It is not often that I get asked to opine on a domestic insurer that I have never heard of.  Thus tonight’s article on HCI Group.  Here’s the request:

I am a longtime and frequent reader.  I appreciate your value-oriented approach and your genuine desire to help your readers.  (A vast difference from much market commentary!) 

I would be interested in your thoughts on the P&C insurer HCI Group  (HCI).  The fundamentals look pretty good to me, and the company is growing well, but the stock has gotten beaten down in recent weeks, the PE is 8, and there is huge short interest. 

The only news of interest seems to be that they have started writing flood insurance in Florida.  I suppose that is a big hurricane risk.

What are your thoughts?

Florida has had many good years recently of no significant hurricane damage.  This company has a lot of coastal hurricane exposure.

Moving into flood insurance, and undercutting the National Flood Insurance Program is highly unusual, and I would be skeptical.  There is a reason why most of the P&C Insurance industry does not offer Flood cover.  Severity of claims is very high when it happens.

I don’t like owning insurance companies at over 2x book, and this one is over 3x book.  Reserving seems a little weak, with a large reserve strengthening done in 2012.

Also, the share count is growing, which is a bad sign ordinarily, and particularly when capital is flush in the insurance industry, as it is today.  Asset growth is also a bad sign, from a quantitative standpoint.

If conditions are normalizing in Florida, the big guys will start to move back in, and HCI will lose a lot of its past advantages.

Taking concentrated risks is great for an insurance company, so long as no claim events occur.  But if there are severe claims from hurricanes, this company could be in a lot of trouble.  That’s why it has a high short interest.

And so my judgment is no interest.  Gun to the head, I would short it, but I don’t short, by and large.  This is another company with a limited strategy that could be washed up by a few major hurricanes in Florida.  We’re due.

There are many in the US troubled over a number of problems:

  • Why are wages not rising faster, particularly on the low end?
  • Why isn’t the middle class doing better?

I may get a lot of flak over this post, similar to my post Rethinking Comparable Worth, but I think it is better that people understand what is happening, even if they don’t like it.

The world as a whole is getting better, bit-by-bit.  But that includes some places that prosper dramatically, while others sag.

Free trade is a good thing, and I think that free trade agreements should be sought globally.  It helps grow the global economy.  Those benefits are not evenly distributed.  Those whose wages are low relative to others who do the same thing are going to benefit disproportionately.  Those whose wages are high relative to others who do the same thing are going to lose disproportionately.

Here’s the simple way to put it.  If you do the same thing as a guy in China, or any other place, why should you earn something different than him?  What is happening to the lower classes in the US is pressure from the global economy.  There are a lot of people who find the work previously done by those in the US desirable, and at lower prices.  The forces making the world as a whole better off are making the low-skill portions of the US labor force conform to the pay that they get in the rest of the world.

I realize that this is not pleasant, and I spend time helping friends of mine who are affected by this.  But the global move to capitalism has had positive and negative effects on the US — positive for capital, negative for labor.

Some will be offended at this, but you might ask, why should we prevent companies in the US from contracting with foreign workers to do work more cheaply than in the US?  Is there a moral basis to do this?  I don’t think so, as people should be free to have legitimate contracts with those they wish to deal with. (Excluding things in wartime, that is different.)

People outside the US need to be able to improve their well-being.  Same for those in the US.  But what that means is that those wanting to improve their well-being must put a lot of effort forth:

  • Be zealous to improve your skills
  • Market yourself to many companies
  • Start your own company

I know it is tough to do this.  I was unemployed for a short period in 2003, and I put 40+ hours per week into seeking employment.  Seeking a job is a job, you are a one-man firm seeking to sell one unique product one time.  It is tough to do this, but it is the only way to do it.

What you have to understand is that the world is far more competitive than is was before the Cold War ended.  Fifty years from now, the world will be far more equal, and poverty will be far lower than it is today.  (That is, assuming there are no significant wars.)

What I say to my readers is be intelligent,  and seek productive niches in the economy that have some lasting potential.  That’s not true of most of the economy.

Younger people have to get the idea that they need to focus on how their careers will support them economically.

More generally, almost everyone needs to think on a long-term basis.  If you are going to college, aim for things that have the the possibility of giving you a good life over the long haul.  Don’t seek your bliss.  It is rare that your bliss will reward you in the long run.  Don’t seek what makes you happy.  Seek what makes others happy.  That is the true understanding of the golden rule — sacrifice yourself for the good of others, and you will be happy.

That is the secret to economic success — seek what makes others happy, not just yourself.  If you follow this, you will do well enough.  Capitalism exists to make the most people happy.  Other systems exist to control for those who are privileged.

