Should I Buy and Hold? November 6, 2009
Posted by shaferfinancial in Finance, Uncategorized.Tags: buy and hold strategy
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Check this out. Pretty Funny.
You all should know where I stand on this buy-and-hold idea!
Warren Buys a Railroad November 5, 2009
Posted by shaferfinancial in Finance.Tags: Berkshire Hathaway, Buffett buys a railroad
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Warren Buffett bought the balance of Burlington Northern Railroad [78%] this week. As usual there is much chatter, most of it negative about the latest Berkshire move. But the truth is this is classic Buffett. He bought a well managed business, for a fair price. Now much is made of his 30% above market price, but this is from people who have never bought a local business, let alone a $34 Billion business.
Does anyone out there think that railroads are suddenly going to stop being the transportation of choice for coal? Or stop moving product around the country? Does anyone think that trucking will be able to compete with the price of diesel where it is at or where it is going? Consider the railroad is profitable in a recession, how much cash flow will it produce as the economy heats up?
Just another reason to believe that Berkshire Hathaway will continue to double the returns of the S & P 500 Index.
Now, the other move was that it is splitting the B shares 50 to 1. I am agnostic about this, but this move probably results in Berkshire being included in the S & P 500 index in the future. So all those index mutual fund investors can get some of those superior returns!
More Commentary on Berkshire Hathaway October 30, 2009
Posted by shaferfinancial in Finance.Tags: Berkshire Hathawy
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Value Investing v. Momentum Investing October 29, 2009
Posted by shaferfinancial in Finance.Tags: Choosing investment style, Momentum Investing, Value Investing
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So you want to be an investor. You better make some decisions up front. One of those is choosing a style of investing. Of course most people just start throwing money around and never think about this, but you should. The two main styles are value and momentum. Value investing, popularized by Benjamin Graham and his disciple Warren Buffett, looks for investments that have a history of consistent performance that can be bought for a fair price. The thinking is that as long as the performance remains consistent you can come to a fair price to be paid and wait until the investment can be bought for that fair price or even lower. Negative emotions are your friend as negative market emotions drive down the prices of even good performers.
Momentum investors could care less about price or performance. They rely on correctly noting the direction the price of an investment is going early into its trajectory. Both positive and negative emotions are relied upon as momentum investors like the ability to sell short if the trajectory is down. The key is hopping on the trajectory early and getting off soon after the trajectory changes.
Note, both these strategies require market timing, one by changes in momentum, the other by good pricing. Now momentum strategies are very high-tech these days with folks writing their own computer code to give the buy and sell signals to take their emotions out of the equation. And proponents of both strategies have publicly disclosed returns and wealth that are impressive.
Now hear this, there are many folks that say that “market timing” doesn’t work, but the fact remains that is the only thing that works to create wealth.
For me, I decided over a decade ago that I was going to be a value investor. 2008 was a very good teacher for me. I did not have a huge amount of $$$$ saved up to take advantage of the values that appeared like I should have. That won’t happen again. Fortunately for me, Warren Buffett did. Early on I decided I would put much of my money into his hands to invest for me while I learned. I often suggest other folks do the same.
Many times I find folks are reticent to put their money in Buffett’s hands, instead trusting in some indexing/mutual fund/asset allocating strategy dreamed up by some engineer/accounting/financial adviser/numbers guy who purports to have found the best risk adjusted way to invest. To each their own, but until I find one of those guys publicly noted rate of return that rivals Buffett, I will continue to do what I do.
On the Future of Berkshire Hathaway October 27, 2009
Posted by shaferfinancial in Finance.Tags: Berkhsire Hathaway, Berkshire Hathaway as an investment?
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Folks regularly question Berkshire Hathaway as an investment going forward [on this blog as well as all over the internet].
Watch this interview with Sokol, one of Berkshire’s CEOs and tell me what you think this tells us about BRK? At 7min and 30 seconds it gets really interesting!
The Truth! October 26, 2009
Posted by shaferfinancial in Finance, Uncategorized.Tags: The truths about investing
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Here are a couple of financial truths:
You will never reach your goals by following the herd;
Already, the Wall Street crowd has put into place and started implementing their plan for your money going forward. Have you seen the adds where they are working on your fear, your fading retirement hopes, etc.?;
It does you no good to become a do-it-yourself investor if you don’t also become a knowledgeable investor;
You can’t become knowledgeable by reading/following the same advice that failed you before;
Any strategy that doesn’t look at purchase price is bound to fail ie dollar cost averaging, no money down real estate purchases, routine mutual fund purchases, etc.;
If you don’t have the inclination or the time to make investing a hobby, then don’t expose yourself to the stock market;
Investing is a game that is best played to win, not to become average;
Beware of a strategy that says that investing is easy;
Never put all your assets into one investment;
Always have reserves;
Diversify yes, but not by owning 50 or 100 different stocks or bonds;
Think income investing once you are 50 years old;
As Promised; Expenses Exposed for EIUL October 21, 2009
Posted by shaferfinancial in Finance.Tags: EIUL Expenses
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So many people speak about EIUL expenses as something extraordinary. Here are some facts; actual expenses exposed for you. The following are the expenses for an EIUL of a 45 year old man, good health, who puts in $10000 a year for five annual payments premium. The assumed interest credit is 8.21% or a full 1% below what the 20 year look back is [if you had bought this policy 20 years ago what the average interest credit would have been].
