by on March 2, 2012 Leave a Comment

Home Represents Idle Capital no Income

HOUSING
For many, the home is the most valuable asset they hold. And, yet, houses cost money to maintain in the form of taxes, mortgage, maintenance, insurance, and so on. Even after the children have left the “nest,” many seniors live in more home than they need. The single biggest reason for this, of course, is that the home is a way of life, and has been for many years, and leaving it for something else is traumatic.

But the fact remains that the home represents idle capital, producing no income, and without the onus of the home, senior citizens could lead a better life, free not only from financial cares but also from day to day living chores.
Congregate living for retired people has become the fashion. Not only can it be less expensive, but it can answer many of the other problems inherent in aging. Traditionally, younger members of the family used to “take in” the older ones, but such is not the case today. The mobility of all people has separated families, and the propensity of all younger people to work has interfered with the traditional family management activities of many.

I have a close association with a company called Life Care Services Corporation. Headquartered in Des Moines, Iowa, it is the leading developer and manager of life care retirement communities throughout the United States. These communities are not nursing homes, nor are they institutions. They are, in fact, communities in which senior citizens live independently but have available to them, within the communities, virtually all of the important necessities for full, productive living.

Residents typically “buy” their apartments or villas, pay a regular maintenance fee, and receive services such as maintenance, housekeeping, food, and medical care when needed. Although each community operates independently and in a slightly different manner, residents often are able to recoup their investment or a portion of it if they move elsewhere. Or leave the community altogether. I have visited dozens of such communities, and I find the residents happy about life in general. And why not? Financially, they have secured good housing at a predictable cost (albeit usually the maintenance fees fluctuate in line with inflation), their housing is managed by professionals and they can lead life as they wish.

There are two other pluses to such communities. First, they provide “peer companionship.” That is, automatically, a senior citizen has access to others with common interests, common outlooks, and common problems. This overcomes one of the inevitable fears of senior citizens, that of social isolation. Second, and not insignificant, is the availability of on-site medical facilities. Access to health care and related assistance assumes an even higher role of importance as people age and require and demand medical assistance, not strictly for major problems but also for many relatively minor ones.

These communities are not “cheap,” but in relation to other housing costs and in relation to services available, they represent good value. There are many other types of retirement communities, some expensive, some not, some offering medical care, some not, some available on a rental basis, others on an “escheatment” of capital. Basis and still others on a “return of capital” basis. The choice of a place to live is varied and is dependent on the way in which a person wants to live, the financial resources available to him, and, of course, both the location and expertise of the professional managers. Such a choice is usually not made lightly, but it can be a good way for a senior citizen to invest capital and receive, in turn, a predictable way of life.

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by on March 2, 2012 Leave a Comment

The Senior Citizen Investment

Whatever the amount of capital a senior citizen has, it is probably all he or she will ever have and, unlike others, the risk of short-term loss of capital or income is profound. Since they have concluded the earned income portion of their lives and are dependent on whatever they have accumulated and whatever has accrued for their benefit, there is neither adequate time nor opportunity for them to recoup from a loss.

A CASE IN POINT
On a recent late-night drive through Chicago, I happened to scan the AM radio dial, eventually honing in on a local station which brought in guest financial planning experts for two hours each week to assist call-in listeners.

A conversation ensued between a 64-year old caller, who was a soon-to-be retiree and the talk show guest for the week, who was touted as an expert in his field. After exchanging pleasantries, the caller described his background. It turned out that his impending retirement as company executive had caused some concern, as it had forced him to focus on the state of his financial affairs. In rummaging over the many financial statements from brokers, he had come to the frightening conclusion that he had not adequately prepared for the inevitable financial period of retirement. He was heavily invested in fixed-income instruments which, he had determined, would be unable to keep him in good stead after inflation. Therefore, he wanted some recommendations for individual stocks.

Before I could sympathize with the caller, the guest offered his two cents worth to the question of which individual stocks the man should consider. “Well,” the guest stated, “I hear from many people like you, who really don’t have adequate time to analyze the stocks of companies. You spend most of your time—and rightly so—taking care of your business and making money. My suggestion is that you leave the decision of which stocks to purchase to the experts and buy the shares of a good mutual fund.”

