Rule #1

Posted on June 24, 2014 | Stock Screens

Based off Warren Buffett’s number-one rule, “Don’t lose money,” this screen seeks to buy stocks of a solid business at an attractive price.

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Investment Knowledge Boosts Portfolio Returns

Posted on June 23, 2014 | AAII Journal

Investing knowledge enhances risk-adjusted returns by at least 1.3 percentage points annually. Over a 30-year investment span, the improved portfolio performance leads to 25% greater wealth. This was the finding of a study, possibly for the first time, linking results from a test of financial knowledge to actual portfolio performance. The researchers believe their conclusion may understate the actual return differential.

A key driver of the return differential is a willingness to invest in stocks. The most knowledgeable investors had a 66% allocation to stocks, whereas the least knowledgeable held about 49% of their retirement assets in stocks. The larger stock allocation did lead to more volatility, but also higher risk-adjusted performance.

Researchers with the Pension Research Council at the University of Pennsylvania’s Wharton School gained access to the retirement plan of a large financial institution with 22,000 employees. The defined-contribution [401(k)] plan offered 16 funds. The plan’s offerings included stock funds, bond funds and a real estate investment trust (REIT) index fund. The study’s authors used this data to analyze account balances, returns and volatility.

Employees were also invited to take an online survey. The survey measured the ability to do a simple interest rate calculation, tested respondents on their understanding of inflation, looked to see how well respondents knew the difference between a stock and a mutual fund and how well they understood risk diversification, determined their understanding of the impact of tax incentives for saving and measured knowledge of employer match incentives.

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Computerized Investing’s Best of the Web

Posted on June 23, 2014 | Computerized Investing


Welcome to Computerized Investing’s “Best of the Web.” Here we have brought together what we consider to be the “best of the best” when it comes to online investment analysis, research and tracking. These are the sites that we editors and staff of CI use ourselves, almost on a daily basis.

The Internet has grown into an invaluable tool for investors, but for every quality website, there are dozens (if not more) that are only marginally useful. Here we provide you with the best online resources for data and analytical tools to help you make informed investment decisions. Beyond looking for sites that offer useful information, we try to find those that are easy to use and do not swamp you with ads. Whenever possible, we seek out websites that are free, though when subscriptions fees are charged, we clearly tell you. (Keep in mind that many websites offer both free and subscription-based content.)

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DI Companies Are Playing ‘Let’s Make a Deal’

Posted on June 20, 2014 | Dividend Investing

We have news of another potential merger in the DI portfolio. At the start of this week, Medtronic Inc. (MDT) reached an agreement to purchase Covidien Plc (COV). Details about the merger can be found in the News and Notes section below. The announcement has made headlines less for the merger itself, however, and more for Medtronic’s move of its corporate headquarters to Ireland.

Ireland is known for its low corporate tax rate and this fact has been brought up in articles about the merger. Due to the higher scrutiny being given to corporate tax issues lately, we don’t know if this will present a hurdle for Medtronic or not. There are business reasons to justify the merger as well. Nonetheless, Ireland’s tax rate is what is making the headlines right now.

If the merger is completed, the tax status of the dividend would change. Medtronic’s dividend would go from being domestic to foreign. We are waiting for Medtronic to give guidance on the tax treatment of the dividend before explaining how the change will impact U.S. investors. We can tell you, however, that the United States does a have a tax treaty with Ireland.

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The Fed Moves Market to New Highs

Posted on June 20, 2014 | Stock Superstars Report

he much-anticipated Federal Reserve meeting ended Wednesday. One of the main takeaways from the post-meeting announcement is that the central bank expects the unemployment rate to fall to 6% by the end of this year, inching closer to the goal of 5%. Although there is a decline in sight, the unemployment rate still remains elevated.

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Guidance for Following Portfolio Alerts

Posted on June 19, 2014 | Investor Update

How fast should you act in reaction to a portfolio addition or deletion alert?

