In running a very tight stock screen recently for value plays Burlington Northern Santa Fe (NYSE: BNI) showed up on a list of 14 stocks. Interestingly all the large railroad stocks did. This reminded me of several stories I have done on the subject, the most recent being Chasing Value: Watch BNI -- the heck with Citigroup.

To summarize, about six weeks ago a Citigroup (NYSE: C) analyst declared it was time to sell the stock when BNI was trading in the mid $60s -- I said investors should do the opposite, it was a great value. Friday the stock closed at $76.98. Even at this price it is a value and ever more so with oil prices steadly creeping up.

Continue reading Sunday Funnies: Economics -- art or science

Sunday Funnies: Economics -- art or science originally appeared on BloggingStocks on Sun, 07 Jun 2009 18:10:00 EST. Please see our terms for use of feeds.

I don't mean to pile on. I know looking at your 401(k) statement is so painful these days many employees don't bother to open it.

History tells us that markets recover over time. Your 401(k) will increase in value, but it will still be far short of what you will need to retire. Why?

Because of hidden costs that enrich 401(k) providers. These costs are totally unnecessary and could be easily eliminated if only your employer cared enough to do the right thing. Most don't.

There is no end of research indicating that index funds outperform funds that try to "beat the markets." I call these funds "hyperactively managed funds." Index funds are also far less expensive.

While "less expensive" is good for employees, it is bad for brokers and advisors to these plans because it deprives them of excessive fees. The porky pig fees in most 401(k) plans include undisclosed trading costs, the payment of excessive brokerage commissions, the practice of subsidizing record-keeping services with high fund management fees and the payment of marketing fees for selling the high-cost funds in the plan, among many others.

Continue reading You can add 30% to the value of your 401(k) plan regardless of the market

You can add 30% to the value of your 401(k) plan regardless of the market originally appeared on BloggingStocks on Sun, 14 Dec 2008 12:10:00 EST. Please see our terms for use of feeds.

Continue reading Amazing but true: Google vs S&P 500

Amazing but true: Google vs S&P 500 originally appeared on BloggingStocks on Wed, 26 Nov 2008 14:20:00 EST. Please see our terms for use of feeds.

1. Get Your "Sleep-At-Night" Allocations Right. The most important investment decision we make is what percentage of our nest egg to put into cash and bonds.

Everyone today wishes they'd put 100% of their money in cash or bonds. But bond investors shouldn't sleep as well as they think -- the protection comes at a very high price. Bonds provide the lowest rate of return and over the years. Inflation eats away a lot of the value of the monthly income. From 1925 through 2003, U.S. bonds only appreciated 5.4% per year, or 61 times, while stocks appreciated nearly 10.4% per year, or 8,000 times.

Stocks are volatile, but over long periods you get paid for the sleepless nights. You just need the time to wait out these markets. Money you need for the next five years should be in bonds or cash. The panicked sellers didn't get these allocations right. If you're 50 years old and lamenting over the equity values in your 401K, remember, you're not allowed to touch it for 10 years anyway. That's a long time!

Continue reading Three main lessons from the Crash of '08

Three main lessons from the Crash of '08 originally appeared on BloggingStocks on Sat, 18 Oct 2008 13:42:00 EST. Please see our terms for use of feeds.

Continue reading Dumb Money Move No. 5: Buy some stocks that have fallen dramatically in price

Dumb Money Move No. 5: Buy some stocks that have fallen dramatically in price originally appeared on BloggingStocks on Thu, 07 Aug 2008 13:30:00 EST. Please see our terms for use of feeds.

Continue reading Naked Truth Investing: Deferred annuities: Your best interests are deferred--forever!

Naked Truth Investing: Deferred annuities: Your best interests are deferred--forever! originally appeared on BloggingStocks on Mon, 16 Jun 2008 15:31:00 EST. Please see our terms for use of feeds.

Market gurus like Jim Cramer preach the benefits of broad diversification, something I think is good for investors too: if your goal is to produce returns approximately equal to the market averages. In other words, if you believe in diversification, buy an index fund. If you don't want to simply buy and hold index funds, broad diversification is unlikely to make sense for you.

I recently found a good summary of why combining diversification with stock-picking is a bad idea from an unlikely source: Michael Konik's The Smart Money, a book about an elite sports bettor who gambles hundreds of thousands a day on football -- and wins. Here, he explains why the elite gamblers don't bet on more than a few games each week:

I'm sober enough about the difficulty of betting sports to realize that gambling on seven pro games in one weekend is the sign of a sucker. The linemakers just don't make that many mistakes on NFL football, where all the information is widely known to everyone in the universe.

It would be impossible to sum up the problem with diversification in the stock market any better. Generating greater returns without taking greater risk requires the investor to spot instances of market inefficiency -- the stock market equivalent of the linemakers making a mistake. And even the best investors in the world can't find enough market inefficiency to earn exceptional returns while owning a lot of stocks.