My summary is this: seek the good of others, and look at where demand may growing, and you will do well.

Hoping that you will do well,

David

December 2013January 2014Comments
Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace.Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters.Shades their view up, but I don’t see much to support it.  Most of the growth is inventories.
Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated.Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated.Shows less confidence as labor force participation falls.
Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months.Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat.Shades their views of household spending and business fixed investment up.
Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing.Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.No change.  Funny that they don’t call their tapering a “restraint.”
Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.No change.  TIPS are showing slightly lower inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.54%, down 0.10% from December.  Treasuries have rallied versus TIPS since the emerging markets crashed partially due to the taper.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

 

No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.No change.  Monetary policy is omnipotent on the asset side, right?
The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced.The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced.No change.
The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.No change.  CPI is at 1.5% now, yoy.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.No change.  They have a deficient model of what deficit spending does for the economy.
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.Reduces the purchase rate by $5 billion each on Treasuries and MBS

 

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.No change
The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.No change.  But it has little impact on interest rates on the long end, which are rallying into a weakening global economy.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.No change. Useless paragraph.
If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.Says that purchases will likely continue to decline if the economy continues to improve.
However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.No change.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.No change.
The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.Not a time limit but economic limits from inflation and employment.

Just ran the calculation – TIPS implied forward inflation one year forward for one year – i.e., a rough forecast for 2015, is currently 1.80%, up 8 bps since the last meeting.  Here’s the graph.  The FOMC has less than 1% of margin in their calculation.

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.No change.
The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.No change. Repetitive.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.

 

The names change, but the vote is largely the same – why no hawks urging for a faster end to QE?
Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate. Rosengren is no longer a voting member.  Good.

 

Comments

  • Small $10 B/month taper.  Equities flat and long bonds rise.  Commodities do nothing.  The FOMC says that any future change to policy is contingent on almost everything.
  • Shades their views of GDP household spending and business fixed investment up, and their views on labor force participation down.
  • They think that if they use more words, they will be clearer.  Longer statements are harder to parse and understand.  They need to clean up the statement.  There are many sentences that could be eliminated with no loss of meaning.
  • Current proposed policy is an exercise in wishful thinking.  Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • In the past I have said, “When [holding down longer-term rates on the highest-quality debt] doesn’t work, what will they do?  I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.  The Fed is playing with forces bigger than themselves, and it isn’t dawning on them yet.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • GDP growth is not improving much if at all, and much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.

Safe-Investor-nest-egg-jacket-5

This is a special book.  It’s special because it explains investment concept in simple language, and tries to give average people an ability to understand how the markets work.

The author shares from his life experiences, where not everything turned out right.  With bonds in the 1970s, what was ordinarily a safe investment turned into “Certificates of Confiscation,” as inflation and interest rates rose.

The author is careful to point out the difference between fake diversification and true diversification.  False diversification has a large number of positions that are related, like owning many tech stocks from 1998-2003, or many financial and housing stocks 2005-2009.

True diversification means there is not some hidden factor that can affect your whole portfolio.  The author argues that we need a broad array of investments in the portfolio to diversify results, reducing volatility, so that the investment program can continue  until the target is reached.

Th author also argues  that investors need to dig into the guts of what they are investing in.  Who is the custodian?  Are my assets safe from commingling with the assets of others?  (Think of MF Global or Madoff.)  Is there any factor that could cause a substantial fraction of my assets to be significantly impaired?  As an example, what if you live to an old age?  Will you outlive your assets?  For most Baby Boomers, that is a significant risk that is under-appreciated.

The author, who managed two significant asset management firms in his career, encourages readers to do detailed checks on any active managers they hire (like me).  Analyze their methods, their incentives, their character, and more.  Passive investing does away with many of those questions, but still you have to set up an asset allocation.

As for active managers, they often buy and sell to make it look like they are doing something for clients, when frequently less activity would be in the best interests of clients.  Active management often works better at lower turnover rates.

Investment performance analysis has its own pathologies.  There is the need to buy an outperforming fund.  Why buy a fund that has done poorly?  An investor could ask two questions: 1) is the manager just benefiting from the current cycle, or are his picks good aside from that? 2) Has the manager gotten so large in that strategy that there is no place to place money to achieve an above average return.

The author also notes a strategy that many rich employ: hold safe assets and risky assets, but not the stuff in-between.  Few have made their wealth on the stuff in-between.  Preferred stock has made no one rich, nor investment-grade corporate bonds.  Junk bonds when carefully chosen may be an exception.

