Kurun waktu 62 tahun untuk sebuah negara muda yang bernama Indonesia adalah sebuah perjalanan sejarah panjang. Perjalanan sejarah itu tentu diwarnai dengan peristiwa-peristiwa sejarah yang menarik ada suka cita dan ada duka cita. Sejak pemimpin bangsa Indonesia, Sukarno-Hatta atas nama bangsa Indonesia memproklamirkan kemerdekaan jam 10 pagi, hari Jum’at, 17 Agustus 1945. Kita secara sadar telah menjadi negara merdeka untuk membangun sebuah negara Indonesia yang modern untuk mewujudkan masyarakat Indonesia yang adil dan makmur.
Selama 62 tahun, negara Indonesia juga telah banyak berbagai macam pergolakan. Tahun 1950-an terjadi pergolakan politik di berbagai daerah, seperti pemberontakan PRRI-Semesta di Sumetera sampai dengan pemberontakan PKI tahun 1965 sehingga negara ini tidak sempat membangun pondasi ekonomi yang kokoh. Tahun 1998, negara ini juga mengalami kembali pergolakan di bidang ekonomi yang di tandai dengan terjadinya krisis finansial yang berubah menjadi krisis multidimensi dan berakibat turunnya Presiden Suharto atas desakan mahasiswa yang didukung rakyat. Tahun 1998 juga kita memasuki sebuah era baru yang di sebut era reformasi. Tujuannya dalah untuk membuka sebuah babak baru yang lebih intelektual dan lebih manusiawi dalam kehidupan berbangsa dan bernegara. Era reformasi dimulai dibawah kepemimpinan Presiden B.J. Habibie yang semula menjabat sebagai Menristek dan Wakil Presiden kemudia menjadi Presiden Republik Indonesia yang ketiga.
Ketika era reformasi berjalan tanpa arah yang menyebabkan bangsa ini sangat lambat dalam proses pembangunan. Semua orang ikut prihatin dan bertanya Apa yang salah dengan bangsa Indonesia? Sebenarnya ini adalah sebuah pertanyaan yang sederhana tetapi membutuhkan jawaban yang panjang dan bukti empiris yang mendalam. Kemudian ketika jawaban yang bangsa ini cari tidak ditenukan juga. Setiap orang kemudian menyerukan diperlukan sebuah Mindset Indonesia baru. Kita perlu nilai-nilai baru dalam kehidupan berbangsa dan bernegara. Tetapi kita lupa Mindset mengenai Indonesia modern telah dibuat oleh presiden pertama kita Ir. Sukarno yaitu Pancasila dan Nation Character Building. Bung Karno semasa menjabat sebagai presiden telah mempunyai visi dan misi mengenai masa depan bangsa Indonesia. Coba Anda baca mengenai Pidato Kenegaraan 17 Agustus 1945-17 Agustus 1966 di dalam buku Dibawah Bendera Revolusi Jilid II. Ketika kita membacanya kita bisa melihat bagaimana visi dan misi seorang pemimpin untuk negaranya yaitu Indonesia dan dunia yaitu bagaimana menciptakan dunia yang lebih adil.
Di masa pemerintahan Sukarno, Indonesia adalah negara dunia ketiga yang dihormati oleh dunia internasional selain membangun di sektor ekonomi (walaupun belum bisa menciptakan pondasi ekonomi yang kokoh karena terus diganggu oleh pemberontakan), Bung Karno juga selalu menyerukan arti pentingnya sebuah persatuan dan kesatuam bangsa di setiap pidatonya yang selalu berapi-api. Bung Karno sebagai seorang pemimpin juga berhasil mengadakan konferensi Asia-Afrika tahun 1955 di Bandung dan tidak lama berselang hasilnya adalah banyak negara-negara di Asia-Afrika yang merdeka. Ini adalah sebuah kemajuan besar dan luar biasa bagi politik luar negeri Indonesia. Tahun 1961, di Gedung PBB Bung Karno menyerukan pembentukan Tata Dunia Baru dalam pidatonya yang berjudul To Build World A New dan perjuangan bersama para pemimpin dunia lainnya membentuk Gerakan NonBlok yang bertujuan untuk meredakan konflik dua negara adikuasa pada waktu itu yaitu AS-Uni Sovyet. Gerakan NonBlok tidak mau memihak salah satu blok hanya karena kepentingan ideologi semata. Tahun 1967, kekuasaan presiden Sukarno riwayatnya tamat akibat pemberontakan G30-SPKI karena MPRS mencabut mandatnya dan menolak pidato pertanggungjawabannya yang diberi nama Nawaksara. Keadaan ekonomi yang kacau balau karena selama pemerintahannya presiden Sukarno sibuk untuk membasmi beberapa pemberontakan yang mengancam kedaulatan NKRI. MPRS kemudian mengangkat Suharto sebagai pejabat presiden yang kemudian secara bertahap diberikan mandat untuk menggantikan presiden Sukarno untuk menjalankan pemerintahan pada tahun 1967.
Tahun 1967, Indonesia memasuki sebuah babak baru dimana rejim Suharto menyebutnya sebagai Orde Baru karena mempunyai tekad untuk membangun sebuah Indonesia Baru yang difokuskan kepada pembangunan ekonomi dengan slogan Politk No dan Ekonomi Yes. Semua yang berbau Orde Lama dibabat habis dan dilarang karena tidak sesuai dengan cita-cita bangsa Indonesia akibat politik yang cenderung ke kiri menurut rejim Suharto. Untuk pembangunan ekonomi maka dibuatlah program Rencana Pembangunan Lima Tahun (Repelita). Tahun 1980-an program ini mendapat pujian dari dunia internasional karena secara tahap demi setahap berhasil membangun perekonomian Indonesia. Bukan hanya itu saja Indonesia mengalami booming minyak yang membuat kas negara menjadi gemuk. Karena kelebihan dana, pemerintah mampu membangun infrastruktur-infrastruktur pembangunan, seperti jalan raya, rumah sakit, rumah ibadah, perumahan BTN, sekolah dll. Tapi sayang saat proyek itu berjalan perilaku untuk korupsi tidak bisa dicegah. Bahkan proyek-proyek pembangunan infrastruktur dimanfaatkan sebagai lahan untuk korupsi. Tahun 1984, Indonesia mendapatkan penghargaan dari FAO di Roma Italia karena berhasil melakukan swasembada beras. Indonesia tidak perlu lagi mengimpor beras dari luar negeri khususnya dari Thailand dan Vietnam karena sudah mampu untuk memenuhi kebutuhannya sendiri. Untuk menopang pembangunan nasional, pemerintahan Suharto mulai membina pengusaha-penguasaha yang diberikan hak istimewa yaitu berupa proteksi karena dalam jangka panjang akan dijadikan konglomerat. Pemerintahan Suharto meniru sukses Korea Selatan dimana para konglomeratnya diberikan hak istimewa dan dijadikan tulang punggung dalam perekonomian nasional.
Proyek konglomerat itu memunculkan nama-nama seperti Sinar Mas, Salim Grup yang diberikan hak istimewa untuk membesarkan bisnis mereka di tanah air. Ekspansi bisnis mereka hampir ke semua sektor. Dari industri perbankan hingga perkebunan. Pemerintahan Suharto berharap mereka dapat menyerap tenaga kerja dalam jumlah besar sehingga dapat mengurangi angka pengangguran dan kemiskinan. Mereka benar-benar diberi kebebasan penuh dan dilindungi oleh pemerintah. Mereka berhasil menguasai 80% aset perekonomian nasional. Roda perekonomian Indonesia pengendaliannya benar-benar di tangan mereka.
Tetapi ketika Indonesia mulai mengalami krisis moneter yang efeknya berasal dari krisis moneter di Thailand kemudian memicu krisis ekonomi yang berakibat kepada krisis multidimensi betrpengaruh juga terhadap ekonomi Indonesia. Pada tahun 1998, ekonomi Indonesia benar-benar sempoyongan. Pak Harto sebagai presiden tidak tahu harus berbuat apa. Krisis ekonomi yang memicu krisis politik akhirnya membuat pak Harto harus mundur sebagai presiden yang mengakhiri 32 tahun kekuasaannya dan membuat tamat riwayat konglomerat-konglomerat yang dibinanya. Hal yang paling menyakitkan adalah mereka para konglomerat mempergunakan bank sebagai mesin uang untuk membiayai banyak mega proyek. Ditambah banyak peraturan-pertauran mengenai industri perbankan sangat lemah dan longgar. Pemerintahan Suharto mengelurakan Paket Oktober 1988 yang membuat posisi mereka semakin kuat untuk menjadikan bank sebagai mesin uang mereka. Tapi ketika krisis ekonomi mengancam ditandai terpuruknya nilai mata uang Rupiah terhadap nilai mata uang Dollar Amerika, bisnis mereka pun hancur berantakan. Bank yang menjadi mesin uang bagi kegiatan bisnis mereka, terkena kredit macet sehingga kredit yang disalurkan tidak bisa dikembalikan sementara bisnis yang mereka jalankan terpaksa dihentikan karena merugi. Krisis ekonomi tahun 1998 membuat kerajaan bisnis mereka tamat.
Era pemerintahan habibie, mereka terpaksa menyerahkan aet-asetnya ke Badan Penyehatan Perbankan Nasional (BPPN). Sementara untuk bank yang bangkrut di beri Bantuan Likuiditas bank Indonesia (BLBI). Biaya yang harus dikeluarkan pemerintah sebesar Rp 600 triliun. Sementara itu di sisi lain kita terus mendapatkan dana dari IMF untuk program reformasi ekonomi. Bangsa ini pun semakin dibuat bingung karena terjebak dalam hutang baru yang tidak bisa menyelesaikan dan menjawab permasalahan ekonomi yang sedang genting. Bank-bank seperti Lippo, Bank Umum Nasional, Danamon harus masuk BPPN karena bermasalah. Banyak pihak yang menagatakan bahwa kredit macet yang terjadi di bank-bank milik konglomerat mempercepat Indonesia memasuki krisis moneter. Ini adalah sebuah pelajaran yang pahit tetapi berharga.
Di era pemerintahan Gus Dur dan Megawati. Pemerintah masih mengahadapi persoalan yang sama yaitu bagaimana memperbaiki ekonomi Indonesia ke arah yang lebih stabil. Melalui Menteri BUMN, Laksamana Sukardi, pemerintah terpaksa menjual aset-aset tersebut kepada pihak asing. Karena pada waktu itu kita perlu dana segar. Sementara dana yang disediakan untuk BPPN sudah menipis tanpa ada hasil yang memuaskan. Perusahaan-perusahaan asing seperti Temasek Holding dari Singapura banyak membeli perusahaan-perusahaan kita yang sudah sakit, perusahaan yang dibeli dibidang perbankan, telekomunikasi, otomotif, perkebunan dll.
Pada era pemerintahan Susilo Bambang Yudhoyono. Mulailah instrumen moneter diperbaiki dan dibenahi setahap demi setahap. Ketika SBY-Kalla pada hari –hari pertama menjabat sebagai presiden dan wakil presiden, pelaku pasar melihat positif karena kedua orang ini adalah pilihan langsung rakyat Indonesia melalui PEMILU. Tim kabinet ekonomi dibentuk dengan merekrut orang-orang yang kompeten dibidangnya. Kabinet Indonesia bersatu pun sadar, bahwa tantangan-tantangan yang dihadapi tidaklah ringan dan itu tidak bisa diselesaikan hanya satu peride saja (lima tahun). Tetapi arah menuju perbaikan mulai terasa dalam tatanan ekonomi makro walaupun masih banyak kelemahan disana-sini. Industri perbankan saat ini jauh lebih kokoh karena didukung modal yang kuat, manejemen risiko, tata kelola yang bersih dan transparan serta adanya pengawasan dari bank sental. Tapi yang menjadi persoalan adalah bank-bank sangat takut untuk menyalurkan kredit khsusnya kepada sektor riil.
Sikap kehati-hatian bank dalam menyalurkan kredit ke sektor riil membuat perkembangan sektor rill berjalan sangat lambat sekali. Bank berhati-hati dalam menyalurkan kreditnya ke sektor riil karena masih dibayangi pengembalian kredit yang macet. Tetapi hal itu oke lah telah menjadi sesuatu hal yang buruk. Tapi ada sektor lain yang memerlukan penanganan khsusus dari sektor perbankan yaitu usaha kecil dan menengah (UKM). Seharusnya bank-bank tidak pelit dan memberikan arah manejemen dan membuka akses pasar dari produk-produk yang dihasilkan oleh UKM. UKM sudah jelas membutuhkan bantuan dari pihak bank khususnya dalam hal permodalan. Industri ini seperti yang telah diketahui adalah bersifat padat karya yang mampu menampung tenaga kerja. Sampai saat ini hal yang terbaik bagi negara Indonesia adalah industri padat karya. Karena satu-satunya industri yang mampu mengurangi angka pengangguran.
Bank Indonesia sebagai pengawas bank-bank diseluruh Indonesia, telah membuat cetak biru industri perbankan Indonesia ke depan dengan nama Arsitektur Perbankan Indonesia (API). Tujuan dibuatnya API adalah menciptakan industri perbankan yang kokoh, sehat, dan efisien. API juga ditujukan untuk mengelola manejemen risiko perbankan. Hal ini bertjuan untuk bagaimana menciptakan sebuah industri perbankan yang maju, kokoh dan kuat. Pemerintah telah belajar banyak dari krisis ekonomi tahun 1998, dimana banyaknya bank yang bangkrut akibat kekuarngan modal dan NPL yang sangat besar. Pada saat ini industri perbankan telah banyak mengalami kemajuan karena telah memiliki manejemen risiko dan tata kelola serta transparasi yang baik. Bank Indonesia juga terus menyempurnakan aturan-aturan mengenai devisa neto, batas maksimum pemberian kredit, kualitas aktiva produktif, tingkat kesehatan bank. Karena Bank Indonesia sadar bahwa peran bank dalam pembangunan nasional sangat vital. Jika Indonesia tidak mempunyai bank yang dikelola dengan baik maka sewaktu-waktu krisis eknomi global mengancam dan akan banyak bank-bank yang akan tutup dan dunia usaha bangkrut karena kesulitan untuk mendapatkan akses kredit untuk kelangsungan usaha mereka. Selain koperasi, bank juga mempunyai peran sebagai soko guru perekonomian Indonesia.
Bank Indonesia juga akan mengkampanyekan implementasi dan standar internasional Basel II yang menitikberatkan kepada manejemen risiko. Diharapkan dengan penerapan Basel II, bank meiliki manejemen yang bagus dan akan lebih diutungkan dalam kegiatan operasionalnya. Tapi bank-bank juga harus mempunyai informasi yang cukup serta daya analisa yang kuat untuk mengantisipasi gejolak pasar keuangan global yang semaik rumit dan komplek permasalahannya.
Ketika instrumen finansial kita menuju arah perbaikan. Ada masalah yang sangat besar yang belum kita dapat selesaikan, yaitu harga sembako. Bagi masyarakat awam ekonomi menuju perbaikan jika kebutuhan pokok dapat dipenuhi dan harganya sangat terjangkau. Mereka tidak butuh informasi mengenai kisaran tingkat inflasi setiap bulan, nilai tukar Rupiah terhadap nilai tukar Dollar Amerika, jatuh bangunnya indeks harga saham gabungan dari bursa efek Jakarta. Yang mereka butuhkan adalah bagaimana dapat membeli sembako dengan harga yang terjangkau. Mereka berpendapat bahwa krisis ekonomi belum selesai karena hal ini dibuktikkan dengan pengeluaran rumah tangga yang semakin meningakt dari tahun ke tahun. Apalagi sebagaian besar kelas menengah ekonomi Indonesia berpenghasilan Rp 1 juta per bulan. Harga dari sembako yang naik pun bervariasi, misalnya bulan ini yang naik minyak goreng, bulan depan telur, bulan depannya lagi daging. Kalau harga sembako terus berfluktuatif makan yang akan terus dirugikan adalah konsumen yang berasal dari kelas menengah. Sementara kelompok rumah tangga yang berpenghasilan Rp 5 juta ke atas tidak begitu berpengaruh. Tapi yang jelas masyarakat mempunyai penghasilan Rp 1 juta per bulan dan masyarakat yang mempunyai penghasilan Rp 5 juta per bulan mempunyai suara yang sama mengenai harga sembako, yaitu pemerintah dapat menstabilkan harga sembako supaya tidak fluktuatif lagi harganya karena ini sangat berpengaruh kepada rencana keuangan keluarga untuk mengkalkulasikan dengan kebutuhan-kebutuhan lainnya.
Kita juga melihat terjai antrean minyak diberbagai daerah. Rakyat kecil membentuk antrean panjang hanya untuk mendapatkan 1-2 liter minyak tanah. Pemerintah selalu membela diri bahwa kelangkaan minyak tanah adalah hal yang wajar hal ini disebabkan karena sedang terjadi konversi dari minyak tanah ke gas elpiji. Tapi ketika sebagaian rakyat kecil yang sudah menggunakan kompor gas mengaku sangat kecewa karena kualitas kompor gas yang dipakai sangat buruk dan dibuat asal jadi tanpa mementingkan kualitas. Di Republik Indonesia yang kita cintai, jika kita tidak mempunyai uang yang banyak sangat sulit untuk mendapatkan pelayanan standar. Kita lihat konversi kompor minyak tanah ke kompor gas elpiji adalah sebuah bukti yang nyata, bahwa elit politik yang diatas sana tidak mau berbuat apa-apa terhadap rakyatnya sendiri. Padahal kita adalah anggota Organisasi Negara-negara Pengekspor Minyak (OPEC) tetapi kita harus menanggung krisis minyak di negeri sendiri. Sebagai negara anggota OPEC sangat ironis jika kita harus melihat masyarakatnya sendiri harus mengantri selama berjam-jam untuk mendapatkan jatah minyak tanah karena minyak sangat langka.
