Money Talks Archives | Page 10 of 11 | Oliver Asset Management

Will Apple be the world’s largest stock?

July 28, 2011

It was interesting to see Apple shares reach an all time high of $403.91 a couple of days ago, while shares around the world were still down following fears of Greek default and record gold prices.

With a market value of over $344 billion, Apple has already overcome Microsoft the world’s largest technology firm and they are now second only to energy group ExxonMobil among US stocks. This has all happened so quickly that despite being a main player in the US stock market, Apple shares are still strangely absent from the Dow Jones Industrial Average.

Apple’s products set the benchmark for personal communication and entertainment gadgets, and the company’s fresh approach to store design has led to more success, generating impressive sales-per-square-foot numbers. As the company goes from strength to strength and the billions pile up on the balance sheet, I found a source to help recall how bleak the future for the company looked according to the “experts” not so long ago.

N.B. Apple historical share price adjusted for splits to ease comparison with $403 price.

$39: “Lately hitting a new high above 77, stock in Apple is not just high-priced—37 times this year’s estimated profit—but high-fashion. … Apple doesn’t tempt me.” Robert Barker, “Apple: It May Be Too Late to Take a Bite,” BusinessWeek, February 14, 2005.
$12: “But behind the hype and buzz surrounding the iPod and Jobs, there are problems stewing at Apple. Its core computer business, which still accounts for 70 percent of the company’s sales, is withering. … What’s more, despite their soaring sales, iPods are depressing profitability because of their lower profit margin.” Stephen Gandel, “Why iPod Can’t Save Apple,” Money, March 24, 2004.
$12: “I give them two years before they’re turning out the lights on a very painful and expensive mistake.” Quotation attributed to David Goldstein, Channel Marketing Corp. Cliff Edwards, “Sorry, Steve: Here’s Why Apple Stores Won’t Work,” BusinessWeek, May 21, 2001.
$11: “Our conclusion is that Apple has started down a path that will lead to its demise as a serious player in the PC market. … Further, we do not believe Apple will survive its next downturn, which will presage the company spiraling into insignificance as it loses any advantage of scale.” Excerpt from Dataquest company report. “Dataquest Sounds Death Knell for Apple,” Reuters, September 23, 1997.
$4 “Apple has attracted a growing crowd of short-sellers, professional speculators who bet against a company by selling borrowed shares they hope to replace later at a profit if the stock falls. The short-sellers, in fact, now hold the equivalent of 10 percent of Apple’s shares.” Steve Lohr and John Markoff. “The Incredible Shrinking Apple Computer” New York Times, January 26, 1997.
$6: “Apple may have few options other than to shrink the company or to eventually sell out to a deep-pocketed partner.” E.S Browning and Jim Carlton, “Apple Still Hobbled Despite Write-Down,” Wall Street Journal, March 29, 1996.

Undoubtedly, over its thirty-plus years as a public company, Apple has turned out to be a very rewarding investment. One hundred shares purchased at the initial offering price of $22 in December 1980 have multiplied to 800 shares after four stock splits with a current market value in excess of $299,000. Over the same period, $2,200 invested in the S&P 500 with dividends reinvested grew to approximately $49,000. But how many investors would have tolerated the three decade wait for these rewards? At the end of 1985, for example, Apple shares were still at $22, and by the end of 2002, they had appreciated at an annual rate of only 4.4%.

How many of us could have stuck it out, especially with industry “experts” telling us at the time that Apple’s best days were behind it?

No doubt some will conclude that the case of Apple’s share price illustrates why clever timing is essential to successful investing.

But predicting the future is difficult and forecasting success or failure in the fast-changing world of technology is harder still. A tiny number of stocks available today will produce incredible results in the years ahead. Owning a broadly diversified strategy provides exposure to the world market’s unexpected winners.

Malcolm Stewart

The need for business succession planning

July 21, 2011

During a meeting with a business owner this week, I had the tables turned on me when she started a discussion about the relative merits of business protection plans.