Now, that said, I think the author is too optimistic on emerging markets.  As in the current mini-crisis, many of them have immature financial systems, and are mis-financed.  Long assets are being financed by short loans.  This can goose growth in the short-run, but not in the long run.  I think that emerging markets have a place in portfolios, but smaller than the author implies.

Three Pockets

The author posits three pockets for assets — a large one for savings (don’t lose this), a medium one for investing (moderate risk), and a small one for trading (high risk).  He is trying to channel male actions in a good way.  You want to gamble?  Gamble with a small amount of money.  Keep the main body of your assets in ordinary hands that you do not touch.  Set it, and mostly, forget it.

This is an interesting way to try to get people to take limited risks, and have most of the portfolio be safe or have limited risks.

Passive vs Active

The author does not take a stark position on this, but points people toward passive funds if active fees are too high, and track records do not validate good investment choices.  That is how I feel about my own investing.  If I can’t outperform, I don’t want you investing with me.  The book’s position is only invest with active investors that have an edge.  That is more common with smaller cap stocks, international investing and junk bonds.

When to Adjust Portfolios to Reduce Risk from Aging

This book has risk positions lasting longer than most books, and generally, I think that is right, unless markets have gone to such high levels that intelligent investors should lighten up.  I think we are in one of those moments now.  Walk, don’t run, to reduce risk assets, and don’t go all the way, just lighten up.  I rarely make big moves, and the book would not advocate tactical big moves either.

I thought the book’s chapters on choosing advisors were well-written.  It gives you adequate ways to check out financial advisors like me, and those much larger than me.

Summary

The summaries at the end of each chapter are very useful.  I can endorse almost everything in the book.  Just be more careful about emerging markets than the book is, they have a lot of risk embedded at present.

Quibbles

None, aside from what what previously mentioned.

Who would benefit from this book: Most amateur investors could benefit from this great book.  If you want to, you can buy it here: The Safe Investor: How to Make Your Money Grow in a Volatile Global Economy.

Full disclosure: The PR people offered me a book, and I accepted it.  I am glad that I did.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

 

This article is prompted by the following article by John Hempton of Bronte Capital.  This is not meant as a criticism of him; I have nothing but respect for him.  The article triggered memories of my own experiences with position sizing at a hedge fund.

The hedge fund I once worked for had great expertise with financial companies, and I worked for them in the boom years of the 2000s.  Our leader was bearish on depositary financials, a view that would eventually be right.  Of course “eventually right” is another way to say “wrong in the short run.”

Let me describe the problem from another angle.  When I was a corporate bond manager, I would mentally set three levels with the bonds that I held.

  • Spread necessary for an ordinary-sized position.
  • Spread necessary for a big position.
  • Spread necessary for a maximum position.

These spreads I would adjust for premium vs discount, optionality, and a bunch of other things.  The point is that I would always have a schedule for where I would be willing to buy more, or lighten up (sell some).  I often dealt in some of the least liquid corporate bonds, and I was patient, and even willing to break rules by holding more than 20% of a given issue.  My analysts almost always did good work, and I trusted them.

When markets are illiquid, they “trade by appointment.”  If you have a balance sheet behind you that is not worried about liquidity, you can do interesting things by buying assets that most ordinary managers won’t touch, because the issue is too small.

I came to the hedge fund after I managed corporate bonds.  In one sense, I had managed a far more complex long-only portfolio.  But being able to short creates complexities of its own.

I can’t tell you how many times at meetings at the hedge fund we had tough discussion on position sizing, more frequently on short positions. We were perpetually long quality, short market capitalization, long insurers, short banks, and long value.  Great idea, if too early. This would be an extreme example:

Boss: “This short position is killing us, it is up 50% from where we shorted it, and now we have a 6% short position, what do we do?”

Others answered in front of me, essentially suggesting no change.  He asked me personally and I said:

David: “If you had no position, and you were approaching this company today, what would you do?”

Boss: “I would short the maximum — 4%.”

David: “Then buy in 2%.”

Boss: “But that locks in the loss.”

David: “Do you want to risk locking in a bigger loss?”

The boss once said to me that I was the only one on his team that was natively a portfolio manager rather than an analyst.  (That said, I remained an analyst, while an analyst was made an assistant portfolio manager.  I think it would have been too difficult to have the insurance guy to manage the portfolio of what was a banking shop.  That said, as a corporate bond manager, I managed the financials, which were mostly banks.)

Setting position sizes on shorts is always harder than longs.  When your thesis goes wrong on a short, your risk increases, as the position size gets larger.  When it goes wrong on a long position your risk decreases, as the position size gets smaller.