Program konversi minyak tanah ke gas elpiji yang dimulai pada awal September 2006 adalah program besar dan strategis. Hal ini disebabkan cadangan minyak bumi kita dari tahun ke tahun semakin menipis sedangkan cadangan gas alam kita masih sangat besar. Karena cadangan gas kita masih sangat besar, pemerintah mempunyai program bagaimana memanfaatkan gas sebagai sumber energi, khususnya bagi keperluan rumah tangga. Dengan dicanangkannya program ini, kredibilitas pemerintah sedang di uji khususnya dalam hal public service karena pemerintah dan rakyat berinteraksi secara langsung hal ini disebabkan menyangkut hajat hidup oarng banyak. Seharusnya pemerintah melakukan sosialisai yang cukup mengenai program ini dan menyediakan infrastruktur yang matang sehingga tidak terjadi kekacauan dalam pelaksanaannya dilapangan.
62 tahun kita merdeka. Tapi masih banyak pekerjaan rumah yang harus diselesaikan.
Kamis, 17 April 2008
South Africa: Street Dogs - Warren Buffett On Efficient Market Theory
"Let me ... tell you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money.
"Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts.
"Walter and Edwin never came within a mile of inside information. Indeed, they used 'outside' information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, 'How would you summarise your approach?' Edwin replied, 'We try to buy stocks cheap.' So much for modern portfolio theory, technical analysis, macroeconomic thoughts and complex algorithms.
"Walter produced results over 47 years that dramatically surpassed those of the S&P 500.
"I first publicly discussed Walter's remarkable record in 1984. At that time 'efficient market theory' (EMT) was the centrepiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expected to overperform the stock market averages using only publicly available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.
"And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter's performance and what it meant for the school's cherished theory.
"Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named pope.
"Walter, meanwhile, went on overperforming, his job made easier by the misguided instructions given to all those young minds. After all, if you are in the shipping business, it's helpful to have all of your potential competitors be taught that the earth is flat."
"Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts.
"Walter and Edwin never came within a mile of inside information. Indeed, they used 'outside' information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, 'How would you summarise your approach?' Edwin replied, 'We try to buy stocks cheap.' So much for modern portfolio theory, technical analysis, macroeconomic thoughts and complex algorithms.
"Walter produced results over 47 years that dramatically surpassed those of the S&P 500.
"I first publicly discussed Walter's remarkable record in 1984. At that time 'efficient market theory' (EMT) was the centrepiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expected to overperform the stock market averages using only publicly available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.
"And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter's performance and what it meant for the school's cherished theory.
"Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named pope.
"Walter, meanwhile, went on overperforming, his job made easier by the misguided instructions given to all those young minds. After all, if you are in the shipping business, it's helpful to have all of your potential competitors be taught that the earth is flat."
Overvalued: Why Jack Welch Isn't God
A recent issue of Publishers Weekly featured a two-page advertising spread touting "the year's most eagerly anticipated book." The promised $1 million marketing onslaught apparently will include national TV and radio spots, appearances on CNBC and the Today show, and "transit advertising" in New York, Washington, D.C., and Boston.
In other words, get ready to know Jack. The book's title, subject, and nominal author is, of course, Jack Welch, the departing chairman and chief executive officer of General Electric (which owns CNBC and the Today show) and easily the most lionized corporate hero alive. Warner Books famously agreed to pay Welch $7.1 million - nearly a record for nonfiction - to tell his story; the book will likely have to be a million-seller just to break even.
It's hard to imagine what Jack, due out in September, will add to the already voluminous body of work describing Welch and his management techniques. Among the at least ten titles in this oeuvre are such classics as Get Better or Get Beaten!: 31 Leadership Secrets from GE's Jack Welch; Control Your Destiny or Someone Else Will: Lessons in Mastering Change - From the Principles Jack Welch Is Using to Revolutionize GE; Jack Welch and the GE Way; Business the Jack Welch Way; and the just-published update Get Better or Get Beaten!: 29 Leadership Secrets from GE's Jack Welch. (Apparently two of the original secrets didn't pan out.) Welch's hagiographers have declared him "the Vince Lombardi of business," "a heroic form of CEO," "the world's greatest business leader," "the manager of the century," and "CEO of the century." You'd almost think Welch was single-handedly responsible for the growth of the entire global economy. Oh, wait, he's been credited with that as well: "As the most widely admired, studied, and imitated CEO of his time," argued Fortune, "Welch has enriched not only GE's shareholders but also the shareholders of companies around the globe. His total economic impact is impossible to calculate but must be a staggering multiple of his GE performance."
Welch's critics (when they can be found) typically point to the massive layoffs he has overseen at GE or to allegations that GE plants have polluted the Hudson River. (Thomas F. O'Boyle's muckraking book At Any Cost is probably the most comprehensive anti-Welch brief to date.) But these and related attacks, whatever their merit, are largely beside the point as far as Welch's boosters are concerned. As long as GE isn't overwhelmed by some massive scandal (think Firestone) or federal lawsuit (think Microsoft), Welch will ultimately be judged by his impact on GE's bottom line.
And that impact looks impressive. In 1980, the year before Welch became CEO, GE recorded revenues of roughly $26.8 billion; in 2000 they were nearly $130 billion. When Welch took over, the stock market judged the company to be worth about $14 billion. Today its market capitalization is roughly $490 billion, making it the most valuable company in the world.
But there's a difference between being a good CEO - which Welch has been - and being the undisputed all-time champion of corporate leadership. Or, to put it another way, think of Jack Welch as a stock. If the most sensible way to gauge the current value of a stock is the famous price-to-earnings (P/E) ratio - that is, the ratio of a stock's market cost to the company's actual or expected profits - then consider Welch's reputation as "price" and his achievement as "earnings." A stock can be overvalued, sometimes wildly so, even if its earnings look solid. In bottom-line terms, Welch's achievements are solid. But his reputation? As a multiple of what he has actually accomplished, it's gotten far too pricey to buy.
* * * * *
What lessons could Jack contain that would justify its $7.1 million advance? Well, one key piece of advice that Welch might offer - but probably won't - is that the best way to look like a great manager is to work for a great company. CEOs are often depicted as almost single-handedly responsible for the good fortunes of their companies. (This is a notion CEOs embrace when crafting or defending their compensation packages; Welch himself has benefited from this reasoning, to the tune of an estimated $93.1 million in 1999 and $122.5 million last year.) So it was Lou Gerstner who turned around IBM, Lee Iacocca who saved Chrysler, and Jack Welch who "revived" GE. But sometimes the truth is just the reverse. Although most observers discuss GE as the house that Jack built, it's more true to say that GE is the house that built Jack.
John Francis Welch (i.e., Jack) took the reins at GE in 1981, following a long, exhaustive, and competitive succession process overseen by his predecessor, Reg Jones. But, contrary to the notion that Welch inherited a moribund company, things were going pretty well already. Over the course of Jones's stint at the top, which began in 1972, revenue had grown at an average annual rate of 12 percent, and earnings had grown at 16 percent. The spin offered by Robert Slater, author of The New GE: How Jack Welch Revived an American Institution (as well as three other Welch volumes), is that Welch "did not want to wait until General Electric was in trouble.... To keep those figures from declining, Welch knew he had to push the company to become more competitive." Janet Lowe, author of Jack Welch Speaks and the recent biography Welch: An American Icon, echoes this line: "The challenge for Welch was to spot trouble before it occurred, to take preventative measures, and to make the most of GE's tremendous momentum."
Fine. And in fact GE has averaged a solid 12 percent annual earnings growth throughout Welch's time at the top, and about 15 percent over the last eight years. But if no trouble had yet "occurred" when he took over, and GE already boasted "tremendous momentum," why credit Welch with a revival rather than with maintaining a past record of excellence? The truth is that while CEO biographers need a larger-than-life hero, GE did not. Indeed, as James C. Collins and Jerry I. Porras explain in their celebrated and insightful 1994 book Built to Last, the firm has enjoyed success under a series of innovative chief executives stretching back to the early 1900s.
Early in the twentieth century GE started what's been called the first major industrial research lab in the United States. Its top managers in the '20s and '30s pioneered "enlightened management" ideas, such as paid vacations for most workers, that helped attract and retain top talent, and they shrewdly moved the company into home appliances. "Few corporations are more progressive or better managed," observed Forbes in 1929. In the '50s GE was again a pioneer, this time in decentralizing its management structure to encourage divisional independence and growth, paving the way for new business units organized around, for instance, plastics. Its CEO in the '50s, Ralph Cordiner, founded the company's well-known corporate university in Croton-on-Hudson, New York, which has been described as the first private facility designed to codify and teach management skills. In the '60s the company experimented with new industries once again, and, while some of these experiments floundered, others - plastics, airplane engines, and especially the decision to let its credit division branch out into other financial services - laid the foundation for the industrial conglomerate that GE is today. When Welch took over after the recession- and inflation-plagued '70s, Jones was a celebrated figure whose tenure had left GE, in the words of Welch biographer Lowe, "one of the strongest [companies] in America" in financial terms; its debt rating was triple-A.
How strong has GE been under Welch? One popular benchmark is return on equity (ROE) - earnings as a percentage of shareholder equity - which measures how efficiently management has used shareholders' capital to create profits. Last year the median figure for profits as a percentage of shareholder equity among Fortune 500 companies was 14.6 percent. According to GE, its average annual ROE under Welch has been 25.8 percent, which is exceptional. But it's not unique, even for GE. In Built to Last, Collins and Porras compile pre-tax ROE figures for seven "chief executive eras" at GE; they find that Welch ranked fifth. (Using an updated number provided by GE that includes the exceptional boom years since that book was published, he places third.) Collins and Porras do not suggest Welch has done a bad job - they go out of their way to note their respect "for his remarkable track record" and "immense achievements." Their point is that they "respect GE even more for its remarkable track record of continuity in top management excellence over the course of a hundred years."
Indeed, despite the marketing of Welch as a "self-made man," a "rebel," and a "revolutionary," he's actually a company man who rose up through the ranks and then continued many of the traditions of his predecessors. In keeping with GE custom, Welch became CEO after spending his entire career at the company. He joined in 1960; by the time The Graduate was encouraging America to laugh at the idea of a future in plastics, he had taken charge of GE's plastics business department. He was part of Jones's inner circle of top managers during most of Jones's tenure. However you want to characterize the changes and decisions Welch made during his 20 years at the top of GE, they stemmed from his background as a consummate insider. And among the many things Welch has not changed at GE is the institutional habit of promoting from within: His successor, Jeffrey R. Immelt, is also homegrown.
* * * * *
But Immelt won't be able to benefit from the second lesson Jack might offer those wishing to emulate Welch's career: Become a CEO in the early '80s. In an era when stock performance has become (for better or for worse) the one true measure of corporate success, it's useful to have begun your tenure as CEO just before the greatest bull-market run of all time.
This run has been driven not just by increased earnings but by a huge change in how much investors are willing to pay for those earnings. In 1981, S&P 500 stocks traded, on average, at nine times earnings, according to Thomson Financial/ First Call. Today, the average is nearly 25 times earnings (way above the historic figure of about 15 times earnings). To be sure, GE shares trade well above this, at 38 times earnings (more on this below). But there's simply no denying that Welch - unlike, say, Jones - ran GE during a period when the winds of investor sentiment blew mightily at the backs of share prices, and that much of his eye-popping share-return performance is attributable to a general sea change in what investors are willing to pay for stocks. (Consider this: GE's P/E is currently 51% above the average. If, in a less generous market, that average dropped to its historic norm of 15, and GE held onto its premium, the company's shares would fall from about $50 to about $29 a share. If the average P/E were 9, and again GE kept its premium, its share price would be $18 - or 64% below its recent price.)
Of course, that doesn't change the fact that today GE is the most valuable corporation in the world, measured by stock market capitalization. This, if we can get down to brass tacks, is the core fact of Welch mania: He did better by his shareholders than anyone.
Except that's not true. Yes, the rise of GE shares during Welch's tenure has been awesome. But turn again to this year's Fortune 500. Where does GE rank in annual rate of return to investors over the past decade? Fifty-fifth. A great performance, to be sure, but not in a class by itself. Elsewhere in its 500 issue, Fortune notes that, over 17 years, shares of Colgate-Palmolive have decisively outperformed those of GE. (The 17-year time horizon is pegged to the tenure of Colgate-Palmolive's CEO, Reuben Mark, who avoids the press and is not, needless to say, being offered seven-figure book deals.)
But then, there are many yardsticks by which to gauge a company's performance, and raw stock market gains may not be the best. (As noted above, the monumental gains made by stocks in general - the S&P 500 is up roughly 2,000 percent since 1981 - distort direct comparisons between stock performances in the last couple of decades and those of pre-'80s CEO tenures.) Built to Last employs a better measure of corporate success: It measures the performance of an individual company's stock relative to the market during the same period. The easiest way to express this is as a simple ratio: Collins has calculated that, from 1981 to 1995, shares of Welch's GE stock stomped the broader market by a factor of 2.4 to 1. Surely that astonishing run of success is close to unique - something pulled off by only a few similarly celebrated corporate chiefs.
In fact, no. In his forthcoming book, Good to Great, Collins finds eleven companies that beat this benchmark. Earlier this year, he wrote about the former CEO of one such firm, Kimberly-Clark, in Harvard Business Review. From 1971 to 1991, that company's stock outperformed the market by a ratio of 4.1 to 1 under the leadership of one Darwin E. Smith. "And yet few people - even ardent students of business history - have heard of Darwin Smith," Collins wrote in HBR.
* * * * *
So why is Welch routinely described as the greatest corporate leader of his generation, if not of the century? Part of the answer is that, during Welch's career, America's relationship with business leaders has changed. For starters, business in general, filtered through coverage of the stock market on networks like CNBC, receives much more public attention than it did in 1980. Add to this the rise of technology companies, from Microsoft to Apple to Dell, that appeared to come from nowhere on the strength of visionary individuals whose entrepreneurial achievements were inspiring in a way few political figures could match. Looking to make business accessible in an age of economic boom and innovation, the press frequently told business stories through the prism of individuals - Iacocca, Bill Gates, Steve Jobs, Welch. In his day, Reg Jones was also lauded by his peers as the nation's most admired and influential CEO. It's just that the wider public wasn't that interested in such things back then.
But there's another explanation as well. Welch has given Wall Street what it wants. And, in the '80s and '90s, what it wanted above all else were companies that delivered results predictably, with no surprises, quarter by quarter. As noted above, GE trades at a distinct and impressive premium to the P/E of other companies. This is something Welch achieved. When he took over, GE was trading at a P/E of eight, roughly in line with the broader market. Typically, a company's P/E shrinks as its revenues and earnings increase; investors get less and less generous in what they're willing to pay for earnings, for the logical reason that percentage gains in earnings growth get tougher to replicate as the numbers get bigger. Nevertheless, GE under Welch has done the opposite: The market is apparently a far greater believer in GE's growth potential now than it was in 1981. That's a neat trick when you consider that today's earnings dwarf those of two decades ago.
One reason the markets may have rewarded Welch's GE with such a generous multiple is that the company has mastered the quarterly earnings ritual with almost eerie efficiency. "Wall Street loves the more than 100 quarters" - it's now 103 - "of uninterrupted growth in net income that have occurred under Mr. Welch," The New York Times summarized late last year. This isn't strictly accurate, since that string began in 1975, six years before Welch took over. Still, it's an incredible feat to roll out orderly growth from continuing operations on a quarterly basis for that long, through a wide variety of short-term economic twists and turns.
Incredible may be right. As the Welch era winds down, some critics have suggested that the methods by which GE produces its vaunted quarterly growth numbers may be less than pristine. A persuasive story by Jon Birger in the November 2000 issue of Money magazine argued that the company uses "a number of confusing but apparently legal gimmicks to achieve its vaunted consistency." (GE responded by sending a note to its stock analysts labeling Money's article "an unprecedented collection of nonsense.") Fortune (arguably Welch's biggest booster) followed up on March 19 with a story called "Accounting in Wonderland." Each wrestled in the thicket of restructuring charges, onetime special gains, and sales and acquisitions.
Observers are particularly suspicious of GE's record of using unique gains and restructuring charges to offset each other without disrupting that quarterly earnings flow. Most recently, charges associated with shutting down the Montgomery Ward chain, which was owned by GE Capital, were offset by a onetime gain from the sale of the last of the firm's stake in PaineWebber. Had these events occurred further apart, they would have ultimately balanced out the same way, but they could have created either a dip in earnings growth or a spike that would have been hard to top the next earnings season. And it does seem curious that GE's many onetime gains, acquisitions, and special charges invariably and smoothly balance each other every three months.
Then there's the company's pension plan. As noted in a 1999 column by Alan Abelson in Barron's, echoed in Money, GE's pension plan has been fully funded for years; it is invested in stocks and fixed-income securities, and when gains in the fund outpace the amount the company must pay, the difference falls into its reported income. This amount has grown at a faster clip than overall earnings in the last few years, and in 2000 it totaled $1.74 billion, or about 13.7 percent of net. (GE has lately stopped using the phrase "total pension plan income" to describe this figure, instead labeling it "cost reduction from pension" in its latest annual report; but it's the same thing.) The point is that this number has nothing to do with GE's actual businesses, but it helps the company meet its aggressive revenue-growth targets each quarter.
Of course, corporate accounting can get extremely creative without running afoul of the law - or even running afoul of good business practices - and no one has suggested that whatever gimmickry may be going on masks a flawed business. The danger is in letting the short-term mania to "make the quarter" undermine the balance sheet's long-term health. There's no evidence that it has so far, but such things take a long time to play out.
* * * * *
Chances are that GE will remain healthy under Immelt - again, because it is a business with executive talent both deep and wide. What's less clear is whether the intangible optimism, tied to Welch's mystique, that has helped inflate the growth of GE stock can hold out. It will take years, for instance, to figure out whether Welch's last act, the mega-acquisition of Honeywell, will play out as planned. If the integration process hits a speed bump - if, God forbid, something interferes with that quarterly earnings streak - that good-vibrations optimism could disappear.
