The house that Jack built

The house that Jack built
Commentary: Time is on your side, Vanguard's Bogle tells investorsBy Chuck Jaffe, MarketWatch

On whether investors should be upset with fund managers, financial advisers or both:

"Defeat has 1,000 fathers. We really don't have much choice but to trust the investor to make his own asset allocation, with or without the help of a financial adviser. I don't think you can expect the fund manager to do it. ... Letting one fund manager decide for all investors how much to have in stocks or cash doesn't really seem to work for most investors. There are not many managers who can do it, for starters, but it's just impossible to know the needs.

"You have to be prepared to take the bad times with the good. There are a lot of good active managers who failed last year -- Longleaf, Marty Whitman {Third Avenue funds], Dodge & Cox, Weitz -- and if you are going to be with an active manager and have found someone who has the values you believe in and who is in the investment business and not the marketing business, then go with it but be prepared to lose one year out of three. I think most investors can't handle that; they are their own worst enemies.

"But advisers don't help this, I think. They hold a magnifying glass up to the worst of things. You say 'God I have to get out of here,' and they say 'Go now' instead of saying 'Stay the course.'"

an old forbes article on Irwin Yamamoto

Irwin Yamamoto: Maui Wowie Nikhil Hutheesing, 02.18.03, 2:00 PM ET


Irwin Yamamoto

Hawaiian born, Irwin Yamamoto, editor of the Yamamoto Forecast, doesn't like publicity, and he will give little details about the success of his newsletter. We do know that Yamamoto, 47, picks stocks from downtown Kahului on the island of Maui, and, according to Timer Digest, his market-timing signals were up 45% in 2002. His success, he says, comes from being a contrarian. As the threat of war with Iraq increases, many advisers recommend fleeing stocks and investing in gold. Yamamoto says to do the opposite.

Forbes: We are on the verge of going to war with Iraq, yet in your latest newsletter you recommend 100% investment in stocks. Why?

Sign up for Forbes' Free Investment Guru Weekly e-mail.
Yamamoto: Right now, everything is about the war. What do I think will happen? I think that it will either be a quick war or, at the very last moment, Saddam will go into exile. So I'm bullish on stocks because I think the market is overreacting. Look at what happened in the Gulf War. As soon as bombs started falling and the market sensed victory, there was a rally. I think the market is currently oversold--on a short-term basis. On a long-term basis, it is still pricey.

So you aren't a long-term bull, just a short-term bull?

Right. This won't be the start of a bull market, but rather it will be a significant, tradable rally. Current price-earnings ratios and book values are too high for a bull market to start. But because of short-term worries about war, the overhead resistance to stocks will be removed. So there will be a chance for profit taking.

When war isn't the overriding concern, how do you pick stocks?

I follow three indicators: fundamental, technical and market sentiment. In the beginning of January, my long-term indicator was bearish. But by the end of January, I changed it to bullish. I turned out to be right. Stocks were heading up until mid-January, then they began coming down. When we had that initial advance, I thought the rally wouldn't last, so I turned negative. I still think the market is waiting for war. But to take a longer view, the war factor has already been priced in and is largely discounted.

So give me some examples of what you look at before you buy a stock?

I look at technicals. Because of the fast decline in January, on a short-term basis the market is oversold. But even if there is no war, I think there will be a reflex rally, a technical bounce. Throw in the fundamentals. Once problems are removed, there should be a rally. Now consider sentiment. Everyone is saying not to touch stocks now. I go to the Borders bookstore here and check Barron's out on Sundays. It always correlates. During the dot-com bubble, the newspaper was always sold out. Everyone was buying, and you know what happened.

Now, because of the war, no one is interested in stocks, and there are plenty of issues of Barron's on sale at Borders. When I invest, my question is, "Have people heard any favorable news lately about this company?" If the answer is yes, I don't buy the stock because I would be paying a premium for it. So I look companies that are hated. I think brokerage stocks fit in that category.

Continued on next page

You are 100% in stocks right now. Which companies do you like now?

The companies I am buying I like on a short- and long-term basis. A.G. Edwards has a spotless reputation and no debt. It is a big regional brokerage firm and a possible takeover candidate. Also, along the same lines is Raymond James. Even if these two are not taken over, they can stand well on their own. I also like Walt Disney. The stock is close to its lows, and when there is a perception that the economy is recovering, advertising will pick up. I recommend Japan Equity Fund because if there is a recovery in the U.S., that will help Japan in terms of exporting goods to the U.S. Japan is on the verge of a major financial change. Once the news is out about the major restructuring changes in Japan and the cleaning out of bad loans, Japan's market will soar.

