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The unique NetWorth Radio broadcast delves deep into the most important headlines and the actual meaning for investors. Interviews with nationally acclaimed authors and Dallas business leaders bring to life investment strategy in a unique and exciting format. The author of two books and 31 investment articles, Spencer is a Certified Investment Management Analyst who manages portfolios for successful families.

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  2. Extraordinary Popular Delusions and, The Madness of Crowds

Extraordinary Popular Delusions and, The Madness of Crowds

Mar 6, 2015

 

Click here for this week's charts.

 

In 1841, Scotsman Charles Mackey published a rather large set of stories about mass hysterias that ended badly. Overpaying for tulip bulbs in Holland’s Tulipmania climaxed with an entire estates being paid for a single rare tulip bulb.  Today’s program honors both Charles Mackey and Adam Smith by carefully examining where investors are overpaying relative to their return targets, and how this year’s planning calendar could provide bargain opportunities as a result. Traditional portfolio construction, by definition, is “diversifying” into investments that reasonable investors would not rationally select. In fact, allocations at 100 time earnings accept a forward return of 1%. Take the high flying shale revolution company that spiked from $20 to over $200, still about $160 with projected earnings consensus now 1.14. Earnings yield below 1%? In deflation Treasury inflation protected securities, TIPS, actually shrink in principal. With an imbedded yield of under 1%, these securities earn an allocation in bond indexes. The 30 year US Treasury is now priced to yield 2.71%. Managers accept premium prices and duration risk of about 20% for every 1% increase in long rates. Index allocation models routinely commit to investments that simply do not make sense. DELUSIONS OF STOCK INVESTORS? Paying 100 times earnings is usually a bad idea because the earnings yield is, by definition, 1% plus or minus growth. Powershares QQQ Trust Series 1 (QQQ US)

- Graph courtesy of Bloomberg L.P.

BOND INVESTOR MADNESS? 1% is not 7%. You may be “out of the market” yet committed to effectively lose money after fees. S&P 10 Year US TIPS Index Avg Yield (SPBDU1SY) 

- Graph courtesy of Bloomberg L.P.

POPULAR ENERGY INVESTMENTS? Buying last year’s winners cheaper, may not be cheap enough. Fundamental deterioration does not reverse instantly. Oil is less than ½ the price of mid 2014. The companies in this space have tremendous downside. “THE PRICE OF OIL IS ABOUT TO BLOW A HOLE IN CORPORATE ACCOUNTING”

The Price of Oil Is About to Blow a Hole in Corporate Accounting

What to do?

Those about you may have lost their heads, but Sir John Templeton provided clear guidance on process: A plethora of good ideas can crowd out the weaker ones.

“All of us, whether or not we are warriors, have a cubic centimeter of chance that pops out in front of our eyes from time to time. The difference between an average man and a warrior is that the warrior is aware of this, and one of his tasks is to be alert, deliberately waiting, so that when his cubic centimeter pops out he has the necessary speed, the prowess, to pick it up.”

- Carlos Castaneda

 

Asset Class Discussions

Potential Bargains Between Now and Year End: more details here

  • Emerging market bonds
  • Preferred Income
  • Discounted corporate bonds
  • Real Estate Investment Trusts
  • Floating Rate Loans
  • Investment Grade Bonds
 

Adam Smith Quotes for Washington

On government… It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense… They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will. The Wealth Of Nations, Book II, Chapter III, p.346, para. 36. The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

 

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