Tag: investing

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Coffeehouse Portfolio The Lazy Portfolio

This is another in a series of lazy portfolios and one of the most popular. There is no single “coffeehouse portfolio” and an investor can adjust the basic version to own needs and investing goals.

This lazy portfolio, Coffeehouse portfolio, that financial advisor Bill Schultheis made famous in his book “The Coffeehouse Investor” is so simple.
The Coffeehouse portfolio is built of 7 funds. The basic version starts with the composition of 60/40 stock/bonds. The fixed income part is put into a bond fund (you have to choose). The 60% in stocks is divided equally between six index funds. That index funds are a large-cap value fund, a small-cap fund, a small-cap value fund, a foreign fund, a REIT fund, and a large-cap fund.

“Investing should be dull,” said Nobel economist Paul Samuelson. Yes, some would say the same. But we have to be honest. This kind of portfolio maybe isn’t suitable for some Millennials experienced in investing. The Coffeehouse portfolio is too much dull. On the other hand, it is good. All you have to do is to set it up and live your lives.

And this discovery is amazing.

You can hear investors saying the same thing again and again: You need some simple but well-diversified portfolio. You don’t need more than several funds (4, 5, 9 whatever), but pay attention, as you are a novice, they have to be low-cost and able to create winners during both bear and bull markets.

That’s the point with lazy portfolios. There is no active trading, no market timing, and of course, no commissions. Moreover, they are simple. Well, someone may ask what happens with assets absent from such a portfolio. Forget it! You don’t care!

How to structure Coffeehouse portfolio

It is quite simple, as we said and here is one example:

10% Vanguard 500 Index
10% Vanguard Value Index
10% Vanguard Small-Cap Index
10% Vanguard Small-Cap Value Index
10% Vanguard REIT Index
10% Vanguard Total International Index
40% Vanguard Total Bond Market Index

Or

10% Large-Cap Stocks
10% Small-Cap Stocks
10% Large Value Stocks
10% Small Value Stocks
10% REITs
10% Total International Stocks
40% Bonds

As you can see in this portfolio, it is massive on the REITs, is slight on international stocks, and misses diversity on the fixed income side.

Roll the dice

Basically it is a “slice and dice” portfolio. So we can say it isn’t a “total market” example of the portfolio. A total-market portfolio consists of 1/3 equal parts of a total bond market index, total stock market index, and total international stock market index. But this “slice and dice” portfolio seeks to benefit from the higher returns. There is a higher risk when investing in value stocks and small stocks. And, as you can see, this portfolio has a massive collection of both small, and value stocks.

The 60% piece of the Coffeehouse portfolio represents 6 different funds that cover a different part of the market. That is a really good part of this portfolio since it is adding to the diversity.

The rest of the 40% of the portfolio is a total bond fund that includes the whole of the bond market.

It is recommended to rebalance the Coffeehouse portfolio every year. That secures that the asset allocation percentages are held at the accurate amounts. But it can be an individual decision for every investor, there are no rules what is the accurate amount.

Modifications of this lazy portfolio

As you can see this portfolio holds more bonds. It is more than some average investors would like to hold, especially if you are young. To make a comparison, the target-date funds, for instance, for Vanguard hold 10% bonds until investors are 45. We found some of the Trinity University studies and one shows that even investors in retirement should own 50/50 portfolios or even more aggressive.

Honestly, the Coffeehouse portfolio favors small-cap and value stocks. And do it with reason. Historically they have had higher returns and which means higher volatility too. But you can tweak the portfolio.

How to adjust the Coffeehouse portfolio

One method is to reduce your exposure to bonds (for example you could hold 10% of them) and split the rest of the portfolio equally into six funds. In this way, you’ll have a much more aggressive portfolio if you like that. But keep in mind, that is riskier at the same time and you must know how much risk you are able to handle.

Why not invest in the Coffeehouse portfolio

Firstly, for some investors, this portfolio hasn’t enough international exposure. It holds only 10% of Total International Stocks. Secondly, the 40% bond allocation will reduce your returns, you can be sure. Also, rebalancing can be expensive. There are too many funds to set them up.

For young investors, it isn’t so easy to just buy and hold. What if the prices are going up and down frequently? How to stay calm and do nothing? That’s the tricky part of any lazy portfolio.

Also, as we said above, the Coffeehouse portfolio can be too conservative for some investors. Where has the excitement of investing gone? Yes, you can adjust the portfolio as we described but still. Hence, to be honest, the one size that suits all methods sometimes don’t work for everyone. Especially if you prefer to be a more aggressive investor.

Why invest in this portfolio

Allocation on the value stocks is an advantage. The value stocks have outperformed growth stocks for 20%, according to historical data. Also, since this portfolio holds 20% small-cap stocks, it is good because they have outperformed large caps. Historically speaking, of course. By being a lazy portfolio and holds 40% in bonds, the Coffeehouse portfolio is less risky.

Bottom line

A creator of this portfolio is Bill Schultheis. He wrote a book about dullness investing. He had found that when you simplify your investment decisions, you end up with better returns.

His book “The Coffeehouse Investor” explains why investors should stop holding top-level stocks or mutual funds, and stop attempting to beat the stock market. Instead, keep stick to three clever principles:

1) There is no free lunch
2) Never put all eggs in just one basket
3) Save for rainy days

Sure, there is one more. Don’t pay too much attention to daily ups and downs in the stock market. It can ruin your life. But with investing in the principle buy-and-hold, with an annual rebalancing of your portfolio, it is more likely that you will build your wealth. There’s nothing wrong with adjusting the CoffeeHouse portfolio. It’s more important that you stick with your plan. The weighting of your allocations is less important but has to be reasonable. And a note for newbies, sometimes it is smarter to be a bit conservative especially in the stock market.

And here is a bit of statistics. Behavioral finance professors Brad Barber and Terry Odean discovered: “The more you trade the less you earn.” Buy-and-hold investors are doing better than traders. Active traders can lose a lot of money paying transaction costs and taxes.

The truth is that active traders can turn their portfolios over for more than 250% per year, but their returns can be just like 11% after paying tax. Opposite, buy-and-hold investors can turn their portfolios over a bit around 2%, making around 18% returns.

Finally, this is just one of the numerous approaches to investing. You are the one who has to choose. It’s all up to you.

28th January 2020
The Barbell Portfolio – Strategy Of A Balance

The barbell portfolio holds only short term and long term bonds and generates fixed income. A flattening yield curve situation is the best time to use this strategy, while a steepening curve is harmful to the strategy.

The barbell portfolio was invented by bond traders. The strategy means to hold safe short-term bonds and riskier long-term bonds. Put them together and that is the barbell portfolio. This also means that you are betting on both sides. But your barbell portfolio gives you protection since you have extremely safe short-term bonds. Yes, they will provide you with less profit but the profit is compensated from the other side of your portfolio – by long-term bonds that are extremely risky but provides a great profit.

Building a barbell portfolio, you will give your investments a balance that can run you through different circumstances, even extreme ones. The barbell portfolio is a very simple investment allocation actually. But the barbell portfolio is heavily weighted on two ends, just like a barbell. This concept is easy to understand and we want to explain it by using bonds. You can create this kind of portfolio with cash and stocks, also it can be a nice substitute to a 60/40 stock/bond portfolio.