Playboy is another great buy. You won't get a free subscription as a dividend, but management has said that the next year will be a profitable one. The stock is worth $30, but you can buy it now for $9.50. Alexander & Baldwin is another company I really like. It has over 90,000 acres of Hawaiian land, so it's a great asset play. The stock yield is 3.5%--a great dividend, especially if it's tax-free. Then, Wall Street will be attracted. On a conservative basis, I think the stock is worth $35 to $40, yet it is selling at just $25. So you get the yield while you wait for the price recognition.

What about investing in oil, bonds and precious metals?

As a contrarian, I was into gold and oil when it was low. Remember, buy low, sell high. Oil is high, so I'm selling it. I think when the war starts, in the first hour or so the price of oil and gold will plunge, especially if it looks like it'll be a quick war. In the Gulf War, American markets were closed when the war began. The gold and oil markets continued to surge, but before the U.S. market opened the next day, oil and gold plunged in price because a quick victory was viewed.

As for bonds, right now, bonds are also used as a safe haven. But by the second half of this year there will be an economic recovery, so the multiyear bull market in bonds is practically over. Good news in the economy is bad for bonds, and soon people will think the economy can recover. Then, bonds will sell off, and people will move into stocks.

But many advisers take a different view. They think that gold shares should continue to do well, especially since the current uncertainties remain.

We are at the top of the gold market now. Uncertainty is favorable to gold, but it will be removed within a matter of weeks.

Yes, but gold was showing strength even before talk of war with Iraq. And there are many other factors that are positive for gold, such as weak currencies, the Fed's monetary policy and inflation pressures.

Before the talk of war, gold was going up because of supply and demand and the weakness of the dollar. But over the last month or so, many of the gains have been directly related to the uncertain situation with Iraq. So if things look good with Iraq, gold investors won't be worried about the recession or soft dollars. That's why I think the best opportunities right now are in stocks.

Thank you.

More Adviser Q&As

Maui tortoise stopped on bear-market rally

Maui tortoise stopped on bear-market rally

By Peter Brimelow, MarketWatch
Last update: 12:04 a.m. EDT May 7, 2009Comments: 10NEW YORK (MarketWatch) -- The Maui Tortoise is further out of his shell. But not far, and he's not coming any further.
I call Hawaii-based Irwin Yamamoto of The Yamamoto Report the "Maui Tortoise" because, in the age of the Internet, he still publishes only monthly, by snail-mail, and appears to have no Web site.
Who does he think he is, Charles Allmon? ( See April 30 column.)
Very few investors or editors can sit still for this length of time, especially with markets as volatile as they have been recently. But long study of the Hulbert Financial Digest market-letter-monitoring data has led us to the conclusion that both infrequent trading and hyperactive trading can be equally successful -- in the right hands. (Equally, virtually every known market method can work -- again, in the right hands.)
Yamamoto appears to have the right hands. He was one of the few services to make money during the Crash of 2008. ( See Oct. 29, 2008, column.)
Over the past 12 months through April, Yamamoto is up 21.32% by Hulbert Financial Digest count, compared to a 34.69% loss for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over 2009 to date, Yamamoto is up 14.3% versus a negative 1.16% for the total return Wilshire 5000.
Yamamoto says he's been publishing since 1983, but Mark Hulbert only began following him in at the beginning of 2002. Over that time, Yamamoto has achieved a 14% annualized gain, compared to a negative 0.6% annualized for the total return Wilshire.
Significantly, both Yamamoto's stock selection and his pure timing beat the market. A portfolio that switched between the Wilshire 5000 and T-Bills on his short-term signals gained 2.7% annualized from 2002 through April, in contrast to a 0.6% annualized loss for buying and holding. A portfolio that relied on Yamamoto's long-term signals to switch between the DJ Wilshire 5000 and T-Bills gained 5.5% annualized over this same period.
Yamamoto recently began buying stocks for the first time in a considerable period. ( See March 12 column.) He is now 35% invested.
And that's enough, he says in his latest letter. He is solidly in the camp that views the recent rise as a bear-market rally.
He writes: "Today, investors are truly spoiled. Prior to the current bear cycle, people experienced a spectacular bull run from 1982 to 1999, or 18 years. ... Furthermore, in recent years, bear markets have been cyclical in scope. The last four bearish periods were measured in months, not years. The longest one was only 10 months. As we previously stated, market participants are taking things for granted."
Yamamoto's unpleasant conclusion: The last two secular bear cycles were 13 years and 16 years in duration. The average: 14.5 years. If equities topped out back in October 2007, then it would be the year 2021 or 2022 before this bear market is completed. ... Even if the length of the downside is shorter than the most recent secular cycles, it should be a lot longer that the previous cyclical downturns."
Yamamoto doesn't offer much rationale for his bearishness, although he says flatly that Obama's efforts to reflate will end in disaster:
"Do not misunderstand us, inflation is not today's enemy. On the contrary, deflationary forces continue to permeate the business environment. Yet in the effort to escape the grips of deflation, the government seeks to reflate the economy back to health. In a few years, hyperinflation will replace deflation as the threat."
Seemingly not now, however. Yamamoto is bearish on gold, short term.
The Yamamoto Forecast just snailed in, and I don't like to reveal portfolios until subscribers have gotten a look. This case is unusual, however: Yamamoto is basically unchanged since my March 12 column, just slightly more invested. He continues to be 5% exposed to Rydex Juno Fund Inv (RYJUX:RYJUX
reflecting his view that bonds will break.
Yamamoto's address, a service to readers who will otherwise email me saying they can't find him online, is: P.O. Box 573 Kahului, HI 96733