Although the rockiness of the market has left GE shares essentially flat over the past 18 months, they are still generously priced. If this generosity deteriorates even mildly - say GE's growth slows a bit - it will severely affect GE shares. Suppose the stock's P/E enjoyed merely a 10 percent premium over the market's current (historically high) average. That would knock about 29 percent off GE's current share price - or wipe out a whopping $142 billion of the company's overall value. Such are the perils of a stock priced to reflect a belief in managerial perfection. Even now, GE shares are about 19 percent off their 52-week high, not because of weaker earnings, but because investors aren't willing to pay as much for those earnings as they used to. If Welch picked the perfect time to take control of a company whose success would be measured by shareholder value, Immelt may have picked the worst.
On the cover of Jack, Welch wears a friendly grin, a cream-colored sweater, and the look of a man who figures his record speaks for itself. He is ready to talk from the gut, to explain his success, to share his secrets. Some of them, anyway.
A very similar version of this story appeared in the June 11, 2001, issue of The New Republic.
In other words, get ready to know Jack. The book's title, subject, and nominal author is, of course, Jack Welch, the departing chairman and chief executive officer of General Electric (which owns CNBC and the Today show) and easily the most lionized corporate hero alive. Warner Books famously agreed to pay Welch $7.1 million - nearly a record for nonfiction - to tell his story; the book will likely have to be a million-seller just to break even.
It's hard to imagine what Jack, due out in September, will add to the already voluminous body of work describing Welch and his management techniques. Among the at least ten titles in this oeuvre are such classics as Get Better or Get Beaten!: 31 Leadership Secrets from GE's Jack Welch; Control Your Destiny or Someone Else Will: Lessons in Mastering Change - From the Principles Jack Welch Is Using to Revolutionize GE; Jack Welch and the GE Way; Business the Jack Welch Way; and the just-published update Get Better or Get Beaten!: 29 Leadership Secrets from GE's Jack Welch. (Apparently two of the original secrets didn't pan out.) Welch's hagiographers have declared him "the Vince Lombardi of business," "a heroic form of CEO," "the world's greatest business leader," "the manager of the century," and "CEO of the century." You'd almost think Welch was single-handedly responsible for the growth of the entire global economy. Oh, wait, he's been credited with that as well: "As the most widely admired, studied, and imitated CEO of his time," argued Fortune, "Welch has enriched not only GE's shareholders but also the shareholders of companies around the globe. His total economic impact is impossible to calculate but must be a staggering multiple of his GE performance."
Welch's critics (when they can be found) typically point to the massive layoffs he has overseen at GE or to allegations that GE plants have polluted the Hudson River. (Thomas F. O'Boyle's muckraking book At Any Cost is probably the most comprehensive anti-Welch brief to date.) But these and related attacks, whatever their merit, are largely beside the point as far as Welch's boosters are concerned. As long as GE isn't overwhelmed by some massive scandal (think Firestone) or federal lawsuit (think Microsoft), Welch will ultimately be judged by his impact on GE's bottom line.
And that impact looks impressive. In 1980, the year before Welch became CEO, GE recorded revenues of roughly $26.8 billion; in 2000 they were nearly $130 billion. When Welch took over, the stock market judged the company to be worth about $14 billion. Today its market capitalization is roughly $490 billion, making it the most valuable company in the world.
But there's a difference between being a good CEO - which Welch has been - and being the undisputed all-time champion of corporate leadership. Or, to put it another way, think of Jack Welch as a stock. If the most sensible way to gauge the current value of a stock is the famous price-to-earnings (P/E) ratio - that is, the ratio of a stock's market cost to the company's actual or expected profits - then consider Welch's reputation as "price" and his achievement as "earnings." A stock can be overvalued, sometimes wildly so, even if its earnings look solid. In bottom-line terms, Welch's achievements are solid. But his reputation? As a multiple of what he has actually accomplished, it's gotten far too pricey to buy.
* * * * *
What lessons could Jack contain that would justify its $7.1 million advance? Well, one key piece of advice that Welch might offer - but probably won't - is that the best way to look like a great manager is to work for a great company. CEOs are often depicted as almost single-handedly responsible for the good fortunes of their companies. (This is a notion CEOs embrace when crafting or defending their compensation packages; Welch himself has benefited from this reasoning, to the tune of an estimated $93.1 million in 1999 and $122.5 million last year.) So it was Lou Gerstner who turned around IBM, Lee Iacocca who saved Chrysler, and Jack Welch who "revived" GE. But sometimes the truth is just the reverse. Although most observers discuss GE as the house that Jack built, it's more true to say that GE is the house that built Jack.
John Francis Welch (i.e., Jack) took the reins at GE in 1981, following a long, exhaustive, and competitive succession process overseen by his predecessor, Reg Jones. But, contrary to the notion that Welch inherited a moribund company, things were going pretty well already. Over the course of Jones's stint at the top, which began in 1972, revenue had grown at an average annual rate of 12 percent, and earnings had grown at 16 percent. The spin offered by Robert Slater, author of The New GE: How Jack Welch Revived an American Institution (as well as three other Welch volumes), is that Welch "did not want to wait until General Electric was in trouble.... To keep those figures from declining, Welch knew he had to push the company to become more competitive." Janet Lowe, author of Jack Welch Speaks and the recent biography Welch: An American Icon, echoes this line: "The challenge for Welch was to spot trouble before it occurred, to take preventative measures, and to make the most of GE's tremendous momentum."
Fine. And in fact GE has averaged a solid 12 percent annual earnings growth throughout Welch's time at the top, and about 15 percent over the last eight years. But if no trouble had yet "occurred" when he took over, and GE already boasted "tremendous momentum," why credit Welch with a revival rather than with maintaining a past record of excellence? The truth is that while CEO biographers need a larger-than-life hero, GE did not. Indeed, as James C. Collins and Jerry I. Porras explain in their celebrated and insightful 1994 book Built to Last, the firm has enjoyed success under a series of innovative chief executives stretching back to the early 1900s.
Early in the twentieth century GE started what's been called the first major industrial research lab in the United States. Its top managers in the '20s and '30s pioneered "enlightened management" ideas, such as paid vacations for most workers, that helped attract and retain top talent, and they shrewdly moved the company into home appliances. "Few corporations are more progressive or better managed," observed Forbes in 1929. In the '50s GE was again a pioneer, this time in decentralizing its management structure to encourage divisional independence and growth, paving the way for new business units organized around, for instance, plastics. Its CEO in the '50s, Ralph Cordiner, founded the company's well-known corporate university in Croton-on-Hudson, New York, which has been described as the first private facility designed to codify and teach management skills. In the '60s the company experimented with new industries once again, and, while some of these experiments floundered, others - plastics, airplane engines, and especially the decision to let its credit division branch out into other financial services - laid the foundation for the industrial conglomerate that GE is today. When Welch took over after the recession- and inflation-plagued '70s, Jones was a celebrated figure whose tenure had left GE, in the words of Welch biographer Lowe, "one of the strongest [companies] in America" in financial terms; its debt rating was triple-A.
How strong has GE been under Welch? One popular benchmark is return on equity (ROE) - earnings as a percentage of shareholder equity - which measures how efficiently management has used shareholders' capital to create profits. Last year the median figure for profits as a percentage of shareholder equity among Fortune 500 companies was 14.6 percent. According to GE, its average annual ROE under Welch has been 25.8 percent, which is exceptional. But it's not unique, even for GE. In Built to Last, Collins and Porras compile pre-tax ROE figures for seven "chief executive eras" at GE; they find that Welch ranked fifth. (Using an updated number provided by GE that includes the exceptional boom years since that book was published, he places third.) Collins and Porras do not suggest Welch has done a bad job - they go out of their way to note their respect "for his remarkable track record" and "immense achievements." Their point is that they "respect GE even more for its remarkable track record of continuity in top management excellence over the course of a hundred years."
Indeed, despite the marketing of Welch as a "self-made man," a "rebel," and a "revolutionary," he's actually a company man who rose up through the ranks and then continued many of the traditions of his predecessors. In keeping with GE custom, Welch became CEO after spending his entire career at the company. He joined in 1960; by the time The Graduate was encouraging America to laugh at the idea of a future in plastics, he had taken charge of GE's plastics business department. He was part of Jones's inner circle of top managers during most of Jones's tenure. However you want to characterize the changes and decisions Welch made during his 20 years at the top of GE, they stemmed from his background as a consummate insider. And among the many things Welch has not changed at GE is the institutional habit of promoting from within: His successor, Jeffrey R. Immelt, is also homegrown.
* * * * *
But Immelt won't be able to benefit from the second lesson Jack might offer those wishing to emulate Welch's career: Become a CEO in the early '80s. In an era when stock performance has become (for better or for worse) the one true measure of corporate success, it's useful to have begun your tenure as CEO just before the greatest bull-market run of all time.
This run has been driven not just by increased earnings but by a huge change in how much investors are willing to pay for those earnings. In 1981, S&P 500 stocks traded, on average, at nine times earnings, according to Thomson Financial/ First Call. Today, the average is nearly 25 times earnings (way above the historic figure of about 15 times earnings). To be sure, GE shares trade well above this, at 38 times earnings (more on this below). But there's simply no denying that Welch - unlike, say, Jones - ran GE during a period when the winds of investor sentiment blew mightily at the backs of share prices, and that much of his eye-popping share-return performance is attributable to a general sea change in what investors are willing to pay for stocks. (Consider this: GE's P/E is currently 51% above the average. If, in a less generous market, that average dropped to its historic norm of 15, and GE held onto its premium, the company's shares would fall from about $50 to about $29 a share. If the average P/E were 9, and again GE kept its premium, its share price would be $18 - or 64% below its recent price.)
Of course, that doesn't change the fact that today GE is the most valuable corporation in the world, measured by stock market capitalization. This, if we can get down to brass tacks, is the core fact of Welch mania: He did better by his shareholders than anyone.
Except that's not true. Yes, the rise of GE shares during Welch's tenure has been awesome. But turn again to this year's Fortune 500. Where does GE rank in annual rate of return to investors over the past decade? Fifty-fifth. A great performance, to be sure, but not in a class by itself. Elsewhere in its 500 issue, Fortune notes that, over 17 years, shares of Colgate-Palmolive have decisively outperformed those of GE. (The 17-year time horizon is pegged to the tenure of Colgate-Palmolive's CEO, Reuben Mark, who avoids the press and is not, needless to say, being offered seven-figure book deals.)
But then, there are many yardsticks by which to gauge a company's performance, and raw stock market gains may not be the best. (As noted above, the monumental gains made by stocks in general - the S&P 500 is up roughly 2,000 percent since 1981 - distort direct comparisons between stock performances in the last couple of decades and those of pre-'80s CEO tenures.) Built to Last employs a better measure of corporate success: It measures the performance of an individual company's stock relative to the market during the same period. The easiest way to express this is as a simple ratio: Collins has calculated that, from 1981 to 1995, shares of Welch's GE stock stomped the broader market by a factor of 2.4 to 1. Surely that astonishing run of success is close to unique - something pulled off by only a few similarly celebrated corporate chiefs.
In fact, no. In his forthcoming book, Good to Great, Collins finds eleven companies that beat this benchmark. Earlier this year, he wrote about the former CEO of one such firm, Kimberly-Clark, in Harvard Business Review. From 1971 to 1991, that company's stock outperformed the market by a ratio of 4.1 to 1 under the leadership of one Darwin E. Smith. "And yet few people - even ardent students of business history - have heard of Darwin Smith," Collins wrote in HBR.
* * * * *
So why is Welch routinely described as the greatest corporate leader of his generation, if not of the century? Part of the answer is that, during Welch's career, America's relationship with business leaders has changed. For starters, business in general, filtered through coverage of the stock market on networks like CNBC, receives much more public attention than it did in 1980. Add to this the rise of technology companies, from Microsoft to Apple to Dell, that appeared to come from nowhere on the strength of visionary individuals whose entrepreneurial achievements were inspiring in a way few political figures could match. Looking to make business accessible in an age of economic boom and innovation, the press frequently told business stories through the prism of individuals - Iacocca, Bill Gates, Steve Jobs, Welch. In his day, Reg Jones was also lauded by his peers as the nation's most admired and influential CEO. It's just that the wider public wasn't that interested in such things back then.
But there's another explanation as well. Welch has given Wall Street what it wants. And, in the '80s and '90s, what it wanted above all else were companies that delivered results predictably, with no surprises, quarter by quarter. As noted above, GE trades at a distinct and impressive premium to the P/E of other companies. This is something Welch achieved. When he took over, GE was trading at a P/E of eight, roughly in line with the broader market. Typically, a company's P/E shrinks as its revenues and earnings increase; investors get less and less generous in what they're willing to pay for earnings, for the logical reason that percentage gains in earnings growth get tougher to replicate as the numbers get bigger. Nevertheless, GE under Welch has done the opposite: The market is apparently a far greater believer in GE's growth potential now than it was in 1981. That's a neat trick when you consider that today's earnings dwarf those of two decades ago.
One reason the markets may have rewarded Welch's GE with such a generous multiple is that the company has mastered the quarterly earnings ritual with almost eerie efficiency. "Wall Street loves the more than 100 quarters" - it's now 103 - "of uninterrupted growth in net income that have occurred under Mr. Welch," The New York Times summarized late last year. This isn't strictly accurate, since that string began in 1975, six years before Welch took over. Still, it's an incredible feat to roll out orderly growth from continuing operations on a quarterly basis for that long, through a wide variety of short-term economic twists and turns.
Incredible may be right. As the Welch era winds down, some critics have suggested that the methods by which GE produces its vaunted quarterly growth numbers may be less than pristine. A persuasive story by Jon Birger in the November 2000 issue of Money magazine argued that the company uses "a number of confusing but apparently legal gimmicks to achieve its vaunted consistency." (GE responded by sending a note to its stock analysts labeling Money's article "an unprecedented collection of nonsense.") Fortune (arguably Welch's biggest booster) followed up on March 19 with a story called "Accounting in Wonderland." Each wrestled in the thicket of restructuring charges, onetime special gains, and sales and acquisitions.
Observers are particularly suspicious of GE's record of using unique gains and restructuring charges to offset each other without disrupting that quarterly earnings flow. Most recently, charges associated with shutting down the Montgomery Ward chain, which was owned by GE Capital, were offset by a onetime gain from the sale of the last of the firm's stake in PaineWebber. Had these events occurred further apart, they would have ultimately balanced out the same way, but they could have created either a dip in earnings growth or a spike that would have been hard to top the next earnings season. And it does seem curious that GE's many onetime gains, acquisitions, and special charges invariably and smoothly balance each other every three months.
Then there's the company's pension plan. As noted in a 1999 column by Alan Abelson in Barron's, echoed in Money, GE's pension plan has been fully funded for years; it is invested in stocks and fixed-income securities, and when gains in the fund outpace the amount the company must pay, the difference falls into its reported income. This amount has grown at a faster clip than overall earnings in the last few years, and in 2000 it totaled $1.74 billion, or about 13.7 percent of net. (GE has lately stopped using the phrase "total pension plan income" to describe this figure, instead labeling it "cost reduction from pension" in its latest annual report; but it's the same thing.) The point is that this number has nothing to do with GE's actual businesses, but it helps the company meet its aggressive revenue-growth targets each quarter.
Of course, corporate accounting can get extremely creative without running afoul of the law - or even running afoul of good business practices - and no one has suggested that whatever gimmickry may be going on masks a flawed business. The danger is in letting the short-term mania to "make the quarter" undermine the balance sheet's long-term health. There's no evidence that it has so far, but such things take a long time to play out.
* * * * *
Chances are that GE will remain healthy under Immelt - again, because it is a business with executive talent both deep and wide. What's less clear is whether the intangible optimism, tied to Welch's mystique, that has helped inflate the growth of GE stock can hold out. It will take years, for instance, to figure out whether Welch's last act, the mega-acquisition of Honeywell, will play out as planned. If the integration process hits a speed bump - if, God forbid, something interferes with that quarterly earnings streak - that good-vibrations optimism could disappear.
Although the rockiness of the market has left GE shares essentially flat over the past 18 months, they are still generously priced. If this generosity deteriorates even mildly - say GE's growth slows a bit - it will severely affect GE shares. Suppose the stock's P/E enjoyed merely a 10 percent premium over the market's current (historically high) average. That would knock about 29 percent off GE's current share price - or wipe out a whopping $142 billion of the company's overall value. Such are the perils of a stock priced to reflect a belief in managerial perfection. Even now, GE shares are about 19 percent off their 52-week high, not because of weaker earnings, but because investors aren't willing to pay as much for those earnings as they used to. If Welch picked the perfect time to take control of a company whose success would be measured by shareholder value, Immelt may have picked the worst.
On the cover of Jack, Welch wears a friendly grin, a cream-colored sweater, and the look of a man who figures his record speaks for itself. He is ready to talk from the gut, to explain his success, to share his secrets. Some of them, anyway.
A very similar version of this story appeared in the June 11, 2001, issue of The New Republic.
Microsoft to bring back SideWinder brand
SideWinder is back.
Microsoft Corp., citing a resurgence in PC gaming, says it will reintroduce the SideWinder brand of gaming peripherals, starting with a new mouse that will be released in October.
The SideWinder name was discontinued four years ago. Microsoft says the decision to come out with a SideWinder mouse was prompted in part by the popularity of its general-purpose IntelliMouse Explorer 3.0 PC mouse among gamers.
It will be the first SideWinder-branded mouse. Previously, the SideWinder line included PC game pads, joysticks and steering wheels. The SideWinder brand was introduced in 1995.
The product line was dropped in 2003 because of the rising popularity of console gaming at the time, said Matt Barlow, director of worldwide marketing and business development in Microsoft's hardware group.
"We saw double-digit declines in these particular businesses around the world," he said. However, in the past 12 months, he said, Microsoft has seen a revival in PC gaming.
