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Jim Walker has been a member since November 8th 2010, and has created 836 posts from scratch.

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Is There Any Use for Active Investments Today

The market keeps going up and those who have simply put their money in index funds tracking the S&P 500 have done better than the vast majority of active investors. At this point you have to ask the question, is there any use for active investments today? Investing in stocks has always been a matter of picking the best stocks to invest in using an approach like intrinsic stock value. But, in the current bull market, stock picking for most folks is not doing as well as choosing and staying with an index fund. Here are some thoughts on the subject.

What Happens to Index Fund Investments in a Bear Market?

When the market goes down, any investments tied to index funds will follow. Is this a reason to get out of an index fund when you suspect that a correction is around the corner? First of all, the reason you are in an index fund is because you know that the fund will do better than managers who try to time the market. So, unless you have a crystal ball that tells you precisely where to put your money instead of the index fund you are using, stay with it. But, if you had that crystal ball, you would not need the index fund!

Market Watch had a useful piece dealing with this issue. They say there is a test of whether you will win or lose in a bear market with index fund investing.
Their advice is to use a buy and hold strategy with index funds and not to bail out when the market corrects. Rather, use a dollar cost averaging approach and continue to add to your portfolio when shares are cheaper!

Is There Any Use for Active Investments Today?

If you have invested in dividend stocks and are using a dividend reinvestment plan, this is something that you cannot do with an index fund. While the cost of investing with index funds is lower than when you routinely buy and sell stocks or when you use a mutual fund, nothing beats the free reinvestment option offered by a dividend reinvestment plan! If your money is in a stock that has been paying dividends for more than 100 years, this is a difficult approach to beat.

And, it is important when investing to understand how a particular investment is going to keep making money over the years. When you invest in a fund that tracks the S&P 500 you are putting your trust in the American economy. But, if you have unique investment skills and knowhow, you may be able to choose some investments that will replicate the Microsoft story of growing nearly 1,000-fold over the years.

Best Investment Approaches Year in and Year Out

No matter if you choose investments where you will not lose any money but also not gain a lot, or if you go with the passive index fund approach, steady investing year in and year out is more likely to be successful for the vast majority of investors than trying to time the market.

When Will the Stock Market Rally Stop?

Despite virtually unending predictions of its demise, the bull market continues. It is tempting to compare the current situation to the dot com bubble at the beginning of the century. But, Mark Cuban, the billionaire who profited from the dot com bubble and was not destroyed by the crash says that this is a different market. There were more investors twenty years ago and interest rates were higher. And, people were buying any stock with dot com in its name! So, when will the stock market rally stop? Cuban says to watch interest rates.

What Is Driving the Stock Market Rally?

Ever-higher earnings are a large part of why some of the big tech stocks keep going up. But, in an interview with CNBC, Dallas Mavericks owner and billionaire Mark Cuban says it has to do with interest rates. You’ll know when the rally is over when rates start going up.

Mark Cuban, who made billions of dollars during the dot-com boom, said Wednesday that the stock market is not reminiscent of 1999.

“Interest rates were a lot different back then,” Cuban said on CNBC’s “Fast Money Halftime Report.” “And you saw a lot more people participating in the market. … You don’t see that now. That individual day trading really led the market to be frothy.”

The levels of day trading have receded and given way to the rise of index funds, creating a fundamentally different landscape, Cuban said.

“There’s so much money chasing index funds, so as long as those funds keep on growing the market is going to go up,” said Cuban, who sold to Yahoo in April 1999 for $5.7 billion.

His argument is that there is a lot of money looking for investments and, so long as rates are low, the stock market and its derivatives art still where the best return lies.

How Abruptly Will the Market Change Direction if Rates Go Up?

Investopedia discusses the effect of interest rates on investments in an article about what can cause a significant move in the stock market.

Rising interest rates can place downward pressure on real estate investment trusts (REITs) and slow the housing market. Higher interest rates mean higher borrowing costs slowing down purchasing activity and causing stock prices to dive.

These factors will come into play a bit at a time as rates go up and earnings drop off. However, the stock market anticipates events as wells as reacting to them. Many investors, like Cuban, will make adjustments as soon as rates start to rise in anticipation of the bull market ending. We have often noted that Warren Buffet’s silent warning to investors is that (like before the dot com crash) is stockpiling cash!

What Else Could Stop the Rally?