The perils of diversification: A lesson from the sports betting experts originally appeared on BloggingStocks on Sun, 24 Feb 2008 12:10:00 EST. Please see our terms for use of feeds.

Continue reading Patient investing versus (over) active investing

Patient investing versus (over) active investing originally appeared on BloggingStocks on Tue, 05 Feb 2008 07:30:00 EST. Please see our terms for use of feeds.

A piece in The New York Times look at the increasing willingness of investors to get creative with their IRAs. Consider this amusing example:

BRIAN HARRIS makes a 30 percent annual return on his Roth individual retirement account, but his money is not invested in a soaring biotechnology stock or a hot currency fund.

Instead, Mr. Harris, a music teacher from Tucson, owns about 25 marimbas, xylophones and timpani. Using the money in his retirement account, Mr. Harris buys the instruments for less than $1,000 each. He then rents them to his students for up to $60 a month. The rental income flows straight back into the I.R.A.

Hmm .... While that sounds tempting, there are ample reasons for most investors to avoid these self-directed IRAs. For starters, you're unlikely to be able to achieve much diversification owning traditional real estate or similar assets in an IRA -- If you want real estate exposure, go with a portfolio of REITs. The idea of investing in racehorses through an IRA seems insane. This is supposed to be your retirement money!

The best bet for an IRA remains low-cost index mutual funds. There are plenty of places for more speculative and creative investments -- the IRA isn't one of them. In addition, unless you have a ton of money in your IRA, the transaction costs of alternative investment will probably be prohibitively high.

Should you get creative with your IRA? originally appeared on BloggingStocks on Sun, 21 Oct 2007 08:40:00 EST. Please see our terms for use of feeds.

In the most recent issue of Money, Walter Updegrave answers a reader's question about whether, given the prevalence of low-cost market-tracking index funds, a financial adviser is really necessary.

Good question! Updegrave explains the benefits that a financial advisor can provide: How much do you need to save? Which index funds should you buy? What about rebalancing?

He's not wrong about any of these ideas, but the reality is that, if your retirement savings are as paltry as most Americans, the benefits of paying a fee-only financial advisor (the only kind you should work with) are likely to be completely our of proportion with the benefits.

If you have $5,000 to invest and spend even $100 on a financial advisor, that's the equivalent of a 2% front-load. That can be pretty hard to overcome, and it's unlikely that a financial advisor will provide enough benefit to make it preferable to going it alone after doing your own research.

If you're a young worker just getting started on the whole idea of retirement planning, a financial advisor is probably a luxury that doesn't make any sense.

Here are some great books that you can get at the library that should make up for it: Yes, You Can Get a Financial Life!, The Only Investment Guide You'll Ever Need, and The Money Book for the Young, Fabulous, and Broke.

With index funds, do you need a financial advisor? originally appeared on BloggingStocks on Sun, 30 Sep 2007 11:10:00 EST. Please see our terms for use of feeds.

Few professional money managers have had the success Peter Lynch has had. The former Fidelity manager of the widely-held Magellan mutual fund racked up great returns year after year in his tenure at Fidelity. After he retired in the 1990s, Lynch wrote a few books (which are worthy reads, I might add), and aimed them at the "everyman" of investing: the normal American consumer (hopefully, investor).

Along with Vanguard founder John Bogle, Lynch is someone I've followed for some time, and following much of what he said has, well, done right by me. But, after having talked with many a business associate and family member in the past year -- as the market has swayed to and fro -- few of them follow Lynch's investing strategy. That is, if they have an investing strategy at all beyond pumping 0.5% into that 401k and putting 50% of their portfolios into their employer's stock. Yikes!

The average mutual fund is a dog and laggard, yet salespeople rope everyday people into these expensive funds by the boatload. Bogle would have said, "just buy index funds and be done with it." Lynch would have said, "check the price-to-earnings ratio, make an informed choice, and be done with it." Both are exemplary ways to examine and adjust your portfolio.

Does it take some self-education? Sure it does -- but hey, it's only your money, right? Why would anyone pay an underperforming fund manager when buying a no-cost index fund produces better returns? Yes, in many cases the situation is a bit more complex than that, and tax rules and holding periods (among other things) come into play. Still, do you invest like Peter Lynch did? If not, why?

Do you invest like Peter Lynch did? Maybe you should! originally appeared on BloggingStocks on Sat, 22 Sep 2007 08:40:00 EST. Please see our terms for use of feeds.

This is the retirement disaster that won't get much media coverage: A study conducted by researchers at the University of Illinois at Urbana-Champaign and the Federal Reserve Board shows (subscription required) that employers are increasingly turning toward pricey actively-managed mutual funds for their 401(k) plans rather than lower cost, better-performing index funds.