The SideWinder mouse, to retail for $79.95, comes with a wider scroll wheel, customizable weight, specially positioned buttons and other features meant to appeal to gamers. It also has a small, built-in LCD screen to display the mouse's DPI setting and help users record macros, small programs that automate specific moves in games.
Barlow declined to talk about specific plans for future SideWinder-branded products, but he said the introduction of the mouse is just the first step in bringing back the name.
Microsoft's renewed interest in gaming hardware was apparent last year, when it introduced a mouse called Habu with gaming peripheral company Razer.
The Microsoft Hardware group is marking its 25th anniversary this year. An anomaly within the software company, the group competes with companies such as Logitech.
Apart from making mice, keyboards and other peripherals, the group has contributed to projects such as Microsoft's Xbox video-game console and Surface tabletop computer. Tom Gibbons, Microsoft corporate vice president of specialized devices and applications, said the hardware unit has been profitable since its inception.
Microsoft Corp., citing a resurgence in PC gaming, says it will reintroduce the SideWinder brand of gaming peripherals, starting with a new mouse that will be released in October.
The SideWinder name was discontinued four years ago. Microsoft says the decision to come out with a SideWinder mouse was prompted in part by the popularity of its general-purpose IntelliMouse Explorer 3.0 PC mouse among gamers.
It will be the first SideWinder-branded mouse. Previously, the SideWinder line included PC game pads, joysticks and steering wheels. The SideWinder brand was introduced in 1995.
The product line was dropped in 2003 because of the rising popularity of console gaming at the time, said Matt Barlow, director of worldwide marketing and business development in Microsoft's hardware group.
"We saw double-digit declines in these particular businesses around the world," he said. However, in the past 12 months, he said, Microsoft has seen a revival in PC gaming.
The SideWinder mouse, to retail for $79.95, comes with a wider scroll wheel, customizable weight, specially positioned buttons and other features meant to appeal to gamers. It also has a small, built-in LCD screen to display the mouse's DPI setting and help users record macros, small programs that automate specific moves in games.
Barlow declined to talk about specific plans for future SideWinder-branded products, but he said the introduction of the mouse is just the first step in bringing back the name.
Microsoft's renewed interest in gaming hardware was apparent last year, when it introduced a mouse called Habu with gaming peripheral company Razer.
The Microsoft Hardware group is marking its 25th anniversary this year. An anomaly within the software company, the group competes with companies such as Logitech.
Apart from making mice, keyboards and other peripherals, the group has contributed to projects such as Microsoft's Xbox video-game console and Surface tabletop computer. Tom Gibbons, Microsoft corporate vice president of specialized devices and applications, said the hardware unit has been profitable since its inception.
Investors at crossroads
With signs the real estate boom is slowing, investors are expected to look elsewhere for profits. Will the stock market be the beneficiary?
Last year investors were asking "Who needs stocks?" when real estate prices were soaring and condo flipping was all the rage. As 2006 gets under way, they're wondering where to turn now that the housing market is slowing and double-digit gains are no longer a slam dunk.
For investors like Jan Fowler, a business broker who lives in Odessa, it's a pressing issue. Like a lot of others, she soured on stocks in the wake of the tech bubble and fled to the relative safety of real estate. Her investment, a rental house in Holiday, nearly doubled in price during the two years she owned it. After repairs and other costs, she walked away from its recent sale with a $55,000 profit.
"I would love to buy another Florida home for rental, but prices are too inflated," she said. Fowler said that with today's prices she wouldn't be able to collect enough rent to cover the larger mortgage and fast-rising costs for property insurance.
Now she's looking for alternatives, but isn't impressed by what she sees. Fowler said she recently bought some stocks and a little gold, but is keeping most of the proceeds from the house sale in a money-market account.
"The pendulum in real estate has moved away from euphoria, but that doesn't automatically make it the next golden age for stocks," said Rick Metzger, a broker for A.G. Edwards & Sons in Tampa. He said investors are neither "scarfing up stocks" as they were in the late '90s,nor despairing as they were from 2000 to 2002.
"We're pretty close to middle ground now," he said. "Maybe if stocks look like they are starting to break out of their trading ranges, investors will come back in."
As another new year begins, the financial markets face both opportunities and potential head winds. As a result, a lot of advisers and analysts are taking the middle road - optimistic, but not wildly so.
St. Petersburg money manager Timothy McIntosh offers a typical comment: "I think we're in a period where we just get very moderate returns," he said.
However, it's easy to find other views in both directions.
"I think the market is setting a stage to have an explosive move to the upside," said Tampa money manager John Bartoletta of High Street Financial. On the other hand, Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, is predicting a difficult year.
Both professional and amateur investors are taking cues from the economic and political backdrop.
One focus is the transition at the Federal Reserve Board, where Alan Greenspan is on his way out as chairman and Ben Bernanke is stepping into those extra-large shoes. Conventional wisdom is that the Fed's cycle of quarter-point increases in short-term interest rates is coming to an end - if not this month, then most likely by the end of the first quarter - with the federal funds rate between 4.5 and 4.75 percent.
The end of the tightening cycle that began in June 2004 will be a relief to the stock market. Rising rates put a crimp in corporate profits because they make it more expensive for companies to borrow money and if they get high enough, they even could push the economy into a recession. So far, profits are doing just fine. Analysts are expecting fourth-quarter earnings for companies in the Standard & Poor's 500 Index to be up more than 13 percent.
However, interest rates offer one ominous sign. Long-term rates have remained historically low even as short-term rates have risen. Last week, investors could earn a slightly higher yield (just under 4.4 percent) on two-year Treasuries than on the 10-year note, a situation known as an inverted yield curve, which often precedes recessions.
If long-term rates start rising, as some expect, that could create another set of problems. Mortgages would become more expensive, putting pressure on housing prices. It's positive for stocks if investors simply put new money in stocks instead of real estate. But if the real-estate market slows so much that investors can't sell properties or have to accept losses, that's negative for both stocks and the economy as a whole.
Most economists are predicting that the economy will slow this year, but not actually move into a recession.
"The economy continues to be stronger than most people thought it would be, particularly in light of the hurricanes," said Clearwater financial planner Ray Ferrara of ProVise Investment Management. He said key factors will be the availability of money for businesses borrowers and creation of new jobs. "I hate being a cynic, but it is an election year (for Congress) . . . the president will do everything he can to have the economy humming, people feeling good about themselves and being employed."
Many investors are watching commodity prices closely. Energy stocks were huge winners last year as oil prices soared and hurricanes disrupted supplies. Prices have come back down from their highs, but oil at $60 a barrel is far from cheap. Higher prices for gasoline and home heating put a crimp in consumers' ability to pay for other purchases, which could hurt retail stocks.
Other commodities, such as copper, zinc, aluminum, silver, gold and platinum have seen double digit increases this year. Overall, inflation was up 3.8 percent through November of last year, compared to 3.3 percent for 2004. In addition, consumers are being squeezed by higher prices in areas that don't show up in the inflation numbers, such as home prices and property insurance.
The war in Iraq and terrorism also are on investors' minds. The progress of the war, political and financial scandals, natural disasters and other news events all have the potential to impact markets during the year.
For investors who want to buy stocks, the pros have plenty of suggestions.
"Technology will be one of the good stories for 2006," predicted McIntosh at Strategic Investment Partners. "We think (companies) will spend a lot of money on technology next year." His picks include Microsoft Corp., Oracle Corp. and Hewlett-Packard Co.
Ferrara at ProVise Investment Management recommended going with stocks that pay dividends.
"Dividends are going to become very important," he said. "If the pundits are right about the stock market not increasing dramatically over the next couple years, you could see dividends representing 40 percent of that return."
The analysts at Raymond James & Associates in St. Petersburg put their heads together to come up with these top picks for the new year: Amdocs Ltd., Briggs & Stratton, Chesapeake Energy Corp., Chubb Corp., Dell Inc., LifePoint Hospitals Inc., Nabors Industries Ltd., Republic Services Inc., Ryanair Holdings, U.S. Bancorp. and UNOVA Inc.
If the economy does slow considerably, that would be good for defensive stocks such as utilities and food. If it doesn't, growth stocks could do better. Just don't bet too heavily on any particular stock or scenario if you want to keep risk in check.
"The one thing 35 years have taught me is that whatever the majority thinks is going to happen usually doesn't play out that way," Ferrara said. "The key from the investor's point of view continues to be a well-diversified portfolio."
Last year investors were asking "Who needs stocks?" when real estate prices were soaring and condo flipping was all the rage. As 2006 gets under way, they're wondering where to turn now that the housing market is slowing and double-digit gains are no longer a slam dunk.
For investors like Jan Fowler, a business broker who lives in Odessa, it's a pressing issue. Like a lot of others, she soured on stocks in the wake of the tech bubble and fled to the relative safety of real estate. Her investment, a rental house in Holiday, nearly doubled in price during the two years she owned it. After repairs and other costs, she walked away from its recent sale with a $55,000 profit.
"I would love to buy another Florida home for rental, but prices are too inflated," she said. Fowler said that with today's prices she wouldn't be able to collect enough rent to cover the larger mortgage and fast-rising costs for property insurance.
Now she's looking for alternatives, but isn't impressed by what she sees. Fowler said she recently bought some stocks and a little gold, but is keeping most of the proceeds from the house sale in a money-market account.
"The pendulum in real estate has moved away from euphoria, but that doesn't automatically make it the next golden age for stocks," said Rick Metzger, a broker for A.G. Edwards & Sons in Tampa. He said investors are neither "scarfing up stocks" as they were in the late '90s,nor despairing as they were from 2000 to 2002.
"We're pretty close to middle ground now," he said. "Maybe if stocks look like they are starting to break out of their trading ranges, investors will come back in."
As another new year begins, the financial markets face both opportunities and potential head winds. As a result, a lot of advisers and analysts are taking the middle road - optimistic, but not wildly so.
St. Petersburg money manager Timothy McIntosh offers a typical comment: "I think we're in a period where we just get very moderate returns," he said.
However, it's easy to find other views in both directions.
"I think the market is setting a stage to have an explosive move to the upside," said Tampa money manager John Bartoletta of High Street Financial. On the other hand, Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, is predicting a difficult year.
Both professional and amateur investors are taking cues from the economic and political backdrop.
One focus is the transition at the Federal Reserve Board, where Alan Greenspan is on his way out as chairman and Ben Bernanke is stepping into those extra-large shoes. Conventional wisdom is that the Fed's cycle of quarter-point increases in short-term interest rates is coming to an end - if not this month, then most likely by the end of the first quarter - with the federal funds rate between 4.5 and 4.75 percent.
The end of the tightening cycle that began in June 2004 will be a relief to the stock market. Rising rates put a crimp in corporate profits because they make it more expensive for companies to borrow money and if they get high enough, they even could push the economy into a recession. So far, profits are doing just fine. Analysts are expecting fourth-quarter earnings for companies in the Standard & Poor's 500 Index to be up more than 13 percent.
However, interest rates offer one ominous sign. Long-term rates have remained historically low even as short-term rates have risen. Last week, investors could earn a slightly higher yield (just under 4.4 percent) on two-year Treasuries than on the 10-year note, a situation known as an inverted yield curve, which often precedes recessions.
If long-term rates start rising, as some expect, that could create another set of problems. Mortgages would become more expensive, putting pressure on housing prices. It's positive for stocks if investors simply put new money in stocks instead of real estate. But if the real-estate market slows so much that investors can't sell properties or have to accept losses, that's negative for both stocks and the economy as a whole.
Most economists are predicting that the economy will slow this year, but not actually move into a recession.
"The economy continues to be stronger than most people thought it would be, particularly in light of the hurricanes," said Clearwater financial planner Ray Ferrara of ProVise Investment Management. He said key factors will be the availability of money for businesses borrowers and creation of new jobs. "I hate being a cynic, but it is an election year (for Congress) . . . the president will do everything he can to have the economy humming, people feeling good about themselves and being employed."
Many investors are watching commodity prices closely. Energy stocks were huge winners last year as oil prices soared and hurricanes disrupted supplies. Prices have come back down from their highs, but oil at $60 a barrel is far from cheap. Higher prices for gasoline and home heating put a crimp in consumers' ability to pay for other purchases, which could hurt retail stocks.
Other commodities, such as copper, zinc, aluminum, silver, gold and platinum have seen double digit increases this year. Overall, inflation was up 3.8 percent through November of last year, compared to 3.3 percent for 2004. In addition, consumers are being squeezed by higher prices in areas that don't show up in the inflation numbers, such as home prices and property insurance.
The war in Iraq and terrorism also are on investors' minds. The progress of the war, political and financial scandals, natural disasters and other news events all have the potential to impact markets during the year.
For investors who want to buy stocks, the pros have plenty of suggestions.
"Technology will be one of the good stories for 2006," predicted McIntosh at Strategic Investment Partners. "We think (companies) will spend a lot of money on technology next year." His picks include Microsoft Corp., Oracle Corp. and Hewlett-Packard Co.
Ferrara at ProVise Investment Management recommended going with stocks that pay dividends.
"Dividends are going to become very important," he said. "If the pundits are right about the stock market not increasing dramatically over the next couple years, you could see dividends representing 40 percent of that return."
The analysts at Raymond James & Associates in St. Petersburg put their heads together to come up with these top picks for the new year: Amdocs Ltd., Briggs & Stratton, Chesapeake Energy Corp., Chubb Corp., Dell Inc., LifePoint Hospitals Inc., Nabors Industries Ltd., Republic Services Inc., Ryanair Holdings, U.S. Bancorp. and UNOVA Inc.
If the economy does slow considerably, that would be good for defensive stocks such as utilities and food. If it doesn't, growth stocks could do better. Just don't bet too heavily on any particular stock or scenario if you want to keep risk in check.
"The one thing 35 years have taught me is that whatever the majority thinks is going to happen usually doesn't play out that way," Ferrara said. "The key from the investor's point of view continues to be a well-diversified portfolio."
A $200,000 'loss' - and happy with it
Century 21 CEO's home is worth 15% less than when he turned down a cash offer in '04, but he's focusing on the gain.
Being the CEO of one of the nation's largest real estate firms didn't stop Tom Kunz from becoming one of those homeowners who's been hurt by the downturn in the housing market.
But not surprisingly, given his position as CEO of Century 21, Kunz thinks the investment he made in his former home in Tuscan Ranch, Calif., was still a good one, even if the value has tumbled about 15 percent over the last three years.
During a recent interview about the state of the current real estate market, Kunz noted that he bought the home for $340,000 in 1998. When he moved to New Jersey from California in 2004 to become CEO of the firm, he had a $1.3 million cash offer for his home. But he turned it down and decided to rent the house instead. A relative now lives there.
This month a former neighbor who has an identical home in the same subdivision sold the house for $1.1 million, Kunz said.
It's the type of decision that could give many homeowners and investors sleepless nights. But Kunz said it's important for him and many homeowners who find themselves in similar situations to look at what they've gained, not the theoretical loss they might have had.
"I could sit here and say, 'Oh I lost $200,000.' But I've still made about a $700,000 profit," he said in the interview late last week about the problems facing the housing market.
In fact, Kunz has seen about a 14 percent compound average rate of growth on his home investment, before inflation, since he bought it in 1998. But if he'd sold in 2004 at the higher price, he would have seen about a 25 percent rate of return.
Monday, the latest reading from the National Association of Realtors showed the glut of existing homes on the market last month jumped to a 16-year high. Sales fell last month and the median price of home fell from a year earlier the 12th straight month.
But as scary as those types of numbers might be, Kunz argues that this is a good time, not a bad time, for those who want to move to be getting into the market. He said home prices in many other markets would allow someone to trade up to a bigger home in a way they could not when sales were strong and prices were rising.
"Those are the kinds of things I think consumers need to sit down and take a look at, rather than just looking at the results the national association is putting out," he said. "I'm not saying they're not accurate. I'm just saying they don't apply to every individual market equally."
Even the National Association of Realtors' own sales report says that some potential buyers are having trouble making purchases, given the upheaval in the mortgage market that's caused lenders to tighten loan standards.
"Some buyers with contracts have been scrambling when loan commitments did not materialize at the last moment, while other potential buyers are simply waiting for the mortgage market to stabilize," said Lawrence Yun, the Realtors' senior economist, in the monthly sales report.
Other economists say most sellers aren't as willing to take Kunz's view, noting that the stubborn desire of some sellers to hold out for the price their home used to be worth is one of the problems for the real estate market.
"The average person buying or selling only does it a few times in their lives. It's driven as much by emotion, and by what their neighbors did a year or two ago, as where the market is today," said Mike Larson, a real estate analyst at independent research firm Weiss Research. "You do get a bunch of stubborn sellers, they may not realize how much the market has turned down, or how much inventory they're competing against."
Larson said that Kunz isn't completely wrong that this is a better market for buyers than where the market was during the boom years. But he said he doesn't think the people should be entering the market now unless they need to move for a job change, to start a family or for some other compelling reason.
"It's certainly a heck of a lot easier being a buyer now than in '06 or '05," he said. "The question is how much easier will it be a year or two from now. I tend to think the downturn has at least until the back half of next year to run, perhaps into '09.
"If you have to buy now, you'll find some bargains," he added. "But if you can wait it out, time is on your side."
Being the CEO of one of the nation's largest real estate firms didn't stop Tom Kunz from becoming one of those homeowners who's been hurt by the downturn in the housing market.
But not surprisingly, given his position as CEO of Century 21, Kunz thinks the investment he made in his former home in Tuscan Ranch, Calif., was still a good one, even if the value has tumbled about 15 percent over the last three years.
During a recent interview about the state of the current real estate market, Kunz noted that he bought the home for $340,000 in 1998. When he moved to New Jersey from California in 2004 to become CEO of the firm, he had a $1.3 million cash offer for his home. But he turned it down and decided to rent the house instead. A relative now lives there.
