The Crash That Was

Over the better part of 30 years I have seen plenty of ups and downs in the financial markets, but nothing compares to the bedlam – the pure panic – that gripped Wall Street and much of the rest of America twenty five years ago today.  It was October 19, 1987, and when the New York Stock Exchange opened that morning, we were off to a weak start that got weaker all day, as investors saw stocks slump 508 points, a 23% drop.  Wags immediately started calling it Black Monday.  To this day we have never seen a bigger one-day decline, and I am hopeful not to have that record broken.

There was no internet, of course, no financial channels on cable, but TV and radio stations broke into regular programming to alert people to the meltdown.  The computer systems that the exchanges used had difficulty handling the volume of transactions, and some major brokerages teetered on the edge of insolvency.  At the office where I worked, most of us stayed until after 9 pm, taking calls from clients.  Then we dragged ourselves – hoarse, tired, and stunned – out to some downtown bar that was not surprisingly filled with colleagues from other firms.  We all hoped our employers would reopen the next morning – it was far from certain that they would.

In the end, some firms were mortally wounded by the crash and had to merge.  Mine, EF Hutton, was one.  But the economy wasn’t tipped into depression as some suggested would happen, and markets gradually recovered.  No crashes, no bear markets, are ever the same as previous ones.  Trying to predict the size and duration of the next one is like generals who always seem to be preparing to fight the last war.  The investors who came out of Black Monday in the best shape were those who selected high quality investments, stayed informed, and held their investments if nothing in their reason for investing had changed.  That has remained a sound basis for investment decisions and will serve well in the next crash – whenever that might be.

GTC

 

 

 

 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule # 7: Do the Opposite

Working my way up we have touched on my rules #10, #9, and #8, all of which are very basic “starter” rules for getting involved with your 401(k) or 403(b) plan at work. Today’s rule assumes you are a plan participant and have been contributing for a while. At some point you start to think about what if any adjustments you should make to the investments in their plan. After all, you get your statement or go online, you see the performance of your funds and of all of the available choices and there is a temptation to move some money into the funds that have done best over the last quarter or year. We see funds flow into growth funds during strong bull markets and into cash in bear markets. It’ human nature – you see a fund with a great quarter or even better, a great year or two. Maybe one (or more) of the funds you’re in isn’t doing so well. So you switch.

Eight times out of ten you will have been better off not making that switch. The hot fund has turned cold (in some cases stone cold). So should you never make a change? My rule #8, Better Than a Crystal Ball, suggests using just 4 funds in your plan. Once you have the 4, simply manage them by rebalancing once a year. Bring all of the percentages back in line, swapping a little out of the fund or funds that have done the best and into the laggards so that you are back to 25% each. But wait – no one wants to put money into the laggard. Everyone wants to put more in the best performer. By doing as I suggest you will be going against the flow, being counterintuitive, contrarian. You don’t make money in the financial markets by following the herd. You make it by doing the opposite.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule #8: Better Than a Crystal Ball

I don’t have a crystal ball.  And if I did I’m not sure I would know how to use it.  It seems like having a crystal ball would come in handy to figure out what investments to choose in your 401(k) or 403(b).  You look at a list of funds or go online and see a bunch of choices, maybe read about a few, look at the numbers, make your choice.  Some folks ask for advice in choosing and we are always happy to consult. I frequently meet with clients seeking my advice and find that their account balance is invested like this: 5% This Fund, 20% That Fund, 15% Other Fund, 40% Big Fund, 20% Obscure Fund.  Many investment gurus will use their crystal ball to tell you what percent to put in any given fund.  Unless no one really has a crystal ball. How then do the gurus come up with their percentages?  Beats me.  Since there is no way to know which fund will do best, why fuss over 11% here and 23% there? 

Think about this: when you get your statement what’s the main thing you want to know? It’s this: How am I doing? That’s what everyone wants to know.  When your assets are split into many odd pieces, how can you figure it out? And do you really want to spend the time trying?  My advice: keep it simple. When investing in your retirement plan choose just 4 funds and put 25% in each.  Then whenever you get a statement you will know how you’re doing. You’ll know which of your funds is the best, which is the worst, and by how much. Decision making will be much easier – no calculator needed, no guessing whether you should have 17% in this or 42% in that. You can rebalance once a year, getting the 25% each back in line.  Meanwhile, if you can get a crystal ball, go ahead and use it.  But for my money, a fixed percentage is better than a crystal ball.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule #9: Ignore This

Sometimes in personal finance – as in the rest of life – you get false clues, things that seem important but lead you astray.  Here’s how you can spot a false clue and ignore it.  Let’s assume you are already participating in your employer’s retirement plan or are about to start.  You have to decide how much to contribute and how to invest within the plan.  Many employers offer a matching contribution, and employees typically calculate how much to put in to get the maximum match. Seems like a good idea, but it’s a bad idea to limit yourself.  Let’s say your employer matches your contribution dollar-for-dollar up to 4% of your salary.  Sounds like a good deal, and it is.  You put in 4% and get 4% – double your money if you don’t earn a dime on investments.  What’s bad about that? It’s bad if you just stop at the 4%.  You will fail to get a tax deduction today for dollars contributed, and fail to get the benefit of years of tax-deferred growth on the much larger pile of cash that will accrue to you from putting in more. And let’s face it – if you’re reading this I’ll bet your goal is that larger pile of cash.