A good general rule for following any portfolio, whether it is one of ours or one run by another organization (e.g., a newsletter service), is to buy when an addition alert is issued and sell when a deletion alert is issued. If you want to mimic the performance of the portfolio, it only makes sense to follow the changes. Acting quickly is prudent.

There is a difference between ‘quickly’ and ‘immediately,’ however. In the Model Shadow Stock Portfolio stock order guidance rules, we advise members to be patient. In the user’s guides for our Stock Superstars Report and AAII Dividend Investing portfolios, we suggest generally “acting on portfolio addition and deletion alerts within the week.” We follow up this statement by saying “don’t be afraid to wait longer if you feel the stock price is moving in your favor (falling if you are a buyer or rising if you are a seller).” In other words, don’t dawdle, but don’t feel rushed either.

The amount of patience you should use depends on the stock itself. A large-cap, widely held stock likely won’t be affected by a newsletter alert. We didn’t notice any unusual trading activity in Apple (AAPL) when we added it to our dividend investing portfolio this past April, for instance. Conversely, a smaller, less-followed stock may well be affected. Before the financial crisis, I once saw Movado (MOV) move upward by more than 10% in just a few days because Jim Cramer talked favorably about it on Mad Money. Lower volume will cause a stock to move in reaction to favorable or unfavorable comments or actions, especially if the portfolio or the commentator has a sizeable following.

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Stocks’ Price Volatility Increased by ETF Ownership

Posted on June 19, 2014 | AAII Journal

Stocks owned by exchange-traded funds experience 16% greater daily price volatility because of arbitrage.

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AAII Sentiment Survey: Neutral Sentiment Rebounds, Above 40%

Posted on June 19, 2014 | AAII Survey

Neutral sentiment jumped above 40% as optimism fell in the latest AAII Sentiment Survey. The increase puts neutral sentiment above its historical average for the 24th consecutive week. The last time we saw a similar streak was in 1999 (January 28 through July 8).

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 9.5 percentage points to 35.2%. This large drop follows a three-week cumulative rise of 14.3 percentage points. It also puts optimism back below its historical average of 39.0% for the first time in three weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 6.6 percentage points to 40.7%. This is a four-week high. As noted above, neutral sentiment is now above its historical average of 30.5% for the 24th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.9 percentage points to 24.1%. The rebound puts pessimism at a four-week high. The move was not big enough to keep bearish sentiment from being below its historical average of 30.5% for the ninth straight week, however.

Neutral sentiment is back up to an unusually high level (one standard deviation above its historical average). As I discuss in this month’s AAII Journal, the S&P 500 has realized above-average six- and 12-month gains following unusually high neutral sentiment readings.

The drop in bullish sentiment follows a jump to what was nearly a seven-month high in optimism. A pullback in stock prices early in the most recent survey period played a role. There was also reversion back toward the sentiment readings we have been seeing in recent months. Some individual investors remain encouraged by the overall upward direction of stock prices, continued signs of economic expansion, the Federal Reserve’s tapering of bond purchases and low interest rates. Others are concerned about elevated valuations, the pace of economic expansion, Federal Reserve tapering and frustration with Washington politics.

This week’s AAII Sentiment Survey:

  • Bullish: 35.2%, down 9.5 percentage points
  • Neutral: 40.7%, up 6.6 percentage points
  • Bearish: 24.1%, up 2.9 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at:

Assembling a Covered Call Portfolio on Dividend-Paying Stocks

Posted on June 18, 2014 | AAII Journal

Covered call writing is one of several ways options are traded.

While often done on an ad hoc basis, one can assemble and manage a portfolio of covered call option positions as either a part of a larger portfolio or on a stand-alone basis. Such an approach does require more detailed attention than managing a stock-only portfolio. Nonetheless, systematically managing a portfolio of covered calls has much for me to recommend it.

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Sell OF THE WEEK 6/18/2014

Posted on June 18, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why MWI Veterinary Supply (MWIV) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week

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