As I have often said, being short is not the opposite of being long, it is the opposite of being leveraged long.  When you are short, or leveraged long, you do not fully control your trade.  The margin desk can take you out of your trade if the equity in the account gets small enough.  They are ruthless in doing so, because the margin desks at brokerages do not want to take losses.

That makes it all the more important to set a schedule of sizes on short positions.  The first question should be: at what price would I put my maximum position on?  That would help in sizing introductory and normal positions.  They would be far smaller than what most hedge funds do.

Again, the same exercise is easier in a long-only format, but the protocol is the same.  Establish introductory, normal and maximum position sizes, and hold to them.  Also put into effect the idea that analysts must give greater scrutiny to large positions.

All That Said

This is a reason I am not a fan of most hedge funds.  I believe in the funds of my former employer and those of Mr. Hempton.  But the difficulties of dealing with bad decisions with a weak balance sheet kills a lot of hedge funds.  Long only — it might survive.  But when you go long and short with leverage, the risk arises of total loss.

So don’t think you are a “cool kid” because you invest in hedge funds.  Long only does better over the long haul, because it is less risky, and compounds value.

 

Every now and then, some will argue that there are no limits on valuations.  This tends to happen in bull markets.  We are getting that now.

This sentiment is sometimes due to ignorance, because bull markets encourage cheerleaders.  There are few who will oppose a bull market, though many who will talk about it after the bear market emerges, as if they had predicted it.

But there are limits on valuations.  Think of the bankruptcy pecking order.

  • Government and lawyers get paid
  • General creditors get paid
  • Banks and secured bondholders get paid
  • Unsecured bondholders get paid
  • Preferred stockholders get paid
  • Common stockholders get paid

That is the way you should think about risk.  What are the odds that you do not get paid?  The higher the odds that you don’t get paid, the higher the yield you must receive.  Don’t own a stock unless you are likely to be earning significantly more then the preferred stock, much less debt instruments on the same company.

That is why I look at the value of various claims on a company.  It gives me data on where the stock should be valued.

I encourage all readers to think like businessmen about investments, because it leads to the best results.  Analyze where valuations are cheap, and where free cash flow is being productively deployed.

That is the way to think about investing.  Think like an intelligent businessman, and only buy companies that you would like to run.

Another letter from one of my readers:

Hello 🙂

I am reaching out to you because you are among the “Got To Guys” in your industry

I am doing an “expert” and “common man” round up on my blog and I think a lot of people including me will benefit from your expert advice

 I will publish a detailed post in about 10 days and will obviously mention your blog along with a link back to your website. I will also be adding a custom infographic related to the topic of discussion and reach out to journalists when I am ready with my post.

I just need few minutes of your time to answer TWO questions mentioned below:

 If you can tell me:

“If you had to buy life insurance at current age, which policy would you buy? and which company will be your choice?”

I appreciate your time and it will be a favor if you reply back.

There are only two reasons to buy life insurance. You can:

  • Protect your loved ones after your death.
  • You can scam the taxman.

If you are young, the first reason predominates.  In order to do that, long-dated term insurance will do the trick.  Insure yourself for 20-30 years, and over that time, build your assets so that at the end of the life insurance policy, your heirs will not need the insurance.  And neither will you, should you survive.  That is what has happened to me.  I have no life insurance — instead, I have assets.  Should I die, my family will survive without my wife having to go to work, intelligent lady that she is.

(She doesn’t have a financial bone in her body, she is a princess, as her father was well-off.  She has lived with me long enough to absorb my prejudices, and grasp that there are no easy pickings in markets, so avoid those with get rich quick ideas.)

If you are old and wealthy, the second impulse is important.  How do you send money to heirs, away from the taxman?  Life insurance in the US is outside of the estate.  A large insurance policy can take assets that would be taxable to an estate, and move them outside of the estate.

As an aside: estate taxes are stupid.  The intelligent wealthy don’t pay them, or pay little of them.  The wealthy have a phalanx of helpers who they hire to reduce their estate (and other) taxes.  It would be far better to tax everyone as traders, and capture income taxes when they are really earned.

As to your second question: what insurance company to buy from?  If your policy is small, it doesn’t matter.  If your company fails, the state guaranty association will pick up the remainder.  If your policy is large, buy from the highest quality companies, you don’t want to deal with the guaranty associations after a default.

