Facebook Raises $16 Billion at IPO Price $38

Facebook Inc. set its final price at $38 a share, as the social network gets ready for its initial public offering on Friday. At $38 a share, Facebook is valued at $104 billion, the biggest-ever valuation by an American company at the time of its offering.

Facebook is set to raise $16 billion from its IPO, becoming third-largest public offering in the history of the United States, behind General Motors and Visa.

On Friday, Mark Zuckerberg, the founder, is set to ring the opening bell for the Nasdaq from Facebook’s headquarters in Menlo Park, Calif., surrounded by executives, engineers and other employees. Shares of Facebook, which will trade under the ticker FB, will start selling to the public later in the morning. Read more “Facebook Raises $16 Billion at IPO Price $38”

Dow’s best closing level since 2008

When one of the most closely watched jobs market reports showed a generally strong picture of the United States economy on Friday, stocks on Wall Street picked right up and surged throughout the day, extending the strong start to 2012 and sending the Dow to its best closing level since 2008.

The government's monthly snapshot of the jobs market showed some acceleration in the United States economy in January. Aside from the performance of the Dow, the markets responded with milestones of other
sorts, with the broader market as measured by the Standard & Poor's 500-stock index pushing ahead by 6.94 percent for the year to date, its best such showing since the 13.97 percent gain in the similar period in 1987.

In addition, the Nasdaq composite index turned in its best close since December 2000, when the boom in Internet stocks was turning to bust.

On Friday, the S.& P. was up 1.46 percent, or 19.36 points, at 1,344.90, and the Dow Jones industrial average rose 1.23 percent, or 156.82 points, to 12,862.23, its best close since May 19, 2008, before the financial crisis. The Nasdaq surged by 1.61 percent, or 45.98 points, to 2,905.66, its highest close since Dec. 12, 2000.

The gains extended what has been one of the best starts to a year in decades. The three major indexes each ended January higher, with the broader market as measured by the S.& P. up more than 4 percent, its biggest January gain since 1997.

The jobs report was the latest in a series of economic reports that have given the United States equities market cause for optimism and provided an important counterpoint to the sovereign debt crisis in the euro zone.

In addition, the Commerce Department said factory orders rose 1.1 percent in December, although that was below forecasts of 1.5 percent and compared with the upwardly revised 2.2 percent jump in November.

Another report, from the Institute for Supply Management, showed that economic activity in the nonmanufacturing sector grew in January for the 25th consecutive month.

Facebook Exceeds Google in Internet Company IPO

Facebook Inc.'s $5 billion initial public offering would make it the biggest U.S. Internet IPO in history, surpassing the debut of its arch-rival Google Inc.

The social networking giant Facebook filed its much-anticipated IPO filing late Wednesday, setting the stage for what's expected to be the biggest public trading debut for an Internet company since 2004 when Google went public in a $1.7 billion offering.

The Facebook's IPO would also mark a high point in the rapidly growing social networking market, underscored last year by the public trading debuts of such players as LinkedIn (the professional networking site) and (Zynga Inc.) the social gaming company.

The IPO of Facebook also would rank among the top 10 biggest overall in U.S. history of U.S.-based companies. That list is led by Visa Inc., whose 2008 IPO was worth $17.9 billion, followed by General Motors in 2010 at $15.8 billion, AT&T Wireless Group in 2000 at $10.6 billion and Kraft  in 2001 at $8.7 billion, according to S&P Capital IQ.

Jeremy Siegle’s Bet on Stock’s Long-Run Outperformance

In the late December Jeremy Siegle published an article about his defense on his claim about long-run performance of stocks. It is based on his original article made public on his website jeremysiegel.com in the last summer. It specially responded critic threw by Jason Zweig, a well-known journalist and financial writer for the "Wall Street Journal".

It is always interesting to follow this debate, as it can broaden our perspective and deepen our understanding about long run performance of stocks. The following is the article published on Yahoo.com.

Last summer Jason Zweig questioned the quality of the early 19th century stock data that I used to support the long-run case for stocks. Although he has no problems with my data or my analysis of the stock market since 1871, he claims that the data from 1802 through 1871 is "rotten with methodological flaws." Furthermore, he claims that I inexplicably raised the dividend yield during that period from 5 percent, when my data were first published in academic journals in 1992, to 6.4 percent two years later. This unwarranted increase, Zweig claims, juiced my stocks returns in the early period and gave a much more favorable cast to long-run stock returns.

One could argue whether any of my (or other researchers') conclusions about the superiority of stocks as long-term investments is at all dependent on data that are nearly two centuries old. But I take his challenge to my data and research seriously, and I believe it very important to set the record straight.