This month a former neighbor who has an identical home in the same subdivision sold the house for $1.1 million, Kunz said.
It's the type of decision that could give many homeowners and investors sleepless nights. But Kunz said it's important for him and many homeowners who find themselves in similar situations to look at what they've gained, not the theoretical loss they might have had.
"I could sit here and say, 'Oh I lost $200,000.' But I've still made about a $700,000 profit," he said in the interview late last week about the problems facing the housing market.
In fact, Kunz has seen about a 14 percent compound average rate of growth on his home investment, before inflation, since he bought it in 1998. But if he'd sold in 2004 at the higher price, he would have seen about a 25 percent rate of return.
Monday, the latest reading from the National Association of Realtors showed the glut of existing homes on the market last month jumped to a 16-year high. Sales fell last month and the median price of home fell from a year earlier the 12th straight month.
But as scary as those types of numbers might be, Kunz argues that this is a good time, not a bad time, for those who want to move to be getting into the market. He said home prices in many other markets would allow someone to trade up to a bigger home in a way they could not when sales were strong and prices were rising.
"Those are the kinds of things I think consumers need to sit down and take a look at, rather than just looking at the results the national association is putting out," he said. "I'm not saying they're not accurate. I'm just saying they don't apply to every individual market equally."
Even the National Association of Realtors' own sales report says that some potential buyers are having trouble making purchases, given the upheaval in the mortgage market that's caused lenders to tighten loan standards.
"Some buyers with contracts have been scrambling when loan commitments did not materialize at the last moment, while other potential buyers are simply waiting for the mortgage market to stabilize," said Lawrence Yun, the Realtors' senior economist, in the monthly sales report.
Other economists say most sellers aren't as willing to take Kunz's view, noting that the stubborn desire of some sellers to hold out for the price their home used to be worth is one of the problems for the real estate market.
"The average person buying or selling only does it a few times in their lives. It's driven as much by emotion, and by what their neighbors did a year or two ago, as where the market is today," said Mike Larson, a real estate analyst at independent research firm Weiss Research. "You do get a bunch of stubborn sellers, they may not realize how much the market has turned down, or how much inventory they're competing against."
Larson said that Kunz isn't completely wrong that this is a better market for buyers than where the market was during the boom years. But he said he doesn't think the people should be entering the market now unless they need to move for a job change, to start a family or for some other compelling reason.
"It's certainly a heck of a lot easier being a buyer now than in '06 or '05," he said. "The question is how much easier will it be a year or two from now. I tend to think the downturn has at least until the back half of next year to run, perhaps into '09.
"If you have to buy now, you'll find some bargains," he added. "But if you can wait it out, time is on your side."
Investing Guide for the Group of Irregular Income
Are you one of them, Group of irregular income? I understand that most freelancers and also small business owners will be the “members” of this group. To be honest, I’m also one of them. Being a small business owner, my income is mostly depending on my business and I can tell you that a business is different with a steady income job, the income is different each month. This is one of the challenges that you might encounter if you want to start your business.
In this article, I would like to share with you the investing guide for the group of irregular income. Although the main target of this article is on the group of irregular income, but I think this guide is also work for any one especially those with tight budget over their steady income.
Preparation before investing Your Money – Budget Your Money
Yes I agree that budget your money is quite boring and annoying. However, from the group of irregular income, we have no choice but have to make a plan to use our money. Planning is important to an investor and budget can help you build a system to control your expenses. There are a few points that you must pay attention on budgeting your money, especially you are from the group of irregular income.
For the first 3 months, set a budget and get the average figure for your income and expenses and also categorize your expenses. The main purpose is to know your habit on spending money.
Use the information you collected for the first 3 months and predict your expenses ahead and then set a budget that included an investing account. This account will be the place where you save a certain amount of money for investing.
Then building up an emergency fund at least 4-6 months. The main purpose is to secure your life just in case anything happens in future.
If needed, try to re-allocate your money in the budget again every 1-2 weeks. This is one of the important steps for budgeting over irregular income. This will ensure your money is enough for the next pay day by reviewing your budget from time to time.
Before this, I wrote a few articles that are about budgeting which might help you:
Learn and Start Investing : Start Small with simple baby steps
I prefer to get started small in everything. This will be much easier for my mind and get motivated to take action. I usually become procrastinate and stress if I want to start something very big and complicated. Eventually nothing is done by me. So I prefer baby steps especially invest using my irregular income.
Learn “how to invest” frugally – Investing is a skill that we must learn. We cannot just jump into the market and invest our money. This sound like gambling and not investing, isn’t it? So I always try to learn and gain information before taking any actions. Since I have a budget, the money for me to take any investing courses, buying any reports or books are quite tight. So I usually read books and reports for free from local library and also local book stores. If you can take good care on their books, you are welcome to spend time reading in book stores.
Always invest with small capital – Yes, sometime I come across some of the investment that can bring more profits in a shorter time. However, those investments usually need a lot of money to invest. For me, I usually let them go and look for those small capital investments. I think stocks, forex and also mutual funds are a good start for. This is because with a small amount of money, you can start investing and gain experience.
Dare to loss “small” – So far I never heard or see any investors that do not loss any money along their life in investment. Everybody will lose money in investment. The key here is how you learn from the losses and then make more profit next time to cover it. So “Exit strategy” is playing an important role here. To minimize my losses, I always have an exit strategy. Since my income is limit and so is my investment capital, I must learn how to control the losses from investment and protect my capital.
Diversify your investment – There are always some argument between putting all your eggs in one nest or diversify them. To me both of them have their pros and cons. However, for irregular income group, I will recommend diversify. The reasons to do that are:
1. Diversify means diversify the investment risks
2. Diversify means diversify your investment capital and hence reduce the impact of losses into your capital.
Because our capital is limited, we must learn how to manage the risks of investment and also protect our capital from being burnt out by the market.
Conclusion
No matter what kind of job, income or business you have, you must learn how to manage your money, how to invest them and plan your future financially. Yes I agree that, sometime, there are a lot of negative voices coming out from my head telling me that “I can’t invest because of my irregular income” or “There is nothing you can do with this kind of irregular income”. This kind of negative voices and mindset don’t block me at all because I have a goal, a goal to achieve financial freedom by age of 30. I know I must do something to achieve my goal and have better future. So I still continue to learn how to prepare my irregular income, get myself ready and invest. You might also have the same condition that I have. But don’t give up! There is something you can do on your personal finance and future, even your retirement. This only depend whether you believe it or not. IF you believe, nothing can block you!
In this article, I would like to share with you the investing guide for the group of irregular income. Although the main target of this article is on the group of irregular income, but I think this guide is also work for any one especially those with tight budget over their steady income.
Preparation before investing Your Money – Budget Your Money
Yes I agree that budget your money is quite boring and annoying. However, from the group of irregular income, we have no choice but have to make a plan to use our money. Planning is important to an investor and budget can help you build a system to control your expenses. There are a few points that you must pay attention on budgeting your money, especially you are from the group of irregular income.
For the first 3 months, set a budget and get the average figure for your income and expenses and also categorize your expenses. The main purpose is to know your habit on spending money.
Use the information you collected for the first 3 months and predict your expenses ahead and then set a budget that included an investing account. This account will be the place where you save a certain amount of money for investing.
Then building up an emergency fund at least 4-6 months. The main purpose is to secure your life just in case anything happens in future.
If needed, try to re-allocate your money in the budget again every 1-2 weeks. This is one of the important steps for budgeting over irregular income. This will ensure your money is enough for the next pay day by reviewing your budget from time to time.
Before this, I wrote a few articles that are about budgeting which might help you:
Learn and Start Investing : Start Small with simple baby steps
I prefer to get started small in everything. This will be much easier for my mind and get motivated to take action. I usually become procrastinate and stress if I want to start something very big and complicated. Eventually nothing is done by me. So I prefer baby steps especially invest using my irregular income.
Learn “how to invest” frugally – Investing is a skill that we must learn. We cannot just jump into the market and invest our money. This sound like gambling and not investing, isn’t it? So I always try to learn and gain information before taking any actions. Since I have a budget, the money for me to take any investing courses, buying any reports or books are quite tight. So I usually read books and reports for free from local library and also local book stores. If you can take good care on their books, you are welcome to spend time reading in book stores.
Always invest with small capital – Yes, sometime I come across some of the investment that can bring more profits in a shorter time. However, those investments usually need a lot of money to invest. For me, I usually let them go and look for those small capital investments. I think stocks, forex and also mutual funds are a good start for. This is because with a small amount of money, you can start investing and gain experience.
Dare to loss “small” – So far I never heard or see any investors that do not loss any money along their life in investment. Everybody will lose money in investment. The key here is how you learn from the losses and then make more profit next time to cover it. So “Exit strategy” is playing an important role here. To minimize my losses, I always have an exit strategy. Since my income is limit and so is my investment capital, I must learn how to control the losses from investment and protect my capital.
Diversify your investment – There are always some argument between putting all your eggs in one nest or diversify them. To me both of them have their pros and cons. However, for irregular income group, I will recommend diversify. The reasons to do that are:
1. Diversify means diversify the investment risks
2. Diversify means diversify your investment capital and hence reduce the impact of losses into your capital.
Because our capital is limited, we must learn how to manage the risks of investment and also protect our capital from being burnt out by the market.
Conclusion
No matter what kind of job, income or business you have, you must learn how to manage your money, how to invest them and plan your future financially. Yes I agree that, sometime, there are a lot of negative voices coming out from my head telling me that “I can’t invest because of my irregular income” or “There is nothing you can do with this kind of irregular income”. This kind of negative voices and mindset don’t block me at all because I have a goal, a goal to achieve financial freedom by age of 30. I know I must do something to achieve my goal and have better future. So I still continue to learn how to prepare my irregular income, get myself ready and invest. You might also have the same condition that I have. But don’t give up! There is something you can do on your personal finance and future, even your retirement. This only depend whether you believe it or not. IF you believe, nothing can block you!
Finding an affordable first home
A young home buyer can't afford pricey Silicon Valley. Money Magazine's Walter Updegrave has three words for him: Relocation, relocation, relocation.
Question: I'm 27, make about $50,000 a year, and I still live at home. I've got about $80,000 in CDs and a money-market account, another $22,000 in a 401(k) and Roth IRA, and I have no debt. My problem is that the housing prices where I live in Silicon Valley are just way too expensive for me to be able to buy anything. What do you think I should do? - Keith, San Jose, California
Answer: I think the real question you should be asking is what should you do with your life? You've done a pretty good job of saving money while living with your parents, but at some point you'll probably want to go leave the nest and venture out on your own.
100 Great American Towns
1. Middleton, WI
2. Hanover, NH
3. Louisville, CO
4. Lake Mary, FL
5. Claremont, CA 6. Papillion, NE
7. Milton, MA
8. Chaska, MN
9. Wallingford, PA
10. Suwanee, GA
The issue then becomes whether you can do this in the Silicon Valley area or whether it makes more sense to consider relocating to a place where house prices are still tethered to reality.
Or, to borrow from The Clash - should you stay or should you go? Let's consider both options.
There's no doubt that if you want to buy a home anytime soon, it's likely to be a tough go in Silicon Valley. True, the recent housing slump has increased inventory and pushed down asking prices in this area as it has in many others. But the median price of a single-family house as of the end of the second quarter was $865,000, according to the National Association of Realtors. That makes affordability a stretch almost any way you look at it.
Indeed, if you go to our How Much House Can You Afford calculator, I think you'll find that even under the most aggressive assumptions, you would be hard pressed to buy even a $300,000 home. And given that banks and mortgage firms today are becoming more realistic about their lending policies - after virtually abandoning sound practices the past few years - you might have a hard time getting a loan to buy a house for even well below that amount.
There are other ways to go if you want to stay in Silicon Valley. One is to look for less expensive digs, such as a condo or a single-family house that sells well below the median.
That's certainly worth a try, although the further you go down in price, the more compromises you generally have to make. (Would you mind having a freeway entrance in your back yard? Or living in a condo the size of a walk-in closet?) And, of course, you could always hope that prices fall a lot more, giving you a better shot at buying. That's possible, I suppose.
But we'd probably have to see a real meltdown before things got to the point where someone with your salary and resources had much to choose from. You could also stay in your parents' home, continue socking away as much as you can, and hope that the combination of your savings and a higher salary will allow you to gain a toehold in the housing market. The likelihood of this happening largely comes down to your salary prospects.
If you're some sort of hot-shot software engineer who's just getting started and will soon be making big bucks at a tech start-up or an already established firm, then, sure, you could soon have enough income to buy some decent digs.
But if your salary is likely to grow at a more normal pace, say 1 or 2 percentage points above the inflation rate, then absent a huge drop in prices or an uncanny ability to unearth some wonderful deal that's escaped everyone else's notice, I think you're talking about a long-shot at becoming a homeowner in the Valley.
Now let's consider the second choice: relocating. Obviously, your range of possibilities will depend on how far you're willing to move. But if you're willing to cast a wide net, you should be able to find plenty of places where you've got a much better shot at owning a home.
I suggest you begin your search by checking out Money's 2007 Best Places To Live package. You'll find stories that list the best places if you're looking for affordable house prices, the best job growth and the highest concentration of singles.
And by ranking the importance of seven different criteria ranging from affordable housing to access to health care, you can also create your own customized list of best places with our Best Places search tool, which is located on the right hand side of the main Best Places page.
On the other hand, if you really just want to get a sense of what house prices are like in different areas of the country, you can click here to scan median prices in 156 different housing markets.
Once you've identified a couple of areas you might consider, you can then go to our Cost of Living Calculator, which lets you compare how far your salary will go in a new city compared to where you're living now.
Of course, such a move isn't something you undertake lightly. Aside from practical considerations, like whether you'll have the same employment prospects in a new locale, you've also got to consider a number of personal issues, such as how you'll feel moving away from family and friends and whether a new area feels like a place where you could see yourself making new friends and building a new life.
Then again, a young person like you could look at this as an exciting adventure. I remember leaving my native Philadelphia (Go Phils!) at your age to move to the Big Apple. Did I experience some trepidation? Certainly. But it was also one of the most exciting times of my life and, ultimately, a move that's worked out. Only you can decide whether you want to hang in and see what develops in Silicon Valley or stake a claim somewhere else.
So I suggest you give it some thought, check out some of the resources I've mentioned and perhaps use some vacation time to visit a few places where you might consider living - sort of a combination road trip and house-job-life search. But whatever you decide, capitalize as much as you can from the low living expenses you enjoy while sponging off - I mean, living with - your parents.
Keep stashing money in that 401(k) and the Roth, and fatten up other savings and investment accounts as much as you can. The more you can sock away now, the more resources you'll have to draw on when you eventually buy a home, wherever that may be.
Question: I'm 27, make about $50,000 a year, and I still live at home. I've got about $80,000 in CDs and a money-market account, another $22,000 in a 401(k) and Roth IRA, and I have no debt. My problem is that the housing prices where I live in Silicon Valley are just way too expensive for me to be able to buy anything. What do you think I should do? - Keith, San Jose, California
Answer: I think the real question you should be asking is what should you do with your life? You've done a pretty good job of saving money while living with your parents, but at some point you'll probably want to go leave the nest and venture out on your own.
100 Great American Towns
1. Middleton, WI
2. Hanover, NH
3. Louisville, CO
4. Lake Mary, FL
5. Claremont, CA 6. Papillion, NE
7. Milton, MA
8. Chaska, MN
9. Wallingford, PA
10. Suwanee, GA
The issue then becomes whether you can do this in the Silicon Valley area or whether it makes more sense to consider relocating to a place where house prices are still tethered to reality.
Or, to borrow from The Clash - should you stay or should you go? Let's consider both options.
There's no doubt that if you want to buy a home anytime soon, it's likely to be a tough go in Silicon Valley. True, the recent housing slump has increased inventory and pushed down asking prices in this area as it has in many others. But the median price of a single-family house as of the end of the second quarter was $865,000, according to the National Association of Realtors. That makes affordability a stretch almost any way you look at it.
Indeed, if you go to our How Much House Can You Afford calculator, I think you'll find that even under the most aggressive assumptions, you would be hard pressed to buy even a $300,000 home. And given that banks and mortgage firms today are becoming more realistic about their lending policies - after virtually abandoning sound practices the past few years - you might have a hard time getting a loan to buy a house for even well below that amount.
There are other ways to go if you want to stay in Silicon Valley. One is to look for less expensive digs, such as a condo or a single-family house that sells well below the median.
That's certainly worth a try, although the further you go down in price, the more compromises you generally have to make. (Would you mind having a freeway entrance in your back yard? Or living in a condo the size of a walk-in closet?) And, of course, you could always hope that prices fall a lot more, giving you a better shot at buying. That's possible, I suppose.
But we'd probably have to see a real meltdown before things got to the point where someone with your salary and resources had much to choose from. You could also stay in your parents' home, continue socking away as much as you can, and hope that the combination of your savings and a higher salary will allow you to gain a toehold in the housing market. The likelihood of this happening largely comes down to your salary prospects.
If you're some sort of hot-shot software engineer who's just getting started and will soon be making big bucks at a tech start-up or an already established firm, then, sure, you could soon have enough income to buy some decent digs.
But if your salary is likely to grow at a more normal pace, say 1 or 2 percentage points above the inflation rate, then absent a huge drop in prices or an uncanny ability to unearth some wonderful deal that's escaped everyone else's notice, I think you're talking about a long-shot at becoming a homeowner in the Valley.
Now let's consider the second choice: relocating. Obviously, your range of possibilities will depend on how far you're willing to move. But if you're willing to cast a wide net, you should be able to find plenty of places where you've got a much better shot at owning a home.
I suggest you begin your search by checking out Money's 2007 Best Places To Live package. You'll find stories that list the best places if you're looking for affordable house prices, the best job growth and the highest concentration of singles.
And by ranking the importance of seven different criteria ranging from affordable housing to access to health care, you can also create your own customized list of best places with our Best Places search tool, which is located on the right hand side of the main Best Places page.
