MONEY Housing Stocks

Smart Ways to Play the Uneven Housing Recovery

Home Depot shopping cart in store aisle
Jim Young—Reuters

While shares of homebuilders remain iffy, there are other attractive stocks in the broader real estate recovery.

The U.S. housing market roared in July, but investors may want to tiptoe rather than jump into the sector.

That’s because much of the 15.7% increase in new home construction in July, the first gain in two months, came from apartment buildings, which tend to attract lower income renters and do not generate as much overall economic activity as single-family homes.

The appeal of apartments to millennials, a generation laden with student loan debt that may make it difficult to afford a down payment on a home, is one reason why some noted investors, such as DoubleLine Capital’s Jeffrey Gundlach, have said they are betting against the shares of homebuilding companies.

Fannie Mae on Monday downgraded its outlook for home sales and construction, estimating that 1.4 million single-family units will be constructed during 2014 and 2015 combined, compared with an earlier forecast of 1.6 million units.

“From an investment standpoint the homebuilder trade has been one of the most hotly anticipated trades over the past few years. Yet it continues to be nothing spectacular,” says James Liu, a global market strategist at J.P. Morgan Funds.

Fund managers, as a whole, are not taking a rosy view of the homebuilding segment. Actively managed U.S. mutual funds, on average, devote just 1.06% of their portfolio to companies such as Toll Brothers TOLL BROTHERS TOL 0.481% and KB Home KB HOME KBH 0.7928% , according to Lipper. That was unchanged from the end of 2013.

Yet analysts and strategists say there are some attractive pockets of the housing market.

Housing-Related Retail

Phil Orlando, chief equity strategist at Federated Investors, built up positions in select retail stocks throughout the summer in expectation that a slowly improving housing market would help retailers such as Home Depot THE HOME DEPOT INC. HD 2.8562% and apparel and home fashion company TJX TJX TJX 1.4344% , parent of TJ Maxx and HomeGoods.

Both companies should benefit not just from new home construction, which accounts for approximately 8% of the housing market, but from rising home prices, which could spur homeowners to upgrade their appliances or otherwise put more money into their homes, he says.

“I’m very comfortable that when the dust settles we will see a resurgent consumer in the back-to-school season,” he says.

Home Depot on Tuesday reported a higher-than-expected 6.4% increase in same-store sales in the United States and raised its full-year forecast. Shares of the company are up nearly 8% for the year, or nearly one percentage point more than the broad S&P 500 index.

Apartment Buildings

To be sure, some investors have already done very well betting on a 2014 multi-family housing market. Exchange-traded funds focusing on residential real estate investment trusts, which typically hold apartment buildings and other multi-family developments, have been on a tear this year. The iShares Residential Real Estate Capped ETF is up 22.3% year-to-date, while the Vanguard REIT ETF is up 17.6%.

Those gains raise the possibility that shares of the companies in the multi-family sector already reflect the boom in apartment buildings and have little room to run, analysts say.

“The data remains inconclusive and uneven, says Dan Veru, chief investment officer at Palisade Capital, “and that’s the nature of the housing recovery right now.”

MONEY Hit Peak Performance

Why You Shouldn’t Overplay a Hot Hand — in Basketball or Investing

Miami Heat's LeBron James
© Mike Stone—Reuters

New research says there is such a thing as a hot hand in basketball — like momentum in investing. Trouble is, hot hands lead to overconfidence, which leads to cold spells.

A couple of winters ago, Larry Summers gave a 30-minute talk to the Harvard’s men’s basketball team over pizza. During the peroration, per Adam Davidson in the New York Times, the former Treasury Secretary and Harvard president engaged in a bit of Socratic dialogue.

He asked the students if they thought a player could have a “hot hand” and go on a streak in which he made shot after shot after shot? All the players nodded uniformly. Summers paused, relishing the moment.

“The answer is no,” he said. “People apply patterns to random data.”

In this case, Summers may be wrong.

A new study by three Harvard grads — using data based on tracking cameras in 15 arenas that captured 83,000 shot attempts in the 2012-13 NBA season — found that “players who are outperforming (i.e. are ‘hot’) are more likely to make their next shot if we control for the difficulty of that shot.”

When you account for the difficulty of the shot, the authors discovered “a small yet significant hot hand effect.” To put a number on it, a player’s chance of making his next shot increases by 1.2% for each prior shot he made.

So what?

While your basketball skills may never carry you to the NBA, there is a lesson to be learned from the paper’s findings.

And it has to do with how you invest.

The study’s authors concluded the following: “Players who perceive themselves to be hot based on previous shot outcomes shoot from significantly further away, face tighter defense, are more likely to take their team’s subsequent shot, and take more difficult shots.”

This basically means when someone makes certain shots (think three-pointers) at a higher percentage than they normally do, the opposing defense reacts by guarding the player more closely. And as defenders start paying more attention to the shooter, he has to take shots from longer range, which are inherently more difficult.

What does this have to do with your portfolio?

Well, consider what’s going on. A player makes a few shots and gets “hot.” He’s in the zone, so he starts growing overconfident. Not only does he start to take more shots, but he starts taking increasingly difficult shots.

While he may be more likely to make those difficult shots at the outset since he’s on a roll, the more difficult shots come with a lower percentage of accuracy. Which means he will eventually start to miss more and cool down. In other words, his overconfidence leads him to take shots that eventually take him “out of the zone.”

This is a lot like momentum investing.

Momentum is a real force in the markets. History, for instance, shows that investors — at least in the short run — are much better off riding last year’s winners than the laggards, says Sam Stovall, managing director for U.S. equity strategy at S&P Capital IQ.

