Day: January 25, 2014

There are Limits to Valuations

There are Limits to Valuations

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.

What Life Insurance to Buy?

What Life Insurance to Buy?

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.

Sorted Weekly Tweets

Sorted Weekly Tweets

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

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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

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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

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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

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