Another Reason BP Isn't a Slick Buy
June 26, 2010
www.waltonsun.com
We left Alys Beach?s Digital Graffiti before finding out our friend Bala Boyd was the blue ribbon winner.
On the way to the car, someone asked, ?Is it a good time to buy BP?? BP could be a good buy as long as the company avoids bankruptcy. While that specter is remote, it is far more likely under the current administration than the former.
Remember also that as a stockholder, you are an owner. Any money spent on oil cleanup, fines, remediation is going to affect your return. Finally, do you really want to be part owner of the worst environmental disaster since Chernobyl?
No one has any idea what the cost of the cleanup will be. The only thing certain is that Wall Street has consistently underestimated the cost. On June 7, Barrons projected $30 billion, while a week later, Oppenheimer doubled the estimate to $60 billion. I am glad President Obama finagled $20 billion from BP, and I am glad he ignored Citigroup and Merrill Lynch with their clueless, much lower estimates of $3.5 billion to $7 billion.
There is a better reason not to buy BP, though.
Owning individual stocks is a huge mistake investors make. There are very smart people who study individual stocks 8 to 10 hours a day. This is not Lake Woebegone, you are not as smart as they are, and neither am I. Trying to beat them is like you and me playing the Williams sisters at Wimbledon.
The best choice is a passive management strategy using index funds, exchange-traded funds or mutual funds from Dimensional Funds Advisors. Stockbrokers often disparage passive investing, instead promoting actively managed mutual funds.
Conveniently omitted from the discussion is the fact that the annual expense ratio of actively managed mutual funds is dramatically higher than their passively managed brethren. Ignoring the annual expense ratio is foolish unless you like giving your money away. Take Fund A with an 8 percent return and Fund B with a 7.25 percent return (.75 percent higher annual expense ratio); after 25 years, Fund A?s return will be 19.03 percent higher. The differential over time is dramatic. This is a low estimate ? the differential can be much larger.
Actively managed funds have much higher turnover than passively managed funds or ETFs. Higher turnover causes an unseen and dangerously underappreciated drag on performance ? not unlike the underwater plumes of oil that we do not see but will profoundly affect us. Higher turnover leads to increased trading costs and can generate tax liabilities for investors.
Outside of the folks selling them, there is absolutely no evidence that actively managed funds consistently outperform their respective index. Very, very few annually exceed the 1 to 2 percent hurdle they must clear to beat their index. More important, the actively managed funds that beat an index like the S&P 500 invest outside the index by owning bonds, international and/or small-company stocks.
If you want to be a contrarian, put some of your money (not all) in U.S. stocks using passively managed funds or ETFs. America has slightly more than 5 percent of the world?s population but generates almost 25 percent of world GDP. The problems we are facing are well-documented and daunting but not insurmountable. America, measured by GDP, produces as much as the next three countries ? Germany, China and Japan ? combined.
Keep some money invested internationally, but do not overlook the USA.
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc., focusing on hourly financial planning and investment management. Contact him at 850-267-1068 or at buz@Livingston ? Financial.net? .
BUZ LIVINGSTON
Just Plain Talk
June 26, 2010
www.waltonsun.com
We left Alys Beach?s Digital Graffiti before finding out our friend Bala Boyd was the blue ribbon winner.
On the way to the car, someone asked, ?Is it a good time to buy BP?? BP could be a good buy as long as the company avoids bankruptcy. While that specter is remote, it is far more likely under the current administration than the former.
Remember also that as a stockholder, you are an owner. Any money spent on oil cleanup, fines, remediation is going to affect your return. Finally, do you really want to be part owner of the worst environmental disaster since Chernobyl?
No one has any idea what the cost of the cleanup will be. The only thing certain is that Wall Street has consistently underestimated the cost. On June 7, Barrons projected $30 billion, while a week later, Oppenheimer doubled the estimate to $60 billion. I am glad President Obama finagled $20 billion from BP, and I am glad he ignored Citigroup and Merrill Lynch with their clueless, much lower estimates of $3.5 billion to $7 billion.
There is a better reason not to buy BP, though.
Owning individual stocks is a huge mistake investors make. There are very smart people who study individual stocks 8 to 10 hours a day. This is not Lake Woebegone, you are not as smart as they are, and neither am I. Trying to beat them is like you and me playing the Williams sisters at Wimbledon.
The best choice is a passive management strategy using index funds, exchange-traded funds or mutual funds from Dimensional Funds Advisors. Stockbrokers often disparage passive investing, instead promoting actively managed mutual funds.
Conveniently omitted from the discussion is the fact that the annual expense ratio of actively managed mutual funds is dramatically higher than their passively managed brethren. Ignoring the annual expense ratio is foolish unless you like giving your money away. Take Fund A with an 8 percent return and Fund B with a 7.25 percent return (.75 percent higher annual expense ratio); after 25 years, Fund A?s return will be 19.03 percent higher. The differential over time is dramatic. This is a low estimate ? the differential can be much larger.
Actively managed funds have much higher turnover than passively managed funds or ETFs. Higher turnover causes an unseen and dangerously underappreciated drag on performance ? not unlike the underwater plumes of oil that we do not see but will profoundly affect us. Higher turnover leads to increased trading costs and can generate tax liabilities for investors.
Outside of the folks selling them, there is absolutely no evidence that actively managed funds consistently outperform their respective index. Very, very few annually exceed the 1 to 2 percent hurdle they must clear to beat their index. More important, the actively managed funds that beat an index like the S&P 500 invest outside the index by owning bonds, international and/or small-company stocks.
If you want to be a contrarian, put some of your money (not all) in U.S. stocks using passively managed funds or ETFs. America has slightly more than 5 percent of the world?s population but generates almost 25 percent of world GDP. The problems we are facing are well-documented and daunting but not insurmountable. America, measured by GDP, produces as much as the next three countries ? Germany, China and Japan ? combined.
Keep some money invested internationally, but do not overlook the USA.
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc., focusing on hourly financial planning and investment management. Contact him at 850-267-1068 or at buz@Livingston ? Financial.net? .
BUZ LIVINGSTON
Just Plain Talk