How to structure barbell portfolio

Let’s say the short-term bonds are risk-free. But you will not earn a lot by holding only them. To have a profit you must add something riskier to your portfolio. So, you can do it by holding long-term bonds. You see we are not considering mid-term bonds. There are long-term bonds to provide the yield to your portfolio.

Yes, they are the riskiest but also give the highest returns.

The idea of this kind of portfolio is to bypass and avoid the risk on one side of the barbell portfolio and to do it as much as possible but to put more risks with long-term bonds.

For every investor, the risks diversification is one of the most important parts. So how to do that with a barbell portfolio? For example, you can build it if one half of your portfolio is in bonds with 5 years maturities and the rest is in bonds with 15 years maturities. The point is to put weight on both ends of your portfolio. But it hasn’t to be equal weight. it can be turned in one direction or another. Of course, it depends on an investor’s vision and yield demands.

You have to pay attention to the bond barbell strategy. It isn’t a passive strategy. You will need to monitor short-term bonds and adjust them frequently. Also, the other end with long-term bonds should be adjusted from time to time because of their maturities shorten. Some investors will just add new bonds to replace the existing.

Barbell Investing

It is all about aiming to balance risk in your investment portfolio. For example, if you put bonds on the left end of the barbell portfolio you might be faced with rising interest rates. So, the value of the bonds could decline. In order to balance the weight, you can replace them or part of them with, for example, with dividend-paying stocks, or some other ETFs. This left side has a great role. It has to protect your wealth so the savvy investor will always choose low-volatile and low-risk assets for the left end.

The right side’s role in your barbell is to give you high profits. That is your financial goal. So you can add some aggressive stocks there instead of long-term bonds.

The barbell strategy is actually a simple investment allocation. Two ends, two sides of your portfolio are designed like opposite ends. What you have to do is to allocate your capital between safe and aggressive sides. Some experts recommend holding 80% treasury bonds and 20% stocks.

Some may ask why to diversify like this. Here is why. Let’s say you have invested 100% in different stocks. Yes, you have a diversified portfolio but you are, at the same time, 100% exposed to downside risk and you are at risk to lose all your capital invested.

But if you build a barbell portfolio with 80% bonds and 20% stocks your downside risk can arise on your risky part of the portfolio. That is 20% of stocks. But the point is that the majority of your portfolio will be in safe investments. Moreover, bonds will give you interest too.

Why use this strategy?

Because it can lower risks for investors. At the same time, it can provide exposure to higher yield bonds. Higher yields will compensate for the higher interest risk rate. So that is the first benefit. This strategy allows investors to have access to higher yield long-term bonds. The other benefit is that this strategy reduces risks because the short-term and long-term bonds’ returns favor being negatively correlated. In other words, when short-term bonds are doing well, the long-term bonds will have difficulties. When you hold bonds with different maturities it is more likely to have less deadfall risk. Let’s say when interest rates grow, the short term bonds are rolled over and reinvested. Of course, at a higher interest rate. That will compensate for the drop in the value of longer-term bonds. Opposite, when interest rates are lower, the value of the longer-term bonds will grow. Simple as that.

But remember, it’s so important to manage the weight of both ends. And to do it actively. The contrary will never produce long-term returns. If you notice that the assets on one end of your barbell portfolio somehow look expensive you have to change it and balance by leaning toward less expensive assets on the other end. Well, if the prices are expensive on both ends, you will need to reduce overall portfolio risk.

Is there any risk?

Yes, interest rate risk no matter do you hold both long term and short term bonds. If you buy the long-term bonds while the interest rates are low they may lose value quickly when the interest rates increase.

An additional risk of the barbell strategy comes from the investors’ limitation, this portfolio doesn’t include intermediate-term bonds so you will not have exposure to them. And we all know that intermediate-term bonds give better returns than short-term bonds. Yes, they are riskier but not too much. In comparison with long-term bonds, intermediate-term bonds will offer a bit lower returns. That is the downside of the barbell portfolio because you don’t have an opportunity to earn on these returns.

Well, the main risk of the barbell strategy lies in the longer-term bonds. They are more volatile than their short-term bonds. As we said, you will lose if rates rise and you choose to sell them prior to their maturity date. If you keep the bonds until the maturity date, the fluctuations will not influence negatively.

The worst scenario for the barbell is when long-term bond yields are rising faster than the yields on short-term bonds. That is the steepening yield curve. The bonds that make up the long end of the barbell drop in value. So, you may be forced to reinvest the profits of the lower end into low-yielding bonds, to balance the portfolio.

But the flattening yield curve, if yields on shorter-term bonds rise faster than the yields on longer-term bonds you will earn. That is an advantageous part of the barbell strategy.

Bottom line

The benefits of the barbell investing strategy are numerous. Firstly, you will have a better diversification of your investments. Also, you will have more potential to reach higher yields with less risk. If interest rates are falling all you have to do is to reinvest at lower rates when the maturity date of that bond comes. In case the rates are rising, you will have the chance to reinvest the profits of the shorter-term securities at a higher rate. Since the short-term bonds mature frequently, that will provide you the liquidity and adaptability to solve emergencies.

27th January 2020
Black Swan Investing Strategy To Reduce The Risk

Predicting when the next black swan event will happen is the mission impossible. But you can create a portfolio created to reduce the risks related to black swans.

Black Swan investing isn’t quite a strategy, it is more a trading philosophy. Actually, it is a method of predicting the occurrence of black swans. The black swan is an unplanned, unexpected event in the markets. Such events come as a sudden blow and may influence the market. But black swan also can have both a positive and negative impact and we are going to discuss them here.

An example of a negative black swan is the crisis of 2008.

Black Swan investing is a trading philosophy based completely on the probability that some accidental event will hit the markets. To avoid losses caused by a black swan, traders who are trading based on black swan strategy always are buying options, never sell. They never estimate will the market go in one or another direction, up or down, they are buying. These traders are actually betting on the chance the market will move both up and down.

Protection of investments

Behind that behavior is investors’ need for insurance for their portfolio to protect against another black swan event like it was financial crisis 2007-2009.

They are afraid of is losing money as they did at the time of the crash. But losing money is a risk that you have and can determine. The black swan is a risk that you can not determine or predict. How can you plan some sudden and hidden events ahead? Hence, we can’t hedge out the risk of secret and unknown events. All we can do is analyzing past events.

The black swan investing theory is based on an old saying that presumed black swans did not exist. Nassim Nicholas Taleb developed black swan theory but in his book The Black Swan he also recommended traders to fire their advisors claiming that they don’t know enough or know a bit about investing. Brave claim indeed. His belief in the incompetence of financial advisors is based on their disregard for Black Swans.

Is it possible to predict the next event?

It sounds like an impossible task because it is. As we said, how can you predict something unknown? But what you can do is to build a well-diversified portfolio to reduce the risks. Also, now you have this tool to determine when to exit your trade and avoid money losses. Moreover, you can determine when to do that in profit.

Yes, your portfolio can be structured to reduce risks linked to black swans.