Apart from fact that this is something I should have been doing, it did highlight that this business owner was thinking about the risks (dare I say it again, because of the current economic climate) to her personal circumstances if something was to happen to her fellow Director.

She did also allow me to regain control of the discussion as the understanding of the difference between Key Person Cover and Director’s Share Protection (and how they can overlap) wasn’t fully clear to her.

When you compare the statistics of the number of US businesses that have protection in place for their Key People and Directors to the UK, it shows the enormous financial risk many British business owners are prepared to take by not putting the proper arrangements in place.

A few throw away lines to highlight some of the issues:

“would you be happy if your biggest rival in business was able to buy into your firm because you hadn’t made sure your fellow Director’s shares were subject to the proper agreements in the event of death?”

“…if the most important fee earner in your business was diagnosed with cancer, would your bank be sympathetic to your request for increased overdraft facilities?”

There are a number of questions that owners of businesses should be asking themselves to highlight the potential need for some type of Business Protection cover.

I have set out a list of the major ones I think you must consider now in Key Questions for Business Protection.

If you need to discuss the implications of your answers to these questions and need professional guidance as to how to set the correct type of Business Protection arrangements for your firm up, please give me a call.

Roland Oliver

Some fun & nostalgia

July 15, 2011

Predicting what may happen to companies, economies and the World at large is at the core of active fund management process.

As you’ll know if you’ve read my previous posts, that I very much believe in the passive approach to investment management as I think it’s incredibly difficult to predict what might happen in any given situation.

In Fooled by Randomness, Nassim Nicholas Taleb eloquently lays out how the hidden chance in the markets has and will continue to catch out the most intelligent of our investment professionals.

Its a must read for anyone giving investment advice regardless of your current stand point.

Whilst I’m dropping names here, Donald Rumsfeld the former Secretary of Defense in the USA, once talked about the “unknown unknowns” and it made me think of all the random events of late that have happened that fall into this category.

So to a little Friday sport that I’d like to call “who would have predicted…”

I give a few easy ones for starters and then let’s see what you can come up with…

Roland Oliver

Who would have predicted:

The News of the World would be shut last weekend
Lehman Brother would have collapsed
Woolworths would no longer be on our High Streets
Edinburgh Council would continue with the tram project…

Over to you.

Later Life Planning

July 12, 2011

As a son of parents in their 80’s, I see first hand the effects of living longer from both a health and financial perspective.

I’m lucky that they are both in good health and are managing to survive on their pensions and savings but the gap between income and expenditure has eroded over the years primarily down to the inflationary costs of just living.

They don’t go holidays, run a ten year old car and rarely buy any “treats” yet they consider themselves well-off.

The outcry amongst our public sector workers is understood (if not always sympathised with) as the all important safety blanket of a Final Salary Pension is threatened.

The pressure on all workers in the UK, when they arrive at what I rather call later life than retirement, to maintain current standards of living will be immense.

I’m not going to tread the well worn pathPension as to why we are where we are but rather make a plea for a sea-change in mentality from one of dependency to one of personal responsibility and of saving for later life.

Imagine that you had 35 years of work ahead of you and that for argument’s sake, you started on a salary of £30,000 and it stayed static until later life and you stopped working.

That’s £1,050,000 of earnings over that period and assuming that it was enough to keep you, then it might be prudent to again assume that if you were to live a further 20 years post stopping work, then 20/35th of this figure would be needed to maintain your lifestyle.

£600,000.

Modest numbers, no assumptions for inflation, investment growth etc but I think it illustrates the point simply that generally we don’t plan to have enough in later life.

Working with a Wealth Manager to plan out what later life might mean for you and how to get an idea what the numbers might be will be initially daunting if not downright terrifying.

But once you have had a look at how you’d like it to be it’s the job of the Wealth Manager to help you take you there, provide the discipline of saving, use all the tax advantages at your disposal and make the whole exercise achievable.

Being specialists in later life planning means we understand the concerns of our clients who need not just pension advice but advice as how to create a tax efficient wall of money that will deal with all eventualities when they decide to stop working.

Our Personal Investment Account allows clients to see the progress they are making towards their goals on-line and we can provide efficient-frontier investment portfolios to control risk.

