It takes money to make money

The rich get richer -- and own more stocks, the Federal Reserve reported today in its triennial report, the Survey of Consumer Finances.

The lengthy report charts the changes in family finances from 2010 to 2013 and not surprisingly most American families did not experience a sea change in their fortunes.

Stock ownership rates did not increase as values rose, according to the report. The number of Americans who own retirement accounts also fell over the past few years, down to 49.2 percent in 2013 from 50.4 percent in 2010. The The median value of the accounts jumped 25 percent during that time.

Here's a few more of the central bank's findings about investing:

• Rates of direct stock ownership fell 1.3 percent from 15.1 percent to 13.8 percent over the time period, though the median value of the stock market gained 26 percent.
• Combining indirect stock ownership rates -- for instance owning stocks in mutual funds -- with the number of people who own stocks directly, paints a similar picture. Direct and indirect holdings of stock fell from a peak of 53.2 percent in 2007 to 48.8 percent in 2013.
• Proving the adage that it takes money to make money, overall stock ownership rates increased 3.9 percent for the top 10 percent of income earners. For the bottom half of earners, the three years between 2010 and 2013 saw already low levels of stock ownership further eroded.

A survey released by Bankrate in April found that Americans are still unsure about the stock market, despite historically low yields on savings accounts and certificates of deposit. Only 22 percent of those polled said they were pushed toward the stock market as a result of low interest rates.

Do you own more stocks or mutual funds now than in 2010?

Source: http://www.bankrate.com/financing/investing/it-takes-money-to-make-money

Why does Warren Buffett avoid technology stocks?

• Warren Buffett prefers to invest in companies which operate in fairly stable and certain environments. Technology sector is the last place to look for certainty.
• He values certainty of returns more than the potentially huge but risky returns.
• He believes predicting the economics of the fast paced technology sector is far beyond his competency, probably a strong reason for his avoidance of the sector.

Warren Buffett has often been in the news for avoiding investments in the technology sector, which has been viewed by many investors as a highly lucrative sector. The Oracle of Omaha has his reasons for this approach. We look into reasons for his avoidance of the hot stocks.

Warren Buffett has historically preferred investments in sectors or companies which are unlikely to experience major changes. In his 1996 letter to shareholders he stated,

“We are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now.  A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.”

Warren Buffett loves to have certain but stable returns over potentially huge but risky returns.  In the same letter he also states:

“Obviously many companies in high-tech businesses or embryonic industries will grow much faster in percentage terms than will the inevitables.  But I would rather be certain of a good result than hopeful of a great one.”

It shouldn’t be assumed that Mr. Buffett despises change. He is only averse to change when evaluating as an investor. In his own words:

“Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good.  As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration:  We applaud the endeavor but prefer to skip the ride.”

In his 1999 letter to Shareholder’s Mr. Buffett highlights the fact that he and his partner Charlie prefer to operate within their level of competence and identifying a durable competitive advantage in the technology space is beyond their combined expertise. In Buffett’s words,

“Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage. Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise.  If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.”

Has Warren Buffett’s stay out of the technology sector impacted the returns of his investments? Well let’s look at the numbers over the last two decades.  The chart below compares the 20 year CAGR of the S&P 500, Berkshire Hathway’s (NYSE:BRK.A) book value per share and Berkshire Hathway’s Market value per share.

20 year CAGR in S&P 500 and Berkshire Hathaway share price and book value

Berkshire’s book value per share has grown at a CAGR of 14.6% over the last 20 years (1993-2013) while the Market price per share has grown at a CAGR of 12.7%. This growth has solidly beaten the S&P 500’s 20 year CAGR of 7.1%. It is clearly seen that Buffett’s decision to stay away from the technology world hasn’t hindered the performance of his investments. And what is the secret of the Oracle of Omaha?