Early Returns

My first studies were based on the path-breaking research of Prof. William Schwert of the University of Rochester, who published a paper in 1991 titled "Index of U.S. stocks prices from 1802 to 1897". In that paper, Schwert assumes a 5 percent dividend yield on stocks, borrowing the yield that researchers found in later data, and he admits that he has no evidence to prove whether 5 percent is correct for the early sample.

My first published article on long-term returns in 1992 used Schwert's 5 percent dividend yield. But when I began sampling the dividend yield on stocks from that period, I found that many stocks had a higher return, and I used an average of those returns to make my case.

New Data

Admittedly, Schwert's early data, first compiled in the 1930s by Professors Walter Smith and Arthur Cole, have flaws. But since then we have been graced with some superb research that strongly supports the returns that I used. Two of the top researchers in the field of U.S. stock returns, professors Will Goetzmann and Roger Ibbotson of Yale University. published an article in 2001 titled "A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability". This work is by far the most thoroughly documented research on early U.S. stock returns, collecting monthly price and dividend data on more than 600 individual securities over more than a century of data.

This was a prodigious effort. They reported that it took their research team more than a decade of effort to track down individual share prices and dividends, mostly from original publications found in Yale's Beinecke Rare Book Library. The data that they collected is free from the survivorship bias and other problems that Zweig cites in his critique of Schwert's data.

Ibbotson and Goetzmann determined that the biggest source of uncertainty in these early stock returns is the dividend yield, since many of the sources from which they obtained stock prices did not report dividends. As a result, they formed two series of dividend yields, one assuming that those stocks for which they could not find dividends had zero dividends (their "low income" estimate), and another which uses the dividend yield of those stocks for which they could find dividends (their "high income estimate"). They write:

"The low income returns from the pre-1871 period is 3.77 percent per year. .... When we consider only the dividend paying stock during that era, however, we estimate much higher income returns -- 9.27 percent per year. This higher income return estimate is consistent with the practice of paying out profits to keep stock prices in the early period trading near par values. The true dividend return to a capital-weighted investment in all NYSE stocks is undoubtedly somewhere in between these two extremes."

This midpoint of their high and low estimates is 6.52 percent, higher than the dividend which Zweig criticizes as too high. Furthermore, their estimate of the capital gains for stocks during the period is actually slightly higher than the 0.3 percent per year estimate that I used. So recent research suggests that my estimate of stock returns in the early period is actually quite conservative.

Long-Run Outperformance

Zweig sharply criticizes my statements about long-term stock returns. He points out that "U.S. stocks have underperformed long-term Treasury bonds for the past 5, 10, 15, 20, and 25 years" and it is likely that 30-year under-performance is near. Well, Zweig can scratch 25 years as the market rally has pushed stocks ahead of bonds over that period. And if stocks return only 4 percentage points more than treasury bonds next year (which I consider extremely likely), he can scratch 20 years from his list as well.

The last 30-year period in which bonds beat stocks was from 1831 through 1861. Furthermore, stocks, in sharp contrast to bonds, have never suffered negative after-inflation returns over any 20 year period or longer. That is quite a record, and Zweig does not disagree with either of these statements. Nor does he disagree with any of my analysis of the data over the past 130 years. Nevertheless, he claims that history cannot tell us whether stocks will beat bonds over the long run.

Final World

With a final knock on my research, Zweig proclaims, "Another emperor [Jeremy Siegel] of the late bull market, it seems, has turned out to have no clothes."

On the contrary, I will be most happy to bet my wardrobe against his that stocks' 30-year returns will keep their century and a half record of outperformance over bonds intact in future years. If he takes the bet, I have no doubt that Jason, not I, will be the one running around naked.

Golden rules for investing

These 16 golden rules for investing came from a super investor, Walter Scholoss. The full article is posted on GuruFocus.

1. Price is the most important factor to use in relation to value

2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).

4. Have patience. Stocks don’t go up immediately.

5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.

6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a scale down and sell on a scale up.

7. Have the courage of your convictions once you have made a decision.

8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.

9. Don’t be in too much of a hurry to see. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E rations high. If the stock market historically high. Are people very optimistic etc?

10. When buying a stock, I find it heldful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 yeas before the stock sold at 20 which shows that there is some vulnerability in it.

11. Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.

12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money, it is hard to make it back.

13. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have inconnection with purchase and sale of stocks.

14. Remember the work compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.

15. Prefer stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

16. Be careful of leverage. It can go against you.

Index Investing: Track the Market with Passive Strategy

More and more institutional investors, especially pension funds, are applying index-investing strategy by shifting their assets from active managers to index funds.

SmartInMoney reported, there are four major attractions of indexing that motivate investors to track market performance, rather than try to outperform it.

