While prices are rising, investors need to maximize their gains. When prices turn down, investors need to minimize their losses. The problem many investors face is worrying about a bear market during the bull market. Worries can be stopped by switching to cash, but then investors miss gains, and failing to take advantage of market gains destroys potential wealth. We do believe that it is OK to worry about the state of the market. However, we don’t believe it is OK to act on those worries without a plan. Investment actions should be based on plans that react to the… Read More

While prices are rising, investors need to maximize their gains. When prices turn down, investors need to minimize their losses. The problem many investors face is worrying about a bear market during the bull market. Worries can be stopped by switching to cash, but then investors miss gains, and failing to take advantage of market gains destroys potential wealth. We do believe that it is OK to worry about the state of the market. However, we don’t believe it is OK to act on those worries without a plan. Investment actions should be based on plans that react to the market, and the 10-month moving average (MA) is the simplest way we know to do this. Before we explain why, this chart of the SPDR S&P 500 ETF (NYSE: SPY) can help highlight the importance of this indicator. The 10-month MA is widely followed. Some investors dismiss the idea as simple, but we have found that simple strategies often work well in the markets. Rather than focusing on difficulty or simplicity, investors should develop a plan and follow that plan with discipline.#-ad_banner-# One problem with the 10-month MA can be seen in 2009. The buy signal came late. Read More

When he buys a stock, Warren Buffett places more emphasis on one factor above almost any other. Since 1986 he has mentioned this single trait more than 20 times in his annual shareholder letters. He calls it “essential for sustained success.” However, you won’t find it listed on a company’s balance sheet. Its value doesn’t rise and fall with the market. And even if a company reports great earnings, the worth of this one advantage still can’t be calculated. #-ad_banner-# But that doesn’t keep it from being a company’s most valuable possession. Take the nasty bear market of 2008 and… Read More

When he buys a stock, Warren Buffett places more emphasis on one factor above almost any other. Since 1986 he has mentioned this single trait more than 20 times in his annual shareholder letters. He calls it “essential for sustained success.” However, you won’t find it listed on a company’s balance sheet. Its value doesn’t rise and fall with the market. And even if a company reports great earnings, the worth of this one advantage still can’t be calculated. #-ad_banner-# But that doesn’t keep it from being a company’s most valuable possession. Take the nasty bear market of 2008 and 2009. From its peak to trough, the S&P lost more than 55%. No investment completely avoided the downfall. Well, almost no investment. Of the 500 stocks in the S&P, only nine made money during that period. Of those nine stocks, six of them (two-thirds) had this advantage. But this advantage also helps these stocks beat the market in uptrends, too. After all, Buffett has made billions thanks to companies with this trait. So what single advantage can capture the attention of Warren Buffett… help a stock beat the market in an uptrend… and help it fall less in a downtrend?… Read More

Last week, stock prices reacted to the news. Stock picking could become more important as the market reaches new highs, and one technical indicator could be helpful to traders looking to avoid downside surprises. It Is Becoming a Market of Stocks Fed chair nominee Janet Yellen confirmed that quantitative easing and low interest rates should continue for the foreseeable future. Traders seem to believe this is good news, and SPDR S&P 500 (NYSE: SPY) gained 1.56% last week.#-ad_banner-# The ETF has now closed up six weeks in a row. SPY has had a winning streak of this length 15… Read More

Last week, stock prices reacted to the news. Stock picking could become more important as the market reaches new highs, and one technical indicator could be helpful to traders looking to avoid downside surprises. It Is Becoming a Market of Stocks Fed chair nominee Janet Yellen confirmed that quantitative easing and low interest rates should continue for the foreseeable future. Traders seem to believe this is good news, and SPDR S&P 500 (NYSE: SPY) gained 1.56% last week.#-ad_banner-# The ETF has now closed up six weeks in a row. SPY has had a winning streak of this length 15 times in the past 20 years. In the short term, this winning streak offers us little information. The next week closed up seven times and lower eight times. Longer term, SPY was up six months later 80% of the time. The winning streak is interesting, but in the long run, stock prices are driven by earnings, and the trend in earnings is likely to determine whether prices are higher or lower six months from now. Earnings season came to an unofficial end when Wal-Mart (NYSE: WMT) reported last week. On this front, the results were mixed. Among the large-cap stocks… Read More

The Great Depression is an era few of us would choose to revisit. Though the economy isn’t especially perky these days, key measures of joblessness, poverty and hunger are nowhere near the levels seen back in the 1930s.#-ad_banner-# But by one key measure, the economy is actually in worse shape. From 1930 until 1933, the U.S. economy grew less than 3% each year. That was the longest such streak of the 20th century — and we’ve already broken it in the 21st century. We’re on pace for a sixth straight year of sub-3% GDP growth, and signs are pointing continued… Read More