So investors who ride the market’s momentum invest in a winning stock or sector. Those investments rise in value. This trend repeats a few times and before long investors believe their skills as a trader are leading to the gains, rather than the momentum effect. Before long, these investors are trading more frequently to capitalize on their “hot hands.” But this has the effect of racking up trading costs and mistakes, which are a headwind to investors that eventually cools them down.

This doesn’t mean you should eschew momentum altogether. As MONEY’s Paul Lim noted in his March 2014 article, “A decent body of research suggests that entire asset classes that shine in one year have a better-than-average chance of outperforming in the next.”

The trick is to find a way to ride the hot hand without taking increasingly inefficient shots.

One idea is to minimize your trading costs by limiting your trading to just once a year. According to researchers at the asset-management firm Leuthold Group, a time-tested way to do this is to buy last year’s second-best performing asset class and hold that for a year (last year’s second-best asset class was large, U.S. stocks). Then repeat the process the following year. Historically, such a strategy returned five points more annually than the S&P 500, while experiencing only slightly more volatility. (Of course, you shouldn’t tilt your entire portfolio toward momentum sectors. Think 10%.)

By incorporating a little bit of the “hot hand” into your investing strategy, you should be able to book slightly higher returns. And you don’t even have to go to the gym.

MONEY Google

4 Crazy Google Ambitions

Vehicle prototype photo of Google's self-driving car.
Prototype of Google's self-driving car. Google

Google has already changed the world by altering the way we interact with technology. As it enters its second decade as a public company, Google wants to repeat the trick.

Google’s thriving search business and Android mobile operating system are throwing off tons of cash. And with $60 billion to play with, the company is looking for the next new technologies to champion.

And it’s thinking big.

Co-founder Larry Page has frequently talked about putting new technologies to the “toothbrush test.” In other words, will we use it once or twice a day like our toothbrush…or for that matter, like Google?

He makes it sounds so easy. Perhaps too easy. Maybe it’s the inevitable overconfidence of someone whose youthful work turned out so spectacularly successful. (It doesn’t help to see this picture of him with a goofy oversized toothbrush.)

Can Google really create a third (or fourth) product that becomes so deeply enmeshed in our lives that it literally changes the way we live? If it fails, it won’t be for lack of ambition.

Here are four of the company’s biggest dreams.

1) Fuse man and machine.

You probably already carry a smartphone (maybe even one that runs on Google’s Android operating system.) Google wants to bring that convenience even closer to you, with projects like Google Glass, its new eyewear; Android Wear, a version of its mobile operating system that pairs with a watch; and a contact lens designed to help diabetics measure their blood sugar.

“Someday we’ll all be amazed that computing involved fishing around in pockets and purses,” Page said, discussing Google Glass on a recent conference call.

Unlike some of Google’s most outlandish schemes, “smart” eyewear and watches are already here, at least for the early adopters. The glasses are for sale for $1,500. At least two companies, Samsung and LG, make watches to pair with Android Wear, although reviewers have warned most consumers may want to wait for the technology to improve.

Of course, not everyone is excited about these new products. In July, the New York Post reported on what it called “The revolt against Glassholes.

“I don’t see why anyone feels the need to wear them,” the Post quoted one 30-year-old, who found it disconcerting to encounter a subway rider sporting a pair. “Was he reading his emails, watching an old episode of ‘Game of Thrones’ or recording everyone?” the man asked. “Just reach into your pocket and get your phone!”

2) Drive Your Cars.

Driverless cars have been a dream of techies for a long time. In fact, at the 1939 World’s fair, the famous “Futurama” exhibit predicted their arrival by 1960.

Things haven’t evolved quite so quickly. But Google’s efforts seem to be on the cusp. Modified Toyotas and Lexuses have already logged hundreds of thousands of miles, including on public highways. The company has said it plans to build a prototype that will operate without steering wheel or brakes next year.

It’s not just a matter of convenience. While most of us will certainly be nervous when we take our first ride, the cars could actually make roads safer by eliminating the all-too-human habits – from texting to falling asleep at the wheel – of today’s drivers.

Then again, solving old problems could create some new ones too…like the driverless car chase.

3) Bring the Internet to everyone, everywhere.

Google puts information at your fingertips. But that’s only if you have access to the Internet in the first place. That’s not something everyone can take for granted.

“Many of us think of the Internet as a global community. But two-thirds of the world’s population does not yet have Internet access,” says the Web site of Project Loon, “a network of balloons traveling on the edge of space, designed to connect people in rural and remote areas, help fill coverage gaps, and bring people back online after disasters.”

Come again? While most of us hook into the Web through our cable or phone lines, there are many people and places those still don’t reach. The idea, as described by Wired, is for a network of high-altitude balloons, each able to beam high-speed Internet to one another, as well as a serve as a hub for access for an area of about 25 miles below.

Last year, Google floated 30 test balloons over New Zealand, allowing “a small group of pilot testers” to connect online. The company hopes to expand the pilot program, soon circling the Earth along the 40th Southern Parallel, which rings Australia and parts of South America.

Apart from technical and political hurdles, some have questioned whether connecting the world to the Internet is really a top priority.

Said Microsoft founder Bill Gates in a recent BusinessWeek interview:

“When you’re dying of malaria, I suppose you’ll look up and see that balloon, and I’m not sure how it’ll help you. When a kid gets diarrhea, no, there’s no website that relieves that. Certainly I’m a huge believer in the digital revolution. And connecting up primary-health-care centers, connecting up schools, those are good things. But no, those are not, for the really low-income countries, unless you directly say we’re going to do something about malaria.”