Warren Buffett has this great quality which investors often call ‘Discipline.’ It is clearly evident in his avoidance of the technology sector, even during the boom of late 1990’s, when every other person was investing to set up a business which had something to do with internet. Though in hindsight Buffett had the last laugh, non-entry into what appeared to be a highly lucrative sector is a proof of the Oracle’s discipline. There are notable exceptions in the technology world, where stocks like Apple & Google have created tremendous value and returns for shareholders. Apple stock price has grown at a 10 year CAGR of 36.7% while Google stock has grown at a 10 year CAGR of 27%. While critics could view these as Buffett’s big misses, we view it as a proof of his disciplined approach to investing. Sticking to your rules is hard to do and that is something every wannabe successful investor needs to learn from the Oracle of Omaha.

In conclusion, Warren Buffett side stepped the tech boom for the following reasons: Buffett was uncomfortable investing in companies operating in rapidly changing environments; He could never find the competitive edge in any technology companies that he felt was durable; and as he admitted, forecasting the long term business economics of internet companies was beyond his competency.

We at Amigobulls live in the exciting world of technology stocks. While we salute the Oracle of Omaha for his discipline and wisdom, we will continue to make our humble attempts to apply his principles in the technology sector and pick value stocks from this sector. We invite our readers to let us know their experiences with technology stocks. Happy investing with Amigobulls.

Source: http://amigobulls.com/articles/why-does-warren-buffett-avoid-technology-stocks

Wall Street Thinks You're Overpaid

Wall Street money managers are worried about two things: that they won’t get paid enough and that ordinary Americans will get paid too much.

The fight over who gets what from the bonus pool is an unseemly annual rite at Wall Street firms. Last year the average bonus paid to securities industries employees in New York City was $164,000, the most since the financial crisis, according to New York State Comptroller Thomas DiNapoli.

In contrast, concern over rising pay for the rest of America is a monthly, not annual, ritual. Today the Bureau of Labor Statistics reported that average hourly earnings in July were flat, vs. an expected 0.2 percent increase. They’re up only 2 percent over the past year. However, hawks pointed out that the Employment Cost Index—which covers both wages and benefits—rose a more-than-expected 0.7 percent in the second quarter, its biggest rise since 2008.

“Wages are trending up, and once wage inflation takes hold, it continues for four to five  years,” says Torsten Slok, chief international economist at Deutsche Bank. Slok notes that a survey by the National Federation of Independent Business finds an increased share of companies—around 15 percent—are “planning to raise wages up significantly in recent months.” He says in a chartbook for clients: “A broad-based pickup in wages in the pipeline.”

For Wall Street, the risk is that higher wage growth will lead to more inflation, which will push up interest rates, which will push down stock prices. The rate-setters of the Federal Reserve think that unemployment can fall to 5.4 percent before inflation starts to be a problem. Slok says inflation could come much sooner, citing academic studies that put the inflationary threshold anywhere from 6 percent unemployment all the way up to 7.2 percent.

The July jobless rate was 6.2 percent, by the way. So if you believe the most hawkish of those studies that Slok cites, the unemployment rate would have to go up a full percentage point before enough people would be out of work to keep a damper on inflation.

Economists such as Slok aren’t being hard-hearted—they’re just reflecting the concerns of their employers and clients.

Inflation hawks can even make a case that they’re standing up for the little guy, not Wall Street bigs. If higher wages really do cause inflation to spike, the cost of living would jump. And to fight inflation, the Federal Reserve might accidentally cause a recession, throwing people out of work.

Still, not everyone on Wall Street has been worrying about incipient inflation from higher pay. Economists at Morgan Stanley described the mixed signals on pay as a “wage gain rollercoaster,” while JPMorgan Chase’s Michael Feroli described “another gutterball for wage growth.” He said the report vindicates Federal Reserve Chair Janet Yellen’s wait-and-see approach to raising interest rates.

Source: http://www.businessweek.com/articles/2014-08-01/wall-streeters-worry-that-theyre-paid-too-little-and-youre-paid-too-much