Positive or negative black swans

Okay, you would like to know how to invest for positive or negative black swans. So, first of all, you have to understand how not to depend on catastrophic predictions. Let’s say, you invested with the belief that the stocks will grow forever. Also, you are pretty much sure that the financial crisis will never come, or the company will never bankrupt. Well, something has to be changed in your beliefs. The truth can be very painful for you at this very moment. Stocks will not rise all the time. Not even in the next 20 years or even five. They will go up and down.

The main point of black swan investing is to profit from unpredictability. But such events come suddenly, they are surprising, so how can we invest in it? We cannot do it directly. All we can do is to be ready for them, meaning to be exposed to such exceptional but extremely impactful events.

How to expose to a positive black swan

How to do that? How to take advantage?

If you follow Taleb’s definition it is quite clear what to do to positive events. If you can seek exposure to something you can not predict, then seek out exposure that is unrestricted to the upside. Well, there is no need to know will some event come or not, or when it is going to happen. All you have to do is to detect exposures that have the potential to blast if meet the proper conditions.

Exposure to positive black swans may sound a bit esoteric. Some investors that are practicing a black swan strategy like to say that it is necessary to build a portfolio that is able to “invite” positive events, amazing and unexpected. We don’t have material proof that it works.

Their idea is to give a portfolio a chance by setting up limited sums of money or scale it up. If it works, it’s okay. If it doesn’t work, just give up and risk later.

This stands in firm contrast to traditional investing advice.

Behind this idea

For any trader who wants to implement the black swan investing strategy, it is necessary to create a barbell portfolio. This kind of portfolio was created by bond traders. This strategy requires owing safe short-bonds on one side of the barbell, and on another side to balance the weight of investments, riskier long-dated bonds.

By building a barbell portfolio, you’ll have very safe investments on one end and notably risky investments on the other end. The safe investments virtually don’t have risk. They will survive even a black Swan. The risky side of the portfolio opens it up to the endless upside. This kind of portfolio advances despite any circumstances in the market. That’s according to Taleb.

Black Swan investing

Since black swan traders never sell and they are counting on the crash, they are buying out-of-the-money options.

But one question arises. Can any empirical evidence account for black swans? We are afraid the answer is no. So, we cannot predict the market. Why there are still people trying that? Because we all need progress in this field. Yes, we have algos, AIs, learning machines, automated trading, etc. But yet, no one can predict the market. And it is a great challenge. By fair, that moment isn’t so far from us. One day someone will find some formula for that. Frankly, how many people were able to predict all possibilities of the internet? A very small number. Today it is part of our daily lives.

Yes, we truly believe that one day, somewhere, someone will find a way to predict market movements. Meanwhile, there is no need to give up from investing because of the lack of unreachable knowledge. Just work with what you have and know. That would be enough. At last, it was enough for the past 200 years.

Pro tip: Develop an efficient portfolio on a demo account first; (1) Examine how well it guards you from random Black Swans (2) optimize (3) only then risk real funds.

Bottom line

Banks are a negative black swan business. The upside is inadequate and the downside is complete. The examples of positive black swan investing biotechnology stocks, venture capital, publishing, etc.

The venture investor that invested in Uber in its beginning was exposed to a positive black swan, but today would be more exposed to a negative black swan with the same investment.

The key principle in black swan investing is to find extremely aggressive as unreasonable as possible assets. Hence, when you find that chance, take it.

26th January 2020
Diversification Is Important to Your Investment Portfolio

When stock prices drop, bond prices increase. A portfolio that holds stocks and bonds plays better than the one that holds only stocks.

Diversification means to spread the risk across different types of investments. The main purpose of diversification is to enhance your chances of investment success. In other words, you are betting on every one.

Diversification is very important in investing because markets can be volatile and extremely unpredictable. If you diversify your portfolio, you will reduce the chance to lose more than you are prepared to.

And that is exactly what you would like in investing: to spread your capital among different assets. So you’re not relying on a single asset for all of your returns. The key advantage of diversification is that it provides you to minimize the risk of losing the capital invested.

What is diversification?

Diversification means building a portfolio of your investments in a way that the majority of the assets will have a different reaction to the same market performance. For example, when the economy is growing, stocks will outperform bonds. In opposite circumstances, bonds could play better than stocks. Hence, if you hold both stocks and bonds, you will reduce the risks in your portfolio from market swings.

Let’s make this more clear. What do you have in your pantry? Only beans? Of course not! When you went to the grocery you bought everything you need for the week or month ahead. The same should be with your investment portfolio. It should consist of various assets. But not too many. Too many assets mean you will not be able to follow their performances. If you are fresh in the stock market, maybe a two-fund portfolio is a good choice for you. More about this you can read HERE.

Think of these various types of groceries as the different areas, techniques, and areas available to you as an investor. If you have a variety of assets, you’ll be better protected. In the situation when one of your assets is hit by the risk you will still have the others that can give you a profit.

Reasons for diversification

Even the explanation is so simple you can still find so many investors that play on one card. You may ask how some really smart guys could avoid diversification and put all eggs in one basket? We couldn’t find the proper answer because the benefits are so obvious.

By diversification, investors lower the overall risk. It is logical how this works. When you spread your investments in various classes (diversifying them) you have more chances to avoid the negative influence in your portfolio. For example, let’s say you invested in stocks only and you hold a stock of just one company. Yes, we know you like it, it is a good company, famous, well-run. But if suddenly something unpleasant hit it and the stock price drops, let’s say, for 30%, how that occasion will influence your overall portfolio? You will lose 30% of your portfolio. But let’s consider the other situation. Let’s say that stock makes up a modest part of 5% in your portfolio. So, how much of your overall portfolio you will lose now? Can you see where is the benefit of diversification? It lowers the risk. Even during economic downturns, you will still have good players in your portfolio. Hence, if you have bonds and stocks added to your portfolio, it is more likely that even one of them will run well during particular circumstances. Bonds will play better when the economy is decreasing, but when the economy is growing, stocks will outperform bonds.

Diversification and investment strategy

You can find various investment strategies but two are most popular: growth and value investing.

Value investors tend to consider the strength of a company and its management. They would estimate if the company’s stock price is undervalued based on its true worth.

On the other side, growth investors would estimate how fast the company is growing, could its new products stimulate future earnings, etc.
By taking just one strategy you can miss out on the benefits of the other. But if you spread your investments on both of these strategies, it is pretty sure that you’ll be able to enjoy the benefits of each.

Influence of “home country bias”

Well, it is completely natural that investors are more attracted to their own state markets, the national industry. That’s how we come to the “home country bias” in investing. Of course, it is a natural tendency. But it can be a problem too. “Home country bias” can limit your investments to the offer from domestic markets. But what is needed for profitable and successful investing is to step out of your comfort zone. Foreign markets can be profitable also. What you have to do as an investor is to add some international fund or company to your portfolio. It is good protection and well-done diversification. Diversification across international markets will protect your investments if the domestic economy downturns (no one wants that, of course) or during the recession in your country. Several years ago we heard one of the investors saying it isn’t a patriotic gesture. Well, we have to say, investing isn’t an act of patriotism. It is all about profit.

Produces more opportunities

Eventually, diversification produces more opportunities if you make smart choices that deliver balance to your investment portfolio.