On the other hand, if you really just want to get a sense of what house prices are like in different areas of the country, you can click here to scan median prices in 156 different housing markets.
Once you've identified a couple of areas you might consider, you can then go to our Cost of Living Calculator, which lets you compare how far your salary will go in a new city compared to where you're living now.
Of course, such a move isn't something you undertake lightly. Aside from practical considerations, like whether you'll have the same employment prospects in a new locale, you've also got to consider a number of personal issues, such as how you'll feel moving away from family and friends and whether a new area feels like a place where you could see yourself making new friends and building a new life.
Then again, a young person like you could look at this as an exciting adventure. I remember leaving my native Philadelphia (Go Phils!) at your age to move to the Big Apple. Did I experience some trepidation? Certainly. But it was also one of the most exciting times of my life and, ultimately, a move that's worked out. Only you can decide whether you want to hang in and see what develops in Silicon Valley or stake a claim somewhere else.
So I suggest you give it some thought, check out some of the resources I've mentioned and perhaps use some vacation time to visit a few places where you might consider living - sort of a combination road trip and house-job-life search. But whatever you decide, capitalize as much as you can from the low living expenses you enjoy while sponging off - I mean, living with - your parents.
Keep stashing money in that 401(k) and the Roth, and fatten up other savings and investment accounts as much as you can. The more you can sock away now, the more resources you'll have to draw on when you eventually buy a home, wherever that may be.
Invest to Financial Freedom - 5 Tips to prepare yourself for Risk? Tips 5
Tip number 5: Take good care on 3 unexpected factors
First of all, you do all the research and learn A to Z of the investment. Then you do all the preparation that you should do ( Those that I mention in my tip 2). Since, now, you have the great idea on the investment, and then you should have the ability to process and make your own strategy to invest and use the benefits of the investment options that you can get. You think all the things you do is complete and the investment is 100% safe and profitable. However, I means sometimes life is not that easy, you still have the risk to lost money. Why?
When comes to investment, there are a lot of factors that outside our prediction, here is 3 that I want to share:
1. Human Factors - When comes to money, there are a lot of party involved. So as your investments. For example, you invest in a stock and you know the price will raise. However, because of a mistake that made by the CEO, the stock price is going down unexpected. So this considered human factors.
2. Timing - Timing is very important for investing. When you want to invest and at what level you must exit and take the profit. This is what we always call entry and exit level. If you enter the market or exit at the wrong timing, you probably will drop down the profit or even lost in the investment.
3. Yourself - Yes, yourself is the biggest unexpected factor. Sometimes, our emotion is the hardest to control. When comes to money, we always bring along our emotion. And the funny thing is, emotion does always affect our decision making. Even you have your own investing plan or strategy, because of your emotion you will forget the plan and make your wrong decision. I experienced this before!
First of all, you do all the research and learn A to Z of the investment. Then you do all the preparation that you should do ( Those that I mention in my tip 2). Since, now, you have the great idea on the investment, and then you should have the ability to process and make your own strategy to invest and use the benefits of the investment options that you can get. You think all the things you do is complete and the investment is 100% safe and profitable. However, I means sometimes life is not that easy, you still have the risk to lost money. Why?
When comes to investment, there are a lot of factors that outside our prediction, here is 3 that I want to share:
1. Human Factors - When comes to money, there are a lot of party involved. So as your investments. For example, you invest in a stock and you know the price will raise. However, because of a mistake that made by the CEO, the stock price is going down unexpected. So this considered human factors.
2. Timing - Timing is very important for investing. When you want to invest and at what level you must exit and take the profit. This is what we always call entry and exit level. If you enter the market or exit at the wrong timing, you probably will drop down the profit or even lost in the investment.
3. Yourself - Yes, yourself is the biggest unexpected factor. Sometimes, our emotion is the hardest to control. When comes to money, we always bring along our emotion. And the funny thing is, emotion does always affect our decision making. Even you have your own investing plan or strategy, because of your emotion you will forget the plan and make your wrong decision. I experienced this before!
A trading Strategy that works in any market
With so many trading strategy available these days, it is hard to choose the right one for you. This will be harder as there are so many trading markets available in the business world and different market needs different strategy to trade. This is why many people claims that make money from trading is hard and risky. This is because they don’t have any clear cut and successful strategy that really can help them to make money from trading.
However this fact is going to be broken because of the new Netpick’s Universal Market trader.
What is Netpick’s Universal Market Trader?
According to what I read, The NetPick’s Universal Market Trader was released in June and immediately sold out in 4 days! This is a pretty cool result that I ever heard. In general, it claims that this system is a successful trading strategy that you can actually learn once and then use it to trade multiple markets such as Forex, Futures, Stocks and other markets. Maybe this is the main reasons why it sold out so fast because it simply provide an all in one trading system for both active and new traders.
Now I think they are trying to expose their trading strategy to traders and this is why they order a reviewme review from Journey to Financial Freedom.
Don’t worry if this strategy sold out in June because this hot trading strategy is coming back on the market with a limited time released—the end of August. So you still have a chance to grab this system.
But the question is
Does Netpick’s Universal Market Trader works?
I think this is a question that many traders will ask. Every one of us wants to know what benefit of certain products is before we spend money on it. This is a natural reaction in the process of making decision, isn’t it?
So in order to prove how this system works, a blog is created and ready for those interested traders to come and visit. This blog is updated in daily with information on actual trades, strategy demos, Q&A and of course some videos and charts that show you how they make money. I watched their videos and I pretty impressed by how they trade and make money. They manage to make some positive results at the end of the day in different kind of market using the same trading strategy. Of course, some time they still loss money, but what important is they still make some profit and the end of the day.
What you can do right now?
If you have any interest in making money from trading, then I will suggest you to visit their blog and see the Netpick’s Universal Market trader in action. The blog is open and ready for you to learn more about this exclusive Universal Market Trader release. Besides that you also can read some feedbacks, interviews and results from actual traders who were fortunate to become owners a couple months ago.
However this fact is going to be broken because of the new Netpick’s Universal Market trader.
What is Netpick’s Universal Market Trader?
According to what I read, The NetPick’s Universal Market Trader was released in June and immediately sold out in 4 days! This is a pretty cool result that I ever heard. In general, it claims that this system is a successful trading strategy that you can actually learn once and then use it to trade multiple markets such as Forex, Futures, Stocks and other markets. Maybe this is the main reasons why it sold out so fast because it simply provide an all in one trading system for both active and new traders.
Now I think they are trying to expose their trading strategy to traders and this is why they order a reviewme review from Journey to Financial Freedom.
Don’t worry if this strategy sold out in June because this hot trading strategy is coming back on the market with a limited time released—the end of August. So you still have a chance to grab this system.
But the question is
Does Netpick’s Universal Market Trader works?
I think this is a question that many traders will ask. Every one of us wants to know what benefit of certain products is before we spend money on it. This is a natural reaction in the process of making decision, isn’t it?
So in order to prove how this system works, a blog is created and ready for those interested traders to come and visit. This blog is updated in daily with information on actual trades, strategy demos, Q&A and of course some videos and charts that show you how they make money. I watched their videos and I pretty impressed by how they trade and make money. They manage to make some positive results at the end of the day in different kind of market using the same trading strategy. Of course, some time they still loss money, but what important is they still make some profit and the end of the day.
What you can do right now?
If you have any interest in making money from trading, then I will suggest you to visit their blog and see the Netpick’s Universal Market trader in action. The blog is open and ready for you to learn more about this exclusive Universal Market Trader release. Besides that you also can read some feedbacks, interviews and results from actual traders who were fortunate to become owners a couple months ago.
The Best Markets for Your Money
Four out of four investment experts agree: Emerging foreign markets are the place American investors should be looking to put their dollars to work.
That was the lesson if you read investment expert John Mauldin's recent "Thoughts From the Frontline." Mr. Mauldin and his roundtable of research analysts concluded quite without debate that:
1."For the first time in a century the US is not the locomotive of global growth -- we are the caboose, bringing up the rear."
2."The emerging world in general and China in particular will continue to grow strongly."
3."China, India, and probably Vietnam will continue to lead Asia's strong economic growth and the region, with its large population, is now the primary engine of global GDP growth."
I share these quotes not because I lack an opinion of my own, but because my opinion should already be well-known: Asia represents a huge opportunity for American investors.
And American investors are getting the memo
At the same time, this is old news. According to the Investment Company Institute (and reported by Jaclyne Badal in The Wall Street Journal), American investors withdrew nearly $10 billion from domestic stock funds in May and deposited nearly $12 billion into foreign stock funds. What's more "87% of the money invested in stock funds [in 2007] has gone into international products."
Of course, even if you're among the many dumping money into international mutual funds, you may not have your bases covered.
Do we invest in China? Yes. Sort of. No.
Another recent Wall Street Journal report revealed that while the Shanghai composite index is up nearly 50% this year, the average "China" stock fund is up just 25%. Why the difference? Because these funds aren't as weighted toward China as investors think they are. Rather, there's a great deal of exposure to multinational companies and stocks that trade in Hong Kong.
Fidelity China Region (FHKCX), for example, doesn't have a single stock among its top 25 holdings that calls a China exchange its one and only home. Its top holding -- Taiwan Semiconductor (NYSE: TSM) -- is domiciled in Taiwan and does 60% of its revenue in North America.
But that's why it pays to read the fine print when investing in funds. "China region" doesn't necessarily mean China.
The more things change ...
Then there's the fact that despite the recent headlong rush into foreign equities, many American investors continue to hold the same old stocks. Data from Citigroup recently revealed that General Electric (NYSE: GE) remains the most widely held stock among the largest mutual funds. It's followed closely by AT&T (NYSE: T), Google (Nasdaq: GOOG), AIG (NYSE: AIG), Coca-Cola (NYSE: KO), and Pepsico (NYSE: PEP).
Any of those names look familiar? If you own funds, you likely own one if not all of them -- and in hefty doses.
Speak softly ...
Yet many financial pundits have been spooked by the recent rises in international markets. They're prophesying on TV, in magazines, and elsewhere near-term volatility and advising caution for new investors entering the markets.
And I don't disagree.
But there will always be volatility in the stock markets -- American or otherwise. While you should be cautious with your savings, you can mitigate some of that risk by taking a long-time horizon. That means at least three to five years and optimally the next decade or more.
... but carry a big stake in foreign stocks
If you're willing to do that, then it's absolutely crucial that you start or continue investing in foreign markets. As Mauldin noted, "More and more investors must seek to be global investors."
And according to Mauldin, you may need to be more of a global investor than you think: "There is no hard and fast rule for what your foreign exposure should be, but if you can stand the volatility and have access to world-class managers who can do stock selection ... then 25% to 40% of a portfolio might be appropriate."
That's a lot of percent
40%? That's right. Not coincidentally, that's the same number that Wharton professor Dr. Jeremy Siegel has been advising. And as demonstrated above, you may not get there by owning so-called "foreign" mutual funds.
Of course, if you're uneasy about picking your own foreign stocks, you can get access to a world-class international stock picker all your own by joining the Motley Fool Global Gains investment service. Advisor Bill Mann has years of experience living, working, and investing abroad, and he recently returned from a research trip to India, China, and Taiwan.
He launched his service in November 2006 and is already beating both the S&P 500 and MSCI EAFE global index. Take a look at all of his research and current recommendations by joining Global Gains free for 30 days. By choosing from the stocks Bill has highlighted, you'll pay lower fees and know exactly what you're invested in, where, and why.
That was the lesson if you read investment expert John Mauldin's recent "Thoughts From the Frontline." Mr. Mauldin and his roundtable of research analysts concluded quite without debate that:
1."For the first time in a century the US is not the locomotive of global growth -- we are the caboose, bringing up the rear."
2."The emerging world in general and China in particular will continue to grow strongly."
3."China, India, and probably Vietnam will continue to lead Asia's strong economic growth and the region, with its large population, is now the primary engine of global GDP growth."
I share these quotes not because I lack an opinion of my own, but because my opinion should already be well-known: Asia represents a huge opportunity for American investors.
And American investors are getting the memo
At the same time, this is old news. According to the Investment Company Institute (and reported by Jaclyne Badal in The Wall Street Journal), American investors withdrew nearly $10 billion from domestic stock funds in May and deposited nearly $12 billion into foreign stock funds. What's more "87% of the money invested in stock funds [in 2007] has gone into international products."
Of course, even if you're among the many dumping money into international mutual funds, you may not have your bases covered.
Do we invest in China? Yes. Sort of. No.
Another recent Wall Street Journal report revealed that while the Shanghai composite index is up nearly 50% this year, the average "China" stock fund is up just 25%. Why the difference? Because these funds aren't as weighted toward China as investors think they are. Rather, there's a great deal of exposure to multinational companies and stocks that trade in Hong Kong.
Fidelity China Region (FHKCX), for example, doesn't have a single stock among its top 25 holdings that calls a China exchange its one and only home. Its top holding -- Taiwan Semiconductor (NYSE: TSM) -- is domiciled in Taiwan and does 60% of its revenue in North America.
But that's why it pays to read the fine print when investing in funds. "China region" doesn't necessarily mean China.
The more things change ...
Then there's the fact that despite the recent headlong rush into foreign equities, many American investors continue to hold the same old stocks. Data from Citigroup recently revealed that General Electric (NYSE: GE) remains the most widely held stock among the largest mutual funds. It's followed closely by AT&T (NYSE: T), Google (Nasdaq: GOOG), AIG (NYSE: AIG), Coca-Cola (NYSE: KO), and Pepsico (NYSE: PEP).
Any of those names look familiar? If you own funds, you likely own one if not all of them -- and in hefty doses.
Speak softly ...
Yet many financial pundits have been spooked by the recent rises in international markets. They're prophesying on TV, in magazines, and elsewhere near-term volatility and advising caution for new investors entering the markets.
And I don't disagree.
But there will always be volatility in the stock markets -- American or otherwise. While you should be cautious with your savings, you can mitigate some of that risk by taking a long-time horizon. That means at least three to five years and optimally the next decade or more.
... but carry a big stake in foreign stocks
If you're willing to do that, then it's absolutely crucial that you start or continue investing in foreign markets. As Mauldin noted, "More and more investors must seek to be global investors."
And according to Mauldin, you may need to be more of a global investor than you think: "There is no hard and fast rule for what your foreign exposure should be, but if you can stand the volatility and have access to world-class managers who can do stock selection ... then 25% to 40% of a portfolio might be appropriate."
That's a lot of percent
40%? That's right. Not coincidentally, that's the same number that Wharton professor Dr. Jeremy Siegel has been advising. And as demonstrated above, you may not get there by owning so-called "foreign" mutual funds.
Of course, if you're uneasy about picking your own foreign stocks, you can get access to a world-class international stock picker all your own by joining the Motley Fool Global Gains investment service. Advisor Bill Mann has years of experience living, working, and investing abroad, and he recently returned from a research trip to India, China, and Taiwan.
He launched his service in November 2006 and is already beating both the S&P 500 and MSCI EAFE global index. Take a look at all of his research and current recommendations by joining Global Gains free for 30 days. By choosing from the stocks Bill has highlighted, you'll pay lower fees and know exactly what you're invested in, where, and why.
Housing starts at decade low
Starts and permits both fall more than forecasts as builders pull back from troubled market.August 20 2007: 11:08 AM EDT
Housing starts and permits both fell to their lowest levels in more than a decade, as the latest readings on the battered housing and homebuilding markets came in below expectations Thursday.
Housing starts fell 6.1 percent to an annual rate of 1.38 million in July from a revised 1.47 million rate in June. Economists surveyed by Briefing.com had forecast starts would fall to a 1.41 million pace in June.
Current Mortgage Rates
Type Overall avgs
30 yr fixed mtg 6.12%
15 yr fixed mtg 5.79%
30 yr fixed jumbo mtg 7.18%
5/1 ARM 6.21%
5/1 jumbo ARM 6.60%
The latest reading is the lowest level of starts since January 1997 and is down nearly 21 percent from the year-earlier level.
Starts of single-family homes fell even more sharply, dropping 7.3 percent to just over a 1 million annual rate, the lowest since December 1996 and the second lowest level in more than 12 years.
Building permits, which are often seen as a snapshot on builders' view on the state of the market, fell to an annual rate of 1.37 million from the June figure of 1.41 million, marking the lowest level since October 1996. Economists had forecast a rate of 1.4 million.
Permits for single-family homes fell to just over a 1 million pace, the lowest level in more than 12 years.
Latest home prices: 149 markets tracked
The report comes the day after a survey of members by the National Association of Home Builders showed builders' confidence in the market at a 16-year low.
In one respect, the weak level of home construction could be a long-term benefit to the battered housing market. One thing pushing down on home values and even sales activity is a glut of both new and existing homes for sale on the market, which is scaring off prospective buyers.
A separate Census Bureau report showed there were 538,000 new homes available for sale on the market in June, including those that were permitted and not yet started.
There were also 177,000 completed new homes available for sale, up 31 percent from a year ago, as the typical time it takes a builder to sell a completed home has risen to six months from less than 4 months a year earlier. It marked the longest time it took to sell completed homes since August 1993.
"I think the builders should be applauded for their behavior at this point," said David Seiders, chief economist for the National Association of Home Builders. "The last thing we need is an increase in production."
But even with builders slamming the brakes on the supply of new homes, the sharp drop in building is a drag on the nation's economic activity. It also could be seen as a sign of the worsening credit crunch that is hitting global financial markets.
"There is no conceivable way the economy will escape the housing slowdown completely, at this point," said Adam York an economist with Wachovia.
Earlier Thursday, embattled Countrywide Financial (Charts, Fortune 500), the nation's No. 1 writer of mortgage loans, was forced to tap an $11.5 billion line of credit Thursday to address its looming liquidity crunch, and it said it is toughening the underwriting standards on the home loans it will make going forward.
Seiders at this point is forecasting that starts will slide a bit more to an annual rate of 1.3 million before the end of the year, and see any significant pickup until 2008 at the earliest.