Having all your savings in our Personal Investment Account makes sure we can make optimum use of all your tax breaks now and importantly, when you need income in the future.

More details on how we provide later life planning are contained within the website but I’d be happy to hear from you personally if you like more information on how we can help you.

Roland Oliver

The impact of the Retail Distribution Review

July 1, 2011

We had our interview with the FSA this week on their proposed new supervisory structure looking at businesses from a governance, control and culture perspective.

This was a very interesting experience for us as it would appear to have gone well and it was rewarding to be able to clearly articulate to the regulator what we do, how we do it and what it means for clients.

I’ve seen a raft of changes over the last 30 years in this industry but it finally struck me after our meeting with the FSA this week, that the changes proposed with the Retail Distribution Review are the the most far reaching of all.

The idea of identifying your service to clients rather than how you’ll pick them a product I believe is well beyond a vast number of current IFA businesses.

I also believe if your current adviser is not already in a post RDR position, they will not be able to adapt before the deadline date of the end of 2012.

I finally made the decision this week to fully remove commission from all we do for clients in favour of a advice based fee system and it was an enormous weight off my shoulders.

It frees up the mind to concentrate on the right advice and already I see clients more at ease with a monetary system that defines what the advice costs and not about getting the product sold.

A couple of very serious questions will have to be addresses by clients in a short space of time; will my adviser still be there post RDR and will he have a service that I’m willing to pay for?

If you would like a second opinion on your current arrangements, the type and structure of the advice you are receiving and how you are paying for it, please give me a call.

Roland Oliver

National Employment Savings Trust (NEST) – implications for small businesses

June 24, 2011

Talking with an accountant this week reminded me that the proposed NEST pension reforms had not really filtered through or even hit the radar in some cases yet.
Small businesses owners can be forgiven in the current economic climate for having other things on their collective minds, but a start to understanding what NEST might mean for their businesses should be addressed sooner rather than later.
I’ve laid out the absolute basic details of the NEST proposals and would encourage you or your employer to give me a call to discuss the implications for your own businesses.
• The UK Government has agreed that all UK businesses, regardless of size, should offer a company pension scheme or enrol their staff into the new National Employment Savings Trust (NEST).

• From October 2012 UK employers will be required to automatically enrol employees into a ‘qualifying workplace pension scheme’. This auto enrolment could be to your existing company pension scheme if it meets certain criteria. If it does not meet the criteria or if you do not operate a company pension scheme then your employees will be enrolled into NEST, a low-cost pension scheme being introduced by the Government.

• Staff who are aged 22 or more and currently earning more than £7,475 a year will qualify.

• NEST is due to start in October 2012, with the largest employers joining first and the smallest joining by September 2016. Contributions from staff and employers will also be phased in. Until October 2016, the minimum overall level of contributions will be just 2%, with 1% coming from employers. From October 2016 to September 2017, total contributions will be 5% with 2% coming from employers. And from October 2017, the total minimum contribution level will be 8%, with employers contributing at least 3%.

• As well as the phasing in of compulsory contributions, legislation designed to minimise the burden on employers includes simple qualifying criteria for existing pension schemes and a simple compliance regime for new employer duties such as automatic enrolment.

Please find a more detailed factsheet here.