4) “Solve Death.”

“Can Google Solve Death?” asked TIME last year. The occasion was an interview with Page about a new Google-founded company, Calico LLC.

Page explained the job of the new venture would be to use data and statistics to look at age-related health problems in new ways because current goals, like trying to cure cancer, weren’t ambitious enough.

“One of the things I thought was amazing is that if you solve cancer, you’d add about three years to people’s average life expectancy,” he told Time. “We think of solving cancer as this huge thing that’ll totally change the world. But when you really take a step back and look at it, yeah, there are many, many tragic cases of cancer, and it’s very, very sad, but in the aggregate, it’s not as big an advance as you might think.”

How exactly does Google plan to pull this off? Apart from announcing some high profile hires, Google hasn’t shared much about its vision. CNN was reduced to speculating about cryogenics.

Can Google really find the Fountain of Youth? Maybe. But they also may end up looking as if spectacular and unexpected success made them arrogant and gullible, not unlike those Conquistadors we learned about in grammar school.

Related:
10 Ways Google Has Changed the World
The 8 Wrongest Things Ever Said About Google

MONEY Google

The 8 Worst Predictions About Google

Magic 8-ball with Google logo
Flickr

In the 10 years since Google became a public company, there have been a lot of predictions made about the search engine giant. And it turns out, a lot have been wrong.

”I wouldn’t be buying Google stock, and I don’t know anyone who would.”
— Jerry Kaplan, futurist, in the New York Times, Aug. 6, 2004

The problem with making any public pronouncement about Google GOOGLE INC. GOOGL -0.2847% is that if you end up being embarrassingly wrong, someone can just Google that prediction to remind you how off the mark you were.

So that’s what we did.

With Tuesday being the 10th anniversary of the tech giant’s historic IPO, MONEY Googled the sweeping predictions that were made about the company and the stock leading up to and after the company’s public offering on Aug. 19, 2004, when Google shares began trading at an opening price of $85 a share.

To be fair, no one could have really predicted the stock would soar more than 1,000%—10 times greater than the S&P 500 index—in its first decade as a publicly traded company. You have to remember that in 2004, the Internet bubble was still a recent memory and Google’s offering was seen as the first significant tech IPO in the aftermath of the 2000-2002 tech wreck.

Still, it’s hard not to wince at some of the things said about what is now the third most-valuable company, with a market cap of nearly $400 billion.

1) Google won’t last.

What are the odds that it is the leading search engine in five years, much less 20? 50/50 at best, I suspect… — Whitney Tilson, The Motley Fool, July 30, 2004

In a memorable 2004 column, value investor Whitney Tilson argued that there was a significantly better chance that Dell would still be a leading computer company in the year 2024 than Google would be a leading search engine in 2009.

Obviously, he was wrong as Google still controls nearly 70% of all search and more than 90% of the growing mobile search market. (Meanwhile, Dell’s PC market share has shrunk considerably and desktop computers aren’t even a growth area anymore).

His argument may have made sense at the time. “Just as Google came out of nowhere to unseat Yahoo! as the leading search engine, so might another company do this to Google,” he wrote, adding that “I am quite certain that there is only a fairly shallow, narrow moat around its business.”

Yet Tilson made the mistake of underestimating the actual search technology. In the early 2000s, Google’s algorithms could search billions of pages at a time when rival search engines were able to get to just tens of millions. That lead in search capability gave Google enough time to leverage that technology into a dominant position in online advertising. Today, Google controls about a third of all global digital ad dollars.

2) Google’s founders won’t last.

These Google guys, they want to be billionaires and rock stars and go to conferences and all that. Let us see if they still want to run the business in two to three years. — Bill Gates at Davos, in 2003.

Microsoft co-founder Bill Gates was, of course, referring to Google co-founders Sergey Brin and Larry Page. Not only did the Google guys not go away, eight years later Page took over as CEO, and under his tenure the company became the dominant player in the smartphone market; made inroads into social media and e-commerce; and began dabbling in more futuristic technologies such as driver-less cars that are likely to boost interest in the stock going forward.

3) Google is a one-trick pony.

I mean, come on. They have one product. It’s been the same for five years — and they have Gmail now, but they have one product that makes all their money, and it hasn’t changed in five years. — Steve Ballmer, former CEO of Microsoft, in the Financial Times, June 20, 2008.

The bombastic Ballmer, who also predicted that the iPhone would go nowhere, wasn’t the first to call Google a one-trick pony. Yet Ballmer was flat out wrong. Today, Google has several tricks up its sleeve. The company still dominates search, but it is also a major player in mobile search, mobile operating systems, online advertising, e-commerce, social media, cloud computing and even robotics.

4) And who cares about search anyway?

Search engines? Aren’t they all dead? — James Altucher, venture capitalist (sometime in 2000)

You have to give Altucher credit for fessing up to what he admits may have been “the worst venture capital decision in history.” Three years ago, the trader/investor blogged about how his firm, 212 Ventures, had an opportunity in 2000 or 2001 to be part owner of the company that would later become an integral part of Google for a mere $1 million.

As he told the story, one of the associates of his firm had approached him with an opportunity in 2000. “A friend of mine is VP of Biz Dev at this search engine company,” the associate told him. “We can probably get 20% of the company for $1 million. He sounds desperate.”

To which Altucher replied: “Search engines? Aren’t they all dead? What’s the stock price on Excite these days? You know what it is? Zero!”

