I respect the management of Google. They are not tied to conventional ways of thinking. When they bought huge amounts of dark fiber (fiber optic cable that had been laid down in the internet bubble period, but was sitting unused). I figured they had made good investments while the cable was very cheap (pennies on the dollar). I watch with interest as they continue to build their own (with partners) fiber network. I am guessing this may be partially because they are smart enough to know the business oligopolies providing internet infrastructure will try to exploit their positions and government cannot be counted out to play their proper regulatory role, which is required in a capitalist system. And partially due to their huge bandwidth needs and projections for future growth.
And since those oligopolies are not very effective companies (that rely largely on paying politicians, in order to undermine the proper role of government in a capitalist system, to gain government granted monopolist profits). That increases the benefit of Google buying into their own distribution network since excess capacity can likely be sold at a large profit: the competing companies are so used to charging monopoly prices leaving lots of room for profit. The second point can be debated but I don’t think if the economy functioned properly, with intelligently regulated natural monopolies providing internet bandwidth, I doubt Google would invest in this, but, of course, I could be wrong.
About the Unity bandwidth consortium
Google stretching underwater comms cable?
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Meanwhile, ITWeb reports that Google is looking to run a third underwater cable to South Africa.
Related: Monopolies and Oligopolies do not a Free Market Make – Challenges in Laying Internet Fiber Under Oceans – Plugging America’s Broadband Gap – Not Understanding Capitalism
Short selling is when you sell something before you buy it (you try to sell high and then buy low later, instead of buying low and then selling high later). In order to sell short, you are required to borrow the shares that you then sell. So if I own 1,000 shares of Google (I wish), I could lend them to someone to sell. Nothing happens to my position, it is just that those shares are now allocated to that short sale. If I sell them then the short seller has to go borrow them elsewhere or buy the stock to close their position. In general the borrowing is either from brokers that hold shares for individuals or from large institution (mutual funds, insurance companies…).
However from everything that I read it appears the SEC hasn’t bothered to actually enforce this law much. There was a bunch of excitement recently when the SEC announced it would bother to enforce the law to protect a few large banks, many of whom are said to practice naked short selling but didn’t like it when that was done to their stock. As you can see, this does make the SEC look pretty bad, when they chose to enforce a law, not in all circumstances, but only to protect a few of those who actually take advantage of the SEC’s failure to enforce the law to make money.
CEOs Launch Web Site To Protect Short Sellers
Some people find the whole concept of short selling bad since it is based on making money on stock price declines. I don’t feel that way and believe it can help the market. But it requires regulators that actually do their jobs and enforce laws. A favorite tacit of those who seek to keep open special ways for themselves to benefit from abusing the system is to try and make things seem complex. The recent SEC order saying they would enforce the intent of the law to protect a few powerful banks from the behavior many (or most) practice themselves for years shows that it isn’t that complicated.
Adding the decision not to enforce the requirement to borrow shares to their recent decision to eliminate the requirement that short sales take place on down ticks in price (a measure put in after the 1929 stock market crash to not have short sellers accelerate market declines and insight panic seems like a really bad combination).
Related: Shorting Using Inverse Funds – Monopolies and Oligopolies do not a Free Market Make – Fed Continues Wall Street Welfare – SEC data on “failures to deliver”
Today, the market capitalization of Apple exceeded Google for the first time since Google went public. Both Companies are now valued at $185 billion. In 2007 Google had revenue of $16.6 billion and net profit of $4.2 billion. Apple had revenue of $24 billion and net profit of $3.5 billion. Since Google went public on 27 August 2004 their stock price is up 367% and Apple is up 1064% – both pretty good. I own Google and have it as the largest holding in the 12 stocks for 10 years portfolio.