Only 11% of U.S. stock funds added to 401(k) plans between 1998 and 2002 were index funds. This in spite of the fact that there are volumes and volumes and volumes of research showing that buying actively managed mutual funds is just not a very good idea. For more on this, please read A Random Walk Down Wall Street and The Little Book of Common-Sense Investing.

The problem isn't just the employers and managers/brokers, who should be beaten if they're not offering index funds. According to The Journal, "A recent survey by Vanguard of plans for which that firm provides record-keeping services found that, though nearly all participants were offered a U.S.-stock index fund, only half invested in it."

Yikes. This latest bit of news is evidence of two things: 1.) Many investors really don't know how to invest for their retirement and 2.) The people who are supposed to be helping aren't making it much easier.

401(k)s don't offer index funds: Where is the outrage? originally appeared on BloggingStocks on Tue, 18 Sep 2007 18:15:00 EST. Please see our terms for use of feeds.

This post is part of our Money Face-Offs feature. Let us know who you think comes out ahead in this head-to-head match-up, and check out our other Money Face-Off posts.

If you're into no-cost investing, you've probably heard the name John Bogle before. The founder of the world's most populated mutual fund company, Vanguard Group, Inc., is completely synonymous with the premise of low- to no-cost investing. To the average joe, that means index funds that track whatever index suits your investment tolerance and pocketbook. Bogle has been a fierce critic of the mutual fund industry (along with me), which charges huge sales loads for minimal performance metrics if you were to average out the thousands of them.

Bogle loves to posit this: Who's getting rich from mutual funds? Those who manage them, but hardly anyone else. Bogle continues to burn the active mutual fund industry on the basis of costs alone. He's probably the largest proponent of investor performance there is, even though he is no longer at the helm of Vanguard. Suggested reading for starters: Bogle on Mutual Funds. There are many other fine selections as well.

Continue reading Money Face-Off: John Bogle vs. Peter Lynch

Money Face-Off: John Bogle vs. Peter Lynch originally appeared on BloggingStocks on Sat, 15 Sep 2007 08:10:00 EST. Please see our terms for use of feeds.

Enhanced index funds struggling: a sign of things to come? originally appeared on BloggingStocks on Thu, 13 Sep 2007 17:02:00 EST. Please see our terms for use of feeds.

"Fed Chair" James Cramer enjoyed taking credit for yesterday's announcement that the Fed had eased its Discount Rate. But today's Barron's takes him to task for trying to keep Mad Money viewers from measuring the extent to which his stock picks underperform the market indices.

Cramer has accomplished many things. He managed a hedge fund, started TheStreet.com (NASDAQ: TSCM) which survived the dot-com bust, he writes columns for New York magazine, and he provides a unique blend of entertainment and stock touting on CNBC.

But Barron's analysis of his stock picks over the last two years suggests that you would have been better off buying a low-cost stock index fund. Barron's cites an analysis by YourMoneyWatch.com that analyzed his stock picks between 7/28/05 and 8/17/07 -- finding that Cramer's picks lagged the general market averages. Specifically, his picks were up 12%, the Dow Jones Industrials Average rose 22%, the S&P 500 gained 16% and the NASDAQ was up 14%.

Continue reading Fed Chair Cramer's stock pix lag the market

Fed Chair Cramer's stock pix lag the market originally appeared on BloggingStocks on Sat, 18 Aug 2007 08:45:00 EST. Please see our terms for use of feeds.

The Dow Jones Industrial Average fell a long way today dropping 387 points and we can all look forward to reading and hearing why in the coming hours. For me, I preach calm. Either you have developed an investment style and portfolio that allows you to rest easy and stay calm over major market hurdles or you are worried silly. If you are worried silly then I still preach calm...of a different sort. You should calmly transform your portfolio to one that does allow you to find peace in down markets. For the calm seekers:

• More cash - less leverage
• Industry (sector) diversification - not specialization
• Large companies paying dividends - not small caps paying nothing
• Index funds - not developing market funds
• Dow Utilities over Dow Industrials
• Time in the market - not timing the market

What would you add to the list to get through difficult markets? What gives you peace, when all around you seems to be behaving badly? Have you made changes or adjustments in your portfolio over the past few months? What were they? Time to share, because this market is going through some real growing pains and your experience and wisdom might help someone. Perhaps some milk and cookies might help.

Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well - INCLUDING ANY BAD CALLS.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.

Dow down 387 - still preaching calm and change originally appeared on BloggingStocks on Thu, 09 Aug 2007 17:30:00 EST. Please see our terms for use of feeds.