To many, this would seem to be sound advice. After all, it makes good sense to let a mutual fund manager, who invests for a living, make these seemingly difficult decisions. But, in fact, the guest expert has committed several errors, not the least of which is that he evaded the question altogether. The caller wants to know which individual stocks to buy, and the expert provided the “populist” response—Buy a mutual fund.”

However, my real problem surrounds a basic logical fallacy which both the guest and, eventually, the caller committed. The soon-to-be retiree works very hard for a living, earning what most would consider a respectable income. He endures all of those long hours, early mornings, late evenings, and extended weekends in order to bring home all of that money. But I submit that the man should also be willing to devote a few hours each week, or a few minutes each day, to account for the status of all of that money. Just because he works hard to make the money does not mean that he should work any less hard to keep it. Yet, the guest has suggested that he “hand off” to a mutual fund manager the responsibility of investing for his future.

One of my basic contentions is that money management is not a science. Anyone, with even a modicum of effort, can determine the best and the worst 100 companies in America. Experts, analysts, and financial planners are there to assist in this endeavor. But each person should recognize and accept his responsibility in the matter and do his own homework accordingly. The easy way is not also the best way, and the working man as well as the retiree should take stock of their own situations and specific ways to invest as a result.

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by on March 2, 2012 Leave a Comment

John Marks Templeton–The Best Money Manager

John Marks Templeton is a gentleman’s gentleman. The son of a self-taught Tennessee country lawyer and cotton ginner, Templeton has become one of the premier money managers of our time. He is a soft spoken, almost condescending man who never utters an ill word of anyone and is the epitome of someone who tries to inflict no pain on anyone. He is also a highly religious person and is one of the major grantor’s of religious awards in the world. Each year, he bestows a religious award; the Templeton Foundation Prize for Progress in Religion, to the person in the world who he thinks has done the most outstanding job. Commencing in 1972, this award has been accompanied by a monetary sum in excess of the amount of the Nobel Peace Prize.

John Templeton is best known as Principal and Founder of the Templeton Mutual Funds, and is also Chairman of an investment management company which, along with its subsidiaries, manages assets in excess of $18 billion.John Templeton has the same kind of patience and insight as Price but utilizes an entirely different strategy to investing money. Early on, he observed that there were economic booms and recessions throughout the world and that they occurred at different times and in different parts of the world. Therefore, he decided that the proper investment strategy should be global. At the time, almost 40 years ago, this kind of thinking demonstrated a great deal of prescience.

Templeton also decided that the right thing to do was to play the economic cycles in various parts of the world. If he found one area of the world in an economic decline, he would invest his money there until there was a recovery. He shifted funds to wherever a decline had already occurred, instead of to where economies were strong. The result is that Templeton has consistently outperformed the best money managers in the business, over a staggering period of time. Although the research capability behind him may not be the best in the selection of individual securities, it is extremely good on long-term timing of economic cycles throughout the world, and I admire him tremendously for his foresight. As an example, he recognized the Japanese market long before others did; he heavily invested in it, and then pulled much of his money from Japan before that market turned downward in the early 1990s.

He is never completely out of any part of the world, but he does shift his money on a worldwide basis. Recently, I remember asking him where he thought the next major breakthrough might be, and he remarked that China would be his best guess, if and when it became available for investment. Indeed, from a fundamental economic point of view, China has more than any nation in the world. It certainly has a labor force which it could employ if it saw fit. Coupled with this are ample natural resources, a good educational system, and superior institutional facilities, although they are relatively small based on the population. Here is where one could envision a major breakthrough. When China solves its political problems, it will certainly emerge as a formidable economic powerhouse.

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by on March 2, 2012 Leave a Comment

“T. ROWE PRICE ” — Best Money Manager

There are two fantastically successful money managers that I have known and respected: T. Rowe Price and John Templeton. These two gentlemen had entirely different philosophies guiding their investment of money, but they had several things in common. They had long-term vision, they had insight, they had a game plan, they were patient, and they were right.