"The vast majority of this downward slide is behind us, but we have further distance to go to stabilize," he said.
But he also cautioned that the developing crisis in credit markets could force him and other economists to cut forecasts on starts and sales even further in the coming months.
"The uncertainties are immense. We don't know when markets are going to come back into some sensible balance," he said. "It could be worse, there's no question."
The current downturn in housing, new home sales and home prices has hit the results of most homebuilders.
The nation's six largest builders in terms of revenue - Lennar (Charts, Fortune 500), D.R. Horton (Charts, Fortune 500), Centex (Charts, Fortune 500), Pulte Homes (Charts, Fortune 500), KB Home (Charts, Fortune 500) and Hovnanian Enterprises (Charts, Fortune 500) -- all have reported losses in at least their most recent quarter, and most are forecast to have losses continue into 2008.
Housing starts and permits both fell to their lowest levels in more than a decade, as the latest readings on the battered housing and homebuilding markets came in below expectations Thursday.
Housing starts fell 6.1 percent to an annual rate of 1.38 million in July from a revised 1.47 million rate in June. Economists surveyed by Briefing.com had forecast starts would fall to a 1.41 million pace in June.
Current Mortgage Rates
Type Overall avgs
30 yr fixed mtg 6.12%
15 yr fixed mtg 5.79%
30 yr fixed jumbo mtg 7.18%
5/1 ARM 6.21%
5/1 jumbo ARM 6.60%
The latest reading is the lowest level of starts since January 1997 and is down nearly 21 percent from the year-earlier level.
Starts of single-family homes fell even more sharply, dropping 7.3 percent to just over a 1 million annual rate, the lowest since December 1996 and the second lowest level in more than 12 years.
Building permits, which are often seen as a snapshot on builders' view on the state of the market, fell to an annual rate of 1.37 million from the June figure of 1.41 million, marking the lowest level since October 1996. Economists had forecast a rate of 1.4 million.
Permits for single-family homes fell to just over a 1 million pace, the lowest level in more than 12 years.
Latest home prices: 149 markets tracked
The report comes the day after a survey of members by the National Association of Home Builders showed builders' confidence in the market at a 16-year low.
In one respect, the weak level of home construction could be a long-term benefit to the battered housing market. One thing pushing down on home values and even sales activity is a glut of both new and existing homes for sale on the market, which is scaring off prospective buyers.
A separate Census Bureau report showed there were 538,000 new homes available for sale on the market in June, including those that were permitted and not yet started.
There were also 177,000 completed new homes available for sale, up 31 percent from a year ago, as the typical time it takes a builder to sell a completed home has risen to six months from less than 4 months a year earlier. It marked the longest time it took to sell completed homes since August 1993.
"I think the builders should be applauded for their behavior at this point," said David Seiders, chief economist for the National Association of Home Builders. "The last thing we need is an increase in production."
But even with builders slamming the brakes on the supply of new homes, the sharp drop in building is a drag on the nation's economic activity. It also could be seen as a sign of the worsening credit crunch that is hitting global financial markets.
"There is no conceivable way the economy will escape the housing slowdown completely, at this point," said Adam York an economist with Wachovia.
Earlier Thursday, embattled Countrywide Financial (Charts, Fortune 500), the nation's No. 1 writer of mortgage loans, was forced to tap an $11.5 billion line of credit Thursday to address its looming liquidity crunch, and it said it is toughening the underwriting standards on the home loans it will make going forward.
Seiders at this point is forecasting that starts will slide a bit more to an annual rate of 1.3 million before the end of the year, and see any significant pickup until 2008 at the earliest.
"The vast majority of this downward slide is behind us, but we have further distance to go to stabilize," he said.
But he also cautioned that the developing crisis in credit markets could force him and other economists to cut forecasts on starts and sales even further in the coming months.
"The uncertainties are immense. We don't know when markets are going to come back into some sensible balance," he said. "It could be worse, there's no question."
The current downturn in housing, new home sales and home prices has hit the results of most homebuilders.
The nation's six largest builders in terms of revenue - Lennar (Charts, Fortune 500), D.R. Horton (Charts, Fortune 500), Centex (Charts, Fortune 500), Pulte Homes (Charts, Fortune 500), KB Home (Charts, Fortune 500) and Hovnanian Enterprises (Charts, Fortune 500) -- all have reported losses in at least their most recent quarter, and most are forecast to have losses continue into 2008.
Berkshire Hathaway's profit soars 33%
Warren Buffett's insurance and investment company says earnings were lifted by higher insurance underwriting profit, investment income.
Warren Buffett's Berkshire Hathaway Inc said Friday second-quarter earnings rose 33 percent as higher insurance and utility profits offset pressure on housing-related businesses from the slowing U.S. real estate market.
Net income for the Omaha, Nebraska-based insurance and investment company rose to $3.12 billion, or $2,018 per Class A share, from $2.35 billion, or $1,522, a year earlier.
Operating profit, excluding investment gains, rose 22 percent to $2.51 billion, or $1,625 per share, from $2.05 billion, or $1,331.
Analysts on average had expected profit of $1,460 per share, according to Reuters Estimates.
Revenue rose 13 percent to $27.35 billion. Berkshire ended the quarter with $46.95 billion of cash, giving Buffett ammunition to make the big acquisition he says he wants.
Warren Buffett and Darfur
Insurance underwriting profit rose 70 percent to $632 million, and insurance investment income rose 10 percent to $862 million. Earnings from utilities and energy rose 46 percent to $231 million.
These helped offset declines in pre-tax profit of 34 percent at Shaw Industries, which makes carpeting and flooring, and 20 percent in furniture and transportation equipment leasing. Profit from manufactured housing rose 4 percent.
"Berkshire has substantial exposure to the housing and building cycle," said Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner, of which 8 percent is in Berkshire stock.
"The beauty is that a unit like Shaw can decline without having investors question the overall value of Berkshire's long-term structure and capacity to weather the storm."
More investments
Known as the Oracle of Omaha, Buffett has transformed Berkshire since 1965 from a failing textile company into a $168 billion conglomerate by acquiring out-of-favor companies with consistent earnings and capable management, and investing in stocks.
Berkshire's equity investments swelled 13 percent since March to $73.61 billion, while its fixed-income investments grew more - up 15 percent to $24.92 billion. These were before the recent stock market swoon, where investors have tried to reduce their perceived exposure to market risk.
"People are trying to play guessing games as to what equities he'll buy, and this is the kind of market Buffett waits for," Russo said. "But he could just as easily buy mortgage-backed securities - if other investors panic, that's the time extraordinary returns could be available."
Berkshire's Class A (Charts, Fortune 500) shares closed Friday down $100 at $109,990 and its Class B (Charts) shares rose $11 to $3,599. The Class A shares are little changed this year, while the Standard & Poor's 500 and insurance indexes are up 1 percent and down 9 percent, respectively.
Currency bet
Insurance generated about half of Berkshire's profit. Underwriting gains before taxes at Geico Corp rose 13 percent, as the auto insurer boosted premiums 7 percent. Gains from underwriting more than doubled Berkshire's reinsurance group and its General Re Corp reinsurance unit.
Berkshire posted a $34 million gain from currency bets. Buffett once had a $21 billion bet against the dollar, but unwound most of it as he bought more non-U.S. companies and stocks. He said at Berkshire's May 5 annual shareholder meeting that he was betting on one currency that would "surprise you."
Berkshire owns more than 70 companies that make such things as paint, ice cream and underwear. It also invests in stocks including American Express Co (Charts, Fortune 500), Coca-Cola Co (Charts, Fortune 500) and Procter & Gamble Co. (Charts, Fortune 500) The company's book value was $115.27 billion on June 30 versus $108.42 billion at year end.
Warren Buffett's Berkshire Hathaway Inc said Friday second-quarter earnings rose 33 percent as higher insurance and utility profits offset pressure on housing-related businesses from the slowing U.S. real estate market.
Net income for the Omaha, Nebraska-based insurance and investment company rose to $3.12 billion, or $2,018 per Class A share, from $2.35 billion, or $1,522, a year earlier.
Operating profit, excluding investment gains, rose 22 percent to $2.51 billion, or $1,625 per share, from $2.05 billion, or $1,331.
Analysts on average had expected profit of $1,460 per share, according to Reuters Estimates.
Revenue rose 13 percent to $27.35 billion. Berkshire ended the quarter with $46.95 billion of cash, giving Buffett ammunition to make the big acquisition he says he wants.
Warren Buffett and Darfur
Insurance underwriting profit rose 70 percent to $632 million, and insurance investment income rose 10 percent to $862 million. Earnings from utilities and energy rose 46 percent to $231 million.
These helped offset declines in pre-tax profit of 34 percent at Shaw Industries, which makes carpeting and flooring, and 20 percent in furniture and transportation equipment leasing. Profit from manufactured housing rose 4 percent.
"Berkshire has substantial exposure to the housing and building cycle," said Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner, of which 8 percent is in Berkshire stock.
"The beauty is that a unit like Shaw can decline without having investors question the overall value of Berkshire's long-term structure and capacity to weather the storm."
More investments
Known as the Oracle of Omaha, Buffett has transformed Berkshire since 1965 from a failing textile company into a $168 billion conglomerate by acquiring out-of-favor companies with consistent earnings and capable management, and investing in stocks.
Berkshire's equity investments swelled 13 percent since March to $73.61 billion, while its fixed-income investments grew more - up 15 percent to $24.92 billion. These were before the recent stock market swoon, where investors have tried to reduce their perceived exposure to market risk.
"People are trying to play guessing games as to what equities he'll buy, and this is the kind of market Buffett waits for," Russo said. "But he could just as easily buy mortgage-backed securities - if other investors panic, that's the time extraordinary returns could be available."
Berkshire's Class A (Charts, Fortune 500) shares closed Friday down $100 at $109,990 and its Class B (Charts) shares rose $11 to $3,599. The Class A shares are little changed this year, while the Standard & Poor's 500 and insurance indexes are up 1 percent and down 9 percent, respectively.
Currency bet
Insurance generated about half of Berkshire's profit. Underwriting gains before taxes at Geico Corp rose 13 percent, as the auto insurer boosted premiums 7 percent. Gains from underwriting more than doubled Berkshire's reinsurance group and its General Re Corp reinsurance unit.
Berkshire posted a $34 million gain from currency bets. Buffett once had a $21 billion bet against the dollar, but unwound most of it as he bought more non-U.S. companies and stocks. He said at Berkshire's May 5 annual shareholder meeting that he was betting on one currency that would "surprise you."
Berkshire owns more than 70 companies that make such things as paint, ice cream and underwear. It also invests in stocks including American Express Co (Charts, Fortune 500), Coca-Cola Co (Charts, Fortune 500) and Procter & Gamble Co. (Charts, Fortune 500) The company's book value was $115.27 billion on June 30 versus $108.42 billion at year end.
Marriage of distinction
Two value-investing luminaries join forces at Oakmark Global Select (OAKWX). Bill Nygren, who manages Oakmark fund and Oakmark Select, picks the U.S. stocks for this concentrated global fund. David Herro, the manager of Oakmark International, selects the foreign stocks. Both employ Oakmark's trademark value-oriented approach to stock picking.
Nygren explains the genesis of the fund idea this way: "David and I realized that the themes we were talking about in each of our markets had a very large overlap." For example, the duo think that large-company stocks, which have lagged in recent years, were undervalued relative to the shares of small and midsize companies both here and abroad. And many of the best firms, U.S. or foreign, are capable of competing strongly across the globe.
At last word, the fund's 20 stocks were evenly split between U.S. and foreign companies. One big holding was McDonald's, which Nygren likes because of its powerful global presence and brand, especially in emerging nations such as China. Viacom, owner of MTV and Nickelodeon, is another top holding. Nygren says that the Internet, iPods and other technologies will expand outlets for Viacom's content at home and abroad. Two large foreign holdings are GlaxoSmithKline, a drug maker based in England, and British Sky Broadcasting, Rupert Murdoch's European satellite broadcaster.
Cage rattler
Most bargain-hunting managers invest in downtrodden companies and wait for other investors to bid up the stocks to their true value. Bob Olstein's new fund, Olstein Strategic Opportunities (OFSCX), takes a different tack. Rather than sit on the sidelines, the veteran fund manager plans to flex his muscle as a shareholder -- and push his own recommendations for improvement.
Olstein's rabble-rousing roots go back four decades. The cocky New Yorker has built a career picking apart company balance sheets and rooting out financial chicanery -- first as an independent stock researcher, and later as a fund manager. As the manager of Olstein All Cap Value (formerly Olstein Financial Alert), he's made gobs of money for shareholders. The fund gained 16% annualized from its 1995 inception, beating the S&P 500 by an average of 5.5 percentage points a year.
For the new fund, Olstein and co-manager Eric Heyman plan to take large positions in small and midsize firms that have suffered short-term setbacks. "We look for companies whose managements we think are not moving in the right direction and that have a high probability of listening to us," says Olstein. Then they begin rattling cages. This might mean pushing for new leadership, for a change in strategy or for selling off assets. Using this approach, Olstein has promoted changes in some of All Cap Value's holdings, including Jo-Ann Stores and RadioShack.
The new fund, Strategic Opportunities, charges steep annual fees of 2.35%. An expense ratio that high is a big hurdle to overcome. Still, Olstein's performance over the years with his older fund suggests that he may be worth the price.
High-yielding mishmash
Great ideas are often lost as managers aim to stay true to a fund's investing style. Take, for example, the problem that managers at Tom Marsico's Denver fund shop encountered: "We kept finding opportunities that didn't fit into any of our funds," says Cory Gilchrist, one of the firm's portfolio managers. "We'd get off a conference call and one of us would say, 'I wish I could buy that for my personal account.' " They couldn't because Marsico forbids employees from owning individual stocks. But it made a lot of sense to create a fund that could invest in these leftovers, and so Marsico Flexible Capital (MFCFX) was born.
Flexible Capital is the odd duck of the Marsico family, which is known for its expertise in growth stocks. The $20-million fund has 12% of assets in junk bonds and the rest in 22 mostly high-yielding stocks. The companies don't easily fit into growth or value portfolios, but many are mispriced, says Gilchrist, who runs Flexible Capital as well as Marsico 21st Century, a large-company growth fund that returned an annualized 25% since he took over in February 2003.
A key theme in the new fund's portfolio is inflation protection. For example, it holds shares of Transurban, an Australian company that builds and operates toll roads throughout the world. Transurban's contracts call for 4% to 4.5% price increases for inflation. The fund also holds a few real estate investment trusts that own apartments. This unusual collection of securities results in a portfolio that recently yielded 4.1%, after annual expenses of 1.6%.
Thriving threesome
Like cabernet sauvignon and bittersweet chocolate, some combinations are made for one another. Take Scott Satterwhite, Jim Kieffer and George Sertl, the team that runs Artisan Opportunistic Value (ARTLX). For the better part of the decade, the threesome have steered Artisan Small Cap Value and Artisan Mid Cap Value. Over the past five years, Small Cap returned 17% annualized and Mid Cap returned 18%. Both are now shut to new investors.
The trio seeks cash-rich companies that trade at bargain prices. "We generally find value where there are low expectations," says Satterwhite. "The best buys are financially strong companies that may have disappointed investors in the short term but don't have deep-running problems."
Launched in March 2006, Opportunistic Value is the first Artisan fund with the ability to focus on large domestic companies (although it may also buy midsize firms and invest up to 25% of its assets overseas). The fund holds 30 to 40 stocks, and the managers can invest up to 10% of assets in one stock. Oil-and-gas producer Apache recently held the top spot, accounting for more than 5% of assets.
Overseas middle ground
The latest addition to T. Rowe Price's lineup aims to fill the gap between the firm's value-oriented and growth-focused international funds. T. Rowe Price Overseas Stock (TROSX) invests mostly in large companies in developed markets that blend growth and value characteristics. An example is Swiss drug giant Novartis, which manager Raymond Mills expects to deliver annual earnings growth of 15% over the next few years. "The company isn't a screaming value in the absolute sense, but it's also not terribly expensive relative to its history," says Mills. The fund has about two-thirds of assets in Western European stocks, 20% in Japanese names and a sliver in emerging-markets stocks.
Mills, who has run money for Price's institutional clients since 2000, has built a terrific record managing the firm's value-focused International Growth & Income fund. Over the past five years, Growth & Income returned 19% annualized, beating the typical diversified overseas fund by an average of four percentage points per year. The new fund charges a relatively modest 1.15% a year for expenses.
Key data: New funds with promise
By definition, new funds don't have records. But the managers of the seven funds on our list have compiled solid records running other funds.
Nygren explains the genesis of the fund idea this way: "David and I realized that the themes we were talking about in each of our markets had a very large overlap." For example, the duo think that large-company stocks, which have lagged in recent years, were undervalued relative to the shares of small and midsize companies both here and abroad. And many of the best firms, U.S. or foreign, are capable of competing strongly across the globe.
At last word, the fund's 20 stocks were evenly split between U.S. and foreign companies. One big holding was McDonald's, which Nygren likes because of its powerful global presence and brand, especially in emerging nations such as China. Viacom, owner of MTV and Nickelodeon, is another top holding. Nygren says that the Internet, iPods and other technologies will expand outlets for Viacom's content at home and abroad. Two large foreign holdings are GlaxoSmithKline, a drug maker based in England, and British Sky Broadcasting, Rupert Murdoch's European satellite broadcaster.
Cage rattler
Most bargain-hunting managers invest in downtrodden companies and wait for other investors to bid up the stocks to their true value. Bob Olstein's new fund, Olstein Strategic Opportunities (OFSCX), takes a different tack. Rather than sit on the sidelines, the veteran fund manager plans to flex his muscle as a shareholder -- and push his own recommendations for improvement.