The Great Depression is an era few of us would choose to revisit. Though the economy isn’t especially perky these days, key measures of joblessness, poverty and hunger are nowhere near the levels seen back in the 1930s.#-ad_banner-# But by one key measure, the economy is actually in worse shape. From 1930 until 1933, the U.S. economy grew less than 3% each year. That was the longest such streak of the 20th century — and we’ve already broken it in the 21st century. We’re on pace for a sixth straight year of sub-3% GDP growth, and signs are pointing continued anemic growth in the years ahead (which I’ll expand upon in a moment). Frankly, anything near 3% GDP growth would be welcome. We appear to have approached that level in the third quarter, hitting 2.8%. But almost a full percentage point of that was due to a buildup in inventories, and such gains tend to reverse in the following quarter. Translation: Get ready for 2% GDP growth — at best — in the fourth quarter. The recent government shutdown means we may end up closer to 1.5%. Of course the stock market seems to be simply ignoring the economic travails. Read More

With stocks continuing to deliver gains week after week, the question is: Which ones should be the strongest over the short term? According to the charts, tech stocks might have an edge. Economic News Keeps Fed on Hold SPDR S&P 500 (NYSE: SPY) gained 0.61% last week, closing higher for the fifth week in a row. The gain was due to a 1.35% rally on Friday that reversed losses for the week.#-ad_banner-# SPY has now closed higher in 16 of the past 22 days (73%) since bottoming in early October. This is an unusually strong market. Over the past… Read More

With stocks continuing to deliver gains week after week, the question is: Which ones should be the strongest over the short term? According to the charts, tech stocks might have an edge. Economic News Keeps Fed on Hold SPDR S&P 500 (NYSE: SPY) gained 0.61% last week, closing higher for the fifth week in a row. The gain was due to a 1.35% rally on Friday that reversed losses for the week.#-ad_banner-# SPY has now closed higher in 16 of the past 22 days (73%) since bottoming in early October. This is an unusually strong market. Over the past 1,000 trading days, there has been an average of 12 up closes over 22 days (54.5%). Strength in the stock market is often followed by more strength, and I expect to see more gains in the stock market in the next few weeks. Friday’s gains could show that traders are getting comfortable with economic growth. GDP could grow as it did in the third quarter while unemployment remains high, a combination that should keep Fed policy on hold. This is bullish for the stock market. Friday’s reversal came after GDP beat expectations and stock prices fell on Thursday. On Friday,… Read More

In the go-go days of 1999, Warren Buffett grew very concerned. Not because his value style of investing had grown unpopular, but because investors were becoming delusional in their zeal for further gains.#-ad_banner-# In a speech he made to friends, as recounted in a 1999 article in Fortune magazine (that was published just a few months before the market peaked and then plunged), Buffett warned that “once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to… Read More

In the go-go days of 1999, Warren Buffett grew very concerned. Not because his value style of investing had grown unpopular, but because investors were becoming delusional in their zeal for further gains.#-ad_banner-# In a speech he made to friends, as recounted in a 1999 article in Fortune magazine (that was published just a few months before the market peaked and then plunged), Buffett warned that “once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks.” A simple test of how much stocks were loved: The aggregate value of the largest 5,000 U.S. companies (as measured by the Wilshire 5000) exceeded the GNP of the U.S. economy. In fact, a market melt-up took this ratio up to 150% by early 2000 (meaning the Wilshire 5000 was 50% larger than the U.S. economy), which set the stage for one of the most painful corrections ever for investors. This ratio eventually dipped well below 100%, which for Buffett, has… Read More

Muddy Waters Research is an investment research firm that specializes in uncovering companies whose financial statements are inflated by questionable accounting practices. The firm was in the news again when it initiated coverage on NQ Mobile (NYSE: NQ), a company that provides software and services for mobile device users. Although NQ claims to have customers all around the world, the company is headquartered in China, and most of its revenue is generated in that country.#-ad_banner-# NQ was one of the biggest gainers a week before the negative research report, but the stock price fell by more than 50% within hours… Read More