For example, you only invest in stocks. But suddenly some great opportunity occurs to invest in, for example, bonds. What will you do? Refuse to invest in bonds because you are not comfortable with them and risk to miss potential profit? We don’t think it is a smart idea. Never miss the opportunity to earn more, that isn’t in the nature of investing. Admit, you will never miss this opportunity to invest in bonds if you have a diversified portfolio. So, diversification gives you more opportunities to invest.

Protect and improve your finances

It is important to understand all the benefits of diversification. It isn’t hard to do. Actually, it is very simple. You have to read more, learn and be patient. If you diversify your investment portfolio you will have a chance to build stable finances over time.

How to diversify your portfolio

Firstly, never be too much invested. You will not be the winner if you own hundreds of assets. Okay, let’s say this way. Your portfolio is your team. And, as in every team, each part plays its role. No coach will put all players in one position. It’s stupid. Plus, how such a team will win anything? Of course, zero chances!

The point of diversifying is to hold investments that able to work separated tasks on your team.

Every single part of your portfolio should have a different role. For example, if you prefer stocks, diversify your portfolio to S&P 500 (that would provide you exposure to large-caps) and add some small-caps.

If you have a bond portfolio diversify it across short and long bonds, or higher-quality bonds, etc. That will reduce the risks. Or just add alternative investments in your portfolio. For example, private equity, hedge funds, real property, venture capital, commodities, etc.

Bottom line

How will you know you’re diversified? A well-diversified investment portfolio will never move in the same trend and at the same time. You must have one thing on your mind: you are the manager of your portfolio. Also, it is almost impossible for all investments to grow all the time. It is 100% sure that some of your positions will be lost, will lose you money. When that happens you will need the other holdings to balance that fall.

Diversification guards you against producing an undesired risk to your capital. Anyway, it is too risky to put all your money into one single investment. The key to diversification is to spread your money across asset classes and to allocate within classes. That is a smart approach.

23rd January 2020
La Roche Caught Lying

La Roche defrauded U.S. federal and state governments for $1.5 billion. The company was lying that its influenza drug Tamiflu was effective at preventing potential pandemics.

Drug company La Roche (OTCMKTS: RHHBY) cheated U.S. federal and state governments out of $1.5 billion. The company was falsifying clinical studies and incorrectly declaring that its influenza medicine Tamiflu was effective at suppressing potential pandemics. That is stated in recently unsealed court documents.

The lawsuit alleges the La Roche company by publishing misleading articles incorrectly affirming that Tamiflu can reduce complications, mortality, and transmission of influenza, mislead the public and regulators. The problem is that the company used those articles for aggressive marketing. Its goal was to assure the US federal and state governments that Tamiflu is efficient for pandemic use.

Governments spent around $1.5 billion to stockpile Tamiflu

According to the complaint, governments spent around $1.5 billion to stock with Tamiflu in good faith to Roche’s claims. But Hoffmann-La Roche caught lying about Tamiflu.

The lawsuit comes under the False Claims Act. According to this Act, individuals can bring claims on behalf of the government. It is stated in the lawsuit that the reimbursement is seeking in the name of taxpayers whose funds were spent on buying Tamiflu. The governments bought tens of millions of units of Tamiflu for the Strategic National Stockpile and spent, from 2005 $1,5 billion for that.

Possible penalties

Roche could pay judgment bellow $4.5 billion but this one, the False Claims Act requires payment of triple damages, and civil penalties are added.
The whistleblower is Dr. Thomas Jefferson, a doctor and public health researcher in the global Cochrane Collaboration research network.
He has researched inhibitors and among them, Tamiflu also. He works in this field over the past twenty years. When he started to examine Tamiflu’s efficacy in 2009 he demanded from the company to release the underlying clinical study data. Dr. Thomas Jefferson got data four years after. It was 2013 when he realized that Tamiflu’s effectiveness didn’t fit Roche’s statements about the use in an influenza pandemic, the lawsuit states.

To make this more unbelievable, as early as 2000 the Food and Drug Administration (FDA) analyzed Roche’s data about clinical trials of Tamiflu and warned the company that data showed different effectiveness than Roche claimed. Moreover, the FDA found that Tamiflu gives a small benefit of reducing the duration of flu symptoms but the drug isn’t able to prevent transmission nor infection. Hence, the FDA also warned Roche that its statement was misleading.

The lawsuit declares that Roche was aware that Tamiflu is an inefficient drug for resisting influenza pandemics. Yet, Roche marketed this medicine to fill Roche’s account at taxpayers’ expense.

Hoffmann-La Roche caught lying a long time ago

This drug was originally produced as an answer to seasonal influenza. But the competition was great and Roche wasn’t satisfied with the revenue the drug generated. So, they started to promote Tamiflu as neuraminidase inhibitors, which are intended to prevent clinically relevant influenza virus strains from spreading inside the body. But the data was false.

Almost six years ago The Guardian reported about how Tamiflu is efficient. At that time, the Cochrane Collaboration, a not-for-profit consortium of 14,000 academics and researchers who periodically examine the medical literature to assess the safety and effectiveness of various treatments. obtained all data despite Roche’s willingness to withhold the results of its clinical trials.

By having the data, the Cochrane Collaboration has found that Tamiflu has little or no impact on problems of flu infection, for example, it couldn’t prevent pneumonia.

In December 2009, the British medical journal (BMJ wrote about an investigation that proved that Tamiflu couldn’t prevent serious complications or death in people that have the flu. At that time, the British medical journal suggested that Roche, the Swiss company that produces and sells Tamiflu, has misled governments and doctors.

Roche has claimed that its medicine decreases hospital admissions by 61% in patients who were healthy before they got the flu. It has also claimed that Tamiflu reduces complications like bronchitis, pneumonia, and sinusitis by 67%, and lower respiratory tract infections requiring antibiotics by 55%. All lies.

Still unrevealed

Who can answer the question of why governments all over the world have invested $3 billion in one year, according to the investment bank, JP Morgan, from the emergence of H1N1 in spring 2008 to the end of 2009, for a drug that is not efficient.

Tamiflu’s luck began in 2003, after the SARS outbreak and the emergence of bird flu. And governments started to pile up the drug in a fear of pandemic.

Roche Holding AG Stock (ROG.SW), (OTCMKTS: RHHBY)

Despite the mentioned scandal with Tamiflu and lawsuits, Roche Holding AG stock seems to be a good long-term investment. RHHBY (ROG.SW) could be a profitable investment option if you are looking for stocks with good returns.

The stock traded at a bit above $41 on January 14 this year. Experts anticipate that RHHBY could go above $73 in the next five years. But the whole pharma sector isn’t in such a good position right now. Especially, European pharmaceuticals.
The interesting thing, Bank of America anticipates European stocks to rise this year. But with the exception of the pharmaceutical sector.
The pharma stocks, related to the broad market, move in the opposite course to U.S. bond yields. So if yields rise (the Bank of America expects it will) then the pharmaceutical sector should be damaged. But also, there are some other problems for this sector too. It is its sensitivity to the dollar. It is normal because 40% of the sector’s sales come from the U.S. With the reduction in trade tensions between the US and China, it is expected for the US dollar to weaken.

If we put all of this together, the European drug sector could underperform the broader index by 13% over six months. Maybe some influence could have a reducing drug price. But we will not bet on it. It’s better to put it on a political field not financial.