Olstein's rabble-rousing roots go back four decades. The cocky New Yorker has built a career picking apart company balance sheets and rooting out financial chicanery -- first as an independent stock researcher, and later as a fund manager. As the manager of Olstein All Cap Value (formerly Olstein Financial Alert), he's made gobs of money for shareholders. The fund gained 16% annualized from its 1995 inception, beating the S&P 500 by an average of 5.5 percentage points a year.
For the new fund, Olstein and co-manager Eric Heyman plan to take large positions in small and midsize firms that have suffered short-term setbacks. "We look for companies whose managements we think are not moving in the right direction and that have a high probability of listening to us," says Olstein. Then they begin rattling cages. This might mean pushing for new leadership, for a change in strategy or for selling off assets. Using this approach, Olstein has promoted changes in some of All Cap Value's holdings, including Jo-Ann Stores and RadioShack.
The new fund, Strategic Opportunities, charges steep annual fees of 2.35%. An expense ratio that high is a big hurdle to overcome. Still, Olstein's performance over the years with his older fund suggests that he may be worth the price.
High-yielding mishmash
Great ideas are often lost as managers aim to stay true to a fund's investing style. Take, for example, the problem that managers at Tom Marsico's Denver fund shop encountered: "We kept finding opportunities that didn't fit into any of our funds," says Cory Gilchrist, one of the firm's portfolio managers. "We'd get off a conference call and one of us would say, 'I wish I could buy that for my personal account.' " They couldn't because Marsico forbids employees from owning individual stocks. But it made a lot of sense to create a fund that could invest in these leftovers, and so Marsico Flexible Capital (MFCFX) was born.
Flexible Capital is the odd duck of the Marsico family, which is known for its expertise in growth stocks. The $20-million fund has 12% of assets in junk bonds and the rest in 22 mostly high-yielding stocks. The companies don't easily fit into growth or value portfolios, but many are mispriced, says Gilchrist, who runs Flexible Capital as well as Marsico 21st Century, a large-company growth fund that returned an annualized 25% since he took over in February 2003.
A key theme in the new fund's portfolio is inflation protection. For example, it holds shares of Transurban, an Australian company that builds and operates toll roads throughout the world. Transurban's contracts call for 4% to 4.5% price increases for inflation. The fund also holds a few real estate investment trusts that own apartments. This unusual collection of securities results in a portfolio that recently yielded 4.1%, after annual expenses of 1.6%.
Thriving threesome
Like cabernet sauvignon and bittersweet chocolate, some combinations are made for one another. Take Scott Satterwhite, Jim Kieffer and George Sertl, the team that runs Artisan Opportunistic Value (ARTLX). For the better part of the decade, the threesome have steered Artisan Small Cap Value and Artisan Mid Cap Value. Over the past five years, Small Cap returned 17% annualized and Mid Cap returned 18%. Both are now shut to new investors.
The trio seeks cash-rich companies that trade at bargain prices. "We generally find value where there are low expectations," says Satterwhite. "The best buys are financially strong companies that may have disappointed investors in the short term but don't have deep-running problems."
Launched in March 2006, Opportunistic Value is the first Artisan fund with the ability to focus on large domestic companies (although it may also buy midsize firms and invest up to 25% of its assets overseas). The fund holds 30 to 40 stocks, and the managers can invest up to 10% of assets in one stock. Oil-and-gas producer Apache recently held the top spot, accounting for more than 5% of assets.
Overseas middle ground
The latest addition to T. Rowe Price's lineup aims to fill the gap between the firm's value-oriented and growth-focused international funds. T. Rowe Price Overseas Stock (TROSX) invests mostly in large companies in developed markets that blend growth and value characteristics. An example is Swiss drug giant Novartis, which manager Raymond Mills expects to deliver annual earnings growth of 15% over the next few years. "The company isn't a screaming value in the absolute sense, but it's also not terribly expensive relative to its history," says Mills. The fund has about two-thirds of assets in Western European stocks, 20% in Japanese names and a sliver in emerging-markets stocks.
Mills, who has run money for Price's institutional clients since 2000, has built a terrific record managing the firm's value-focused International Growth & Income fund. Over the past five years, Growth & Income returned 19% annualized, beating the typical diversified overseas fund by an average of four percentage points per year. The new fund charges a relatively modest 1.15% a year for expenses.
Key data: New funds with promise
By definition, new funds don't have records. But the managers of the seven funds on our list have compiled solid records running other funds.
Market
A street market in Aix-en-Provence, France
A market is a social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange of goods or services. It is one of the two key institutions that organize trade, along with the right to own property. In everyday usage, the word "market" may refer to the location where goods are traded, sometimes known as a marketplace, or to a street market.
The function of a market requires, at a minimum, that both parties expect to become better off as a result of the transaction. Markets generally rely on price adjustments to provide information to parties engaging in a transaction, so that each may accurately gauge the subsequent change of their welfare. In less sophisticated markets, such as those involving barter, individual buyers and sellers must engage in a more lengthy process of haggling in order to gain the same information. Markets are efficient when the price of a good or service attracts exactly as much demand as the market can currently supply. The chief function of a market, then, is to adjust prices to accommodate fluctuations in supply and demand in order to achieve allocative efficiency. An economic system in which goods and services are exchanged by market functions is called a market economy. An alternative economic system in which non-market forces (often government mandates) determine prices are called planned economies or command economies. The attempt to combine socialist ideals with the incentive system of a market is known as market socialism.
Types of markets
In supermarkets in industrialized countries, such as this one in Netherlands, the seller periodically changes prices for classes of goods in response to market conditions, rather than negotiating the price of each good with each buyer.
Although many markets exist on the traditional sense--such as a flea market--there are various other types of markets and various organizational structures to assist their functions.
A market can be organized as an auction, as a shopping center, as a complex institution such as a stock market, and as an informal discussion between two individuals.
In economics, a market that runs under laissez-faire policies is a free market. It is "free" in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum wages, price ceilings, etc. Market prices may be distorted by a seller or sellers with monopoly power, or a buyer with monopsony power. Such price distortions can have an adverse effect on market participant's welfare and reduce the efficiency of market outcomes. Also, the level of organization or negotiation power of buyers, markedly affects the functioning of the market. Markets where price negotiations do not arrive at efficient outcomes for both sides are said to experience market failure.
Most markets are regulated by state wide laws and regulations. While barter markets exist, most markets use currency or some other form of money.
Markets of varying types can spontaneously arise whenever a party has interest in a good or service that some other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. There can be black markets, where a good is exchanged illegally and virtual markets, such as eBay, in which buyers and sellers do not physically interact. There can also be markets for goods under a command economy despite pressure to repress them.
A market is a social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange of goods or services. It is one of the two key institutions that organize trade, along with the right to own property. In everyday usage, the word "market" may refer to the location where goods are traded, sometimes known as a marketplace, or to a street market.
The function of a market requires, at a minimum, that both parties expect to become better off as a result of the transaction. Markets generally rely on price adjustments to provide information to parties engaging in a transaction, so that each may accurately gauge the subsequent change of their welfare. In less sophisticated markets, such as those involving barter, individual buyers and sellers must engage in a more lengthy process of haggling in order to gain the same information. Markets are efficient when the price of a good or service attracts exactly as much demand as the market can currently supply. The chief function of a market, then, is to adjust prices to accommodate fluctuations in supply and demand in order to achieve allocative efficiency. An economic system in which goods and services are exchanged by market functions is called a market economy. An alternative economic system in which non-market forces (often government mandates) determine prices are called planned economies or command economies. The attempt to combine socialist ideals with the incentive system of a market is known as market socialism.
Types of markets
In supermarkets in industrialized countries, such as this one in Netherlands, the seller periodically changes prices for classes of goods in response to market conditions, rather than negotiating the price of each good with each buyer.
Although many markets exist on the traditional sense--such as a flea market--there are various other types of markets and various organizational structures to assist their functions.
A market can be organized as an auction, as a shopping center, as a complex institution such as a stock market, and as an informal discussion between two individuals.
In economics, a market that runs under laissez-faire policies is a free market. It is "free" in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum wages, price ceilings, etc. Market prices may be distorted by a seller or sellers with monopoly power, or a buyer with monopsony power. Such price distortions can have an adverse effect on market participant's welfare and reduce the efficiency of market outcomes. Also, the level of organization or negotiation power of buyers, markedly affects the functioning of the market. Markets where price negotiations do not arrive at efficient outcomes for both sides are said to experience market failure.
Most markets are regulated by state wide laws and regulations. While barter markets exist, most markets use currency or some other form of money.
Markets of varying types can spontaneously arise whenever a party has interest in a good or service that some other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. There can be black markets, where a good is exchanged illegally and virtual markets, such as eBay, in which buyers and sellers do not physically interact. There can also be markets for goods under a command economy despite pressure to repress them.
Marketing
Marketing is the process of planning and executing the pricing, promotion, and distribution of goods, ideas, and services to create exchanges that satisfy individual and organizational goals." American Marketing Association.
Many companies, particularly prior to the 1970s, were product-focused, employing teams of salespeople to push their products into or onto the market, regardless of market desire. A market-focused, or customer-focused, organization instead first determines what its potential customers desire, and then builds the product. Marketing theory and practice is justified on the belief that customers use a product or service because they have a need, or because a product has perceived benefit.
Two major aspects of marketing are the recruitment of new customers (acquisition) and the retention and expansion of relationships with existing customers (base management).
An emerging area of study and practice concerns internal marketing, or how employees are trained and managed to deliver the brand in a way that positively impacts the acquisition and retention of customers.
Once a marketer has converted the prospective buyer, base management marketing takes over. The process for base management shifts the marketer to building a relationship, nurturing the links, enhancing the benefits that sold the buyer in the first place and improving the products/service continuously to protect her business from competitive encroachments.
Marketing methods are informed by many of the social sciences, particularly psychology, sociology, and economics. Marketing research underpins these activities. Through advertising, it is also related to many of the creative arts.
Types of markets
The word market originally meant the place where the exchange between seller and buyer took place. Today we speak of a market as either a region where goods are sold and bought or particular types of buyer (summarized from Wells, Burnett, Moriarty, pg. 65–66). When strategizing specialists in marketing comment about markets they are usually referring to the different groups of people and/or organizations. The four major market groups are 1) consumer, 2) business to business, 3) institutional, and 4) reseller.
[edit]
Product, price, promotion, and placement
In popular usage, the term "marketing" refers to the promotion of products, especially advertising and branding. However, in professional usage the term has a wider meaning that recognizes that marketing is customer centered. Products are often developed to meet the desires of groups of customers or even, in some cases, for specific customers. McCarthy divided marketing into four general sets of activities. His typology has become so universally recognized that his four activity sets, the Four Ps, have passed into the language.
The Four Ps are:
Product: The Product management aspect of marketing deals with the specifications of the actual good or service, and how it relates to the end-user's needs and wants.
Pricing: This refers to the process of setting a price for a product, including discounts.
Promotion: This includes advertising, sales promotion, publicity, and personal selling, and refers to the various methods of promoting the product, brand, or company.
Placement or distribution refers to how the product gets to the customer; for example, point of sale placement or retailing.
These four elements are often referred to as the marketing mix. A marketer can use these variables to craft a marketing plan. The four Ps model is most useful when marketing low value consumer products. Industrial products, services, high value consumer products require adjustments to this model. Services marketing must account for the unique nature of services. Industrial or b2b marketing must account for the long term contractual agreements that are typical in supply chain transactions. Relationship marketing attempts to do this by looking at marketing from a long term relationship perspective rather than individual transactions.
[edit]
Technique
For a marketing plan to be successful, the mix of the four "p's" must reflect the wants and desires of the consumers in the target market. Trying to convince a market segment to buy something they don't want is extremely expensive and seldom successful. Marketers depend on marketing research, both formal and informal, to determine what consumers want and what they are willing to pay for. Marketers hope that this process will give them a sustainable competitive advantage. Marketing management is the practical application of this process.
Most companies today have a customer orientation (also called customer focus). This implies that the company focuses its activities and products on customer needs. Generally there are two ways of doing this: the customer-driven approach and the product innovation approach.
In the consumer-driven approach, consumer wants are the drivers of all strategic marketing decisions. No strategy is pursued until it passes the test of consumer research. Every aspect of a market offering, including the nature of the product itself, is driven by the needs of potential consumers. The starting point is always the consumer. The rationale for this approach is that there is no point spending R&D funds developing products that people will not buy. History attests to many products that were commercial failures inspite of being technological breakthroughs.
In a product innovation approach, the company pursues product innovation, then tries to develop a market for the product. Product innovation drives the process and marketing research is conducted primarily to ensure that a profitable market segment(s) exists for the innovation. The rationale is that customers may not know what options will be available to them in the future so we should not expect them to tell us what they will buy in the future. It is claimed that if Thomas Edison depended on marketing research he would have produced larger candles rather than inventing light bulbs. Many firms, such as research and development focused companies, successfully focus on product innovation. Many purists doubt whether this is really a form of marketing orientation at all, because of the ex post status of consumer research. Some even question whether it is marketing.
Diffusion of innovations research explores how and why people adopt new products, services and ideas.
A relatively new form of marketing uses the Internet and is called internet marketing or more generally e-marketing, affiliate marketing or online marketing. It typically tries to perfect the segmentation strategy used in traditional marketing. It targets its audience more precisely, and is sometimes called personalized marketing or one-to-one marketing.
[edit]
Criticism of marketing
Some aspects of marketing, especially promotion, are the subject of criticism. See the main article Criticism of marketing
Many companies, particularly prior to the 1970s, were product-focused, employing teams of salespeople to push their products into or onto the market, regardless of market desire. A market-focused, or customer-focused, organization instead first determines what its potential customers desire, and then builds the product. Marketing theory and practice is justified on the belief that customers use a product or service because they have a need, or because a product has perceived benefit.
Two major aspects of marketing are the recruitment of new customers (acquisition) and the retention and expansion of relationships with existing customers (base management).
An emerging area of study and practice concerns internal marketing, or how employees are trained and managed to deliver the brand in a way that positively impacts the acquisition and retention of customers.
Once a marketer has converted the prospective buyer, base management marketing takes over. The process for base management shifts the marketer to building a relationship, nurturing the links, enhancing the benefits that sold the buyer in the first place and improving the products/service continuously to protect her business from competitive encroachments.
Marketing methods are informed by many of the social sciences, particularly psychology, sociology, and economics. Marketing research underpins these activities. Through advertising, it is also related to many of the creative arts.
Types of markets
The word market originally meant the place where the exchange between seller and buyer took place. Today we speak of a market as either a region where goods are sold and bought or particular types of buyer (summarized from Wells, Burnett, Moriarty, pg. 65–66). When strategizing specialists in marketing comment about markets they are usually referring to the different groups of people and/or organizations. The four major market groups are 1) consumer, 2) business to business, 3) institutional, and 4) reseller.
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Product, price, promotion, and placement
In popular usage, the term "marketing" refers to the promotion of products, especially advertising and branding. However, in professional usage the term has a wider meaning that recognizes that marketing is customer centered. Products are often developed to meet the desires of groups of customers or even, in some cases, for specific customers. McCarthy divided marketing into four general sets of activities. His typology has become so universally recognized that his four activity sets, the Four Ps, have passed into the language.
The Four Ps are:
Product: The Product management aspect of marketing deals with the specifications of the actual good or service, and how it relates to the end-user's needs and wants.
Pricing: This refers to the process of setting a price for a product, including discounts.
Promotion: This includes advertising, sales promotion, publicity, and personal selling, and refers to the various methods of promoting the product, brand, or company.
Placement or distribution refers to how the product gets to the customer; for example, point of sale placement or retailing.
These four elements are often referred to as the marketing mix. A marketer can use these variables to craft a marketing plan. The four Ps model is most useful when marketing low value consumer products. Industrial products, services, high value consumer products require adjustments to this model. Services marketing must account for the unique nature of services. Industrial or b2b marketing must account for the long term contractual agreements that are typical in supply chain transactions. Relationship marketing attempts to do this by looking at marketing from a long term relationship perspective rather than individual transactions.
[edit]
Technique
For a marketing plan to be successful, the mix of the four "p's" must reflect the wants and desires of the consumers in the target market. Trying to convince a market segment to buy something they don't want is extremely expensive and seldom successful. Marketers depend on marketing research, both formal and informal, to determine what consumers want and what they are willing to pay for. Marketers hope that this process will give them a sustainable competitive advantage. Marketing management is the practical application of this process.
Most companies today have a customer orientation (also called customer focus). This implies that the company focuses its activities and products on customer needs. Generally there are two ways of doing this: the customer-driven approach and the product innovation approach.
In the consumer-driven approach, consumer wants are the drivers of all strategic marketing decisions. No strategy is pursued until it passes the test of consumer research. Every aspect of a market offering, including the nature of the product itself, is driven by the needs of potential consumers. The starting point is always the consumer. The rationale for this approach is that there is no point spending R&D funds developing products that people will not buy. History attests to many products that were commercial failures inspite of being technological breakthroughs.
In a product innovation approach, the company pursues product innovation, then tries to develop a market for the product. Product innovation drives the process and marketing research is conducted primarily to ensure that a profitable market segment(s) exists for the innovation. The rationale is that customers may not know what options will be available to them in the future so we should not expect them to tell us what they will buy in the future. It is claimed that if Thomas Edison depended on marketing research he would have produced larger candles rather than inventing light bulbs. Many firms, such as research and development focused companies, successfully focus on product innovation. Many purists doubt whether this is really a form of marketing orientation at all, because of the ex post status of consumer research. Some even question whether it is marketing.
Diffusion of innovations research explores how and why people adopt new products, services and ideas.
A relatively new form of marketing uses the Internet and is called internet marketing or more generally e-marketing, affiliate marketing or online marketing. It typically tries to perfect the segmentation strategy used in traditional marketing. It targets its audience more precisely, and is sometimes called personalized marketing or one-to-one marketing.
[edit]
Criticism of marketing
Some aspects of marketing, especially promotion, are the subject of criticism. See the main article Criticism of marketing
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