Related: Buy Google – Stop Picking Stocks – Lazy Portfolio Results – Great Google Earnings
The USA stock market has not been doing so well recently (the S&P 500 index is down over 9% so far this year). And I own S&P 500 indexes in my retirement account (in addition to other index funds). So I am losing money on those investments but I am not worried. It is possible the market will do very poorly over the next few months, year… if the economy struggles (and with the huge credit card like spending Washington much of the last 30 years and huge increases in gas prices that is certainly possible). But I am not worried.
I don’t plan on using that money for decades. Therefore the short term declines really have no impact on my life. Sure if I was able to move all that money into a money market fund for the decline and then move it back into stock funds for the increase that would be wonderful. But I can’t and no-one has proven to be able to time the market effectively over the long term. It is unlikely you or I will be the ones that do it right. I wouldn’t be surprised if the market was lower at the end of the year, but I wouldn’t be surprised if it was higher either.
Dollar cost averaging is the best long term strategy (not trying to time the market). And using that strategy, if you assume stocks reach whatever level they do say 20 years from now, I am actually better off will prices falling now – so I can buy more shares now that will reach that final price. You actually are better off with wild swings in stock prices, when you dollar cost average, than if they just went up .8% every single month (if both ended with stocks at the same price 20 years later). Really the wilder the better (the limit is essentially the limit at which the economy was harmed by the wild swings (people deciding they didn’t want to take risk, make investments…) to the point that the final value 20 years later is deflated.
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I originally setup the 10 stocks for 10 years portfolio in April of 2005.
At this time the stocks in the sleep well portfolio in order of returns:
| Stock | Current Return | % of sleep well portfolio now | % of the portfolio if I were buying today | |
|---|---|---|---|---|
| Google – GOOG | 163% | 17% | 14% | |
| Amazon – AMZN | 124% | 7% | 7% | |
| PetroChina – PTR | 114% | 7% | 7% | |
| Templeton Dragon Fund – TDF | 90% | 10% | 10% | |
| Templeton Emerging Market Fund – EMF | 47% | 4% | 4% | |
| Cisco – CSCO | 42% | 7% | 8% | |
| Toyota – TM | 38% | 10% | 11% | |
| Tesco – TSCDY | 9% | 0% | 10% | |
| Intel – INTC | 3% | 5% | 6% | |
| Danaher – DHR | 1% | 5% | 8% | |
| Pfizer – PFE | -29% | 4% | 6% | |
| Dell | -30% | 7% | 6% |
At this point I am most positive on Google, Toyota, Templeton Dragon Fund and Tesco. I am wary of Dell – they seem to be moving in the wrong direction, but I am willing to give them longer to improve. I am even more wary of Prizer but again willing to stick with them for the long term. I will be looking for a suitable replacement.
In order to track performance I setup a marketocracy portfolio but had to make some minor adjustments. The current marketocracy calculated annualized rate or return (which excludes Tesco) is 9.8% (the S&P 500 annualized return for the period is 7.9%) – marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that the return is about 10.8%). View the current marketocracy Sleep Well portfolio page.
Related: 12 Stocks for 10 Years Update (Feb 2008) – Retirement Account Allocations for Someone Under 40 – Lazy Portfolio Results
Every year at the Berkshire Hathaway Warren Buffett and Charlie Munger provide great insights on investing and the economy. Here are some thought from today – Buffett to investors: Think small
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“Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies
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Asked what’s in store for the economy, Buffett said he doesn’t have a clue and doesn’t care. “I haven’t the faintest idea,” he said. “We never talk about it, it never comes up in our board meetings or other discussions. We’re not in that business [of economic forecasting], we don’t know how to be in that business. If we knew where the economy was going, we’d do nothing but play the S&P futures market.”
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In terms of the [chief] investment officer, the board has four names, any one or all of whom would be good at my job. They all are happy where they are now [working outside of Berkshire], but any would be here tomorrow if I died tonight, they all are reasonably young, and compensation would not be a big factor…. There will be no gap after my death in terms of having someone manage the money.