But isn’t a 401(k)/403(b)/457 only good if there is an employer match?  Nonsense.  Some advisors say that with no match you should do other things with your money; paying down debt, for example.  I disagree.  By all means eliminate debt, but always keep a sense of perspective: building savings (such as a 401(k)) and reducing debt are equally important.  You should work both angles: contribute what you can spare each month to your retirement plan and pay down debt ahead of schedule.

Remember – building a sizeable retirement account is about securing your future. It’s not about whether there is a matching contribution or how much it is.  Ignore the match and put in all you can.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule #10: Start

Today I’ll start the countdown of my Ten Ground Rules for 401(k)/403(b) Success. These are common sense guidelines I have refined from nearly three decades of talking with clients and observing their results within employer-sponsored retirement plans.

The first rule seems so simple and obvious as to be unnecessary: Start.  Get started. Enroll in whatever plan your employer makes available.  It’s surprising how many people delay their participation in retirement plans. There are always reasons: you’re new on the job and not familiar with the plan, or you feel you can’t afford to, or you mean to get involved but just hadn’t gotten around to it.  Would you fail to sign up for your employer’s health insurance benefit? Would you not take any vacation because you hadn’t gotten around to understanding the time-off rules? Of course not.  Building your personal net worth is just as important, it’s just not as immediate.  So focus on your employer’s plan, ask for guidance if you need it, and enroll.

Some people get frustrated by articles stuffed with numbers showing how much money you need to save to retire.  That frustration can cause them to avoid participating altogether and make the goal even harder to reach.  Don’t worry about goals, not yet.  Just get in your plan and start contributing. Without a start, the rest of my rules won’t do you any good.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Understanding Apple

When Apple started selling the first iPhone in June 2007,  you could buy Apple stock for about $100 per share. Two weeks ago, You’d pay $644 for that same share. During that same time, $100 invested in an S&P 500 mutual fund would be worth about $95.

Yet Apple naysayers abound, calling the stock overpriced; saying the iPhone is threatened by Droids, or the iPad by cheaper competitors. How does Apple answer? With last night’s earnings report, to wit:

Sales up 50%.
Profits nearly doubled.
iPhone sales up 88%.
iPad sales up more than 100%.

Investors have sent Apple stock up $50/share (9%) this morning on that news.

It took me a while to understand Apple and its products, despite buying the first iPhone and nearly every subsequent model, and becoming inseparable from them.  I really looked at iPhones as a great phone that could do some other things – and that’s where I was wrong. The iPhone and iPad are devices that provide such a range of function that it can hardly be imagined that any two people use them the same way. That coupled with high quality and reliability suggest that continued strong sales are likely for Apple.

The next wave: when iPads start to surpass big-box televisions for TV viewing. It may be coming.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

When Kodak Listens

You can’t live in Rochester without knowing Kodak employees and retirees, and those of us who have never worked there draw a lot of our picture of what happens inside the Big Yellow Box from what we hear from family and friends.  But an image of Kodak created by secondhand accounts is a little like a portrait painted by listening to someone describe the subject instead of seeing it for yourself.  After all, like the blind men and the elephant, most Kodak employees see a small piece of the operation, and we’re getting a small story from them.

But over the last year as Kodak slid toward, then into, bankruptcy, I have heard a consistent story from a variety of smart, skilled people from different parts of Kodak’s operation: the story of the consumer inkjet business.  In February 2007, I traveled to Manhattan to attend Kodak’s investor briefing and the rollout of the new inkjet printers.  The appealing pitch: high-quality ink at very low cost, designed to broaden the market by letting consumers print as much as they wanted without worrying about cost. Attendees received sample photos and they looked great.

The only problem is that 5 years later, the consumer inkjet business is still not yet profitable, and much of Kodak’s Consumer Digital Group (CDG) is being dismantled. This is where the listening part comes in.  I can’t reasonably paint that picture from a story I hear from one or two people. But over many months I’ve pieced together an image from different parts of the company. Like the Kodak market researcher who reported that their group told management that the inkjet business had a major entrenched competitor (Hewlett-Packard), thin profit margins, and a shrinking market (people just don’t print many photos).  Like the two senior researchers in Corporate Research & Engineering who report that their group told management that the inexpensive ink was ruining the printer heads and needed more work before going to market. Like the members of the finance staff who report that Kodak has been losing money on each printer sold, with no change in sight.  In each case, current and former employees say, warnings were ignored by senior management and the printers were rushed to market. Result: overwhelming number of defective printers (one source says 100% in the first months), loss of retailer support, and a business that 5 years later loses $50 on each printer Kodak sells.