Age Prem prem Ch COI Pol Iss Other Accu Value Surr Value Death Value
45 10,000 -550 - 223 - 875 - 60.0 8,973 2,563 223, 429
46 10,000 -550 - 245 - 875 - 60. 0 18,659 12,355 233,115
47 10,000 -550 - 269 – 875 - 60 .0 29,114 22,918 243,570
48 10,000 -550 - 282 – 875 - 60 .0 40,413 34,328 254,869
49 10,000 -550 -297 – 875 - 60 .0 52,624 46,653 267,080
50 0 0 - 71 -875 - 120 .0 55,790 50,190 103,212
51 0 0 - 72 -875 - 60. 0 59,281 55,081 105,520
52 0 0 - 74 -875 - 60 .0 63,056 60,256 107,825
53 0 0 - 79 -875 - 60. 0 67,136 65,735 110,102
54 0 0 -84 -875 - 60 .0 71,544 71,544 112,325
55 0 0 - 90 0 - 60. 0 77,256 77,256 115,884
56 0 0 - 101 - 0 60 .0 83,425 83,425 121,800
57 0 0 - 111 0 - 60. 0 90,089 90,089 127,926
58 0 0 - 118 0 - 60 .0 97,293 97,293 134,264
59 0 0 - 125 0 -60 .0 105,081 105,081 140,808
60 0 0 - 131 0 -60.0 113,501 113,501 147,551
61 0 0 -148 0 - 60 .0 122,595 122,595 156,921
62 0 0 - 167 0 - 60. 0 132,414 132,414 166,841
63 0 0 - 188 0 - 60. 0 143,016 143,016 177,340
64 0 0 - 209 0 - 60 .0 154,467 154,467 188,450
65 0 0 - 228 0 - 60 .0 166,837 166,837 200,205
The internal rate of return at age 65 is 7.55% meaning the total cost of all the expenses and fees and cost of insurance is 1.66%. The internal rate of return rises the longer you hold the policy.
So, yes there are expenses that are mostly front loaded, but less than the average mutual fund.
What tax bracket do you think you will be in at retirement? Think you will pay more than 1.66% tax rate?
How do you structure an EIUL to keep it from becoming an Modified Endowment Contract? October 16, 2009
Posted by shaferfinancial in Finance.Tags: EIUL and Modified Endowment Contracts
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One of my readers asked this question and I think it was a great question to answer in a post.
There are two IRS tests to determine if this is a modified endowment contract or life insurance; Guideline Premium Test and the Cash Value Accumulation Test. The appropriate test for minimizing the life insurance is the GPT which uses one set of corridor factors to maintain an IRS mandated minimum amount of death benefit above the contract’s accumulated value.
The way it works is pretty simple, but the formula for determining is somewhat complex. Basically you must keep a certain percentage of insurance compared to the cash value which starts at 250% at age 40 and decreases each year. In order to accomplish minimizing the insurance and maximizing the cash value you need to think backwards from how traditional life insurance sales people normally sell life insurance. You need to determine the premium amount and the length of time first. Now we know that the fastest you can put the premium in is 4 years and 1 day. So in the ideal world you would put the premium in that fast. So if you have $100K to put into one of these you would put it in five annual payments. However, if you don’t have a lump sum like that to put into it, you can decide to put $10K in for 10 years or $400/month until you turn 65 years old or any way you want to put in premium. But the key is that it has to be decided up front.
So once, you decide on the premium amount and length of time, then companies software can figure out the face value of the insurance for you. Once that is fixed then you are good to go. Now it is important to understand that each year you put premium in the calculation is done. So once you have stopped putting premium in there is no chance it would convert. During the premium years, if there a problem then the company would decrease the premium amount it would allow to be put into the policy. The good part of this is that means your cash value buildup is higher than what was predicted so the policy is performing better than expected.