Emerging Markets Submerge

 

  • Argentina to Ease Currency Controls After Devaluation http://t.co/pnDs7kHHDb Argentina finally does something smart that will stabilize $$ Jan 25, 2014
  • Contagion Spreads in Emerging Markets as Crises Grow http://t.co/8tQg0o3wEA The Volatility Machine amplifies the tightening of the Fed $$ Jan 25, 2014
  • Traders watching for signs to see if this sell off is the big one http://t.co/EujnhyTV3z Feels like Shanghai Feb2007, market up&then died $$ Jan 25, 2014
  • Stocks Slide Toward Biggest Weekly Drop Since May http://t.co/AJ8JGDmZNl Volatility Machine kicks in, as emerging markets get hammered $$ Jan 25, 2014
  • China Moves to Avert Shadow Lender’s Default http://t.co/X6UnupKats China wants 2 avoid defaults, but what will they do when too big? $$ Jan 25, 2014
  • China Trust Products Gone Awry Evoke Soros Crisis Echoes http://t.co/sMEaYwiS61 Really sounds like China has a lot of Ponzi schemes going $$ Jan 25, 2014
  • China-Dumps-Dollars Hoax Not So Funny http://t.co/nvNpEgGK42 Remember the mercantilists lost. The neomercantilistic Chinese will lose big $$ Jan 25, 2014
  • Argentine Default Chaos Relived as Blackouts Follow Looting http://t.co/EW7kZrzbOa & Argentine Peso Drops http://t.co/nD9qMSJxla A mess $$ Jan 24, 2014
  • Fool’s Gold: Behind Nu Skin’s Chinese Subculture http://t.co/FiwozVHn6y What does the party think about a business that sounds cult-like? $$ Jan 24, 2014
  • Rousseff Debuts at Davos to Assure Investors She Had Spurned http://t.co/YTr84l0eTg Shortly after Dilma elected, I sold Brazilian stocks $$ Jan 22, 2014

 

Energy

 

  • You can’t be sure of Shell – or shale http://t.co/5n1PLW2msn Behemoth oil companies are like utilities &pay good dividends, meh cap gains $$ Jan 25, 2014
  • Steady oil market at risk from sabotage, instability http://t.co/zHMkSoGlsD This is normal 4 the oil market; no reason to worry $$ Jan 25, 2014
  • Dunno: Polar Pig Deserves Little Blame for Propane Shortage  http://t.co/ehK6qV9cRl I think corporations & individuals should stockpile $$ Jan 24, 2014
  • Quoting Bible, using Joseph stockpiling grain in Egypt, neglects an interpretation rule: u can’t get doctrine from a historical passage $$ Jan 24, 2014
  • Energy is gradually decoupling from economic growth http://t.co/gn09N1yIJH What is really meant is that we continue to get more efficient $$ Jan 24, 2014
  • Valero forecasts 4Q results above expectations http://t.co/NIOthsoMsl Well run company has a surprise beat FD: + $VLO $$ Jan 24, 2014
  • European businesses rushing to find Iran bonanza http://t.co/2258VWxDG9 Greed of businesses overcoming ideology of political allies $$ Jan 24, 2014
  • Megaprojects a megaheadache for oil bosses http://t.co/X3IXqYAVDa Big projects almost always tend to lose $$ Jan 23, 2014
  • How America’s Fracking Boom Helps 2Boost Treasuries Demand http://t.co/lyAXsrmTUo Funny, but when we ran deficits, foreigners bot r bonds $$ Jan 22, 2014

 