Bottom line

The analysts have issued 12-month target prices for Roche Holding Ltd. Genussscheine’s shares. Their forecasts are from CHF 225 to CHF 375. On average, they anticipate Roche share price to reach CHF 318.17 in the next year.

Twelve Wall Street analysts have issued “buy,” “hold,” and “sell” ratings for Roche Holding Ltd. in the last year. Currently, there are 2 sell ratings, 2 hold ratings and 8 buy ratings for this stock. So, a consensus recommendation is “Buy.” After the last lawsuit that alleges the Hoffmann-La Roche company was incorrectly affirming that Tamiflu can reduce complications and death in people with flu, everything is possible. The company can be punished by investors and they may start hard selling. That will decrease the stock price. Since things work that way in the market, some other investors will see the opportunity to buy more at a lower price.

14th January 2020
Risks Of Investing In The Stock Market And Strategies to Avoid Them

Investing in stocks is a risky game. On some of them, you can have full or partial control.

Risks of Investing in the stock market is a necessary part of investing. If investors want great returns, it is necessary to take great risks. However, the greater risks will not guarantee you will have greater returns. So, additional risks will not always bring you huge returns. But if you are long-term-type investors, you must understand that there will be some periods of underperformance in the investments. And you have to be prepared for that and not panic. If you cannot handle your emotions while investing you are likely to have a smaller chance in the stock market. Taking a risk means to have a higher tolerance for risk. Well, if you are not comfortable with it, you will probably make lower returns. But one thing is in your favor – you will never make great losses.

Anyway, you must understand that there is a necessary trade-off between investment and risk. Greater returns are linked with risks of price changes.

So, it is crucial to decide what is your risk tolerance and you have to do so before you enter the stock market.

What do you want: to protect your initial capital or you are ready for a wild ride with all the ups and downs in the stock market to reach higher returns?
If you can take a low or zero portion of the risk, be prepared that your returns will also be very low. On the other hand, if some investment generates huge returns, think twice is there some high risk you cannot accept.

High-risk investments require to hold a position for a long time, not less than 5 years. Do you have a stomach for that? Why the time matter?

As an investor, you must have the capacity to hold it longer to give shorter-term issues time to fix themselves. But remember, higher levels of risks will not always result in high returns.

There are special risks which investors should be aware of.

What are the risks of investing in the stock market?

We will point on some of them. The risk can be a capital loss. Let’s say you picked up some stock of the company with suddenly poor performing and the market recognizes it as negative. The consequence is that stock price could drop, a lot under the price you paid for them. The stock may even end up worthless. Zero! In such a case, the company’s stock will not trade. Moreover, the company may be delisted.

Further, there is always volatility risk. Stocks are volatile assets, their price may shift significantly in price in a short time. And, also, there is an exceptional market risk influenced by external factors. In such circumstances, the whole market could decline and the stock prices will be affected too. Also, not the whole market has to decline but the sector could. For example, a specific sector may experience downturns. Well, while some will catch the losses but at the same time, such periods are a great chance to buy stocks at a lower price. You see, the stock market is a zero-sum game. You can profit only when some others lose.

Also, the risks of investing in the stock market could come from the nature of the stock. To be honest, the stock price is extremely sensitive to bad news or investors’ sentiment toward some companies. For example, the company issued a poor earnings report or published management changes. The investors may disagree with that and could start selling the stocks.

Very specific risks of investing in the stock market may appear if you try to sell or buy stocks at the wrong time. You must have the right entry but more important, you must have a great exit. The last is the hardest part of the stock market but doesn’t have to be. Check HERE.

As we said, these are just a few risks you can meet while investing in the stock market. The crucial part is to understand what kind of risks you may have with your investments and how you can handle them.

Strategies to avoid risks of investing

Frankly, it’s impossible to entirely avoid risks. What you as an investor can do is put them under control. Actually, you can control your exposure to risks to the agreeable level. The risk you can handle and want to take. For that to do you have to know exactly what are you investing in and identify the possible issues all of these before entering the market and buying a stock. When you identify the risks involved you’ll be able to handle them.

How to manage the risks?

Firstly, define your investment goals, risk tolerance, and limitations, and plan according to what you found. Invest only in a sector that carries a lower risk than you are prepared to take. Go below your possibilities when it comes to risks.

The other solution is a diversified investment portfolio. It will give you good support. Your investment portfolio must contain several different assets. Spread your investments on bonds, utilities, mutual funds, cash, along with the stocks. Never put your whole capital into one single investment.

Combine them, long-term investment, short-term, but be careful about changes in your fundamental investment.

Also, a good decision could be to add derivatives to your portfolio. You can use them as a hedge against the risk. For example, the stock price is dropping, instead of selling them you can avoid losses by shorting futures. Of course, you have to choose futures of underlying assets that match your holdings. The hard part here is the value of futures compared to your stock portfolio. Exchange-traded futures have standard sizes of the contract. Hence, sometimes they will not give you a perfect hedge and you can over-hedge or under-hedge your stocks.

The other stock market risk management possibilities

You can also adopt a maximum portfolio drawdown rule. What does it mean? You have to set limits to the size of the drop in your portfolio value you can allow. In other words, determine how much of your portfolio you can bear to lose. This will decrease your personal ability to make emotional changes at the wrong time.

Keep your focus on stock price, and the value of an investment. Of course, plan ahead. The valuation is actually the heart of long term risk. Smart investors may have the advantage of volatility if they use tactical asset allocation. Follow their example. That will give you a chance to buy more assets when the prices are low but also, to hold fewer stocks when the prices are expensive.

Historical data shows stocks purchased while valuations are low, provide higher returns in the long run. Contrary, buying while valuation is expensive, generates the returns below average.

Bottom line

Risks of investing are part of being in the stock market. Sometimes, you will need to take bigger risks to reach your goals.
Learn the risks of investing in the stock market and do your homework. Make choices that will help you meet your investing plans.
Examine the risk of your investments from time to time. You have to know they still satisfy your risk tolerance.
Once some phrase appeared, we’ll paraphrase it: Be willing for the best, but act like the worst is coming soon.
You must be able to shift fast if suddenly something wrong appears. And, never give up!

13th January 2020
Value Investing Is Coming Back

Value stocks have underperformed since the beginning of 2007. But Goldman Sachs and Morgan Stanley claim that they have great potential.

Value investing is coming back according to data from the last autumn. This granddaddy of all investment types was set up in the first half of the 20th century and it is still actual.

For example last year, value investing has gotten fired by a typical value sector, energy. Last September made value investors satisfied, as returns of winners among cheap stocks outperformed big companies by a wide margin. The value-stock rally was exciting, unexpected, and fabulous. The past 10 years weren’t good for value investing. Actually, the value stocks were underperformed the growth stocks. They had weaker performances than it was the case with growth stocks. Moreover, some fund managers didn’t want to invest in utilities. What a great mistake! Utilities are the value stocks backbone. Their explanation was the value stocks are too expensive. Really? The fact is that utilities had a great performance last year and those managers suffered in a loss.

Why value investing is still a good opportunity?

