Since almost all closed-end funds tend to sell at a discount, it can appear obvious that there is no reason to purchase closed-end funds when they are selling at a premium. Sometimes a special feature, for example, a closed-end fund having a private placement in its portfolio which is about to go public as a hot issue, may justify purchase at a premium. Otherwise, it is difficult to make a case for paying a price higher than NAV.
Central to the advantages of closed-end funds is the discount; both as to dividends and as to pricing variances. Read the rest of this entry »
A primary reason for discounts is a lack of sponsorship. If a securities salesperson (dependent on commissions) has a choice of selling someone an existing closed-end fund (say at a regular stock commission of around 1 percent) or a load mutual fund with a sales charge (that can be as much as 8 percent), the incentive is to direct “investors” to the open-end fund.
The incentives associated with higher sales charges can be easily observed when new closed-end funds are issued. In new issues, compensation is by underwriting fees. A typical fee is 7 to 8 percent. If a fund was coming public at $10 per share, an 8-percent underwriting fee would be 80 cents per share. Read the rest of this entry »
In the published common stock portfolio modeling the Continuous Full Investment portfolio models were included to function as a control to allow objective comparisons with the market timing models.
Although intended as a control, allowing demonstration of the validity of the timing technique, the Continuous Models have significantly outperformed the broadly based popularized market averages. The reasons for this superior performance are twofold. First, the rigid requirements for stocks to qualify for the Master List results in the stocks comprising the Continuous Models to be of usually superior fundamental quality, thereby giving the group an upward bias relative to the overall market. Second, the Continuous Models change positions in a gradual, relatively slow process in which new positions are selected that are among the most discounted (low-priced relative to the others) on the list. In effect, a rotational process adds those that have become more discounted and deletes those less discounted. Read the rest of this entry »
For the fourth scenario, we chose a qualified pension plan for the following reasons:
- A lot of very well-known companies are adding managed futures to their investment portfolios for the reasons already documented in this book, particularly because they can often increase the overall return while reducing risk. For example, some of the corporations currently using managed futures are Intel, Libby Owens Ford, Weyerhauser, World Bank, and Virginia Supplemental Retirement System.
- These plans are highly regulated by the Department of Labor, IRS, SEC, CFTC, and state banking, insurance, and securities agencies. All these organizations scrutinize the investment practices of these plans for the protection of the employees who invest. If managed futures can pass the muster of all this regulatory oversight, there must be something worth consideration for just about every serious investor.
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Let’s illustrate the mechanics of a standard single-name credit default swap. Assume that the reference entity is the ABC Corporation and the reference obligation is the ABC Subordinated Debenture due 2110. The swap premium—the payment made by the protection buyer to the protection seller —is 550 basis points. If a credit event occurs, the protection seller pays the protection buyer the notional amount of the contract. In our illustration, we will assume that the notional amount is $10 million.
The notional amount is not the par value of the reference obligation. For example, suppose that a bond issue is trading at 73.53 (par value being 100). If a portfolio manager owns $13.6 million par value of the bond issue and wants to protect the current market value of $10 million (approximately equal to 73.53% of $13.6 million), then the portfolio manager will want a $10 million notional amount. If a credit event occurs, the portfolio manager will deliver the $13.6 million par value of the bond and receive a cash payment of $10 million. Read the rest of this entry »
1. Lose Money
Like Maria, most gluttons rationalize their investing behaviors. They equate action with money: You’ve got to play if you want it to pay. This may be true if you are a trader in Chicago Board of Trade, but for the rest of us, frenetic investing usually results in losses rather than in wins. Gluttons invest burdened by four weaknesses that they may be unaware of or that they may discount. Let’s examine these four vulnerabilities and why they should not be discounted: Read the rest of this entry »
Sloth is often a function of time. It may be that you don’t have the hours or don’t want to put in the hours necessary to be a good investor. That’s fine. Though there is a minimum amount of work every investor needs to do, you must find the right investing mode given the hours you are willing to expend. Your sloth may result from being in the wrong mode; you’re trying to do it yourself when you really should be relying on a money manager. The three modes, therefore, are:
- Doing it yourself
- Focusing on mutual funds
- Using a money manager
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Certain types of investing seem to trigger anger in certain investors, and if you’re vulnerable to this sin, you should do everything possible to avoid these types. Specifically, don’t:
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SEEK HIGHLY VOLATILE, MICROCAP STOCK INVESTMENTS
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For all the seven sins, the goal is to keep your emotions in check when making investment decisions, but it is especially important here. Anger flares up faster than any of the other sins and it can be so powerful that before you know it, you’ve made an ill-advised investment. Besides the previous recommendations, here are some proactive steps that can keep Your anger out of the process:
- FORCE YOURSELF TO TAKE BREAKS FROM THE INVESTMENT WORLD IN GENERAL AND YOUR PORTFOLIO IN PARTICULAR
The more you immerse yourself in an investing mindset, the angrier you’re likely to get, especially if things aren’t going your way. Rubbing your nose in your own mistakes or the market’s unpleasant surprises for hours every day will just raise your hackles. As a long-term investor, you don’t need to be tracking your stocks nonstop or be up on every market development. While I strongly advocate being aware of events that have an impact on your portfolio, you can maintain this awareness by monitoring it every few days or by spending just a little time on it daily. Reducing your exposure to the investing world will reduce your aggravation. You will be less likely to blow your stack or your investment dollars from the accumulated pain associated with nonstop market monitoring. Read the rest of this entry »