Market Impact

  • Gundlach Counting Rotting Homes Makes Subprime Bear http://t.co/SXM2uwxd0Z Gundlach moves on anticipating a bearish housing situation $$ Jan 25, 2014
  • One in Three Audits Fail, PCAOB Chief Auditor Says http://t.co/FCZMp7tGfF No surprise. Some accounting requires intelligence of actuaries $$ Jan 25, 2014
  • How to invest in the hottest stock sectors http://t.co/ZIaKwXmdma I’ve written about this b4. It works, but it flames out occasionally $$ Jan 25, 2014
  • 6 reasons your investments stink http://t.co/4NfbdyIMsm Good asset allocation considers time horizon, & asset class relative valuations $$ Jan 25, 2014
  • 6 flawed rules of personal finance http://t.co/nO5kOsmVsb Generally right, except you shouldn’t spend >4% of your lump sum per year $$ Jan 25, 2014
  • Hard-to-Sell Junk Debt Lures Oaktree to JPMorgan http://t.co/MyJdNpw4Fo I respect Marks; there r no absolute values 2b had in junk debt $$ Jan 24, 2014
  • The mountain without Mohamed http://t.co/joadD6Wp2D Pimco is a “quant shop” which grew too large for the markets that it exploits $$ $TLT Jan 24, 2014
  • Goldman Stocks Strategist Fends Off ‘Barrage’ After Valuation Call http://t.co/nNCz1syP8m No one ever gets popular opposing a boom. $$ $SPY Jan 24, 2014
  • Bubbles as a deflationary escape chute http://t.co/hiDhyar3aD There are simpler & safer ways to run economic policy. Regulate banks hard $$ Jan 23, 2014
  • Pressure mounts for corporates’ cash piles to be put to work http://t.co/WBdUF52rz2 1 corporation’s cash is another corps short-term debt $$ Jan 23, 2014
  • Floating Notes Debut in US as Cash Chases Fewer Securities http://t.co/9On051rHUu This will be good 4 money market funds in the short-run $$ Jan 23, 2014
  • Why IBM Should Stop Buying Its Stock http://t.co/1gsVe7tLpS If you have highest price in the Dow Jones Industrial Avg u get more scrutiny $$ Jan 23, 2014
  • Buffett Makes Millions Selling 500:1 Monkey-Linked Derivs http://t.co/6juOLsh2m3 @matt_levine Wrote about this 2 http://t.co/D3sirU5yWN $$ Jan 22, 2014
  • Buffett Backs $1B NCAA Hoops Tournament Prize http://t.co/MLvgHtx7NX Almost no way that Buffett can lose here; perfect bracket impossible $$ Jan 22, 2014
  • US Bank Risk Guidelines Would ‘Accelerate’ Enforcement http://t.co/DaeYf9zoje I’m not sure this will work, but it will bulk up compliance $$ Jan 22, 2014
  • CFOs Use Face Time, Plant Tours to Court Shareholders http://t.co/7CHts6TqdO This isn’t new, but it is wise to build goodwill w/investors $$ Jan 22, 2014
  • Why earnings could grow http://t.co/Zmwatc3v87 h/t: @ritholtz rising profitability, overseas biz, wise cap allocation, reasonable val’ns $$ Jan 22, 2014
  • Why ‘Peak-Earnings Models’ Are Nonsense http://t.co/Sa3uAci0pj Let’s see where actual unadjusted earnings are, & see if they are growing $$ Jan 22, 2014
  • Pimco CEO El-Erian Resigns http://t.co/Bl05w8h5Tn U have 2 remember that Pimco is a “quant shop.” They follow their models, not people $$ Jan 22, 2014
  • Gold-Price Banks Meet Amid Regulatory Pressure http://t.co/2W5hTdfKpm Post-LIBOR probe it’s in their interest to solve it quietly if poss $$ Jan 22, 2014

 

Rest of the World

 

  • Iceland Traps Hedge Funds in Refusal to Discuss Bank Claims http://t.co/kVUcp2fXvf Iceland delays claims from the crisis, cares 4 people $$ Jan 24, 2014
  • Merger Bonanza Hits Finland as Economic Pain Becomes Asset http://t.co/FXCOFmQABx Finnish assets r cheap, & other firms buy them up $$ Jan 24, 2014
  • Sochi Security Slalom Shows Terror Risk With Putin on Guard http://t.co/ij243mnvCN Russia will try hard, but will they prevent terrorism? $$ Jan 24, 2014
  • Investors Seek Yields in Europe, but Analysts Warn of Risk http://t.co/a3eXCJjgqc Seek a margin of safety & don’t reach 4 yield anywhere $$ Jan 24, 2014
  • Europe, Facing Economic Pain, May Ease Climate Rules http://t.co/2aK9oLpKg6 What a hoot! The Eurocrats turn their back on global warming $$ Jan 24, 2014
  • West Explores Plan B for Forces in Afghanistan http://t.co/9cKJcmzbyt If Afghans don’t want the US, we should leave; fractious place $$ $TLT Jan 24, 2014
  • Can Rising Property Values Spur Wary Japanese to Spend? http://t.co/fsrr5ArGtP Dangerous game, at the end 2much debt & 2 little cash flow $$ Jan 24, 2014
  • Israeli Ultra-Orthodox Do the Math in Bid to Enter Workforce http://t.co/afrV0U0fd4 Think of Dark Ages where 25% were supported by others $$ Jan 23, 2014
  • Olympics host Sochi remains a volatile region http://t.co/B8gwlvHrOR A great test 4 Russia; how well can u protect a perfect target $$ $SPY Jan 22, 2014
  • Abe Eyes Land-Price Reflation to Spur Construction Boom http://t.co/1QMMntydBq But Abe thinks he will succeed in creating property bubble $$ Jan 22, 2014
  • Pimco Dropping Linkers Calls Time on Abenomics Inflation Target http://t.co/r37SBu12G5 Pimco doesn’t believe Abenomics will inflate much $$ Jan 22, 2014

 