“No thanks,” Altucher said. That company was Oingo, which changed its name to Applied Semantics, which in 2003 was purchased by Google and re-branded AdSense. As Altucher points out, “Google needed the Oingo software in order to generate 99% of its revenues at IPO time. Google used 1% of the company’s stock to purchase Oingo, which meant that Altucher’s potential $1 million bet would have been worth around $300 million in 2011.

Oh well.

5) Microsoft will chase Google down.

Word has it that Microsoft will feature an immensely powerful search engine in the next generation of Windows, due out by 2006… As a result, Google stands a good chance of becoming not the next Microsoft, but the next Netscape. — The New Republic, May 24, 2004.

Alas, Microsoft’s Bing search engine didn’t come out until three years after the article said it would. And it wasn’t until last year when Microsoft truly embedded Bing into Internet Explorer on Windows 8.1.

Even if Bing gains traction on desktops — where it still only has about a 19% market share — search is transitioning to mobile. And there, Google utterly dominates and will probably stay in control because its Android operating system powers around 85% of the world’s mobile devices, versus Windows’ mere 3% market share.

6) Google isn’t a good long-term investment.

Don’t buy Google at its initial public offering. — Columnist Allan Sloan, Washington Post, Aug. 3, 2004.

I’m back from the beach and it’s clear that my advice turned out to be wrong…But now that the price is above the original minimum price range, I’m not in doubt. So I’ll repeat what I said three weeks ago. This price is insane. And anyone buying Google as a long-term investment at $109.40 will lose money. — Allan Sloan, Washington Post, Aug. 24, 2004.

Well, investors didn’t lose their shirts. A $10,000 investment in Google back then would have turned into more than $110,000 over the past decade. By comparison, that same $10,000 invested in the S&P 500 would have grown to less than $22,000. Howard Silverblatt, a senior index analyst for S&P ran some numbers and discovered that only 12 stocks currently in the S&P 500 wound up outpacing Google during this stretch.

To his credit, Sloan, now a columnist at Fortune, later admitted that “I was wrong, early and often, on Google’s stock price when it first went public, for which I ultimately apologized.”

7) Google isn’t a good value.

If you have any doubts at all about Google’s sustainability — you may, for example, recall that Netscape browsers used to be just as ubiquitous as Google home pages — you shouldn’t touch the stock unless its market capitalization is well under $15 billion. — MONEY Magazine, July 2004.

Okay, so we’re not infallible either. If you had followed MONEY’s line of thinking, you never would have purchased this stock because at the opening price of $85, the company was already valued at $23 billion. And it never dipped below that level on its way to a near $400 billion market capitalization today.

MONEY based its analysis on numbers crunched by New York University finance professor Aswath Damodaran, an expert on valuing companies.

Damodaran came to the $15 billion assessment after figuring that Google would generate a total of nearly $48 billion in cash over its lifetime. That turned out to be a bit off, as Google has generated that amount of free cash flow in just the past five years.

Again, this was an example of how difficult it is to estimate the future value of a corporation based on what the company is up to at the moment.

8) Google will avoid being evil.

Don’t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company. — Google’s 2004 Founders’ IPO Letter.

Now, evil is in the eye of the beholder. Some privacy buffs think Google long crossed the line when it began tracking user behavior across all of its services including search, Gmail, You Tube, etc.

Progressives, meanwhile, point to Google’s lobbying efforts as a sign the company is behaving like any other corporation. The company has reportedly contributed to conservative causes such as Grover Norquist’s Americans For Taxpayer Reform, which seems to belie the company’s left-leaning Silicon Valley culture.

Then there’s the fact that Google’s chairman Eric Schmidt has stated that he is proud of how the company has managed to avoid billions in taxes by holding company profits in Bermuda, where there is no corporate tax.

Whether you think this qualifies as evil or not, it highlights what folly it was to try to ban evil.

As Schmidt stated in an interview with NPR:

“Well, it was invented by Larry and Sergey. And the idea was that we don’t quite know what evil is, but if we have a rule that says don’t be evil, then employees can say, I think that’s evil,” he said. “Now, when I showed up, I thought this was the stupidest rule ever, because there’s no book about evil except maybe, you know, the Bible or something.

Related:
4 Crazy Google Ambitions
10 Ways Google Has Changed the World

MONEY Google

10 Ways Google Has Changed the World

Google Earth view
Google

It's been a decade since Google went public. Here are 10 ways the company has transformed the market—and our lives— since.

Back in 2004, investors weren’t entirely sure what to make of Google, and skeptics abounded. Fast-forward to today, when we can look back at how far the company has come, in ways that inspire both awe and concern. Below are 10 examples of its influence.

1. It has changed our language. Despite Microsoft’s best efforts, there’s a reason “Bing” never caught on as a verb, let alone as a beleaguered anthropomorphic meme. The phrase “to Google” is so popular that the company is actually worried about losing trademark rights if the term becomes generic, like “escalator” and “zipper,” which were once trademarked.

2. It has changed our brains. Recent research has confirmed suspicions that 24/7 access to (near) limitless information is not only bad for human discourse—it’s also making us worse at remembering things, regardless of whether we try. And even if we aren’t conscious of it, our brains are primed to think about the Internet as soon as we start trying to recall the answer to a tough trivia question. Essentially, Google has become our collective mental crutch.

3. It set the stage for Facebook and Twitter’s sky-high valuations. Yes, lofty valuations based on mere speculation were also common back in the dot-com fervor of the ’90s, says Ed Crotty, chief investment officer for Davidson Investment Advisors. But Google broke new ground by proving that even just the potential for a huge audience could pay off in a big way.

