

Subscribers to …read more

Time to Shake Up Your Portfolio

Did you know that if you ever see a service dog unattended, you should follow it?

That dog has been specially trained to find help for its owner when he or she is in danger. You and your cellphone could make a very important difference.

The chances of this actually happening are pretty slim. But knowing something that could be helpful in the future is always a good idea.

According to a recent survey conducted by Bank of America Merrill Lynch, some 85% of fund managers believe that worldwide growth is in the late stages of an economic cycle.

While this is only conjecture, it’s still useful information.

That same survey noted the analysts also believe the S&P 500 will end the year at 2,946.67… which would be an all-time high (albeit by only about six points.)

If true, that would mean a welcomed lack of volatility for many investors to end the year.

This news comes as markets have mostly been in sell-off mode the past couple of weeks. Many cite worries that the Federal Reserve will continue to raise interest rates that could cut into corporate profits.

The sell-off and analysts’ projections suggest now would be a good time to analyze your personal exposure… and start preparing for the chance of a market slide sometime next year.

You can start by considering making changes to your portfolio. A common approach is to move money into the bond market. However, that same Bank of America survey found the yield on the benchmark 10-year Treasury note would need to hit 3.7% (it currently sits around 3.18%) for investors to consider selling equities in favor of bonds.

Another approach would be to allocate more money to emerging markets.

Chinese internet stocks look particularly appealing right now. They’re down as much as 40% over the past few months. Alibaba (NYSE: BABA), Baidu (Nasdaq: BIDU), iQIYI (Nasdaq: IQ) and Tencent (OTC: TCEHY) have been taking a beating due to trade war worries and reported slowing growth in China.

While China’s third quarter numbers were underwhelming across the board, the public’s uncertainty could lead to a major rebound.

Here’s why…

A lack of confidence among the Chinese consumers led to less spending last quarter. And disposable income went up.

A Chinese consumer base with expendable income may very well lead to a boon for online shopping and entertainment providers… making the months-long downturn a temporary issue.

These Chinese internet companies have potential for enormous growth – most notably because of rising incomes and a continued trend toward online activities of all sorts.

Megacap Chinese internet stocks, like Alibaba and Baidu, are priced around where Google (Nasdaq: GOOG) was 10 years ago. If you had the chance to go back and invest in Google then, you’d be glad you could.

Cynics have been beating the bear market drum for years now. And eventually it’ll ring true. But even when that happens, there will be opportunities to make short- and long-term gains by looking for undervalued investments with lots of growth potential.

Just as the service dog can lead …read more

Looking for the True Value of the U.S. Employee

The latest jobs report was rolled out by the U.S. Bureau of Labor Statistics last week. In case you haven’t heard, the unemployment rate in the U.S. hit 3.7%. That’s the lowest it’s been since December 1969.

Additionally, the closely tracked wage growth report signaled that wages grew 2.8% from 2017.

These statistics indicate an increasingly healthy labor market. And wages are being driven higher to attract an increasingly sparse supply of workers.

But we’re not quite there yet. Despite rising wages, the American worker is still undervalued.

The current rate of wage growth still puts us below the 3.5% needed to compensate for the Federal Reserve’s 2% inflation target and 1.5% productivity growth.

Today’s real average wage (which accounts for inflation) has about the same purchasing power as it did in 1978, according to Pew Research. So wages aren’t actually going up – but at least they’re holding pretty steady.

In the near term, companies looking for skilled employees in this tight labor market are going to need to provide incentives of some sort to fill open positions.

If the unemployment numbers hold steady (I know that’s a big if) and the search for skilled workers continues, we could be poised for a paycheck reckoning in certain sectors.

This becomes a big deal when you consider the coming retail holiday hiring bonanza. The economy is still strong. And because U.S. consumer confidence is at its highest level in 18 years, according The Conference Board, lofty holiday sales are expected.

This means stores busy with customers… and a need for employees to help them.

Seasonal holiday hiring needs are expected to call for around 650,000 employees, according to the National Retail Federation. That’s in addition to the already outstanding more than 750,000 open retail positions across the country.

So what’s a store to do?

Kohl’s (NYSE: KSS) and J.C. Penney (NYSE: JCP) started their holiday hiring pushes way back in June. And Penney’s will be ponying up paid time off to its seasonal workers for the first time ever.