Companies & Industries


·  Fed May Protect Warren Buffett as a National Treasure http://t.co/zTdv5t6tTz Unlike most, Buffett has more than enough cash 2 survive $$ Jan 25, 2014

  • T-Mobile Answers Call of Underbanked as Banks Fail to Pick Up http://t.co/sAl7vhJJlP New cheap way 2do payments w/o a bank account $$ $TMUS Jan 24, 2014
  • eBay CEO Says Icahn PayPal Spinoff Makes No Sense http://t.co/4bKyeBMODa Then rename the company Paypal,& spin off $EBAY . $$ Jan 24, 2014
  • What Bankers Need to Know About the Target Breach http://t.co/L6XXJaFmVY Detailed; explains how credit data captured, stored & sent $$ $TGT Jan 24, 2014
  • Pinterest CEO Ben Silbermann on Being a Dad &Running a Company http://t.co/exLTi0CLyi The “Glass Ceiiing” Means u care about your family $$ Jan 23, 2014
  • Madoff Haunts Yeshiva as University Slides to Junk http://t.co/ZbNeoudT1k Wise 2 avoid board conflicts where board member invests 4 board $$ Jan 23, 2014
  • Diamond Foods CFO on Recovering From a Crisis http://t.co/aVFn9zioB9 America offers unlimited second chances, but clean things up or else $$ Jan 23, 2014
  • Dan Loeb’s Third Point Discloses Stake in Dow Chemical http://t.co/2RuMuNEKjK Separate petrochemicals from specialty chemicals $$ $DOW #easy Jan 22, 2014
  • Buffett Leans on 29-Year-Old Cool to Oversee Problems http://t.co/NfABsLkBzD The start of a gradual centralization of $BRK-B businesses $$ Jan 21, 2014

 

US Politics & Policy

 

  • Thrill of Obama Home Visits Fades for Americans Cited at Events http://t.co/x0aWw6ddia Change seems like spare change or loose change now $$ Jan 25, 2014
  • Why Uncle Sam Can’t Guarantee College Grads a Job http://t.co/oM0htsJcLk College is debauchery, not job preparation; end the subsidies $$ Jan 25, 2014
  • Tor Anonymity Software vs. the National Security Agency http://t.co/mhBGgZPZyS Very cool, let TOR hide private communications from Gov’t $$ Jan 25, 2014
  • The Sleepiness of a Hollow Legend http://t.co/d2NRpymDBP Peggy Noonan on State of the Union Address. I never listen to them; not worth it $$ Jan 25, 2014
  • Davos pusillanimity watch, LGBT rights edition http://t.co/5BkuxGdANL vs Romans 1:28-32 http://t.co/jFOUPLWLgF Jan 24, 2014
  • Resolved: Obamacare Is Now Beyond Rescue http://t.co/SXiG685Z2r Idea is most of the improvements won’t survive the necessary cost cuts $$ Jan 24, 2014
  • NSA’s Spying on Phone Calls Illegal: US Privacy Board http://t.co/ZStT1WAiwT Should not be written off; this aids a healthy debate $$ $SPY Jan 24, 2014

 

US Healthcare

 

  • More Women Seeking Medical Help to Get Pregnant http://t.co/8ICRmFNKx3 Natural result of delaying marriage, or not marrying at all $$ Jan 24, 2014
  • Where Have All the Uninsured Gone? http://t.co/0jlpsHORUj They don’t want insurance. They will take their risks & pay as they need to $$ Jan 23, 2014
  • How Qualified Is Your Doctor? http://t.co/XkAxYmjsA6 Hard 2 tell, is certification busy work or real testing? $$ Jan 23, 2014
  • Circumcision Coverage Comes Into Focus http://t.co/rZ24KWxvGb One of those issues where if someone has a view, it tends 2b polarized $$ Jan 22, 2014

 

Other

 

  • How Real is Spike Jonze’s ‘Her’? Stephen Wolfram and Peter Norvig Weigh In http://t.co/IgJG3bdrYr AI will not get self referential ideas $$ Jan 25, 2014
  • New York Officials Arrest Man in Lufthansa Heist http://t.co/toMAGIz5ck It took 35 years, but finally an arrest 4 the ’78 heist & others $$ Jan 24, 2014
  • Card-Theft Software Grew in Internet’s Dark Alleys http://t.co/cvTgCMC0lA The losses occurred from Target missing hacks of credit cards $$ Jan 23, 2014
  • Give the guy a second chance. Yes he blew it once b4, but he is smart and now knows what the limitations r http://t.co/6Fbp1jc6EJ $$ Jan 23, 2014
  • Can a Disgraced Trader Get a Job in Academia? http://t.co/qjoP4duPQL He deserves a second chance; that is what makes America great $$ Jan 23, 2014
  • Vital Signs: More Households Don’t Own a Car http://t.co/HBlc8L9z1V More options available 4 getting around & owning a car is costly $$ Jan 22, 2014
  • Top employers for flexible and work-at-home jobs http://t.co/UGz6F2XMae Home work getting more common, challenges managing the dispersed $$ Jan 21, 2014