“In the early days, when people were thinking in terms of web portals, the barriers to entry didn’t seem high for search,” Crotty says. That meant Google’s competitive advantage wasn’t clear. But “the tipping point was when Google was able to scale up their audience enough to attract ad agencies, and then further improve their algorithms, since those get better with scale. That’s partly why you see tech companies now willing to forgo profits for a period of time in order to build an audience.” And also why investors are willing to throw money their way.

4. It has taken over our cell phones. Since the first Android phone was sold in 2008, Google’s mobile operating system has bulldozed the competition. Today it claims nearly 85% of market share, nearly doubling its hold over the last three years. Next stop, self-driving cars?

5. It has transformed the way we use e-mail. Gmail was invented a decade ago, before bottomless inboxes were a sine qua non. It’s hard even to remember those dark ages when storage space was sacred—and deleting emails was as tedious-but-necessary as flossing. Today our accounts serve as mausoleums, housing long-forgotten files, links, and even whole relationships. Google itself has touted alternative uses for Gmail, such as setting up a virtual time capsule for your newborn—though in practice accounts can’t be owned by anyone under 13. But even that last point is about to change.

6. It’s changed how we collaborate. Back in 2006, Google acquired the company behind an online word processor named Writely. With that bet, Google created a world where it’s taken for granted that people can collaborate on virtually any type of document, whether for work, play, or (literally) revolution.

7. It has allowed us to travel the globe from our desks. Yes, MapQuest was popular first. But Google Maps (and Earth) has become much more than a tool for measuring travel routes and times. Since Google Street View came onto the scene in 2007, it’s been possible to “visit” distant destinations, give friends a virtual tour of your hometown, plan ahead of trips, and waste even more time on the Internet. Of course, the more popular a tool, the more useful it is to those who’d like to spy on us.

8. It has influenced the news we read. Ranking high in Google search results is serious business and can have a profound effect on the success of companies, media outlets, and even politicians. When I just Googled “how SEO affects journalism,” this link was at the top of my search results. How is that significant? Well, for one, that story itself has been so successfully search engine optimized that it still tops the list despite being four years old.

But most importantly, many of the concerns raised in the piece have not gone away—such as the pressure to “file some pithy blog post about the hot topic of the moment” at the expense of covering stories that would be prioritized based on traditional measures of newsworthiness. What that means for you, the reader: more headlines like this and this.

9. It has turned users into commodities. We all love free stuff, but it’s easy to forget that services offered by companies like Google and Facebook aren’t truly “free,” as data expert Bruce Schneier has pointed out. Remember that all of your data (across ALL of the services you use, and that includes Calendar, Maps, and so on) is a valuable good that Google is packaging and selling to its real customers—advertisers.

10. It’s changed how everyone else sees YOU. Unlike your Facebook profile, the links that turn up when potential employers (or love interests) Google you can be near-impossible to erase. Perhaps unsurprisingly, Google uses the fear of embarrassing search results to encourage people to manage their image through Google+ profiles.

Related:
4 Crazy Google Ambitions
The 8 Worst Predictions About Google

MONEY retirement planning

3 Smart Moves for Retirement Investors from the Bogleheads

The Bogleheads Guide to Investing 2nd Edition
Wiley

A group of Vanguard enthusiasts offers sound financial advice to other ordinary investors. Here are three tips from one of their founders.

Wouldn’t be great to get advice on managing your money from a knowledgeable friend—one who isn’t trying to rake in a commission or push a bad investment?

That’s what the Bogleheads are all about. These ordinary investors, who follow the teachings of Vanguard founder Jack Bogle, offer guidance, encouragement and investing opinions at their website, Bogleheads.org. The group started back in 1998 as the Vanguard Diehards discussion board at Morningstar.com. As interest grew, the Bogleheads split off and launched an independent website. Today the Bogleheads have nearly 40,000 registered members, but millions more check into the site each month. (You don’t have to be member to read the posts but you must register to comment—it’s free.)

As you would expect given their name, the Bogleheads favor the investing principles advocated by Bogle and the Vanguard fund family: low costs, indexing (mostly), and buy-and-hold investing—though the members disagree on many details. The Bogleheads are led by a core group of active members, who have also published books, helped establish local chapters around the country, and put together an annual conference. Their ranks of regular commenters include respected financial pros such as Rick Ferri, Larry Swedroe, William Bernstein, Wade Pfau, and Michael Piper.

For investors who prefer their advice in a handy, non-virtual format, a new edition of “The Bogleheads’ Guide to Investing,” a best-seller originally published in 2006, is coming out this week. Below, Mel Lindauer, who co-wrote the book with fellow Bogleheads Taylor Larimore and Michael LeBoeuf, shares three of the most important moves that retirement investors need to make.

Choose the right risk level. Figuring out which asset allocation you can live with over the long term is essential—and that means knowing how much you can comfortably invest in stocks. Consider the 37% plunge in the stock market in 2008 during the financial crisis. Did you hold on your stock funds or sell? If you panicked, you should probably keep a smaller allocation to equities. Whatever your risk tolerance, it helps to tune out the market noise and stay focused on the long term. “That’s one of the main advantages of being a Boglehead—we remind people to stay the course,” says Lindauer.

Keep it simple with a target-date fund. These portfolios give you an asset mix that shifts to become more conservative as you near retirement. Some investing pros argue that a one-size-fits-all approaches has drawbacks, but Lindauer sees it differently, saying “These funds are an ideal way for investors to get a good asset mix in one fund.” He also likes the simplicity—having to track fewer funds makes it easier to monitor your portfolio and stay on track to your goals.