Dick’s Sporting Goods (NYSE: DKS) is looking to bolster its staff to improve the shopping experience and distinguish itself from online-only retailers.

Target (NYSE: TGT) announced last month that it will be increasing its seasonal workforce by 20% compared with last year’s. And it will be paying employees a full dollar more per hour.

Other companies are offering incentives, like signing bonuses, additional training and better employee discounts.

Macy’s (NYSE: M) this year introduced a new plan that awards employees a quarterly bonus based on performance. Macy’s CEO Jeff Gennette recently stated that the program has helped bring down turnover and attract new workers.

Higher pay and incentive plans aren’t free though. They could cut into fourth quarter profits for retailers depending on whether sales expectations are merely met or exceeded.

If the lines are long this holiday season and you notice unstaffed checkout lines, it could be an indicator of how well these hiring plans are working out… and how Q4 earnings reports will look.

These are good problems to have for the American worker. …read more

The Formula That Made Buffett a Billionaire

When 24-year-old Warren Buffett received a phone call offering him a job in New York City, he accepted without asking about the salary.

It was arguably the smartest – and most profitable – decision he ever made.

That’s because Buffett knew the man who had just employed him – a man he studied under at Columbia University – held the proverbial keys to the kingdom.

His name was Benjamin Graham.

Years earlier, Buffett had offered to work for Graham for free. But Buffett was kindly turned down.

Years later, he finally got his wish (and with pay).

Even so, Buffett’s life was about to change in ways even he could not foresee.

For Graham was about to teach him something far greater: how to translate his knowledge into an abundance of riches.

The Godfather of Investment Analysis

Graham was a phenomenal figure in the history of investing. But his importance stretches beyond his relationship with Buffett.

Graham founded the value investing school. But he also gave birth to the field of security analysis.

He established himself as a first-class investor during his years managing the Graham-Newman Corporation with his business partner, Jerome Newman.

The firm had an annualized return of 21%, compared with the market’s 12% rate of return.

But the firm’s great success was due to Graham’s insight, which was the foundation of the firm’s investment strategy.

It was summarized in the firm’s 1946 shareholder letter: “To purchase securities at prices less than their intrinsic value… with particular emphasis on purchase of securities at less than their liquidating value.”

But the struggle of analysts has always been to determine a company’s intrinsic value.

Calculating the intrinsic value of a company requires thorough analysis. But such analysis is not always easy in a fast-paced market.

Graham knew that it was helpful to have a “guesstimate”… a simple method for estimating a company’s value on the fly.

In his book Security Analysis, Graham laid out his original pen-and-paper formula.

Intrinsic Value = EPS x (8.5 + 2g)

EPS stands for earnings per share…

The average price-to-earnings for non-growth stocks at the time was 8.5…

And “g” represents the long-term growth outlook of the company.

Once you plug in the numbers, the formula hands you an intrinsic value estimate. Then, all you do is purchase stocks trading at discounts to their true values.

But despite the success this formula handed Graham and his followers…

Almost no one uses it today.

Investment analysis has become a more complicated and competitive field. Most successful value investors have developed their own approaches to measuring value.

In fact, Graham himself noted that his formula was not perfect. He made revisions to the formula over time, acknowledging its flaws.

Even so, the principles and strategies of Graham still live today. And the basic idea of buying stocks below their true values is as important as it’s ever been…

Especially in today’s market.

As Chief Investment Strategist Alexander Green reported in Sunday’s Market Wake-Up Call, stocks are currently trading above their historic average price-to-earnings ratios.

“That doesn’t mean the market’s about to go down,” said Alex. “But what it does …read more

Teddy Bulls for Christmas?

With Halloween about a month away, my apologies if the mere mention of Christmas induces a groan.

But next week marks the beginning of the fourth and final fiscal quarter of the year… and that inevitably means holiday chatter.

Whether you’re practicing your best Grinch impression or joyfully anticipating Michael Bublé’s return from hibernation, the Ghost of Christmas Past has an important public service announcement.

The chart above shows that 38 of the previous 50 fourth quarter returns for the S&P 500 have been positive.

That bodes well for the seemingly endless bull market run we’re in… especially considering the S&P is on the cusp of a double-digit increase year to date.

As we enter what’s typically the three best months of the fiscal year for the Dow and the S&P, for some companies – especially in the retail sector – more than 40% of revenue will come during the final 45 days.