Historically, they beat Grand Depression, played well during recessions, and inflation periods. Moreover, growth stocks have not become more profitable. So, the value stocks should finally be better. The reason is simple. They are unfairly cheaper. And that’s the point of value investing – finding under-appreciated stocks trading at low prices.

The stock market analysts found that stocks traded with low P/E and P/B ratios can easily beat the wider market. This opinion is supported by the facts.

A historical outlook

At the time of the financial crisis in August 2007, the S&P 500 index has returned 175%. The total return of value stocks in the US market was 120%. The return of growth stocks was fantastic 235%. Let’s go in the past more. Almost 20 years ago, value investors were devastated. For example, in 1999 and 2000 were so bad years for the value investing that some value investors had to step out of the market and retired.

But let’s stay for a while in 2007 and analyze growth investing deeper. What did happen?

That growth-strategy outperformance ended with the fall of the dot-com bubble. Value stocks came out of favor after the 2007 Global Financial crisis. On the other hand, growth stocks are performing remarkably well. Value stocks became unfairly cheap. You can notice that investors are expecting this global trend to continue since the global economic growth is slow. So, value stocks are trading at a discount compared to its more expensive growth peers.

But, is this discount a reason to invest in value stocks? It looks like that because value investing builds up. Slow economic growth caused value stocks to continue to produce stable free-cash flows. Yes, their businesses have slowed, but not damaged. At the same time, some of the growth stocks become extremely expensive. Moreover, the risk of failure in growth stock investing during slow economic conditions has grown.

Value Investing continues to make the headlines and not only in the US but also in Europe. We all can witness an increased number of headlines and publications, most recently, on the coming death of value investing. But now, something has changed.

Value investing is not dead

Timing the market seems to be difficult for investors. The intraday volatility grew over the last year, therefore, investors prefer not to bet as it will hurt long term goals. But this situation is beneficial for value. The value stocks start to outperform.

That will be a major market change. Value stocks’ years-long downtrend begins to turn. For some, it may seem a bit strange because investors in more cases neglect bargains. Everyone is trying to catch the major winners, famous companies, expensive stocks. They prefer to overpay some stock because of excitement. Oh, how wrong they are! But as we said, value stock investing is coming back.

Firstly, value stocks are cheap.

Value investing is the main principle for equity managers. There is long-term potency to buying cheap stocks over expensive growth stocks. Value investing was attractive over the entire history. Why shouldn’t it continue?
No one could say value investing is dead.

Goldman Sachs predicts a new life for value investing

Value investing has been decayed after years of underperformance. But Goldman Sachs says there’s still great growth possibilities in this classic factor strategy. And here are some reasons behind.

Value stocks will come back in favor very soon.

David Kostin, Goldman’s chief U.S. equity strategist explained that during the last 9 years the difference in valuation of expensive and cheap stocks was wider than ever.

Kostin said: “A wide distribution of price-to-earnings multiples has historically presaged strong value returns. However, a rotation into value stocks would require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing.”

The renaissance is coming

Value investing has gone out of favor particularly because the economic expansion gets stretched longer. Value brands continue to falter due to modest GDP.

But this course could start to change for value stocks. In the US an easier monetary policy from the Federal Reserve could increase growth expectations. Also, a rate cut could support the economy additionally. Bankers announced that possibility. Also, we already saw signs of resilience in US value stocks last September. Analysts predict that value stocks could finally enjoy a rebirth in 2020. Value investing means buying stocks that are trading below their value in the hopes of notable profit when the company comes into favor.

By default, value stocks have underperformed since the financial crisis. The investors have shifted into more energetic growth stocks, for example into technology. But last autumn, growth stocks were trading at high valuations and they became too expensive. In the same period, value stocks have shown important strength.

From October last year, the Russell 3000 Value index has dropped 2.4%, and the Russell 3000 Growth index has experienced a worrying 7.1% reversal.

Yes, growth stocks had a bounce, and outperformed value stocks. But there is some rule pointed by Morgan Stanley’s analysts. The markets are in the process of a regime change. That means the investors’ willingness to buy growth stocks will decrease as interest rates rise.

Goldman’s High Sharpe ratio

For investors assured on value stocks comeback, Goldman has selected value stocks with “a quality overlay.” Do you understand what does it mean?

These stocks could easily generate three times bigger returns than the average S&P 500 company with similar volatility. It is Goldman’s Sharpe ratio basket composed of 50 S&P 500 stocks with the highest ratios. This ratio measures a stock’s performance related to its volatility.

Goldman named the stocks with the highest earnings-related upside to consensus target prices. That are Qualcomm, Western Digital, Marathon Petroleum, Halliburton, Facebook, and Salesforce.

Bottom line

Many of the world’s most successful investors hold value stocks. They are buying cheap value stocks and benefit as the companies manage to work better.

For this to work, the stock has to stay cheap, so the company spends money on tremendous dividends and buybacks. The other option is the company be re-valued at a more relevant valuation, meaning more expensive. That is happening when the market recognizes the previous mistake in valuation.

For example, take a look at Altria (MO).

When the evidence about how toxic smoking is, appears to the public and more and more people stopped to smoke, investors had a feeling that cigarette producers will have a problem, the stock valuation was low. Well, something different happened to the company. The fundamentals remained strong. These stocks had good returns and still have.

How is this possible?

The stocks had higher dividend yields and investors reinvesting their dividends. Very good play. Tobacco companies also reinvested. They were buying back their cheap stocks and increased their earnings-per-share and dividend-per-share.

Smart investors know that value stocks can outperform most other factors. Some of the cheapest stocks in the market today are banks, oil companies, and so on. Keep it in mind.

So is value investing coming back? Do we really need to think better what the definition of value is?

12th January 2020
Stocks Reached New Records in the First Five Days This Year

Stocks rose in the first five trading days in January. There is an old tale of the January Effect but is that true or myth?

Stocks reached new records in the first five days of this year. And when stocks play well in the first several sessions in some years like it is in this one, investors like to recall the “first five days” rule. The point is that this rule is, therefore, able to predict the market is often up at year-end. But is this true?

Stock Trader’s Almanac, which analyzes the market phenomenon since 1950, discovered that if the first five days have a good track record it is a good prediction for the whole year meaning it will be well in the stock market.

Actually, it is an old Wall Street “first five days in January” indicator and as we know the brokers are superstitious. They believe if the stock market during the first 5 days of the year reaches record, that represents the potential for the strong performance in the given year.
So, stocks are sending a bullish signal for this year, according to that old indicator. Well, it is a good way of pumping stocks. Bulls in the market do that.

Will the whole year be like this?

But is this a reasonable way to make predictions for the whole year? We think it is an absurd way to estimate valuations.
Yes, stocks reached new records but if you take a serious look at the indicator you will find some drawbacks. Frankly, stocks are overvalued more than ever.

The stocks reached new records

Yes, in the first five days in 2020 but few days will last forever and maybe it’s time to consult the historical data just to compare what could happen next.

According to Dow Jones, historical data shows that the S&P 500 index has completed the year in the same trend as it started it in 82% of presidential-election years. It occurred from 1950 to today every time. In the first 5 days of 2020, the S&P 500 rose 0.7% and if the mentioned historical pattern is correct that should suggest that this year will finish with higher gains.

