Machine Learning for Stock Selection
As discussed, conventional wisdom preaches that the U.S. stock market yields the highest long-term rates of return. Homes Buy one if you must, the pundits advise, but only as a comfortable place to live. Certainly, don't think of it as a bank account with a white picket fence. There's no liquidity in property. You can't take that unused bedroom to the supermarket to buy groceries, says BusinessWeek in quoting financial planner Thomas Grzymala.
In a perfectly efficient market, stock prices and company intrinsic values would move in lockstep. Thankfully, the real market is not so efficient, giving smart investors the opportunity to take advantage when a stock price diverges markedly from its underlying value. Panic and fear create buying opportunities euphoria and complacency deliver great opportunities to sell.
In Chapter 2 we tabulated and explained the volatility characteristics of two extreme types of bond contracts, neither of which are often found in real life 1) the perpetual bonds with no maturity and hence no lump sum payment at maturity (like non-callable preferred stocks) and 2) 0 coupon discount bonds which offer only one lump sum payment which includes principal and interest (like savings bonds). We found that the volatility characteristics of these two types of bonds were very different, almost opposite, as follows
Beyond the dreadful economy, the market 's recent concerns appear to revolve around four things the pounding Berkshire 's stock portfolio has taken, earnings, the exposure to derivatives, and Buffett's age, all of which are raising questions as to whether Buffett has lost his touch. Before we address each of these, let 's step back and provide some background.
The sale of endowments in the UK has been at the centre of some controversy, with suggestions that third party originations (mortgage brokers rewarded by commission on sales) have led to widespread 'mis-selling'. The 'mis-selling' relates to the contention that consumers were not made aware of the risk that endowment funds might not grow sufficiently to eventually pay off the mortgage debt. The appropriateness of using a risky investment vehicle for this purpose has also been questioned. A low interest rate environment and depressed stock market returns in recent years have led to widespread endowment shortfalls. The analysis of so called 'mis-selling' is a linguistic and analytical minefield and an issue that has not really been explored in the mortgage analysis literature (for an exception see Leece 2000c), though there is US research on agency problems and third party originations that is relevant to this issue (see LaCour Little & Chun 1999 Alexander et al. 2002). Econometric...
Beneficial's success was lost somewhat on Angelo Mozilo. In the early to mid-1970s he and his partner, David Loeb, were busy managing a very young mortgage banking company called Countrywide Credit Industries, which went public on the New York Stock Exchange in 1969, raising 450,000. (They were hoping for 3 million.) The two men, who had met while working for a home lending company that Loeb owned part of, launched the first version of Countrywide on Loeb 's kitchen table in his apartment at 99th Street and Park Avenue in Manhattan. To hear Mozilo tell it, the owners of Loeb 's previous company had itchy fingers they couldn 't keep their hands off of the lender's escrow accounts, which legally belonged not to the company
Over the past 159 years American Express (Amex) has grown to be one of the most admired companies in the world and among the most recognized global brands, yet its stock price has plunged more than 80 percent from its peak less than two years ago, hitting a 14-year low below 10 on March 6, 2009, as shown in Figure 8.1. Figure 8.1 American Express Stock Price, March 6, 2007-March 6, 2009 Figure 8.1 American Express Stock Price, March 6, 2007-March 6, 2009
During the 1990s, some financial writers and advisors urged homeowners to cash out their home equity and invest it in the stock market. In his 1997 book, The Strategy A Homeowner's Guide to Wealth Creation (Key Porter Books), Garth Turner painted a wealthy, risk-free future for homeowners who would borrow against their home equity to buy stocks In his influential book, Stocks for the Long Run, 3rd ed. (McGraw-Hill, 2002), Wharton School professor Jeremy Siegel enthuses over stocks as the salvation for all investors who will keep the faith.5 Buy and hold through the market's ups and downs, Siegel advises. You will become wealthy. It's virtually guaranteed. Like Garth Turner, Siegel suggests (though not so emphatically) that homeowners leverage up their home financing and put their cash proceeds into the stock market. From a casual perspective, this technique to build wealth seems reasonable. Borrow mortgage money at a tax-deductible rate of 6 to 8 percent. Use that cash to buy stocks....