Another advantage of target-dates is that holding a diversified portfolio of stocks and bonds masks the ups and downs of the market. “If the stock market falls more than 10%, your fund may only fall 5%, which won’t make you panic and sell,” says Lindauer. But before you opt for a fund, check under hood and be sure the asset mix is geared to your risk level—not all target-date funds invest in the same way, with some holding more aggressive or more conservative asset mixes. If the fund with your retirement date doesn’t suit your taste for risk, choose one with a different retirement date.

Don’t overlook inflation protection. Given the low rates that investors have experienced for the past five years—the CPI is still hovering around 2%—inflation may seem remote right now. But rising prices remain one of the biggest threats to retirement investors, Lindauer points out. If you start out with a $1,000, and inflation averages 3% over the next 30 years, you would need $2,427 to buy the same basket of goods and services you could buy today.

That’s why Lindauer recommends that pre-retirees keep a stake in inflation-protected bonds, such as TIPs (Treasury Inflation-Protected Securities) and I Bonds, which provide a rate of return that tracks the CPI. Given that inflation is low, so are recent returns on these bonds. Still, I Bonds “are the best of a bad lot,” Lindauer says. Recently these bonds paid 1.94%, which beats the average 0.90% yield on one-year CDs. If rates rise, after one year you can redeem the I Bond; you’ll lose three months of interest, but you can then buy a higher-yielding bond, Lindauer notes. Consider them insurance against future spikes in inflation.

More investing advice from our Ultimate Retirement Guide:
What’s the Right Mix of Stocks and Bonds?
How Often Should I Check on My Retirement Investments?
How Much Money Will I Need to Save?

MONEY

Why I Cried When Berkshire Hathaway Hit $200,000 a Share

Crying baby
Robert Holmgren—Getty Images

Lessons from a guy who sold his stock in Warren Buffett's company for just $4000

The A shares of Berkshire Hathaway, the company run by superinvestor Warren Buffett, closed above $200,000 a share yesterday. But all I could think of was another number—$400,000—which is roughly the amount I’d be ahead today if I hadn’t foolishly sold Berkshire many years ago. Clearly, I screwed up. But maybe you can profit from my blunder in your own investing.

Here’s how it happened.

After the stock market crashed in October 1987, I noticed that Berkshire Hathaway shares, which had been selling for more than $4,000 in the months leading up to the crash, had dipped to around $3,000 a share. I’d long admired Buffett as an investor, and especially liked his views about long-term investing. He once said in one of his famous annual letters to Berkshire shareholders that his “favorite holding period is forever.”

So I decided to buy two shares for $3,000 apiece in November of 1987. At first, they dropped even more. But, like Buffett, I was in for the long term. So I held on. And before long, Berkshire’s share price began to climb, passing $3,900 a share by April, 1988.

It was about then that a little voice began whispering in my ear: “Maybe you should sell.” It continued: “You’re up $1,000 a share, two thousand bucks, in just seven months. That’s pretty damn good.” I resisted at first. But I began to weaken, inventing rationales about why Buffett’s long-term philosophy didn’t make sense in this instance. “Who in his right mind is going to pay almost $4,000 for one share in a company? The last time these shares sold at this level, look what happened: they dropped by 25%. Get out while the getting is good.”

When the share price hit $4,000 in June of 1988, I bailed, netting myself a nifty little profit of $2,000, before brokerage commissions. My initial trepidation at selling gave way to delusions of grandeur. I felt escstatic: a $2,000 profit on a $6,000 investment in just seven months. Look at the way I’ve navigated the stock market, I told myself. I’m displaying truly Buffett-esque qualities.

But air began leaking from my inflated sense of my investing abilities when I saw that Berkshire shares continued to rise. And rise, and rise. A year later, they were selling for more than $6,500 a share. A few years after that, they cracked the $10,000 mark. In 2006, they hit six-figure territory, more than $100,000 a share. Sure, there were ups and downs along the way. But it was pretty clear that my genius move wasn’t such a genius move after all. Had I held on, I would own two shares worth $405,700, giving me an annualized return of about 17% based on my intial $6,000 investment. The Standard & Poor’s 500 index gained roughly an annualized 11% over the same span.

So, what lesson can you take from my Berkshire experience and apply to your own investing, whether for retirement or any other purpose?

Well, first I want to be clear that I’m not suggesting that you invest a substantial sum in Berkshire Hathaway—whether through the A shares or, more likely, the B shares, which closed at a mere $135.30 yesterday—in hopes of extravagant gains. You can always find examples of great stocks that generated dazzling returns. But there are also plenty of stocks that people were sure would be winners that flamed out. So the mere fact that, looking back, we can all see that Berkshire did extraordinarily well doesn’t mean it would have been a wise move years ago or a smart move now to concentrate one’s money in it, or any other single stock or small group of stocks.

And, in fact, the money I invested in Berkshire back then was a small portion of my investable assets. I held the overwhelming majority of my savings in a well-rounded and broadly diversified portfolio. So as chagrined as I was and am that I didn’t hold on to those Berkshire shares, my financial future wasn’t riding on them.

Rather, the real lesson here is that many times you will be tempted to deviate from your core investing principles or your long-term strategy. When the market is soaring, you may be tempted to shift bond holdings into stocks. That’s where the returns are, no? Or after the market has cratered, you may come to see stocks as far too risky and feel a strong urge to dump your stock holdings and hunker down in the safety of cash or bonds. After all, who knows how much lower stocks can fall and how long it may take them to recover?

Similarly, while you know that plain-vanilla low-cost index investments are a proven way to reap the rewards of the financial markets over the long haul, you could still find yourself intrigued by a pitch for a high-cost investment that purports to offer outsize gains with little downside risk. The people who peddle such illusions can be mighty persuasive.