But be serious. We will need a deeper look at this indicator and on what it shows. Otherwise, you can easily read your horoscope (pay attention to the “sex” section better than “finance”) it will make more sense.

The ‘first five days of January’ indicator

January in the stock market has a strong influence on predicting the trend of the stock market for the rest of the year. The January Effect occurs when investors’ selling off their losing positions at the end of the prior year to realize the tax losses. Usually, these stocks are at a discount during January. And what we have there? Bargain hunters! They step in with their buying pressure in the market.

Statistics show when the S&P 500 rise in the first five trading days, there is around 86% possibility that the stock market will rise in that year. But this indicator isn’t very reliable due to the fact that we cannot find what happens when the gains in the first 5 days in January are below expected or in comparison to previous January or whatever. All we have is data for periods when the January Effect is triggered. But markets exist even without the January Effect. Even more, the markets exist even beyond January.

With a little help of stats, we can see that this effect had good predictions in 31 out of the past 36 years. Stocks reached new records in the first five days of 5 exceptions, 4 were war years and one was a flat market.

So, this was a confirmation of the January Effect.

Statistical answer as confirmation of something different

Let’s use more current data and divide the past 34 years into two sections separated, from 1984 to 2000 and from 2001 to 2017.

Let’s observe the period from 2001 to 2017. Data shows that, for example, the December effect produced an average return of 2.62% or a return of 36.5% during the observed years. But if you take a look at January for the same period, you will find poorer results. The average returns in that month were at 2.48% or 34% pre the whole year.

This seems to be a strong approval for the January effect. Nevertheless, whoever tried to use the January effect, and bought an S&P 500 index fund on January 1 and sold it on January 31, and kept cash for the rest of the year and did it in the next years to the end of 2017 made losses of 0.84% per year.

Stocks reached new records but ignore the January effect.

The using the January effect can be dangerous. This phenomenon is based on limited data and adjustments for confirmation. So, you shouldn’t believe that every time when the stocks reached new records in the first five days of the year were great gains in the market.

The conclusion about the January Effect came from small samples. So, it has low statistical reliability if it has at all. You cannot make a conclusion based on limited data. Yes, some financial press reports will try to assure you how these “five days effect” is important and you will find a lot of catchy titles but it’s fishing and fake news also.

Even the month of January was great for the stocks, what about the other months? If it is the only one-month effect what are you going to do with your investment over the rest of 11 months? Would you make decisions based on superstitions? Cash-out? We don’t think it is a smart investment strategy.

Common sense tells us something different. This isn’t a hypothetical situation, this is reality. Try to figure out why this phenomenon isn’t part of any extremely advanced computer software? Some software, and even not so sophisticated, will be able to identify the phenomenon and profit on it.

The reason is obvious. There is no unusual market’s phenomenons, that’s nonsense. If there is any phenomenon that is simple to be explained to the inexperienced trader or investor you can be sure it isn’t real. It is superstition.

Bottom line

This was another old tale to neglect, just like many others. Who can really believe that the first 5 trading days in January could predict the stock market’s direction for the full year? Yes, this old “indicator” gets much attention every year. As we said, the bulls are trumpeting it right now.

But nothing is that easy, especially the stock market.

If you have a problem to accept all of this, examine what did happen over the last 40 years. You will find that this pattern was a reversal. The fact is, since the 1970s every time when the Dow was down during that mythical period of 5 days in January, the whole year had higher gains.

To be said, any investor who admits the extraordinary influence of this superstition has a lack of knowledge and self-confidence. On the other hand, newspapers and financial reports enjoy cheating people when insisting on this.

We would like to point one thing at the end. The words written above doesn’t mean the stock market will not rise this year. It can do it very well and produce great gains, but what does it have with “First Five Days of January”?

Nothing!

10th January 2020
Is Coca Cola Overvalued – Trick Or Treat

Coca-Cola has performed very well in 2019. The stock isn’t cheap but also, not overvalued. The increasing margin and investors seeking yield couldn’t be a problem for the company to continue great performing.

The question Is Coca Cola overvalued could be a trick. Why do we think so? If we take a cash flow at a consideration we can see that Coca Cola is trading at 24.4 times operating cash flow and 31.3 times earnings. Further, the forward price-to-earnings ratio is at 24.6%. and the latest price is $54.69 (data from January 3th, source Yahoo Finance). Although, the company is not expensive.

Further, if you have in your mind that most government bonds are trading under 0% yield, the negative interest rate in the EU, currently inflation is low, KO that provides a 2.9% yield, you must understand that it isn’t expensive.

Of course, it will be better if the stock can provide a higher yield but for that, we have to wait for additional dividend increases. On April 9, the stock traded at $55.77, the current price is at $54.69 but we all have to admit it isn’t a sharp decline in the stock price. Coca Cola management may reinvest the company’s operating cash in capital expenditures (CapEx) to get, improve, and keep the property, improve technology, or equipment. Further, the company can reinvest in development such as innovation to improve the product portfolio, marketing or M&A to maintain the business like it was in the past 20 years or more.

Also, Coca Cola can use the operating cash to further improve profitability. That would influence its P/E ratio.
Having all these indicators in mind it is easy to conclude that Coca Cola isn’t overvalued stock.

It has a high debt

Coca Cola has raised debt levels. The company has a slightly low liquidity position as the current ratio is at 0.92. The sustainable level should be 1.00 but the current debt levels are not something to be worried about. Boosted debt came from the fast increase of long-term debt and falling sales. But as we said, the company plans to improve sales and operating cash flow will likely grow. That could easily cover the debt. Moreover, the company’s bonds are doing very well.

Why do some investors think that Coca Cola is overvalued?

Some investors avoided this stock due to its valuation. But try to be honest, it isn’t expensive. The company is paying a stable dividend yield and, according to its statements, it plans to have strong sales in the future. Coca Cola isn’t in the phase of low operating cash flow. Experts’ opinion is the stock hasn’t sell signal. It is contrary, with 31.3 earnings it has “hold” or even “buy” signal. Moreover, some estimations and predictions show that stock may hit over $60 (close to $65) this year. Well, Coca-Cola is a solid dividend-paying stock and it will likely continue to produce stable profit for its shareholders.

The profitability of the company

Let’s see is Coca Cola overvalued. Over the last four years, the company had a total revenue drop of $10 billion to $34.3 billion. Operating margin was improved by 560 points up to almost 29% and income dropped to about $10 billion which is a difference of just $400 million. The good sign is that the company increased cash by almost $10 billion from its operations while dividend payments hit a new record of $6.74 billion.

This year, Coca Cola has got back $3.4 billion through dividends and distributed stock worth $233 million. Yes, it is lower than for the same period last year due to several factors and the dividend increase of 3% may not be so visible. But the stock has had a great play in 2019 with a return of over 16%. So, what do you think, is Coca Cola overvalued? We think it isn’t. The company has a great product portfolio that could boost sales. So, KO could be one of the best investments in the next year since, as we can see, there is still a lot of potentials. Maybe the better question could be is Coca Cola undervalued rather that is Coca Cola overvalued stock.

Coca Cola through the history

After 133 years of existing Coca Cola isn’t a woman-body-shaped-bottle. More about the company you can find in its fresh statements updated for Q3 earnings result for 2019.