Roland Oliver

The long term futility of active management

June 15, 2011

A couple of weeks ago Roland mentioned a few reasons why we strongly believe in asset class investing – buying a complete representation of the market in each asset class and staying away from the two key features of active management: market timing and stock picking.
A lot of research has taken place in academic economics into the true cost of active investing and whether, on average, active managers can consistently beat the average market return after transaction and management costs are taken into account.
We believe this academic evidence, coupled with some solid figures from Standard and Poor’s Indices Versus Active (SPIVA) research, explains why even the most successful active managers of recent times, Warren Buffett and Peter Lynch, stated that passive management is best for most investors.
Using the small space a blog article allows, I will briefly go into more depth below.
This excerpt from The Cost of Active Investing by Prof Kenneth R French explains the futility of the average active manager’s task:
“Whether fund of fund investors break even or not, a passive market portfolio produces a higher return than the aggregate of all active portfolios. Why do active investors continue to play a negative sum game? Perhaps the dominant reason is a general misperception about investment opportunities. Many are unaware that the average active investor would increase his return if he switched to a passive strategy.
Financial firms certainly contribute to this confusion. Although a few occasionally promote index funds as a better alternative, the general message from Wall Street is that active investing is easy and profitable.
This message is reinforced by the financial press, which offers a steady flow of stories about undervalued stocks and successful fund managers.
Overconfidence is probably the other major reason investors are willing to incur the extra fees, expenses, and transaction costs of active strategies. There is evidence that overconfidence leads to active trading. (See, for example, Odean (1998), Barber and Odean (2001), and Statman, Thorley, and Vorkink (2006).) Investors who are overconfident about their ability to produce superior returns are unlikely to be discouraged by the knowledge that the average active trader must lose.”
According to Fama’s efficient market hypothesis, all information is already factored into a stock’s price. The very existence of active management makes this so. When we include the higher fees, expenses, and trading costs, it is clear that active investors are playing a negative sum game.
Mr French concludes thus: ‘If a representative investor switched to a passive market portfolio, he would increase his average annual return by 67 basis points over the 1980 to 2006 period.”

The figures taken from the SPIVA research show that in the US and Australia over a 5 year horizon well over half of the active managers fail to outperform indices. Not only this, the inconsistency of fund performance makes it hard to anyone to pick a winning manager. In the US, over the five years ending March 2011, only 0.96% of large cap funds, 1.14% of mid-cap funds and 2.59% of small cap funds maintained a top half ranking over five consecutive 12 month periods.

I must clarify that we do not believe that there are no active managers who can perform well. But the task of picking the few that do perform consistently better than the market over a long investment horizon is futile.
Some investors do trade actively because they really are able to produce superior returns.
The existence of superior investors, however, does not explain the behaviour of the average investor. Active investing is still a negative sum game. Every pound a superior investor earns must increase the aggregate losses of all other active investors.
We do not accept that the City or Wall Street can predict the future, and we certainly would not bet ours or your money on it.

Malcolm Stewart

Cash flow modelling and utility bills

June 10, 2011

Whilst working with a client this morning and using our Voyant cash flow process, a couple of very interesting points where raised.

Our client noted that this approach of getting into the real detail of his income, expenditure, assets and liabilities then testing different financial scenarios was the only way to plan. He felt that this was a serious way to approach his Wealth Management plan and it was the first time he felt fully involved in the process.

During the meeting, he noted that since we last spoke a few weeks ago, his monthly payment for electricity was to double.

It’s not been a good week for the majority of Brits as we continue to be faced with ever higher costs across a whole range of goods and services we need on a daily basis.

Clearly our client wanted to factor in this increase in his monthly expenditure and for him knowing what his financial picture looked like, good or bad, was infinitely better than not knowing.

From the point of understanding the effects of increased cost and from the peace of mind that comes with knowing you’ll be OK financially, cash flow modelling is such an important part of a Wealth Manager’s process.

We find that using this approach allows clients to better understand their financial circumstances “in the round” and avoids falling into the specifics trap and confusion over jargon, policies and industry-speak.

Take Voyant away from me now and I’d struggle to do my job.

As we continue to live through these tough economic conditions the value we provide to clients in managing their cash flow models becomes even greater.

Please call us today and we’d be delighted to demonstrate how our Wealth Management Experience, including cash flow modelling, can put you firmly in control of your financial plan.

Roland Oliver

The fundamental need for protection

June 7, 2011

Reading an article in the paper the other day reminded me that one of the most basic functions of my job is in ensuring that clients are adequately protected with life and critical illness cover. This is arguably the most important but often the least appreciated part of my work.

We all have stories of untimely death or serious illness and how families been devastated but have survived because of having financial protection in place.

I’m not going to go into all the details of what plan, who with or what type of cover at this stage but I am going to point out some areas that must be addressed.