But if you abandon your long-term strategy every time the markets get rocky or a clever salesperson dangles a shimmering investment bauble before your eyes, you won’t have a strategy at all. You’ll be flying by the seat of your pants.

Which is why at such times it’s crucial that you take a moment to remind yourself of why you have a long-term strategy in the first place. It’s so you won’t end up simply winging it. And having done that, you’ll have a better chance of ignoring that voice whispering in your ear. I wish I had.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

More from Real Deal Retirement:
Do You Really Need Stocks to Invest for Retirement?
How an Early Start Can Net You An Extra $250,000
5 Tips for Charting Your Retirement Lifestyle

MONEY tech stocks

Which 80-Year-Old Billionaire Would You Trust With Your Tech Portfolio?

Diptych of Warren Buffett and George Soros
Mark Peterson/Redux (Buffett)—Luke MacGregor/Reuters (Soros)

Billionaire hedge fund manager George Soros and billionaire investor Warren Buffett are both buying tech stocks—but decidedly different kinds. So who would you bet your portfolio on?

Both billionaire investor Warren Buffett and billionaire hedge fund manager George Soros have had somewhat troubled relationships with tech stocks over the years.

Buffett famously punted on tech throughout the 1990s, declaring that “we have no insights into which participants in the tech field possess a truly durable competitive advantage.” So his investment company Berkshire Hathaway severely lagged the S&P 500 in the late 1990s — but at least it missed the tech wreck in the early 2000s. For Soros, the opposite was the case: His fund stayed at the Internet party too long in 2000.

Recently, though, both octogenarians have been dabbling in this sector — but in decidedly different ways.

SEC filings released on Thursday indicate that while Buffett is looking to the past for time-tested but overlooked plays on this sector, Soros seems only to be interested in future trends.

Buffett and ‘Old Tech’

Buffett is taking the old school approach. Quite literally. His tech sector holdings — indeed, his entire portfolio — looks as if it was straight out of the early or mid 1990s.

For instance, one of his biggest tech holdings, which recent SEC filings indicate he’s been adding to, is the century-old IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM 0.0158% .

This technology service provider — which has run into difficulties in the crowded cloud computing space lately — has seen its revenue growth decline for several quarters while its stock has been under fire.

IBM Chart

IBM data by YCharts

No doubt, Buffett clearly sees IBM as a value, as the stock trades at a price/earnings ratio of around 9, which is about half what the broad market currently trades at. In his most recent letter to Berkshire shareholders, Buffett described IBM as one of his “Big Four” holdings, along with American Express, Coca-Cola, and Wells Fargo.

Beyond IBM, Buffett prefers lower-priced but slower growing internet backbone companies to fast-growing but pricey content providers. This is part of a tech investing trend that MONEY contributing writer Carla Fried recently addressed.

Other stocks he recently purchased or positions that he has been adding to include the Internet infrastructure company Verisign VERISIGN INC. VRSN 0.7422% and internet service providers Verizon VERIZON COMMUNICATIONS INC. VZ 0.2464% and Charter Communications CHARTER COMMUNICATIONS INC. CHTR -0.2434% .

Soros’ ‘New Tech” Bets

By contrast, Soros seems to be trying to ride current and future trends — albeit with highly profitable names.

In the second quarter, Soros added to his stake in the social media giant Facebook FACEBOOK INC. FB -0.6375% . Last month, Facebook shares hit a record high after the company reported robust profits. Plus, Facebook has proven to Wall Street that it can conquer the mobile advertising market, as nearly two-thirds of its revenues now come from mobile ads.

Facebook isn’t the only mobile bet Soros is making. He has also been recently adding to his stake in Apple APPLE INC. AAPL 0.0398% , which along with Google dominates the mobile computing space. New data from IDC showed that Apple’s iOS operating system held about a 12% market share among phones shipped in the second quarter — even though demand for iPhones has fallen as consumers await the arrival of the new iPhone 6, which will be introduced in September.

For the moment, Soros’ bets on these new tech names seem to be in the lead.

AAPL Chart

AAPL data by YCharts

But over the long-term, would you bet on Team Soros or Team Buffett?

MONEY The Consumer Economy

The Real Reason You’re Not Shopping at Walmart

Female shopper in Wal-Mart store aisle
Patrick T. Fallon—Bloomberg via Getty Images

Despite the improving job market, workers still don’t have that much walking around cash, which means they have less to spend at retailers.

The summer has not been kind to some of America’s largest retailers.

Traffic at Wal-Mart’s U.S. locations, for instance, was down, while sales at stores that had been open for at least a year failed to grow. Macy’s lowered its full-year sales growth projection, and sales at Kohl’s dropped 1.3% in the last three months. Nordstrom’s earnings per share were basically flat.

If you’re noticing a trend, that’s because there is one: Merchants are struggling.

The Commerce Department recently announced that retail sales decelerated in July for the fourth consecutive month, despite the fact that more workers are finding jobs, and the unemployment rate is hovering around 6%. So what’s going on?

Well, one potential answer is that you, the consumer, just don’t have that money to spend. Yes, employers have added more than 200,000 workers a month to their payrolls since February. And yes, the unemployment rate has dropped to 6.2%—about the same as in September 2008. But workers really haven’t seen the benefits of job growth in their bottom lines.