The threats of war, societal chaos, and economic collapse can all drive the market down temporarily. For example, the Chinese coronavirus may be an opportunity for some pharmaceutical stocks, but a global pandemic like the Spanish Flu epidemic a hundred years ago that killed 500 million worldwide would have widespread effects on the economy, investments, and governments!

Investing in Pharmaceuticals and the Chinese Coronavirus

A deadly coronavirus in central China has made the jump from animals to humans and threatens to spread throughout the world. Health authorities in China race to contain the infection as the virus has the ability to jump from human to human. It is already in Japan and Thailand and major US entry points are taking precautions by screening new arrivals for fever. For the investor, there are two issues involved. One is how badly the spreading virus could affect the economies of countries where it lands and the other is opportunities in the pharmaceutical sector as companies strive to find efficient screening and diagnostic tools as well as vaccines and anti-viral antibiotics.

What Is a Coronavirus?

The coronavirus is an infectious agent commonly found in animals. Strains of the virus that are sometimes found in humans cause “usually cause mild to moderate upper-respiratory tract illnesses, like the common cold” according to the CDC. But, “human coronaviruses can sometimes cause lower-respiratory tract illnesses, such as pneumonia or bronchitis. This is more common in people with cardiopulmonary disease, people with weakened immune systems, infants, and older adults.”

And, there are more aggressive strains such as MERS-CoV and SARS-CoV according to the CDC. “About 3 or 4 out of every 10 patients reported with MERS have died.” And the SARS virus that jumped from birds to humans was commonly fatal but no cases in humans have been reported since 2004.

The 2019-nCoV Strain of Coronavirus

This is the name of the new coronavirus strain that emerged in the 11 million-person city of Wuhan in East-Central China. It is of concern because the first cases seem to have been associated with a huge seafood and meat market and were probably animal to human transmissions. But, now there is strong evidence that human to human transmission has occurred as more than a dozen hospital staff came down with the disease after caring for an infected patient. Of the 200 confirmed cases in Wuhan, four patients have died. And, of the 169 persons still undergoing treatment, 35 are said to be in “serious condition.” As with previous human versions of this virus, older adults, infants, and people with weakened immune systems are at greater risk of serious complications and death.

What Is Being Done about the Chinese Coronavirus?

The first line of defense for this virus is to contain the disease and prevent its spread across the world. Thus organizations like the CDC are setting up screening at the main entry points into the USA for folks from China and especially from Wuhan. The CDC has developed an in-house test the works to identify the virus and is working to get testing materials to other national and international agencies.

There is no antibiotic for this disease and no vaccine at this time. Patients receive supportive care and attempts are made to keep the infection from spreading.

What Pharmaceutical Investments Benefits from the Chinese Coronavirus?

Stocks in several Chinese pharmaceutical companies went up on hopes that diagnostic and therapeutic products can be invented and sold. Is this a reasonable investment approach?

Pharmaceutical Companies Doing Coronavirus Vaccine Development

Johnson & Johnson announced recently collaboration aimed at a vaccine for preventing the MERS coronavirus.

Janssen Vaccines & Prevention B.V., part of the Janssen Pharmaceutical Companies of Johnson & Johnson, the Coalition for Epidemic Preparedness Innovations (CEPI) and The Jenner Institute at the University of Oxford, United Kingdom, are working together to not only enhance novel vaccine development against MERS-CoV, but are also striving towards developing advance novel vaccines against the Lassa and Nipah viruses.

From an investor’s point of view, is this a good reason to invest in Johnson & Johnson? Johnson & Johnson is a huge company and the potential profit from preventing a few hundred cases of MERS virus deaths a year is tiny in comparison to their total cash flow. However, the research required to develop such a vaccine will make the next coronavirus vaccine easier to develop. The company that eventually has the wherewithal to create on demand a vaccine for a disease like the new Chinese coronavirus will be a moneymaker in our interconnected world where a virus develops in one place and ends up infecting the whole world within a year. As such, investing in Johnson & Johnson or anyone else doing research for vaccines or treatment of such viruses is for the long term and the province of intrinsic stock analysis.

Whose Purchases Are Driving Stock Prices Higher?

The stock market keeps going up. The top tech picks have been especially impressive. Strong corporate earnings, a pause in the intensity of the trade war, and low unemployment have been positive factors. But, just exactly whose purchases are driving stock prices higher? And, why is it important to know that?

Who Is Buying Stocks?