5 Buffett Picks at a Discount

5 Buffett Picks at a Discount
This story is an edited version of the original, which appears in the May issue of SmartMoney Magazine. Berkshire Hathaway has its annual meeting Saturday, and is expected to draw 35,000 attendees.

Warren Buffett usually attracts as much public criticism as, say, puppies or Santa Claus. He filed his first tax return at 13 (bicycle deduction: $35), amassed an investment fortune of more than $60 billion by the end of 2007 and has committed most of his wealth to charity. He lives in the same Omaha house he bought in 1958 and argues that people like himself don’t pay enough in taxes.

But Buffett’s stock picks, like just about everything else, tumbled over the past year, and some on Wall Street are grumbling. U.S. stocks fell another 28% after Oct. 16, when Buffett penned a New York Times op-ed piece titled “Buy American. I Am.” The Oracle bet especially wrong on banks and oil over the past year. And after calling derivatives “time bombs” and “financial weapons of mass destruction” in a 2002 letter to shareholders, Buffett noted earlier this year Berkshire Hathaway (BRK.A: 94900.00, +400.00, +0.42%) had 251 derivatives contracts outstanding. Mostly, it had written insurance against the stock market falling, which, of course, it had.

Some critics say Berkshire is suffering from mission creep. Others say buy-and-hold investing is dead. I’m guessing it’s not. I’m guessing that while Buffett admits he made some bad bets over the past year, he made plenty of good ones, too. Some things he bought are selling for well less than he paid, and some long-standing names are newly cheap. So if you ever wanted to mimic the master without paying a Buffett premium, now seems a fine time.

After all, consider the long-term record. When Buffett took control of Berkshire in 1965, it was a withering textile firm with $19 a share in book value—roughly what accountants figure its assets could raise in a sale. At the end of 2008, book value stood at $70,530 a share. That’s a yearly compounded increase of more than 20%, more than double the broad stock market’s annual return during that stretch. Berkshire’s book value has shrunk in only two years during Buffett’s tenure, by 6.2% in 2001 and by 9.6% last year. Of course, Berkshire’s trading price is based as much on what investors see as its earnings power as it is on what the firm might fetch in a liquidation sale. Generally, the stock trades at a big premium. Over the decade ended 2007, it went for 70% more than book value. Now it sits just 30% above it.

As for derivatives, Buffett has said they’re dangerous but not necessarily evil (comparing them to uranium, which can be used for bombs or electricity). When the put options he wrote come due starting in 2019, he said in a March CNBC interview, even if the stock market is 15% below where it was when he wrote the contracts, he’ll still breakeven and will have enjoyed the use of $5 billion in customer cash in the interim. And while that New York Times headline might have been an early call, writers (readers can never be reminded enough) generally don’t write headlines. While Buffett said he’s buying stocks, he also wrote that he didn’t have the “faintest idea as to whether stocks will be higher or lower a month—or a year—from now.”

Truthfully, though, I’m more interested in exploiting Buffett than defending him. The shortest path to being a great investor is to copy one. Berkshire shares might be a good deal, but the firm has a giant stake in financials. Investors who prefer to avoid that can simply cherry-pick from its holdings, which are reported quarterly. To find the names below, I trolled Berkshire’s statements for purchases and for companies Berkshire was sticking with, but not for ones like Johnson & Johnson (JNJ: 54.21, -0.15, -0.27%) and Procter & Gamble (PG: 50.84, +1.05, +2.10%), which Buffett says he still likes but that Berkshire has trimmed its stake in to make room for new purchases. I also looked for purchases of common shares available to the rest of us, ignoring privately negotiated deals with companies like General Electric (GE: 13.67, +0.57, +4.35%) and Goldman Sachs (GS: 139.22, +4.02, +2.97%), which secured Berkshire fixed returns and upside potential.