Now beyond this is a couple of points. First the seven pay rule limits the amount of premium paid in the first 7 years to the total amount that would be needed over the life of the policy to fund a paid up policy. Second is a practical application which allows you to reduce the face amount of the universal life insurance policy [usually around year 11] because expenses are taken out largely in the first 10 years limiting your cash value build up. In other words, just at the time your life insurance policy really starts to perform well you can further reduce the life insurance expense down significantly. Then the policy face value will start to increase as you go forward with an increasing cash value. So in year 11 you can call up the company and have your face value dropped [sometimes by 1/2] which will reduce your life insurance expenses dramatically. Then the policy face value will automatically increase the face value as needed to maintain the proper amount of life insurance as your cash value increases.
So, lets review. The policy is first set up with a set premium amount and time in mind. Once the original face value is set it can never become a MEC. Next, you can reduce the face value starting in year 11 to reduce expenses within the policy if you want. If you want to maintain the face value [for whatever reason] you can do that.
What if you want to add more premium into the policy. It is a possibility starting around year 11 as long as you stay within the guideline corridor rules. However, I like the idea of reducing expenses more than I like the idea of increasing premium, so I generally think that it is best to initiate a new policy for the additional $$$ you want to put into an EIUL and reduce that face value of your current policy.
Ouch, Bobblehead Sucker Punches Brett Anderson October 14, 2009
Posted by shaferfinancial in Finance.Tags: EIUL advocate gets sucker punched by financial planner
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Last week I pointed out a financial planner who was seemingly taking a non-biased look at EIULs on the request of my friend Brett Anderson. Well this week we got his answer and he set Brett up for a sucker punch. You can see his post here.
Make sure you read through Brett’s and others comments.
Now that you have looked at the post here are my comments:
His response kept moving the target at best and for the most part discussed things that had nothing to do with the original challenge;
Like most financial planners he likes to talks about hypotheticals, putting his ideas in the best possible light and others ideas in the worse, but never directing himself to the actual performance of the various products.
He likes to do “Monday morning quarterbacking” by telling folks if they had done X, then you would have gotten Y% return but always is changing the time period. And then has the gall to complain about the time period chosen by Brett as being the result of the 18 year bull market????? But that is the same period of time that makes his indexing ideas look good. [For the record, indexing will out perform EIULs in extended bull markets because of lack of down years, but bear markets will favor the EIUL because it doesn't go negative.]
His worse case example of the EIUL is not matched with a similar worst case example of indexing [asset allocation]. This is called setting up a straw man and is a well known rhetorical strategy.
Finally, he says you can do the same thing the insurance company does with your money and not end up paying those commissions and insurance fees. True, but how many folks are sophisticated enough to enter into option contracts and brave enough to do it with large sums of money?
And of course he ignores the tax benefits, which is my #1 reason for considering an EIUL!
All in all a nice sucker punch from the initial post the week before. Very well done Mr. Roth! I applaud you.
And now back to reality…………………………..
Efficient Market Theorist and its Discontents! October 7, 2009
Posted by shaferfinancial in Uncategorized.add a comment
Regular readers know that I am not a believer in the efficient market theory. Facts are, I am a social scientist and understand the huge amount of data that tells us we generally act upon our emotions and are not rational especially in times of stress. The percentage of folks that can remain completely rational at all times is extremely small.
But efficient market theory demands of market participants that they are rational at all times [as a whole] among other questionable assertions. So it is of no surprise that I blog against the theory and the strategies that extend from it like mutual fund investing, asset allocation and diversification.
For me it all started with reading Warren Buffett, but he is far from the only EMT discontent. Unfortunately, the media, the financial planning world, and most of the internet media are big fans of EMT and its associated strategies. What that has led to is the vast majority of folks losing out on a once in an investors lifetime opportunity. Because so many people were either panicking or convinced that their asset allocation, mutual fund, strategy was solid the vast amount of people missed it. What is it? If you had been paying attention you could have bought solid companies at rock bottom prices back in March and April. Want examples? General Electric went below $7 [currently at $16.16]. Wells Fargo below $9 [currently $29.26]. Goldman Sacks below $60 [currently at $190.48] and Berkshire Hathaway went down below $73,000 [currently at $100,400]. Apple below $80 [currently $190.25].
Now my point isn’t to play Monday Morning Quarterback with stock picking. Only to point out that if you had followed Warren Buffett’s investing theories instead of some academic’s or what Wall Street wants you to believe in, there really were “once in a investing lifetime” opportunities. And if you were following those bobble heads or mutual fund sales folks or financial planners or any of the other so called experts you missed it.
My only regret was that I was not more liquid in order to buy more than I did.
Note*** My friend and peer, Brett Anderson has taken up the $100,000 challenge here. Can’t wait for the next post. But more and more people are starting to understand how the Minnesota Life EIUL can enhance your retirement!