1. They offer a remarkably simple, convenient way to create a diversified portfolio.
2. Index funds typically cost less to manage than actively managed funds.
3. Their performance track record has been impressive, even during bear markets.
4. Index funds are fully invested strategy that keeps investor staying in the game during market recover

Simple

Indexing is a very simple way of gaining exposure to an investment style or the broad market. Index funds can help investors to build a portfolio that's appropriately diversified to meet investors’ goals, time horizon, and tolerance for risk in a convenient way.

Low Cost

Index funds’ main advantage is lower cost than investors would get from an actively managed mutual fund. Index funds win in all three components of investment cost.

Index funds charge low expense ratio, which is the cost of managing the fund. An average non-index fund has an expense ratio of around 1.5%; whereas many index funds have an expense ratio somewhere between 0.15% to 0.5%. Index funds are not actively managed; they are managed largely using computer programs. There are no expensive analysts required to try to figure out what bets to take.

Index funds transaction costs are generally much lower. The costs are incurred as the portfolio manager is managing the portfolio. Indexing is a very low-turnover strategy, relatively low compared to active management. While active strategy involves relatively frequent buying and selling securities, index fund managers only need to maintain the appropriate weightings to match the index performance; the technique is known as passive management.

The third cost is associated with taxes, in the form of capital gains or taxes on dividends. Passive management generates realized capital gains from trading far less frequently than does active management. Consequently, more tax payments could be either deferred of avoided entirely.

What matters to investors are after-cost returns. A fund's return is the total return of the portfolio minus the fees an investor pays for the investment costs. If a fund charges 1.5%, then the portfolio manager have to outperform the fund’s benchmark by that amount just to be even. Anything less, and the fund's returns would lag its benchmark. Studies reveal main culprit for the failure of actively managed funds to beat the indexing is the high costs that they charge. The more you trade, the less you earn, because management fee, transaction costs, taxes and bad decisions always kill returns

Hard-to-Beat Performance

Historically, index funds have performed very competitively against actively managed funds, and frequently outperforming a majority of active funds whether it's a shorter time period, like a year, three years, five years, or extending out ten years.

Over the year 2008, which was a very difficult year in the marketplace, index funds still outperformed a majority of the actively managed portfolios. Over the same period of time, index fund performance was very competitive against the active investments in different segments within the marketplace. In the nine Morningstar "style boxes," such as large-cap value or large-cap growth, indexing outperformed active managers in three of those, according to Gus Sauter, Vanguard's chief investment officer. It underperformed in three, and matched the active managers in three.

Over longer time periods, index funds provided even more competitive performance because that's where the costs of active management get compounded over time. So investors tend to find that over a 10-year (or more) time horizons, most indexes have outperformed the active investments.

Recent studies provided more evidence that the failure of active management in beating their benchmark index is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What's more, a new study found that it is very hard, if not impossible, to justify active management for most individual, taxable investors over a long term. (Detail findings of the studies are elaborated in the "Index Investing Supremacy")

Investing in an index fund doesn't guarantee that you'll never lose money. Index funds will decline in a bear market and up in a bull market, right along with the market. Investors should really think long-term because indexing is a great way to capture the long-term returns of the marketplace with its low-cost benefit. If investors get nervous during a downturn and sell, they’ll probably miss the recovery.

Fully Invested

Index investing can be a great way to capture the typically fast burst that a market experiences when it's making the shift from a bear market to a bull market. A fully invested strategy of index investing positions investors very well to benefit from the large rate of return during the market recovery. It's designed to perform right in line with the market as it goes up. In the last five or six bear markets, particularly the very steep bear markets, the market typically had a very large increase in the first 12 months coming out of a bear market (read "One year after the bear").

Market just witnessed that after months of the most recent cruel bear market, which bottomed in March, the stock markets closed the third quarter ending Sept. 30. 2009 with huge gain and the Dow Jones Industrial Average reclaimed the 10,000 mark on Oct. 14, 2009.

As a bear market turns into a bull market, active managers may suffer from a couple of problems as a bear market turns into a bull market. First, the active managers tend to hold the most cash near market bottoms. Because of the cash drag in an actively managed portfolio, it won't fully benefit in the rebound.

Current bull is still below the median

As of Oct 14, 2009, the current bull market that started on Mar 9, 2009 has gained 61.41% within 219 calendar days. The current bull is still below the median in terms of both gains and days. The median gain for all bull markets has been 68%, and the median length has been 308 days, wrote Seeking Alpha.

The table shows historical S&P 500 bull markets since index data begins in 1927. The table is sorted by bull market length. The bull markets had at least a 20% gain that was preceded by at least a 20% decline.

Table: Courtesy of Seeking Alpha

Confidence returned, Dow reclaimed 10,000 mark

U.S. stocks soared higher sparked by earnings news on Wednesday, Oct. 14, pushing the Dow Jones Industrial Average to close above 10,000 for the first time in more than year. The sharp rally signaled investors' confidence that the economy is recovering from the financial crisis and recession.

