The Performance of Trust Funds

The average trust fund in the United States has underperformed the S&P 500 by 2.3 percentage points annually during 2004-2014, according to a study released by the U.S. Trust. That may not be quite the indictment you think it is, as the specifics of underperformance were not examined. A lot of times, when you’re dealing with seven-figure portfolios, you start to enter that wealth preservation mode and U.S. Treasuries start to become an important of the picture.

If 25% to 50% of the principal is invested in things paying 3%, it makes sense that even shrewd stock pickers would have trouble keeping pace with a basic index fund. But it is also possible that the trust management was a result of mediocre investment selection that could have been fueled by poor incentives in the trust management field.

Shackelford O’Connor McSwain, one of the primary influences behind the original prudent man-investor … Read the rest of this article!

Jack Lew’s $10 Treasury Mistake with Alexander Hamilton

If you ever study alternative dispute resolution methods, the central principle that you will learn is that not everything in life must be a zero sum game. A great mediator is different from a good mediator if he is able to find ways to expand the pie rather than distribute existing resources in the most tolerable way to concerned parties.

Usually, these type of tactics are most useful when trying to sort out disputes between struggling but still profitable businesses and the creditors that are receiving less than they are fully owed. Imagine if you operate a restaurant in 2009 that makes $10,000 per month against $11,000 in operating costs with a $3,500 monthly rent being a big chunk of those operating costs. If you have a zero-sum mindset and represent the landlord, you are going to be focused on evicting the restauranteur and finding someone else as a tenant.… Read the rest of this article!

Sears Stock Will End Up At $0

I have been mulling over one of the seeming paradoxes of investing: Stocks that are trading in the cheapest quintile according to book value go on to outperform the other four quintiles combined by 2.5% annually over the subsequent twenty-year measuring period. It is this insight, coupled with the construction of client portfolios following this principle, that made Benjamin Graham a millionaire quickly and earned him the nickname “The Dean of Wall Street.”

And yet, Peter Lynch also stumbled upon an important insight–stocks that fall more than 50% in a three-year period go on to underperform the S&P 500 by almost five points annually over the coming decade. This insight was one of the gems of his work “One Up On Wall Street” and explained why most of his successes at the Fidelity Magellan Fund came when he purchased companies trading in the vicinity of the then-existing fifty-two week highs. … Read the rest of this article!

Clorox Stock In A Blue-Chip Portfolio

Since June of 1998, Coca-Cola stock has returned 2.5% annually. I always keep that figure in the back of my mind, as it is a harsh reminder that getting the company right is never enough–you can’t mess up the overvaluation and drastically overpay. In a way, that 2.5% is actually an incredible testament to the enduring strength of Coca-Cola’s beverage portfolio, as the valuation shifted from 62x earnings to 19x earnings over the June 1998 through September 2015 measuring period. The fact that you were able to come close to keeping pace with inflation, despite paying almost triple what the asset is worth, is actually impressive in light of the overvaluation amount.

Although the 2015 market presents nothing quite so drastic, there are still companies trading at valuations far in excess of what is merited when you take a deep look at the growth projections, balance sheet, and historical valuation … Read the rest of this article!

Real Estate Investment Trusts (REITs) Are Buying Back Stock

Stock buybacks are one example of theory not quite holding up to reality. After the Securities & Exchange Commission issued a 1981 ruling which stated that companies will not be held liable for stock manipulation if they engage in repurchases of their own stock. Repurchases of common stock occurred before 1981, but it did not come with the explicit blessing from the SEC that civil and criminal charges for stock price manipulation would not apply.

Since then, there has been a significant debate about whether stock repurchases or significant dividend hikes are in the best interest of the shareholders. In the late 1990s, stock repurchases gained favor in corporate boardrooms, as stock options were tied to reaching earnings per share targets and the retirement of shares would help executives reach those target deals.

This is one of those big deal things in investing that you need to keep in mind–almost … Read the rest of this article!