The very large flows of mortgage funds over the past two years have been described by some analysts as possibly symptomatic of an emerging housing bubble, not unlike the stock market bubble whose bursting wreaked considerable distress in recent years. Existing home prices (as measured by the repeat-sales index) rose by 7 percent during 2002, and by a third during the past four years. Such a pace cannot reasonably be expected to be maintained. And recently, price increases have clearly slowed But any analogy to stock market pricing behavior and bubbles is a rather large stretch. better investments than homes over time (providing real returns of 6.3 and 4.7 percentage points, respectively, while the real return on homes totaled only 0.6 percent over this long period). Only from 1997 to 2007, a period that encompasses a collapse in stock prices due to the dot-com implosion and the growth of a major housing price bubble in its place, did homes deliver higher real returns than stocks and...
Funds borrowed against a person's current deposits or investment balance. Financial institutions often allow their individual investors to borrow against the value of their individual portfolios, up to a percentage of their portfolio value--usually 50 . A drop in the stock market may lower the portfolio value, which would increase the ratio of margin loan. It if exceeds the limit, margin calls are made and private investors must immediately pay down their loan to bring it within limits.
Some people even blame shorts for bringing down entire companies like Bear Stearns and Lehman Brothers. This is 99 percent nonsense (though we are certainly aware of occasional case in which short sellers behave badly, just as there are cases in which stocks are fraudulently pumped up). It 's one reason we support reinstating the up tick rule, which means that a stock can be shorted only at a price higher than the previous trade. This prevents a wave of short selling from driving a stock price down. We question whether this happens very often in our opinion, it 's almost always waves of longs dumping their stock when they finally figure out a company is in trouble that drive the stock down at that point, many short sellers are covering by buying the stock but reinstating the uptick rule would remove all doubt.
Today, REXI manages assets across a broad range of categories and earns attractive spreads on structured finance pools. We believe that while some of these pools may experience problems, REXI has modest liability, which is more than discounted in the stock price. In addition to substantial excess assets outlined later, we estimate that REXI has earnings power of over 1 per share, though it will not reach this level in 2009 the company's guidance is 0.50 to 0.70 per share. REXI operates in three segments financial fund management (FFM), which manages various types of asset-backed securities real estate,
One of the major drivers of Berkshire 's recent stock price decline is the massive decline in the company 's U.S. stock portfolio from roughly 70 billion at the end of Q3 2008 to 34 billion as of March 6, 2009. This 36 billion drop, after adjusting for taxes, is equal to 15,000 per share, which sounds like a lot until you consider that the stock has fallen 58,200 per share. Regarding the recent losses in Berkshire 's stock portfolio, some of the things that look like mistakes might end up turning out okay. We recall that earlier in this decade he bought USG Corporation in the high teens and it soon plunged to around 3 yet by 2006, the stock was above 120. We think most of the stocks in Berkshire 's portfolio are likely to eventually return to their former highs. The financial stocks Berkshire has large positions in Wells Fargo, American Express, and U.S. Bancorp have declined significantly during the crisis, but long-term the jury is still out. As we discuss later, we recently covered...
Using either valuation method, we come to roughly the same intrinsic value. Figure 7.4 shows Berkshire 's stock price from 1997 through early March 2009, along with the intrinsic value each year using the first method cash and investments plus 12 times pretax earnings until 2008, when 8 times earnings was used. Note that in most years, Berkshire 's stock at some point during the year reaches intrinsic value. If Berkshire were to do so this year, it would jump more than 30 percent.
The stock market has introduced most Americans to the scourge of capital gain taxes. The problem many Americans (especially Republicans) have with capital gain taxes is that it smacks of unfair double taxation. For example, if you own stock in IBM, that company pays income taxes on its earnings, which also happen to be your earnings. Paying capital gains seems to many as another layer of income taxes.
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