Wrong

  • Wrong: This 100-year-old idea could end San Francisco’s class war http://t.co/Wtxk7wwsvH Sorry, land tax would get passed to renters $$ Jan 24, 2014
  • Dunno: Don’t Care About Deficits? Vote Republican http://t.co/1BKNS2m80j The t-party cares about deficits & they r growing in the GOP $$ Jan 24, 2014
  • Wrong: Huge cash pile puts recovery in hands of the few http://t.co/8rRHHFpZJN Most of the cash collateralizes derivatives, etc. Not free $$ Jan 24, 2014

 

Comments, Replies, Retweets

  • Roddy Boyd finds alleged Ponzi schemer http://t.co/GRBY0dqLqv What a guy, Roddy Boyd. $$ Jan 24, 2014
  • @footnoted @theofrancis @BoydRoddy His skills r considerable, as r his ethics. $$ Jan 24, 2014
  • @pmarca I’ve said that, but less colorfully; the market reflects all information acted upon, including errors. $$ Jan 23, 2014
  • @maoxian Good point, will have to consider that. But board should not have members investing for them $$ Jan 23, 2014
  • Wrong: UBS Tells Davos Leverage Ratio Over-Reliance Threatens Stability http://t.co/DZ5gfHmXXK After a crisis from overleveraged banks? $$ Jan 22, 2014

 

In general, over the years, I have had respect for John Buckingham, who writes The Prudent Speculator.  I caught this because we own the  same stock Ensco plc.  As he said:

For instance, Ensco PLC (ESV) is the world’s second largest offshore driller, operating in six continents with one of the newest jackup and deepwater fleets in the industry. The company has shown a relatively impressive ability to keep operating expenses in check and generate solid free cash flow, while the P/E is less than 10, the dividend payout is more than 5% and profits per share are expected to increase from $6.14 last year to $6.67 this year and $7.79 in 2015. In short, we find Ensco to be a high-yielding, value-priced, financially-strong growth stock, operating in an industry with high barriers to entry and favorable long-term demand characteristics!

Great minds think alike, and fools seldom differ.  You shouldn’t buy Ensco after reading this unless you have studied it out.  Just because I agree with a comrade does not mean you should take action.  We could both be wrong.

At the end of his piece he listed many summary statistics of his portfolio.  I want to compare his with mine:

Dividend yield: His: 2.3%, mine 2.2%

P/E: His 15.9x, mine 12.0x

P/B: His 1.65x, mine 1.48x

P/S His 0.86x, mine 0.68x

I don’t look for dividend yields, and many European stocks that I own pay dividends, just not regular dividends — the philosophy is different there.

One thing that is different for me versus Buckingham is that I have more foreign stocks in my portfolio.  I am willing to consider companies in countries that follow the rule of law.

I have done better, and you are free to ask me how.  My main idea is to search for the best ideas regardless of where they are domiciled, or what size they are.  I analyze stocks regardless of how they are categorized by most.

Full disclosure: long Ensco plc [ESV]

 

F153889255

This is a practical book that is a very good book.  Do you want to write things that people want to read?  This book will help you do it.

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This book will help you source ideas.  It will help you refine ideas, as you write and rewrite ideas.

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Now if you read this book does it mean that it will guarantee that you write great stuff? No.

You have to have some edge that you want to express.  Most investment commentary is garbage.  Those the have a differential insight might be able to create value.  But that is not generally true, unless we are at Lake Wobegon, where all of the children are above average.  Lake Wobegon is fictitious, easy excess returns are hard.

The main idea is start blogging, and start improving.  Start with a good idea that would have broad interest. Then write, revise, revise, revise.  Writing gets better with effort and editing.

Beyond that, you will have to think of compliance.  Disclose all relevant interests that you the writer might have.  If you own or short a stock that you write about, disclose it.

This book will improve your blogging.  It will sharpen what you write about, the frequency at which you write, and how you write.  This is a great book for financial bloggers.

Quibbles

None

Who would benefit from this book: Almost all financial blogger could benefit from the book.  Though I am experienced, there are many places where I learned more.  If you want to, you can buy it here: Financial Blogging: How to Write Powerful Posts That Attract Clients.

Full disclosure: I asked the author for a review copy, because I respect her to a high degree.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.