Muddy Waters Research is an investment research firm that specializes in uncovering companies whose financial statements are inflated by questionable accounting practices. The firm was in the news again when it initiated coverage on NQ Mobile (NYSE: NQ), a company that provides software and services for mobile device users. Although NQ claims to have customers all around the world, the company is headquartered in China, and most of its revenue is generated in that country.#-ad_banner-# NQ was one of the biggest gainers a week before the negative research report, but the stock price fell by more than 50% within hours of the release. According to Muddy Waters’ analysts, NQ’s financial statements are completely fictitious. Their analysis indicates that the company’s sales and assets are overstated. They claim at least 72% of the company’s security revenue from China is fabricated, and the revenue generated in other countries is even “less real.” This means the profits are also overstated. If Muddy Waters is correct, there is no way to determine what NQ actually earns. Creating false financials seems like it should be impossible, but if the allegations are true, NQ fooled at least four Wall Street brokerage firms that rate the stock… Read More

Despite a series of boulders thrown in its path, the market has managed to march steadily higher throughout 2013. The 23% gain for the S&P 500 Index thus far in 2013 is higher than even the most bullish forecasts anticipated. Yet a look at why the market is reaching new heights can give us a clear read into what to expect in the year ahead. The S&P 500 has risen in eight of the past 10 months Here’s a look at five key themes from this year, and what to expect in 2014. 1. The Fed’s long-awaited… Read More

Despite a series of boulders thrown in its path, the market has managed to march steadily higher throughout 2013. The 23% gain for the S&P 500 Index thus far in 2013 is higher than even the most bullish forecasts anticipated. Yet a look at why the market is reaching new heights can give us a clear read into what to expect in the year ahead. The S&P 500 has risen in eight of the past 10 months Here’s a look at five key themes from this year, and what to expect in 2014. 1. The Fed’s long-awaited tapering For the past six months, the Federal Reserve has inched ever closer to ending the massive quantitative easing (QE) program that has pumped $85 billion into the economy every month. The Fed seemed poised for an imminent move in the spring, which led the markets to slump in late May and early June. The fact that Fed decided to wait a bit longer led investors to conclude that it was still safe to buy into a liquidity-fueled market. Few have expressed concern that the Fed’s inaction is the result of an economy that just can’t build… Read More

Derivatives are simply investments that trade based on the price of something else. In other words, the price of a derivative is “derived” from something else. #-ad_banner-# Often that something else is an index, a stock or an exchange-traded fund (ETF). While derivatives can be customized and complex, there are also “plain vanilla” derivatives, and this variety includes ordinary call options and put options on stocks and ETFs. An option is a derivative because the price of the option is based on the price of the underlying stock or ETF. Options give… Read More

Derivatives are simply investments that trade based on the price of something else. In other words, the price of a derivative is “derived” from something else. #-ad_banner-# Often that something else is an index, a stock or an exchange-traded fund (ETF). While derivatives can be customized and complex, there are also “plain vanilla” derivatives, and this variety includes ordinary call options and put options on stocks and ETFs. An option is a derivative because the price of the option is based on the price of the underlying stock or ETF. Options give buyers the right to buy (in the case of a call option) or sell (with puts) a stock or ETF at a predetermined price (the strike price) before the option expires. Options are typically used to leverage a move in an underlying stock or ETF, and they can potentially be used to provide portfolio insurance for individual investors. In order to understand the costs and potential benefits of portfolio insurance, we will use an example. Imagine an investor with an account worth $10,000 invested entirely in the stock market. If the investor believes that stocks are… Read More

The notion of a wide moat around your castle has been around for centuries. The early moats were designed to repel rivals and prevent them from invading and conquering. Today’s moats also keep rivals at bay. Companies that have built a solid moat around their business, limiting the threat of competition and price wars to some degree, tend to garner higher valuations from investors. How do we know that? Because the Market Vectors Wide Moat ETF (NYSE: MOAT) exchange-traded fund (ETF), which debuted in April 2012, is handily outperforming its benchmark, the S&P 500 Index. The question for… Read More

The notion of a wide moat around your castle has been around for centuries. The early moats were designed to repel rivals and prevent them from invading and conquering. Today’s moats also keep rivals at bay. Companies that have built a solid moat around their business, limiting the threat of competition and price wars to some degree, tend to garner higher valuations from investors. How do we know that? Because the Market Vectors Wide Moat ETF (NYSE: MOAT) exchange-traded fund (ETF), which debuted in April 2012, is handily outperforming its benchmark, the S&P 500 Index. The question for investors: Is it better to own this fund, or to try to find your own companies with solid moats? To answer this, let’s first look at how this ETF is constructed. Deep Concentration Unlike many ETFs that own a tiny slice of hundreds of companies, this ETF has a roughly 5% weighting in just 20 companies. In the portfolio, you’ll find household names such as Coca-Cola (NYSE: KO), Cisco Systems (Nasdaq: CSCO), eBay (Nasdaq: EBAY) and Bank of New York (NYSE: BNY). It’s immediately clear why companies like Cisco or eBay get the nod as they possess the products… Read More