SmartInMoney reported that the Dow finished up 144.90 points, or 1.5%, to close at 10,015.86, its highest level since global markets plunge on Oct. 6, 2008, when the Dow fell below 10,000 amid the outbreak of financial crisis on Wall Street. The Dow first closed above 10,000 in May 1999 but retreated in the years after the dot-com bubble deflated. It then regained the 10,000 mark in late 2003 before peaking at 14,000 in October 2007.



Other indexes hit fresh one-year highs as well. The broader S&P 500 stock index gained 1.8% to end at 1,092.02, while the Nasdaq Composite rose 1.5% to 2,172.23.

The Dow is still more than 4,000 points off its all-time highs; while S&P 500, a broader measure of the market, are down 30 percent from their peaks.

The sharp rally was fueled by surprisingly better than expected results from two blue chips, Intel and J.P. Morgan Chase and a smaller decline than anticipated in U.S. retail sales.

Big gains followed a brutal bear market

Stock markets closed its best quarter since 1998 on Wednesday and posted big gains following a seventeenth months of cruel bear market. Stock markets have rallied since the early spring and gained steam over the summer, wrote SmartInMoney.com.

The Dow Jones Industrial Average index is up 48% from its March 9 low and up 11% this year, although still down 31% from its October 2007 record.

The Standard & Poor's 500-stock index is up 17% for the year and up 56% from its March low but off 32% from its October 2007 high.




For the past seven months, it has been a beta-driven rally. As investors took advantage of the easy money and moved back into riskier assets, many of the biggest decliners during the crisis posted the largest gains. Buying volatile stocks is known as a beta trade. A financial statistic called beta is a measure of an individual stock's moves in relation to the market. A stock with a beta of two, it historically moves twice as much as the market.

Read the full article at SmartInMoney

September effect mystery

We are in the beginning of September, a well known month among investors with its September seasonal effect on stock markets around the world. Investors will find an interesting article about the September anomaly in SmartInMoney.com. Next are excerpts from the article.

... there is a puzzle whether the stock market will continue its upward momentum or will fall to follow the seasonal pattern of the September effect anomaly. According to the efficient market hypothesis (EMH), the stock return should not be predictable and thus, the behavior of the stock returns inconsistent with the EMH is considered an “anomaly”.

Jeremy J. Siegel in his book “Stocks for the Long Run” shows that September is by far the worst moth of the year. Dow Jones Industrials has an average negative return of 1% for the period of 1885 to 2006. Furthermore, the September effect has not only prevailed until recently, but it has actually been stronger since 1990 with an average negative return of 1.5% from 1990 to 2006.



The poor returns in September also prevail in the rest of the world. September is the only month of the year that has negative returns in a value-weighted index. September has been the worst month in 17 of the 20 countries analyzed and all the major world indexes, including the EAFE Index and the Morgan Stanley all world index.

A dissertation presented by Hyung-Suk Choi from Georgia Institute of Technology in December 2008 mentions that the U.S. stock market return in September was negative 0.24 % over the last two hundred years, and it is the only month with the negative mean return. The September average return is significantly negative in 15 out of 18 developed countries over the whole sample period, which varies from 38 years to 208 years upon data availability. Moreover, the September return is negative in all 18 countries over the period 1970 to 2007.

Flash orders will be banned

The Securities and Exchange Commission (SEC) is moving toward banning a trading practice, called as “flash orders”, that gives some brokerages a split-second advantage in buying or selling stocks.

Flash orders give certain members of exchanges including Nasdaq, Direct Edge and BATS the ability to buy and sell order information for milliseconds before that information is made public. High-speed computer software can take advantage of that brief period to allow those members to get better prices and profits.

Investing in bear market by dollar cost averaging

At times like these you may even admit that shares are probably pretty cheap now. But what if things get a lot worse?

Investing by dollar cost averaging can facilitate your investment appetite and your worry about the risk. The idea is that you put exactly the same amount of money into mutual funds or stocks every month or certain interval of time.

Choosing to dollar cost average strategy, you are giving up any attempt to time or catch the market bottom. Trying to catch the bottom is like attempting grasp a falling knife.

To see how dollar cost averaging might have helped an ordinary investor during the worst meltdown in history, Brett Arends looked at the Great Depression data from Ibbotson Associates. He looked at total shareholder returns, which includes reinvested dividends, for a basket of the top 500 companies on the market. He wrote the following results on the Wall Street Journal.

At the worst moment in the crash of 1929-1932, someone who dollar cost averaged had still lost about two-thirds of his or her money.

That is plenty scary. Terrifying, even. But before you bolt from your mutual funds, never to return, let me add several things.

First, these are the numbers for the unluckiest investor - the guy who began dollar cost averaging at the absolute worst moment in history, namely Sept. 3, 1929. Those who started later in the crash did at least slightly better.