CNBC published a useful article about who is doing all the buying that is driving the market up.

Given a series of new highs for the S&P 500, the Dow Jones Industrial Average and the NASDAQ, the obvious question is who is doing all this buying?

The author goes through the list of investor categories and come up with conclusions that should be of concern to regular investors.

The large investor groups for stocks include retail investors who own about 20% of US stocks. However, this group now has holding comparable to 2007 and is likely not the main culprit in driving up prices. Public corporations themselves are larger factors with money coming from the Trump tax cuts going to share buybacks. The same amount of investment capital (or more) is going to purchase fewer equities. That fact greatly skews the supply and demand curve!

And, hedge funds have become a huge factor in the markets. Money invested in hedge funds comes to a third to a half of that held by retail investors. But, the holdings in these funds are by definition more labile. Unfortunately for many hedge fund investors, the S&P 500 went up 31% last year while the average US hedge fund dealing in equities did about half that. The result is that the “rebalancing” of portfolios is impressive, especially as fund managers have attempted to make things look better at year’s end.

Quant funds, multi-strategy funds, and high-frequency traders add to the mix on the hedge fund side of things.

Why Does It Matter Who Is Buying Stocks?

It matters whose purchase are driving stock prices higher because it tells you a bit about their intentions. Success long term retail investors tend to follow an intrinsic stock value approach when investing in stocks. Hedge funds and short term traders are looking to time the market. If you are following the example of those who are looking for long term value, you want to emulate long term retail investors. If you are buying stocks because the hedge funds are driving up prices (temporarily) you may be in trouble as you prepare to stay the course and they are ready to bail out at a moment’s notice.

A common theme for folks promoting long term investing is to emulate Warren Buffet who only invests in companies that he understands and only buys when the intrinsic value is greater than the current stock price. That approach and following the purchases of hedge fund managers may make you money in the short term if you can respond fast enough but it does not put you in a position to sleep well at night with solid and dependable investments!

Investments for New Investors

Everybody who invests has a starting point. They hope to experience profitable investing over the years. But, they may fall prey to bad stock tips, pump and dump schemes, or other investing pitfalls. On the other hand, they may choose solid dividend stocks or investments where they will not lose any money but will forego huge profits. Choosing the best investments of new investors depends on their risk appetite, risk tolerance, investment timeline, and the time and energy they have available for managing their investment portfolio.

Best Investments for New Investors Today

Over the long run, the US stock market is the best money-making vehicle available to the majority of investors. However, the entire market, whole investment sectors, and individual investments all have good and not-so-good periods. That being the case, what are the best investments for new investors today?

The Motley Fool has a good article about stocks to choose if you start investing in 2020.

One of the best ways to [make money in stocks] is to start with the stocks of strong, easy-to-understand businesses. This will make it easier for you to track the progress of your companies, which, in turn, will help you better determine when to buy and sell their stocks. Additionally, strong businesses tend to perform well over the long-term, even if you don’t buy them at the most opportune time.

Their five choices are Apple, Chipotle, Netflix, Planet Fitness, and Grocery Outlet. Despite their suggestion to choose easy-to-understand businesses, only the first three fit that recipe. Planet Fitness and Grocery Outlet use new approaches in old and established business sectors. Our take on their list is that Apple, Chipotle, and Netflix are good choices and Planet Fitness and Grocery Outlet are a bit more speculative.

Although Netflix is on a roll, it will have increasing competition from the likes of Disney, which is a stock that goes on our own list of safe investments for beginners. Apple became a holding of Berkshire Hathaway when Warren Buffet decided that its strong brand name and dedicated customer base differentiated it from other tech stocks. Chipotle has a well-run business and is growing, but like McDonald’s, it will need to constantly make adjustments to its menu and operations to stay ahead of competitors. Nevertheless, any or all of these three stocks would be good investments for new investors.

Choosing Investments for New Investors

When a new investor starts out with “household name” stocks, they still need to do a bit of homework to make sure that they are good investments. Companies that have been paying dividends and increasing their dividends over the decades are usually safe choices. Companies that have strong cash flow attract investors but tend to be overpriced. The key to investing in stocks is the ability to analyze intrinsic stock value. With this approach, an investor looks at the potential of a company to keep making money with its business plan into the distant future. He or she compares the stock price that this sort of fundamental analysis would predict with the current stock price. When the intrinsic value thus derived exceeds the current price of the stock, those are sound long term investments for new investors.

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