SEC Chairman Chris Cox called on the mutual fund industry to join him in the "war on complexity." Cox discussed the difficulties that investors have in comparing mutual funds using the SEC's Edgar Database. He also called for more disclosures about 401(k) fees and performance, saying that "We will continue to purge all the legalese and convert it to plain English. But getting rid of the gobbledygook is no easy task. But we want to give every investor the info to achieve sound investment decisions."

I'm highly skeptical about the odds of mutual funds making it easier for investors to compare expenses and performance because, if they did, most people wouldn't buy most mutual funds. If people had a solid understanding of mutual funds and the factors impacting their performance, pretty much everyone would buy the lowest cost index fund they could find. Needless to say, that wouldn't be good news for most investment management companies.

However, instead of complex disclosures and spreadsheets that 99% of individual investors really don't care about, I have a plan. Every mailing/advertisement/prospectus discussing a mutual fund should be required to contain a red piece of paper with the following:

DEAR INVESTOR:

Most likely, the mutual fund that is soliciting your business brags about its track record and its management team's expertise. As an investor, there's something you need to know: None of that matters.

Past performance, Ivy League credentials, and colorful promotional literature have very little impact on a fund's future performance. Here's what matters: The expense ratio. By keeping your costs as low as possible, you will beat more than 80% of actively managed funds.

Investment legends including Warren Buffett, John Bogle, and Burton Malkiel (to say nothing of Ben Stein and Suze Orman) have all said that most investors should stick with passively managed, low-cost index mutual funds. If the fund being advertised here does not fit that description, we strongly advise you to toss the mailing into your recycling bin.

Best of luck in your pursuit of wealth.

Your Friends at the Securities and Exchange Commission

SEC wants to make mutual funds easier to understand originally appeared on BloggingStocks on Fri, 11 May 2007 17:30:00 EST. Please see our terms for use of feeds.

When Warren Buffett talks, investors should listen -- especially when what he says echoes the sentiments of other investing legends like John Bogle and Burton Malkiel, as well as vast reams of academic research: If you try to pick stocks or mutual funds, you will probably not beat the market, especially after expenses. Therefore, your best bet for the long-term is low cost index funds, which are designed to track the performance of indices, such as the Dow or the Wilshire 5000.

At the Berkshire Hathaway (NYSE: BRK.A) annual meeting, Warren Buffet once again expressed his support for passive investing, saying that "A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money...The gross performance may be reasonably decent, but the fees will eat up a significant percentage of the returns," he said. "You'll pay lots of fees to people who do well, and lots of fees to people who do not do so well." He even conceded that he would be "amazed" if Berkshire Hathaway's portfolio outperforms the S&P 500 by more than few points, given its size.

I agree wholeheartedly with Buffett's ideas. There is simply no reason for most investors to buy actively managed mutual funds. On a governance level, his statement about paying lots of fees to managers who don't perform well may strike at the root of the mutual fund problem: They are compensated for gathering assets, not performing well. Given a choice between staying small and doing well or growing large and doing not so well, the choice is obvious for most fund managers: Grow big because the expense ratio is based on assets under management rather than earnings.

The compensation system makes no sense: Why should someone be paid more for underperforming with 100 million in assets than outperforming with 50 million in assets? But until that changes, mutual funds will continue to focus on asset gathering at the expense of shareholder returns. And that's one good reason to stick with index funds.

Buffett: Buy index funds originally appeared on BloggingStocks on Mon, 07 May 2007 17:09:00 EST. Please see our terms for use of feeds.

Invest in mutual funds or the lottery? originally appeared on BloggingStocks on Wed, 02 May 2007 17:27:00 EST. Please see our terms for use of feeds.

This weekend's Wall Street Journal (subscription required) discussed the Oracle of Omaha's quest to find his successor as Chief Investment Officer of Berkshire Hathaway (NYSE: BRK.A). Buffett joked that they will run the search "like American Idol" and said that he will be looking for someone who already knows how to do it, not an "apprentice."

Here's one of the most interesting tidbits: Warren Buffett says that he isn't impressed by titles and diplomas, and that a college education is not a requirement for the job. Here's what he's looking for: "independent thinking, emotional stability, and a keen understanding of both human and institutional behavior."

If that sounds like you, the rewards could be quite nice: Around 10% of the manager's earnings above that achieved by the S&P 500. But here's the thing: How likely is it that someone will be able to do that? In a 1996 letter to shareholders, Buffett wrote: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."

While Buffett has delivered admirable results, I would argue that there can be no assurance his successor will be able to do the same. Given the size of Berkshire's portfolio, he may be better off putting the money in index funds after he retires. Buffett is one in 6.5 billion, and I doubt his successor will be another Warren Buffett.

Warren Buffett's successor will be no Warren Buffett originally appeared on BloggingStocks on Sun, 29 Apr 2007 09:10:00 EST. Please see our terms for use of feeds.