Second, the performance in real terms wasn't quite as bad as it seems. That's because of deflation - the phenomenon of falling prices that helped cause the crash in the first place. A dollar in 1932 bought a lot more than a dollar in 1929: Average prices fell by about a third. So in real terms even the unluckiest investor - one who started in September 1929 - was only down, at the low point, by just over a half.

Third, they recovered fast. When the market turned, those who stuck quietly to their plan got repaid quickly. Forget that stuff about 1954. According to Ibbotson data, someone who dollar cost averaged was back on level terms by 1933. And by 1936 he had doubled his money (though the crash of 1938 then knocked him back to evens for a while).

Incidentally, while Wall Street plummeted 89% at its lows, overseas markets did not do quite so badly. They fell, overall, about two-thirds according to data from Philippe Jorion, an economics professor at University of California-Irvine. That's still bad, but it is very different from 89%.

It's an argument for sticking to regular investments through this crash: Not bailing, and not jumping in with both feet either. The simplest strategy worked; investing the same amount, every month. It's also an argument for investing globally, and not just in the U.S., which is a lot easier to do today than it was in 1929.


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Lessons from tumultuous 2008

We just left the tumultuous year 2008, when U.S. stock market sank almost 40 percent, non-U.S. developed market fell more than 40 percent, and emerging market tumbled more than 50 percent. Investors reacted emotionally and indiscriminately selling their stocks, while hedge funds were forced by clients’ liquidation to dump their stock position. Stock went for roller coaster rides indicated by volatility index VIX that top all-time high of 80 mark. All of these cost investors greatly.

Entering this new year of 2009, investors should learn the lesson of the 2008. John C. Bogle, the founder and former chief executive of the Vanguard Group of Mutual Funds, shared his following thought about Six Lesson for Investor, as he wrote on The Wall Street Journal.

Beware of market forecasts, even by experts.

…Strategists aren't always wrong. But they have been consistent, betting year after year that the market will rise. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003…

Never underrate the importance of asset allocation.

…With all the focus on historical returns that greatly favor stocks, don't ignore bonds. Consider not only the probabilities of future returns on stocks, but the consequences if you are wrong…

Mutual funds with superior performance records often falter.

… Chasing past performance is all too often a loser's game…

Owning the market remains the strategy of choice.

…Active management strategies as a group lose because they are expensive. Passive indexing strategies win because they are cheap…

Look before you leap into alternative asset classes.

…When the investment grass looks greener on the other side of the fence, look twice before you leap…

Beware of financial innovation.

…Most of financial innovation is designed to enrich the innovators, not investors…

Under the mattress money outperforms equity

This year has been a disaster for investors as their stock portfolios dive to unimaginable level. Frustrated investors may be discouraged from buying stocks for their retirement. The daunting truth is that they would be better off putting their money under the mattress than saving in equity funds or balance funds in the past ten years. The following excerpt and chart from The Economist tells a little of the facts

… The stockmarket’s decline this year has been so steep that it has erased all the gains made in the rally from 2003 to 2007. In late November, the S&P 500 index dipped to its lowest level in 11 years. The extravagant claims made for equities in the late 1990s, when there was talk of the Dow Jones Industrial Average hitting 36,000 (or even 100,000) have proven to be hollow. Lately the Dow, which was at about 13,000 at the end of last year, has been trading between 8,000 and 9,000.

… Those who have been methodically putting money into pension plans (often known in America as 401(k) schemes) must be wondering why they bothered.

Figures from Morningstar, an investment-research firm, show that an American who put $100 a month for the past ten years into the average equity fund would have accumulated just $10,932—$1,068 less than he invested. Even a balanced fund (one that mixes government bonds and equities) would have lost money.

… The value of stockmarkets around the world has fallen by almost half and is now about $30 trillion below its peak.

Investment Outlook & Favorite Picks from the Pros

In the mid of the stock market meltdown, stockpickers see some investment opportunities. The followings are excerpt from Businessweek about investment outlook and favorite picks from two investment pros

TEUN DRAAISMA, Europe strategist at Morgan Stanley, said:

Key market-timing indicators, which include cheap valuations and strong fundamentals, say it's time to buy.

… "The severe part of the bear market is over, and there is plenty of value out there, but there's no hurry," says the Dutch-born strategist, who is now based in London. His models say the next bull market may not kick off until next summer. Meantime, expect a lot of "bumping around the bottom."

One sector that offers promise right now is telecommunications. "Minutes spent on the phone are not as cyclical as holiday spending or luxury resorts," Draaisma says. "People will still talk as much, maybe even more, to complain about their lives." …

PETER SCHIFF, President of advisory firm Euro Pacific Capital, said

The U.S. economy is in much worse shape than people realize. "At some point the world will cut us off and won't supply us with consumer goods, resources, and credit," Schiff says. While the next five years will be "extremely dire" for the U.S., Asian markets have the most to gain once their dependence on the U.S.