So what can we glean from the Ghost of Christmas Future?

Malls may be losing steam, but traditional brick-and-mortar retailers like Macy’s still bring in lots of Q4 cash. And the savvy shareholder can still be rewarded with some short-term gains in this sector.

Even the mall-averse type need to buy Grammy and Pap Pap a little something for the holidays. To cater to this segment, most retailers have long since been pivoting toward delivering an online shopping experience.

That’s where a transportation company like United Parcel Service (NYSE: UPS) comes in. Like Macy’s, UPS also gets its hands on a quarterly revenue boon at the end of the year.

To hammer home the good news, U.S. consumer confidence unexpectedly rose in September, according to global research by The Conference Board. The recently released figures put the index close to levels not seen since 2000.

The bottom line is current market conditions remain favorable thanks to a strong economy and robust job growth – both harbingers of further good news.

If this wasn’t a rosy enough forecast for you, there’s also good news waiting on the other side of the world.

The trade war hasn’t been very friendly to the Chinese economy. Chinese electric vehicle maker NIO (NYSE: NIO) had an underwhelming IPO this month. Video streaming service iQIYI (NYSE: IQ) has seen a mixed year. And e-commerce titan Alibaba (NYSE: BABA) has been on a mostly downward trajectory for the past three months.

But Q4 is a pretty big deal in China too. The consumer buying frenzy that Black Friday and Cyber Monday trigger in the U.S. doesn’t hold a candle to China’s Singles Day.

The November 11 holiday (which doubles as both a celebration of being single and in a relationship) has become the largest shopping day in the world. Consumers spent upward of $25.4 billion on Alibaba alone during last year’s celebration.

As we head into the holiday season knowing all of this, there’s reason to believe we’re on track for this rally to continue. Teddy bulls all around!

Good investing,

Matthew …read more

Does More Risk REALLY Lead to More Reward?

We’ve all heard it before: Higher risks demand higher rewards.

Most investors take this statement as gospel. But it was only until the 1950s that the idea became popular, when economist Harry Markowitz laid the foundation for Modern Portfolio Theory.

The theory describes the proper relationship between risk and reward in portfolio construction.

Today’s chart shows that theory at work in the real world.

To do this, we’re taking another look at the corporate bond market – again comparing default rates per bond credit rating to their effective yields.

Last week, I broke down the corporate bond market to reveal how increasing levels of default risk correspond with increasing levels of reward in the form of yield.

I also emphasized that the generalizations of comparing “investment-grade bonds” with “junk bonds” didn’t show the middle ground of high-yielding bonds and relatively low-default bonds.

Today’s chart presents the same data in a different way.

It also reveals just how nonlinear the relationship between risk and reward is, suggesting not all risk-taking is worthwhile.

Here’s what I mean…

Look closely at the left side (or low-risk section) of the chart. You’ll notice that slight increases in risk result in much larger increases in returns.

This shows that taking modest degrees of risk is generally best for investors looking to maximize the long-term growth of their portfolios.

But as the line moves further to the right, you’ll notice that increased risk yields diminishing increases in returns.

In fact, at some point, even large increases in risk result in almost negligible bumps in returns.

There’s an important lesson in this…

There are limits to how much risk an investor should take on in order to maximize reward. At some point, taking on excess risk no longer makes sense.

But adding a modest amount of risk is perfectly reasonable – and occasionally essential – to growing your wealth over time.

Taking large risks on speculative bets can be alright here and there, but the core of your investing should balance risk and reward.

And, of course, this is also true outside of the bond market.

Take stocks as an obvious example.

Small cap stocks are typically more volatile than your blue chip, large cap stocks. Yet it’s exactly this volatility that gives small caps their appeal for generating above-average gains.

Year to date, small cap growth funds have returned about 18.7% to investors while their large cap growth peers have risen just 13.7%, according to Morningstar.

That said, the stock return spectrum has an extreme end as well.

Much like the C rated corporate bonds that flirt with default, penny stocks are notorious for promising sky-high gains… but most end up losing all value.

But the point is this…

The best way to maximize returns is to manage risk and diversify your investments.

Keep your risk modest and you won’t lose your shirt on a gamble gone wrong.

And even if you do choose to speculate now and then, be sure to limit your portfolio’s exposure so that one bad apple doesn’t spoil the whole bunch.

Good investing,

Anthony …read more