T. ROWE PRICE
The firm carrying his name is headquartered in Baltimore, appropriate as he was a native Baltimore . Price was a very quiet, unassuming man, not particularly effervescent or outgoing, but exceptionally thoughtful. His story is quite interesting. While he was in the brokerage business during World War II, he observed that the war was producing plenty of good technology. In addition to electronic technology, he witnessed some great developments occurring in the health care field as a result of the war. For example, during the war one of the larger goals was to find cures for ailments like the flu and pneumonia. A product that emerged from that quest was penicillin, along with other tangential discoveries.

Price also noticed the great strides occurring in radar technology, which was a precursor to television. When the war eventually ended, he determined that over the next several years’ science would make great strides as a result of domestic application of the technologies created during WW II, and he decided that this was the place in which to invest. He forecast the creation of new products and a greater increase in sales and profits from new products than old ones. In contrast to investment advisers who, at the end of World War II, focused on consumer-driven companies, which would meet the pent up demand from the lack of available consumer goods resulting from the war (automobiles, etc.), Price concentrated on technology and other growth companies. To some, he is the father of the term “growth stock,” famous for the formation of the T. Rowe Price growth fund, which was the nucleus of what became a very significant organization.

During the mid-1960s, Mr. Price foresaw that the next major economic problem would be inflation. It is unclear how he arrived at that conclusion, but once he did he moved swiftly to invest his personal funds in inflation offsetting assets. He left the growth stock arena for inflation resistant investing, and he plowed money into asset companies and invested in oil, gold, and precious metals companies. It took years for him to realize a big profit, just as the growth stock theory took years to pay off. But the strategy eventually yielded rewards, and handsome ones at that.

Price had the uncanny ability to forecast future trends eight to ten years before they happened, and he was patient enough to wait for them to occur. It is an intriguing exercise to predict what his visionary outlook would be for the next ten to fifteen years. His bias would most likely be toward something very different from inflation or growth industries; it would probably be along the theme of capital spending or the global rebuilding of the infrastructure, a venture of multimillion dollar proportions, and an enormous subject in it.

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by on March 2, 2012 Leave a Comment

Be a Trader not an Investor

Very few short-term traders consistently make much money. The only exception to the rule may be the brokerage firms which, in addition to trading profits or losses, also include mark-ups, mark-downs, and commissions as part of their profits. As a rule, individuals rarely make consistent money trading the markets. If they do, they may be lucky, as opposed to smart.

Commission costs alone can debilitate a good trader. If a trader buys a stock, holds it for a week and sells it, he has lost 4 percent via commissions. Then he has to decide what to do with the capital once he sells the stock, whereupon he pays another commission. In the end, if only one trade is wrong, the entire series of trades can realize net losses. In the futures and options markets, where increased leverage can magnify gains and losses in a short time, traders know that 50 winning trades followed by one loser can wipe them out. These traders express this truth in a familiar, but crass colloquialism: “In this business,” they say, “you masticate like a bird and defecate like an elephant.” One bad trade can bury you.

Investors who try to be traders find they are unable to make money trading in the marketplace. Of course, some individuals who are exceptionally talented and disciplined do succeed. But they are the exception rather than the norm. The average investor cannot, and does not, spend as much time in the marketplace as he must to become a proficient trader. One example of how the trader mentality has come to pervade the marketplace is the use of the “limit order.” Investors, in their buying and selling habits, place limit orders on the prices for which they are willing to buy or sell. In doing so, they make a critical mistake. Sometimes it works and other times it does not.

With a limit order, one can buy a stock for less than it is now selling or sell a stock for more than it is now selling. But, consistent with a long-term strategy, it is always best to buy a stock regardless of its current price. Likewise, it is best to sell a stock without worrying about the price. An investor should want to be in the stock or out of it. Whether it is selling for 53, 53 1/2, or 54 makes little difference. The buyer wants the stock because he thinks it is going to go to 100; the seller wants out of it because he believes it is going to fall to 25. Yet, many people are so enamored of trying to fine-tune the prices at which they are willing to buy or sell, that they miss the bigger picture. The trading mentality that strives to squeeze the last quarter or the last half, or even the last point in the marketplace is, at best, myopic.

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