With stocks down as much as 50% in such markets as Hong Kong's, it is a good time to buy. He recommends some unusual commodity stocks with big dividends. One is Singapore Petroleum, an Asian oil-and-gas company. It's trading at 2.5 times next year's projected earnings, and its dividend works out to a 25% yield.

Why it's time to buy stocks

From money.cnn.com. By Shawn Tully. November 3, 2008

After being overpriced for more than a decade, equities now trade at sensible-but not bargain-prices.

You didn't hear this uttered very often, but over the past decade and a half, through bull and bear market alike, the value proposition for stocks could be stated succinctly: There's nothing to buy.

The fact is that equities were over-valued for years, making them vulnerable to the kind of brutal, sudden sell-off we've just witnessed. But now that the S&P has declined 40% in 12 months, the question is whether equities are at long last a bargain. The answer is a qualified yes: Stocks aren't exactly cheap, but for the first time in years you can expect decent returns, provided you're patient.

"If you buy now and wake up in 10 years, you'll probably get a return around the historic average," said Yale economist Robert Shiller. In the near term, however, Shiller - who correctly predicted the implosion of the stock-market and real-estate bubbles - is more cautious. "There is a substantial risk that with all this economic turmoil, stocks will fall far lower," he warned.

But make no mistake, stocks are now at levels where buying makes sense.

The best measure of stock valuation is Shiller's own index of price-earnings multiples. Shiller uses a 10-year average of inflation-adjusted earnings to calculate an adjusted P/E. The advantage to the Shiller method is that it smoothes out the peaks and valleys in profits.

Example: In the 2003 to 2006 period, earnings soared to historic heights, jumping from a normal 9% of gross domestic product to an extraordinary 12%. The profit bubble made P/Es look artificially low, handing the stock jockeys a logical-sounding reason to claim that equities were a buy, when in fact they were overpriced. Both the "P" and the "E" were in a bubble - the "P" even more than the "E." When the "E" collapsed in the face of the current downturn, the outrageous valuations were rudely exposed.

To see how out of whack P/Es had gotten, let's take a look back. From 1890 to the early 90s, the average Shiller P/E stood at 14.6. It dropped as low at 6 in the early 80s, and never went over 24. Then, in the late 90s, P/Es regularly stood at over 30, and at their peak in 2000 hit 44.

In the bear market that followed, P/Es dropped - but only into the low-20s. Then they took off again, averaging 25 to 28 from 2003 to the beginning of this year. Now they're at 15.7, not far from their pre-bubble average. That decline is tonic for investors. Research by economist and hedge fund manager Cliff Asness shows that buying in at a high Shiller P/E usually leads to poor returns, while grabbing stocks at a low Shiller P/E is a reliable route to riches.

From today's levels, what can we expect? Stocks' future return is closely related to the inverse of the P/E, also known as the earnings yield. So at a P/E of less than 16, investors should obtain real, or inflation-adjusted, gains of around 6.5%, which is about what Asness found in his research. Add 2.5 points for inflation, and the nominal return comes to a respectable 9%. That's about a point below stocks' long-run return, but it's far better than anything investors could expect for a decade and a half.

The rub is that getting even that 9% return won't be easy. Assuming no escalation of P/Es, stock returns come from a combination of earnings growth and dividend income. Earnings per share grow only at about 2% a year after inflation. (Total earnings grow faster than that, but new issues of stock dilute that growth.) So add in our 2.5% inflation rate to 2% real growth, and you still need a dividend yield of 4.5% to get to that 9% goal. The yield on the S&P 500 is now around 3.3%, versus around 2% earlier this decade. That's better, but not enough.

So simply buying "the market" at today's decent valuations isn't enough. You also need to choose stocks that pay higher-than-average dividends to reach the 9% threshold. Fortunately, that's not too difficult to do now. Lots of stocks with predictable, reliable earnings streams now offer yields between 4% and 6%.

You'll also want to avoid most tech issues. Companies such as Oracle, Google, Symantec, and Research in Motion pay no dividends at all, and sell at pricey multiples between 16 and 23.

Finally, remember this: Shiller points out that stocks were cheap in the early 1930s, and investors who bought then eventually made good money. But it took them many years to get there. So if you buy now, stick with strong dividend-paying stocks, and fasten your seatbelts. It will be a bumpy ride.

Is buy-and-hold dead and gone?

From money.cnn.com. By Brian O'Keefe. Last Updated: October 29

As volatile and scary as stocks look now, here are three big reasons not to abandon your investing strategy.