The Coca-Cola Company is an American corporation established in 1892. It is primarily recognized as a producer of a sweetened carbonated beverage. It is a global brand not only the US trademark. The company is also focused on producing and sells soft and citrus drinks. Its product portfolio consists of more than 2,800 products available all over the world. That makes it one of the largest beverage producer and seller in the world and, also, one of the biggest corporations in the US. The company is headquartered in Atlanta, Georgia.

Almost 55% of its sales come from carbonated soft drinks. The rest 45% goes to juice, dairy, tea, coffee, etc. The interesting part is that Coca Cola is a market leader in almost all of these areas selling its products through over 28 million customer stores.

Speaking about its stock, Coca Cola could be everything but not overvalued. Moreover, it is a growing brand after 133 years. And the company still has great ambitions to meet consumers’ demands. Respect.

And don’t be worried if this famous producer is able to meet them. Despite the increasing competition, the company has transformed into an asset-light company. It manages to improve supply chains and modernize its packagings, the concentration of sugar and modern tastes.

Don’t ask is Coca Cola overvalued. It isn’t.

Bottom line

Coca Cola is consumer staples stocks. It provides goods that people need on a daily basis. That fact makes it an excellent investment in practically every economic condition exceptionally winning during economic slowdowns. People will always need these products no matter what economic or financial status is or if there is inflation or market downturns. The whole industry’s total return in 2019 was 27.3%. Compare this data with the 12-year average annual return of 10.4% and you will understand why it is still a good investment choice. Yes, it is 3% points below the S&P 500. Nevertheless, if the market gets rough, and especially if we will face the market correction, this industry will shine.

In the face of this context, Coca Cola is one of the best consumer staples stocks to buy in 2020. This pick should be proficient if the market is turbulence in 2020.

So, KO could be a good addition to investors’ portfolios.

5th January 2020
The Average Stock Market Return

The stock market average return of 10% is exactly that – an average, while the returns for any particular year may be lower or higher.

The average stock market return was about 10% annual for the past almost 100 years. But when we take a look at any year particularly we could notice that the returns weren’t always average. And that is the truth about the average stock market return, it is average rarely.

Historical data shows the average stock market return is 10% but when you look at year-to-year it can vary. For example, this rate should be reduced by inflation. Inflation can vary too let’s say from 2% to 3% which is a regular rate.

But when we talk about investing and investors we usually think about long-term investments. To be honest, the stock market likes long-term investors. They are keeping their investments five or more years.

Keep in mind: the stock market’s returns aren’t average and could be far from average. For example, over the past 80 years, you could find that the average stock market return was from 8% to 12% only several times. Due to the volatility of the stock markets, most of the time the average stock market return was higher or lower. So, returns can be positive even when the market is volatile but the average stock market return will not rise every year. Sometimes it will be lower sometimes higher.

What is the average stock market return?

The average stock market return actually is about 7%. If we take into account the periods of highs, for example, the 1950s the returns were up to 16%. But we had the negative returns of 3% in the 2000s.

For example, from 1998 to 2018, we had an average stock market return of 6.88%. The lower return came from the enormous loss in the market in 2008.

But, over the last 50 years, the average stock market return was 10.09%.

The stats may help here, the Dow Jones – by May 25, 2018, the average annual return was 5.42%. On January 6, 2012, a 25-year period ended with an average return of 7.55% per year. But if we look at data from the beginning of 20 century, the average stock market return was around 4.3% respectively.

On the other hand, the S&P 500 index had average returns from 1957 through the end of 2018 about 7.96%. But, the average annual return from its inception in 1926 through the end of 2018 was about 10%. Last year, 2019 was great with a return of 30.43%. If we include dividend reinvestment, the S&P 500 return was 33.07%.

How to calculate the average return on stocks?

The average return on your stocks’ portfolio should reveal to you how well your investments have run in a particular period. This can also help you to predict future returns. Remember, this measure isn’t the annual compound growth rate.

So, to calculate the average return on stocks you will need to calculate the return for each period. The next step is to add returns together and divide the result by the number of periods. That’s how you will get the average stock return.

Calculate the average rate of return

Firstly, what is the average rate of return?
It is the percentage rate of return that is expected on an investment but compared to the initial cost.

The formula is quite simple. Divide the average annual net earnings after taxes or return on the investment to get the average annual net earnings and then display in percentage.

The average rate of return formula = (Average Annual Net Earnings – Taxes) / Initial investment x 100%

Here is the explanation of what we did:

Firstly, determine the earnings from stock for a particular period, let’s say 10 years. Now, you have to calculate the average annual return. Do that by dividing the total earnings after 10 years by the number of years.

Further, if you have a one-time investment, find the initial investment in the stock. If you want to calculate for regular stock investments, take the average investment over life.

And finally, divide the average annual return by initial investment in the stock.

Also, you can do all of this and get the same result if you divide the average annual return by average investment in the stock but expressed in percentage.

Let’s take the example of a stock that is likely to generate returns of 10% per year after taxes and for a period of 3 years.

The initial investment $10.000
First-year’s net earnings $1.000
Second-year net earning $2.100
Third-year net earnings $3.310

Use formula

The average rate of return formula = (Average Annual Net Earnings – Taxes) / Initial investment x 100%

After 3 years your initial investment will be increased by 64% or you will have $6.420 more in your account.

What does this mean for investors?

As always, computing dividends is important and you have to account for them. If you reinvested received dividends, even better. That’s compounding on compounding!

The truth be told, those who have stayed invested in stocks have largely been rewarded.

The understanding of the concept of the average rate of return is important because investors make decisions based on the possible amount of return expected from an investment. Based on the average rate of return, you can decide will you enter into an investment or not. Moreover, the return is used for ranking the stocks and ultimately you will choose per the ranking and include them in the portfolio.

In a few words, the higher the return, the better is the stock.

But let’s examine one different case of the average stock market return.

Let’s say your initial investment is also $10.000 but (this isn’t easy to say) in the first year you lost 20% of the initial investment. That’s bad news. But in the second year, you gained 20% of the initial investment. Oh, how nice it is!

Yes, nice but your gain is zero.

(-20+20) = 0

What do you think? Do you still have your $10.000? Things never move in that way.

Here is why.

When you lose 20% of your initial investment you ended up with $8.000. Right? That amount became the amount of your investment. On that amount, you gained 20% or $1.600. So, after two years you have $9.600 in your hands and you are short for $400 compared to your initial investment of $10.000. You lose money and your return isn’t zero. Your return is minus and you will need more gains in bigger percentages to cover that loss.

The stock market average return isn’t misleading. That is how you have to calculate it.

Or to calculate CAGR.

Bottom line

This means that investors MUST have a financial plan and investing strategy.
There are no guarantees for big gains in the stock market and never were. The average return of 7% or 10% is great if you are a long-term investor. It is reasonable to expect a good return on the current stock markets if you reduce your enthusiasm when the good times come.
That’s nice, you’re making money. But, when stocks are jumping, remember that not so good time may come. Especially keep this in your mind over the bull market cycle.
You can get the average return only if you buy and hold but not if you trade frequently. Even a few percent per year can produce nice gain over the years.

3rd January 2020