For instance, take a look at real disposable income for U.S. workers. The year-over-year change in disposable income is only 3.9%, below pre-recession levels. “While stronger job growth has played a role in sustaining consumer spending, the slower income growth has served to keep a lid on real spending activity over the past several quarters,” per a recent Wells Fargo Securities economic report.

disposable income

 

Another way to gauge the plight of workers is a metric called the Employment Cost Index (ECI), which is published by the Bureau of Labor Statistics. The ECI measures what it costs businesses to actually employ their workers—so, wages, salaries and fringe benefits like medical care. Before the Great Recession struck in 2007, the ECI gained nearly 3.5% over the prior 12 months. Since the economic recovery, however, employee costs have not risen above 2%.

wages
BLS

Rising wages are a lagging indicator; people only see raises after the jobs picture improves. Which is happening now. Fewer people are filing unemployment claims, and the number of job openings continues to nudge higher. (And traditionally, job openings have an inverse relationship with wage gains.)

So, hopefully, sometime soon demand will pick up, businesses will start giving their workers substantial raises, and those workers will go out and spend their newfound dollars. (After all, my spending is your income.)

What’s good for the economy is sometimes what’s good for Wal-Mart.

MONEY mortgage bonds

This Danger Is Lurking Among Your Plain Vanilla Investments

201409_INV_01
Claire Benoist

Five years after financial crisis bond managers are again embracing risky, esoteric mortgage bonds. Here's how to spot them -- and protect yourself.

Updated on Aug. 15, 2014.

The New York Times is reporting that mutual funds with ties to JPMorgan Chase, SEI Investments and others are snapping up high-risk, high-reward bonds backed by delinquent mortgages. While investors accustomed to thinking of bonds as the staid part of a portfolio may be surprised, these managers’ efforts to dabble in exotic securities are hardly unusual.

In fact the controversy follows hot on the heels of another in July when fund maven Morningstar said it would no longer rate the $34 billion star bond manager Jeffrey Gundlach’s DoubleLine Total Return Fund—which ranks among the 10 biggest bond portfolios — after DoubleLine declined to answer its questions regarding a different variety of esoteric securities such as “inverse interest-only” and “inverse floating-rate” bonds, among other things. (DoubleLine was quoted in the Times article as saying they had looked at the low-quality mortgage bonds but hadn’t bought any yet.)

What gives? Amid today’s ultra-low interest rates many bond managers feel they need to go beyond traditional bonds like Treasuries and corporates to earn investors a decent return.

The use of complex securities—such as credit default swaps (a form of private insurance) and fixed-income derivatives (bets made on or against bonds that the funds don’t actually own)—has become so widespread that Morningstar had to create a whole new category: “nontraditional” funds. Yet unconventional investments can be found in many traditional portfolios. Even basic intermediate-term bond funds, for instance, are dabbling. This isn’t necessarily bad.

Some of these investments, such as futures and options contracts, allow managers to achieve a certain level of returns without the cost of buying hundreds of individual issues. The problem is that such funds become harder and harder to analyze. And inevitably a few will pile on really big positions that go south. In 2008, Schwab YieldPlus, an ultrashort bond fund, lost a third of its value because of bad bets on mortgage-backed securities.

Here’s how to strike the right balance between creativity and risk in your bonds:

Gauge your exposure to exotic investments

There’s no easy way to look up a fund’s derivative exposure online. Even prospectuses are written too broadly to be of much use, says securities expert Mercer Bullard. So you have to search for clues. Start with your fund’s cash stake. Many derivatives such as futures and swaps involve investing borrowed money. This can lead funds to report negative cash and outsize investments in other parts of the market. One high-profile example: Pimco Total Return. Go to Morningstar.com and you’ll see the fund, run by star manager Bill Gross, holds –36% of its assets in cash and more than 130% in bonds.

Index some of this risk away

While it’s hard to argue with the long-term success of Gross—or Gundlach—you don’t want all your managers to be so adventurous. Index funds can help. Passively managed funds aren’t necessarily derivative-free. The policy statement for Vanguard Short-Term Bond Index VANGUARD BD IDX FD SHORT TERM PORTFOLIO VBISX -0.095% , for example, says the fund may use derivatives “to a limited extent.” However, because index funds merely track broad market benchmarks, their managers have little incentive to use esoteric securities to juice their returns, analysts and industry experts say.

Manage your “manager risk”

Now, you might want to go with active management—perhaps you like the fact that some managers use unconventional securities to guard against market risks. DoubleLine officials, for example, say the investments that Morningstar took issue with make Gundlach’s bond fund less susceptible to the risks of rising interest rates.

Nevertheless, you should still diversify your bond pickers, since they’re using these instruments in different ways. Merritt Island, Fla., financial adviser Steve Podnos likes Pimco Income PIMCO FUNDS INCOME FD CL A PONAX 0.0789% , and Loomis Sayles Bond LOOMIS SAYLES FD I BOND FUND RETAIL CLS LSBRX -0.1265% . Both funds can invest in various types of debt globally. And both have beaten more than four out of five of their peers since 2009. Yet while the Pimco fund dabbles in some unconventional stuff like interest rate derivatives, the Loomis Sayles fund, which is on our MONEY 50 recommended list, tends to be a bit more strait-laced. If you’re 40, say, with 30% of your portfolio in bonds, dividing your fixed-income stake between two active portfolios and an index fund would limit exposure to any single manager to 10%. That’s insurance in case one of your bond pickers turns out to be a real gunslinger who misfires.

(Note: This story was updated with additional clarifying details regarding Morningstar’s dispute with DoubleLine. Morningstar says it stopped rating the DoubleLine fund after the company declined to answer its questions regarding holdings of esoteric securities such as ‘inverse interest-only’ and ‘inverse floating-rate’ bonds).

 

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