That's about the craziest thing I've ever heard!" shouts Jeremy Siegel through the phone when I mention the headline of this story. "I mean, what's the rationale for anyone saying that?" I had called up the Wharton professor because he's one of the high priests of buy-and-hold investing. In his classic book, Stocks for the Long Run, Siegel analyzed 200 years' worth of U.S. market returns and concluded that patient, consistent investment in stocks over a long period is the most effective strategy for wealth creation among regular folks.

It's a message that makes a lot of sense to people under normal circumstances. But lately, of course, the market has been anything but normal.

As Siegel and I were speaking in mid-October, the Dow was down some 39% from its high a year earlier. Investors were taking their money out of equities by the billions. The S&P 500's ten-year return was -11% (with dividends included, it was up a measly 5%). Plenty of people had suddenly begun to ask themselves whether the idea of long-term investing was a sham.

Interviewed on thestreet.com TV, CNBC's Jim Cramer declared, "You haven't made any money in ten years, so buy-and-hold must come into question." Siegel begs to differ. "We had a bad ten years, so now we're going to have another bad ten years?" he wonders incredulously, sounding as if he wants to reach through the receiver and rap my knuckles. "I'm overwhelmed by the emptiness of that idea. The history of the market is precisely the opposite. If you have a bad ten years, you're likely to have a good next ten years."

That may be, but it's hard to look at your retirement savings in such a rational way when a bear market is raging - and this one is a hulking, rabid grizzly. The widely accepted definition of a bear market is when stocks fall 20% or more from their high. We got there back on July 7, when the S&P 500 closed at 1,252. Doesn't that seem like a happy, innocent time, compared with recent lows? The market has now fallen more than 40% from its high - just the third time that's happened in the past 50 years. No wonder it feels a little bit like the world is ending.

Making matters worse, U.S. equities are hardly the only investments that have been routed. "What we have right now is a take-no-prisoners market," says Robert Arnott, who manages more than $35 billion as founder and chairman of investment firm Research Affiliates in Pasadena. Arnott says that of the 16 different asset classes he and his team track, every single one except U.S. Treasuries was down in September. That was the first month in three decades that 15 out of 16 categories were down at the same time. And things only got worse in October. "This is definitely the ugliest asset-allocation market we've seen in the last 30 years," says Arnott. "So we're looking at markets without a lot of precedent."

That's what happens when you have a near-total meltdown of the world financial system. And though the infusion of trillions of dollars of stimulus by governments around the globe has apparently begun to calm the credit markets a little, there may still be plenty of bad news to come. Today the question on the minds of most economists is not if a recession is happening, but how painful it will be. In late October, Fed chairman Ben Bernanke warned of a "protracted slowdown." In this kind of environment, it's only natural to question whether the strategy you're following makes sense. You may, in fact, feel that riding the market's highs and lows isn't for you at all.

"What I always try to tell every client I talk to," says value-oriented mutual fund manager Wally Weitz, whose Omaha-based Weitz Funds oversees some $3 billion, "is that if you're going to have a stock portfolio, if you can't stand either financially or emotionally to have it be down 50% at some point, you shouldn't be in the stock market." But if you can pass the Weitz test, being a buy-and-hold investor today makes as much sense as it ever did. The point of sticking to sound, fundamental strategies, after all, is to keep you from making big mistakes in moments of crisis. And abandoning the market now could turn out to be a very big mistake. Here are three reasons.

You can't time the market.

We've got proof. If you get out now, when will you get back in? "You really have no choice but to stay the course in an intelligent way," says John Bogle, who as founder of Vanguard has been one of the great pioneers of low-fee mutual funds as a vehicle for buy-and-hold investing. "It's one thing to get out of the market at the perfect time - how many people can do that? - and quite another to get back in at the perfect time. You've got to be right twice."

The evidence shows that most investors get it wrong over and over again. According to a study called the Quantitative Analysis of Investor Behavior by financial research firm Dalbar, over 20 years through the end of 2007, the average equity-fund investor earned an annualized return of just 4.5%, vs. the S&P 500's 11.8% return. Why? In large part because investors, chasing performance, shift money out of lagging funds and into hot ones at the wrong times. We buy high and sell low repeatedly.

Need more evidence? Go back to the dot-com bubble. In the first quarter of 2000, according to Morningstar, investors channeled $97 billion into equity funds - nearly double the total of the previous two quarters - right before the S&P 500 peaked on March 24, 2000. And in the third quarter of 2002, they withdrew $41 billion from stock funds just before the market bottom on Oct. 9. What's happening now? Fund research firm TrimTabs reports that investors pulled some $56 billion out of mutual funds in the first ten days of October, when the market was already 25% off its high.

Rather than thrashing about like that, we would all be better off focusing on some of the simple planning rules that have been proven to make a big difference:

Don't invest money you can't afford to lose.

Don't let excessive fees eat into your returns.

Do diversify your portfolio mix with fixed income and other assets, and reduce the risk in your portfolio as you get closer to retirement.