Kodak didn’t listen to its own employees: skilled, dedicated, hardworking people. So who is Kodak listening to now? Bankruptcy consultants and lawyers, at a cost of tens of millions of dollars and counting.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Harvard vs. Hartwick: The Economics of College Tuition

Several years ago, when my daughter was a high school senior, my wife bought a softcover book with a page on each of hundreds of different schools (I think it was this book).  It wasn’t an important reference for us because she had pretty much already decided to attend Sarah Lawrence College.  I had heard that Sarah Lawrence was an expensive school, according to some article I had read.  So out of a bit more than idle curiosity, I picked up the book and sought the page on Sarah Lawrence. Yes, the book confirmed it to be expensive, and on a whim I paged through looking for Harvard University to compare. On the way to Harvard’s page I came to Hartwick College, of which I know little other than it’s in Oneonta, and an acquaintance attended school there.  I was surprised to find that Hartwick’s total cost for a year was within a few hundred dollars of Sarah Lawrence, and even more surprised to find that Harvard’s total cost fell neatly between the two.  I think at the time that the total annual cost was in the $40,000 range, making a few hundred dollars of difference practically meaningless.

Now, they are all good schools, but you will have a hard time convincing me that you will get 99+% of the benefit of going to Harvard by attending Hartwick. If Hartwick is not a Chevy it might be a Buick, but Harvard is a Mercedes; they’re not the same. Why do they cost the same?

At the root of the price of anything is that eternal equation: supply and demand.  Add to that my theory of “Next-Best.” In this case, Harvard University is perceived worldwide as a desirable school, and it receives so many applications each year that it accepts only a small percentage: 6.2% last year.  That leaves 93.8% of Harvard’s applicants to seek another school – the one they view as “next-best.” As demand cascades from first to second choice (or to third or fourth), there remains enough demand to keep pricing high even among choices not otherwise seen as equal. That’s cold comfort to families struggling with the cost of college and graduates grappling with student loan debt.  Higher education costs may be just a footnote in the presidential election, but whoever wins you can look for this topic to rise in prominence over the next few years.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Sweet

I’m not sure why the quarterly earnings reports from Hershey are more blogworthy than others.  Maybe it’s because I like chocolate, so the very name Hershey always makes me smile.  But Hershey shareholders have plenty to smile about today, too. That’s because the company reported higher earnings today and projected that 2012 will keep kids and customers (and their dentists) smiling with even better results.

The roots of Hershey’s current success go back a few years. The company made a few acquisitions to broaden their confectionary product lines, and transformed their supply chain to get their products to market more efficiently. With cash dividends to shareholders raised 9 out of the last ten years (including a 10% increase announced today) that makes for a sweet time all around.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Bankrupt

 Kodak, bankrupt. How can it be? Who would have thought, ten years ago – even a year ago –  that this would come to pass. And yet here we are.  Our firm has been busy holding Community Resource Meetings for Kodak employees and retirees, helping to provide clear information at a time when rumor, half-truth, and urban legend have all circulated throughout the community.  We have another session tomorrow night here at our office and one a week from tomorrow in Greece, home of the largest concentration of current and former Kodakers.  

Here’s a quick rundown of what to expect – and what not to:

1. Bankruptcy means reorganization for Kodak – not liquidation. The company will try to sell its patents and some business units with a plan to slim down and emerge a smaller and more profitable company. Estimated time in bankruptcy: about 18 months.
2. For retirees who are receiving monthly pensions, no worries. Your pensions are safe and will continue to be paid. Some special executive plans will probably suffer, and current employees may find available pension options curtailed.  But KRIP pensions are well-funded and safe.
3. SIP, Kodak’s well-known 401k plan, is also safe. Kodak cannot touch those assets and neither can its creditors. There should be no meaningful short-term change in investment options, including the Fixed Income Fund (still known as “Fund D” to many).
4. Health insurance benefits are safe – for now. Since Kodak will operate under bankruptcy protection, the company cannot terminate or alter retiree health benefits without court approval. It’s true that Kodak could move quickly and ask the court to approve a prompt termination, but we see that as highly unlikely. Current view: retiree health insurance will not end prior to the end of bankruptcy.
5. Employees will keep their jobs and benefits – for now. Kodak will try to sell businesses (consumer is high on the list) but even if sold a lot of jobs will remain.
6. Many of the upbeat projections rely on a sale of patents for the higher end of the range, $2 – $3 billion. A strong patent sale will lubricate the entire process.
7. Still waiting to hear a realistic, believable scenario from the office of the CEO.  Because this time last year, here was the story

Stay with us on Facebook and Twitter for the latest.  For Kodak employees and retirees with questions, our hotline is 585-340-2246.

 

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).