Related: Live From Omaha 2007 – Buffett’s 2008 Letter to Shareholders – 2005 annual meeting with Buffett and Munger – Why Investing is Safer Overseas
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Lazy Portfolios update by Paul Farrell provides some examples of how to use index funds to manage your investments:
I think the article is a bit misleading in showing the out-performance of the S&P 500 index (during periods where the S&P 500 index does very well these portfolios will under-perform it). The out-performance shown in the article is largely due to the great performance of international markets recently. Still the strategy is well worth reading about. The strategy is based on using index funds from Vanguard (very well run mutual funds with very low fees). But don’t get tied into Vanguard, if they start to focus on lining their pockets by increasing your fees look for alternatives.
Overall, I give this concept high marks. Dollar cost average appropriate levels of money into such a strategy and you will give yourself a good chance at positive results.
My preference would be to include significant levels of international and developing stocks. For aggressive long term investing I like something like:
40% USA total stock market
15% Real Estate
25% international developed stock market index
20% developing stock market index
When aiming for more security and preserving capital (over growth) I favor something like:
30% USA total stock market
10% Real Estate
25% international developed stock market index
10% developing stock market index
10% short term bond index
15% money market
Of course all sorts of personal financial factors need to be considered for any specific person’s allocations.
Related: Allocating Retirement Account Assets – Why Investing is Safer Overseas – Saving for Retirement – 12 stocks for 10 years – what is a mutual fund?
For those that don’t find picking stocks fun it is nice to know that just investing in indexes is likely the best option for almost everyone. I have much of my retirement assets invested in index funds. I still think I can beat the market (though the results of the last few months have not been kind) but the amount I invest in individual stocks is not a huge percentage of my portfolio. I still like Google, for example, and in fact might well be buying more this week (it is down over 10% since I added to my position a couple weeks ago). Can You Beat the Market? It’s a $100 Billion Question
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From 1986 to 2006, according to his calculations, the proportion of the aggregate market cap that is invested in index funds more than doubled, to 17.9 percent. As a result, the negative-sum game played by active investors has grown ever more negative.
The bottom line is this: The best course for the average investor is to buy and hold an index fund for the long term. Even if you think you have compelling reasons to believe a particular trade could beat the market, the odds are still probably against you.
Interesting. I am surprised by the rapid increase in the total expense of trying to beat the market. I guess all those wall street bonuses add up. In my opinion the article does not provide adequate support the claims made, but I think overall the claim are sensible (based on numerous studies of results). The odds of beating the market yourself are very low. And the odds of paying the right people to beat the market for you are likely not worth the cost (in the market today).
Related: Advice from Warren Buffett – Stop Picking Stocks? – 12 Stocks for 10 Years Update – Feb 2008
As usual, Warren Buffett’s letter to shareholders is packed with wisdom. Berkshire Hathaway 2007 Letter to Shareholders:
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This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s financial statements, employing no advisors and engaging in no nit-picking. I knew that the business would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed entirely. With the Pritzkers, as with Berkshire, a deal is a deal.
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Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock market purchases….
A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.
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Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the business, and she loves her associates. That beats having an MBA degree any time. (An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.
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I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year.
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You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run.
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The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar.
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What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost until long after they retire.
A must read for all investors.
Related: Buffett Letter to Shareholders (from last year) – Live From Omaha (2007) – Overview of Warren Buffett
I bought some more Google yesterday. Google has fallen from almost $750 a share to $450 a share. Now before some people get excited about how bad that is: until about 18 months ago Google had never been as high as $450 a share. Anyway, I think at this price it is a great long term buy. Time will tell whether I was wise or foolish. FYI, $450 is over 100% above my original purchase price a few years ago. I am happy it has fallen and given me this opportunity to purchase more.
Related: 12 Stocks for 10 Years Update (Feb 2008) – Is Google Overpriced? – Great Google Earnings (April 2007) – Stop Picking Stocks – post on our management blog on Google