Do consistently rebalance your portfolio.

Do add new money steadily over time, in good markets and bad, so that you "dollar-cost average" - buying more when prices are low and less when they're high.

"The way you can make dollar-cost averaging not pay is when you get scared and stop making contributions," says Burton Malkiel, author of A Random Walk Down Wall Street and another bona fide member of the buy-and-hold intelligentsia. "This is the perfect market for it. In the long run, I think this is going to be an extraordinary opportunity for investors."

Buffett is buying

Here's all you really need to know about whether you should be in the market now: Warren Buffett is buying. As he announced in an op-ed in the New York Times on Oct. 17, he's recently begun taking advantage of the pervasive fear in the market to scoop up stocks for his own account. "If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in U.S. equities," he wrote.

It's not just Buffett who's recently turned bullish. Jeremy Grantham, who oversees $120 billion as chief investment strategist at money manager GMO Capital, has been a steadfast and vocal stock bear for well over a decade. But in an October letter to investors, Grantham announced that the S&P 500 had fallen below his fair value estimate of 975 and that he would begin buying stocks (although, in keeping with his cautious approach, he warned that stocks might irrationally fall to 50% below fair value before they bottom out).

The upside of the painful bear market, of course, is that stocks are much cheaper - as cheap, in fact, as they have been in many, many years. Based on the price/earnings ratio (using earnings from the past 12 months), the U.S. market is as inexpensive today as it has been since 1990. From today's levels, says Bogle, it's reasonable to think that the S&P 500's profits could grow by 7% a year. Throw in the current dividend yield of over 3%, and Bogle believes stocks could return 10% a year for the next decade. "I don't think that's a pipe dream," he says - and this from a man who at the turn of the century was warning of years of subpar returns.

There's another reason to look past the current chaos. We may be in a recession, but the market usually comes roaring out of downturns. Earlier this year Ned Davis Research looked at the ten U.S. recessions since World War II and found that the average market return one year after the market low point was 32%. That's the kind of recovery rally you don't want to miss. "If history's a guide, we're approaching one of those rare excellent buying opportunities," says Ed Clissold, senior global analyst at Ned Davis.

Bargains abound

As cheap as the U.S. stock market is today, there are many other markets and asset classes that have been hit even harder - and thus may represent even better deals right now. Chinese stocks, for instance, are down 68% over the past 12 months. The price of oil is down more than 50% since early July. And many emerging-market bonds have plummeted this year.

"There are some folks who've called me a perma-bear because I've been so reliably cautious on equities in recent years," says Arnott of Research Affiliates. "But this is one perma-bear who is now optimistic on a whole array of markets, including some equities. The selloff has driven yields on emerging-markets debt, on high-yield debt, on convertible bonds, on senior bank debt, and on other assets to levels that are almost without precedent. It's a pretty neat opportunity."

Arnott is also a long-term commodities bull, despite the falling prices of everything from copper to wheat. "I think what we're seeing is a commodities bear market within a long-horizon bull market," he says. "China and India are still going to grow much faster than the United States. Looking out at these emerging economies, there is still a supply-demand imbalance that favors rising commodity prices."

Mohamed El-Erian, co-CEO of bond giant Pimco, shares Arnott's view that there are historically attractive deals emerging outside of U.S. equities. The former manager of the $35 billion Harvard University endowment says global markets are experiencing a bumpy transition to a world in which the U.S. is merely one of several growth drivers - a change that he described earlier this year in his book When Markets Collide. "Every once in a while, investors have a wonderful opportunity to truly diversify at a relatively low cost, and this opportunity is coming up again," he says.

To prepare for this new world, El-Erian advises investors with long time horizons - 15 or 20 years- to have one-third of their equity investments in international stocks and another third in emerging markets. He also recommends that you protect your portfolio with inflation hedges such as Treasury inflation-protected securities (TIPS) and commodities.

And at the moment El-Erian sees some unprecedented opportunities to lock in fixed-income returns. "Three years ago, if you came to me and said, 'I need 6% returns,' I would have said you can't do that on the bond side without taking huge risks," he says. "Today you can get paid 6% on agency-backed mortgage notes. This is stuff backed by Fannie and Freddie that, as a result of the announcement six weeks ago, is now backed by the U.S. government. That's hard to beat." Hard, yes, but he expects to find even better opportunities later this year as hedge funds are forced to liquidate assets.

A few days after our initial conversation, I call Siegel back and tell him that I have come up with three reasons why buy-and-hold isn't dead. The market is even lower, but he is in good spirits. "Look, it's always painful near the bottom, but the outlook from here is extraordinary for investors," he says, echoing Malkiel. "I think the important thing is that the question of buy-and-hold comes up at the bottom of every bear market that I have gone through, and I get calls about it, and invariably that proves to be the time when you should own stocks." Let's hope history repeats itself.