Beating Buffett at His Own Game
Company Ticker Industry Avg. Prices Paid (Est.) Current
Price

Burlington Northern BNI Railroad $75 to $80, summer 2007 through early 2009 $67.48
Eaton ETN Industrial Products $44 in late 2008, $71 in fall 2008 43.80
ConocoPhillips COP Oil & Gas $49 in late 2008 41.00
Kraft KFT Packaged Food $30 in early 2008, $33 in late 2007 23.40
NRG Energy* NRG Utility $21 in late 2008, $35 in fall 2008 17.98
* A $5 billion takeover proposed by Excelon (EXC) is under review.


Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."

Stay in May by Jim Lowell

Stay in May
Commentary: Seasonality charts point to continued gains in the broad markets
By Jim Lowell, MarketWatchLast update: 10:22 a.m. EDT May 4, 2009NEWTON, Mass. (MarketWatch) -- With a remarkable April rally, in concert with March's upward march, the major market averages delivered their best returns since the Great Depression.
Investors now feel more confident about the present and future prospects of investing in their own financial future. That is a sea change in outlook which bodes well for a changed sea-state in which to invest -- but is it enough?
It's hard to make the case for a sustained run until economic data, earnings news and forecasts confirm a move toward better times. But our proprietary seasonality charts tell us that May has a longstanding history of blossoming gains.
The cold water?
There is much to be concerned about. For one, the auto industry remains in critical condition, even as rumors of a swine flu pandemic could turn into a more problematic human and economic headwind.
Also, the release of the bank stress-test results could prove to be more controversial than currently priced. Jobless claims won't quit nipping at our heels. The global economy is on the tenterhook of our own recovery. And geopolitical instability seems to be rising.
Our May chart's course for the above landscape is fairly straightforward. It suggests buying the U.S. market and steering clear of international indexes. Investing in a basket like the Vanguard Total Market (VTIVanguard Total Stock Market ETF
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VTI) is one way to go. But, our charts refine that view to suggest that active traders can unpack that basket into constituent elements in order to set greater profits.

Mid- and small-cap names trended better than their large-cap brethren in May of years past. Vanguard Extended Market (VXFVanguard Extended Market ETF
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VXF) or the more aggressive PowerShares Dynamic Mid Cap (PJGPowerShares Dynamic Mid Cap Portfolio
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PJG) both play in those fields. Then again, mid- and small-cap growth trended best of the overall broad-market bunch -- making iShares Mid Cap Growth (IJKiShares S&P MidCap 400 Growth Index ETF
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IJK) and the PowerShares Dynamic Small Cap Growth (PJMPowerShares Dynamic Small Cap Portfolio
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PJM) my recommended picks on this bough.
Beyond that broader, extended market pale, our seasonality indicators point to several, sector-specific opportunities. Energy is a green shoot, despite the fact that emerging markets aren't. This month, I prefer to play this patch via the United States Oil Fund (USOUnited State Oil Fund LP
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USO) in order to closely track the price of light, sweet crude oil.
While crude oil remains a slippery slope, technology has been gaining more than a toehold throughout the year. That, in and of itself, is enough to put technology on any trader's screen. But it's on our May screen, too.
What gives?
For one thing, as domestic and global financial systems stabilize, technology names seem to breathe easier. For another, there's a new buyer in tech town: the U.S. government. Couple those with another key macro factor: legacy systems.
There's a near universal need for an upgrade at a time when businesses large and small are aiming to use more technology to pace the recession and keep pace with the recovery. A nearly 15% year-to-date gain in the MarketWatch ETF Trader's "Aggressive Growth" portfolio reflects this trend, as does a 24% leap in my Technology-Plus Portfolio at Fidelity Sector Investor.
Here, as technology as a whole continues to exhibit signs of a classic recession-recovery trajectory, I like State Street's SPDR Technology (XLKSPDR Technology Select Sector ETF
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XLK) broadly, and the more chip-focused PowerShares Dynamic Semiconductors (PSIPowerShares Dynamic Semiconductors Portfolio
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PSI) .
In case the above steps into May encounter "maybe days," our charts tell us to pack inflation-protected bonds. For that, I'll be packing iShares Inflation Protected Bond (TIPiShares Barclays TIPS Bond Fund
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TIP) . And, while our historical analysis tells us that healthcare is a dim bulb in May's past, PowerShares Dynamic Pharmaceutical (PJPPowerShares Dynamic Pharmaceuticals Portfolio
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PJP) appears to remain well positioned, pandemic or no, to benefit from a recession mired market in need of a lasting rebound injection.