Operating Cash Flow: Measuring Day-to-Day Profitability

Posted on July 31, 2014 | Dividend Investing

In the June DI Monthly, we introduced the statement of cash flows, which shows how much cash a company is generating through operations as well as through changes in company assets, liabilities and equity. This month, we examine the calculations behind cash flow from operating activities, which is a measure of the amount of cash generated by normal business operations through revenues from selling goods and providing services. It excludes activities classified as investing activities or financing activities.

Cash flow from operating activities (also known as operating cash flow or cash flow from operations) has a very simple objective-to show whether a firm’s day-to-day operations generated or depleted cash. If net cash flow from operations is negative, it means that the company is spending more cash than it is generating in producing and selling its goods and services. If it is positive, the company is generating more cash than it is spending on its day-to-day operations.

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Pessimism Now Above Average, But Bulls Match Bears

Posted on July 31, 2014 | AAII Survey

Pessimism among individual investors is above 30% for the first time since mid-April. Nonetheless, the percentage of bulls and bears is evenly split in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 1.5 percentage points to 31.1%. Even with the rebound, this is the seventh consecutive week and the 18th time in the past 20 weeks that optimism is below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 2.7 percentage points to 37.8%. Even with the decline, neutral sentiment is above its historical average of 30.5% for the 30th consecutive week. This is the third-longest streak of consecutive weekly readings above 30.5% in the survey’s history.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 1.2 percentage points to 31.1%. This is the first time pessimism is above its historical average of 30.5% in 15 weeks.

This is the first time there has been an equal percentage of bulls and bears in our survey since September 6, 2012.

Since reaching a short-term bottom of 21.3% on June 12, 2014, bearish sentiment has risen by a cumulative 9.8 percentage points. The rebound in pessimism is occurring as the S&P 500 has failed to consistently set new highs and geopolitical tensions have heightened. Some AAII members have concerns about prevailing valuations, events in the Middle East and Ukraine, the pace of economic growth and Washington politics. Other AAII members remain optimistic about sustained economic growth, the market’s upward trend and the Federal Reserve’s tapering of bond purchases.

This week’s AAII Sentiment Survey results:

  • Bullish: 31.1%, up 1.5 percentage points
  • Neutral: 37.8%, down 2.7 percentage points
  • Bearish: 31.1%, up 1.2 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: http://www.aaii.com/sentimentsurvey.

AAII Members Split on Importance of Stock Buybacks

Posted on July 31, 2014 | AAII Survey

This week’s special question asked AAII members how important it is for a company to buy back its shares. Though the responses varied, one theme appeared regardless of a member’s opinion about buybacks: Other uses of cash should be given priority before shares are repurchased. Nearly 17% of all respondents said dividends or growing the business should take precedence over buybacks.

In terms of how necessary it is for a company to buy back shares, 30% of respondents said share repurchases are not important. The second-largest group (23%) said stock buybacks are important or otherwise viewed them favorably. Several of these respondents said share repurchases show optimism on the part of management, while some others liked buybacks only if they reduced the number of shares outstanding or offset employee stock awards. Approximately 13% of respondents said their opinion depends on factors such as which other uses for cash are available or the reasons behind the buyback. Slightly more than 10% of respondents were against share buybacks. Some of them thought buybacks signal that there is not a better use for cash, while others wanted the money to go to raising dividends instead.

Here is a sampling of the responses:

  • “Not important at all, though I would rather see a company use its money for dividends as opposed to buybacks.”
  • “Depends on what other things the company is doing. Generally, I look very favorably on companies that buy back their stock.”
  • “I believe it is a good thing if conditions such as valuation and free cash flow give merit.”
  • “They are a warning sign that management has not found better opportunities for growing the business.”
  • “Not important. I would rather see dividends or capital investment.”
  • “I am concerned that companies buy back stock when the price is high.”


“Risk-Wise” Risk Management

Posted on July 31, 2014 | Computerized Investing

The turmoil of the stock market over the last decade has forced professional and individual investors to refocus their attention on identifying, managing and mitigating as many investment-related risk factors as possible. Michael Carpenter’s book, “The Risk-Wise Investor” (Wiley, 2009), offers a look at the evolution of risk and how investors today should plan for and protect themselves from market risk. Carpenter has spent over 35 years in the investment business as a financial advisor. He urges investors to take an honest look at risks and to face them head-on instead of waiting until it is too late.

While developing and implementing successful trading strategies is important, managing your portfolio’s risk is equally as important. However, protecting your investments from downside risk does not have to be complicated and, according to Carpenter, can be very simple once you have the knowledge and tools.

Risk management is not a new phenomenon, but has received much press over the last few years. Carpenter argues that individual investors should employ risk management tools and ideas just as businesses and professional investors do.

He also believes that everyone has the ability, knowledge and experience to manage risk naturally. Carpenter notes that successful management of risk and reward happens every day and transferring this knowledge to your investment portfolios is not hard.

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Money Funds and the Regulators

Posted on July 31, 2014 | AAII Journal

Following the 2008 financial crisis, there has been debate about how much regulatory change is needed, including whether floating net asset values should be required.

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July Letters to the Editor – Members comment on John Bogle’s advice, the PEG ratio, covered calls and estate planning

Posted on July 30, 2014 | AAII Journal

Mr. Bogle has a very sound knowledge about investing. I am very fortunate to have my 401(k) plan through Vanguard. My plan offers both index funds and active funds as options. Although my investments are mostly in index funds, I also use a couple of active funds to balance out my portfolio. Although the index funds have lower expenses, the two active funds I use have expense ratios of approximately 0.35% to 0.45%, which is still very inexpensive. I feel that a mix of index and active funds will give me a greater chance for investment success. Of course, other fund companies charge much more than Vanguard and that could make a major difference in returns!
—Jerry Durham from Tennessee

A really great article. How can I save it for my grandchildren?

Shortly after I retired 11 years ago, I did a long calculation on my 43 years of stock market performance and I just matched the Dow Jones industrial average. I could have saved eight to 10 hours a week with an index fund (22,360 hours by 2003). The moral of the story is that unless you are in the market more for kicks than profits, you should be in index funds.
—Homer Milford from New Mexico

Charles Rotblut responds:

Near the top of every Journal article, on the left-hand side, is a section labeled “Share this article.” Below it are options to email a link to the article or to share it on social media websites such as Facebook. If you want to save a copy of the article, click on “Download printable PDF” just above under the heading “Print this article.”

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Sell OF THE WEEK 7/30/2014

Posted on July 30, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Mattel (MAT) 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

BUY OF THE WEEK 7/29/2014

Posted on July 29, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Cash America International (CSH) is his “Buy 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: Buy of the week

Supreme Court: No Bankruptcy Protection for Inherited IRAs

Posted on July 29, 2014 | AAII Journal

Inherited IRAs do not qualify for the same protections under the bankruptcy code as other types of IRAs do.

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Balancing Your Return Ideals With the Realities of Risk

Posted on July 28, 2014 | Classroom

Every builder starts with a foundation. If you are new to investing, you are building an investment portfolio, and you need to start with an investment foundation. That foundation consists of the basic investment principles.

Boiled down to its bare basics, investing concerns returns and risks.

An investor’s return consists of current income, plus capital gains due to growth, minus any losses from the investment.

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