I will not be alone in noting that clients have a reluctance to paying for something “they may not need” and tend to try and talk the cost of life and critical illness cover down to a budget.

We use Voyant cash flow modelling to determine the actual financial cost of someone dying early or suffering a critical illness which tends to bring some serious reality to the levels of cover needed.

Often clients will have some protection in place (flogged by a bank in many instances) which the level of cover bears no resemblance to the actual level of risk. There are a lot of fans of nice round numbers out there and clients are usually at a loss as to why a particular level of cover has been arrived at.

Establishing with clients the real cost of early death or serious illness by more rigorous methodology is paramount and the costs of providing this cover are then seen in the right context.

I find that people do understand the need for cover and are much happier to have the right level of protection in place once they see the real amount of money required to make sure their family will be financially protected if the unthinkable happens.

Once we have the right numbers established, then using the appropriate trusts to ensure swift dispatch of any monies in the event of claim should be a given.The option of using Relevant Life policies were possible also adds a very welcome 20% corporation tax saving on premiums.

So to summarise, don’t leave it to chance; make sure the amount of cover is relevant to the level of risk and get the proper amount and type of cover you need.

If you need us to give you a more accurate figure as to how much cover you might need, contact Malcolm Stewart our Voyant guru on 0131 273 5202 and he’d be happy to help out.

Roland Oliver

Rising Above The Noise – as to be published in Scotland on Sunday early June

June 3, 2011

Some investment professionals work hard to make their work confusing. They believe they have a vested interest in creating investor confusion. They use jargon that can intimidate and make it difficult to understand relatively simple concepts.

But investing is not that complicated. It can be broken down into two major beliefs.

• You believe in the ability to make superior share selections, or you don’t
• You believe in the ability to time the Markets, or you don’t

Let’s have a look at which investors have which belief systems and where you should be with your own beliefs.

If we break investment decision matrix down into four quadrants, then quadrant one is the Noise Quadrant. It characterised by investors who believe it is both possible to time the markets and pick better stocks.

They think that they or their favourite financial guru can consistently uncover mis-priced investments that will deliver Market-beating returns. In addition, they believe it’s possible to guess whether entire Market segments or geographical areas will go up or down.

The media need you to return to them time and time again and encourage this thinking to try and sell newspapers, magazines and TV shows.

Conventional wisdom is quadrant two and includes most of the financial services industry. Most professionals (including financial planners and stockbrokers) won’t bet the farm on predicting markets swings with any degree of accuracy and know that making incorrect predictions on stock selections can mean losing clients.

However, they do believe that there are fund managers and high tech information systems out there that will find undervalued securities for their clients and add value.

Most economists believe fundamentally that capital markets work and so in an efficient Market this methodology adds no value on average.

Quadrant three, Tactical asset allocation quadrant, is populated by investors that think the markets are efficient and stocks are priced accordingly, and they (and only they!) can see mis-pricing in entire Market sectors.

They believe the way to add value is by buying a Market they think is undervalued and wait until other investors realise their mistake and then selling when the market is considered to be fairly valued again.

If you believe that stock prices are priced fairly, we think it is inconsistent to accept that market prices would be incorrectly priced as, after all, this is an aggregate of the fairly priced individual securities!

No prudent investors are found in this quadrant.

Finally, and most crucially, is the Information Quadrant.

Most of the academic community and institutional investors reside here. They believe that dispassionate research into what works, and then following a rational course of action based on empirical evidence is the way to go.

As far as results from the first three quadrants are concerned, research indicates that on average, they return no better than the Market after fees, transaction costs and taxes.

Passive investments, those in quadrant four, because of their lower costs have higher returns on average than the other types of investment over time.

Clearly there are instances of Market timing and stock selection providing better returns than the passive approach but we believe these are not consistent enough to warrant the typically higher costs.

Investors need to make smart decisions about their money and we believe that they should move from the Noise Quadrant to the Information Quadrant as this is where you should be to maximise the probability of achieving all your financial goals.

For more information or to arrange a meeting with me personally, please follow the contact us link below.

Roland Oliver