San Francisco Financial Planner, San Francisco Financial Advisor

Although many investors are familiar and comfortable with traditional valuation parameters such as earnings per share (EPS) and return on equity (ROE), these tools may only provide a partially accurate picture of a company’s value.  Investors may want to familiarize themselves with another measurement called “incremental return on capital.”

Incremental return on capital is a rather interesting figure.  Distillation of its meaning essentially leaves you with this definition; a method to assess the return on capital earned on new investments or new dollars.  It is a forward leaning analysis of what will likely to occur, based on what has most recently occurred.  In many ways this figure is an assumption, a type of financial inertia put in motion by...

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Noted investor Warren Buffett rarely predicts the future direction of the stock market. He prefers to focus commentary on his trademark investing style, the analysis of corporate valuations.  But in 1999, in a series of speeches, Mr. Buffett did cross the prediction threshold—and in the process, provided investing insight that is as relative today as it was 10 years ago.  Mr. Buffett reviewed the historical performance of the Dow Jones Industrial Average for the 34-year period that preceded his speech, breaking it into two 17-year segments. His perennial advice?  Govern your market expectations carefully.

Segment 1: 1964–1981

During the first 17-year segment, from the end of 1964 through the end of 1981, the Dow Jones Industrial Average (“DJIA”) rose by only 0.88 points, from 874.12 to 875.  It wasn’t because...

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Living a comfortable retirement means planning for how much you will need now, when you have the ability to put away the money to do so.  What is your picture perfect retirement?  Are you…

• Living on a boat, seeing the world one coast at a time…
• Travelling, seeing all of those places you have imagined over the years…
• Spending time at home with your grandchildren, enjoying friends….
• Starting a business or investing more time in a lifelong hobby.

Today's retirees are doing much more than they used to….and the costs of retirement are also much different.  In order to better understand how much in assets you need to accumulate (and earn in company pensions and social security), to live the type of life you want…you should know what your retirement life is really going to be like.  What should you be planning for?

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Dream road is littered with great ideas that were going to solve everything. Many proposals were so sure to be successful that money fell out of the sky to fund them. In sports, talent at times can be so dominant that any opposition is a futile. Remember when the New England Patriots were so dominant that the New York Giants had no chance in the SuperBowl?

I’ve learned to be rather quiet about absolute convictions. Loud conviction likes to make a mockery of its believers. How did Eli Manning make that throw? It was as if the gods of irony all agreed to make bumbling fools of the experts. It just goes to show how dangerous overconfidence can be. Overconfidence will have you ordering the championship cake before the first quarter starts...only to give it embarrassingly to the stadium security staff later that evening.

No one wants to believe they may be in their own way, especially when it comes to investing. Yet, research has shown there are several common biases that can cause an investor to make decisions based more on emotion, than on strategy or science. This can impair investment returns...and in some cases, a total loss of capital.

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The world around us has many risks that we cannot control, so we plan accordingly. Essentially, you give yourself some room for error — or a margin of safety in the event something unexpected occurs or your assessment is overly optimistic. In the investment management process, there’s also a margin of safety. While the term may have many different connotations in finance, the most common usage occurs in security analysis, where it refers to the amount by which a security is priced (or “available for purchase”) below its intrinsic value.

"Price is what you pay -- Value is what you get", said Warren Buffett. Valuing a business is, therefore, a fundamental skill that every value investor must master to be able to discern the intrinsic value of a business. If you’ve already guessed this has something to do with value investing, you’re right. Benjamin Graham, who is often referred to as the father of value investing, first introduced the term in his 1934 book, Security Analysis, which he co-authored with David Dodd. He later revisited it in the much more readable The Intelligent Investor, published in 1949. Today, many well-known value investors, including Warren Buffett (“Berkshire Hathaway”), Mason Hawkins (“Southeastern Asset Management”), Seth Klarman (“The Baupost Group”), Glenn Greenberg (“Chieftain Capital”), Charles Brandes (“Brandes Investment Partners”), Robert Rodriguez (“FPA Capital”) and Joel Greenblatt (“Gotham Capital”) are advocates of the concept.

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Why do investors fall in and out of love with stocks at exactly the wrong time? Strong recent performance (“momentum”), fleeting fads and promises of huge growth potential are irresistibly compelling to inexperienced investors as they push their valuations up to unsustainable levels. After investors have experienced negative earnings surprises (which is inevitable), they overreact once more to the prospect of lower growth. What is the driving force behind this? Why do companies doing so well suddenly disappoint? Why do shares which outperform in the short term underperform over longer periods? The answers lay both in the allocation of capital and associated psychological biases or tendencies.

Companies do not exist in a vacuum. Their fortune is determined, to some extent, by the activities of other businesses. Relating a company to its environment is the essence of determining sustainable competitive advantage; which some believe is the prime determinant of investment success when combined with purchasing an interest below a conservative estimate of intrinsic value. In the book Competitive Strategy by Professor Michael Porter of Harvard Business School, he outlines five forces which influence a firm’s strategic position.

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The importance of saving for retirement cannot be overstated.  In addition, no matter how much money you are setting aside for retirement, you may also have credit card debt.  Even those with expansive investment accounts and retirement funds able to support them for years, are still paying costly credit card debt.  Does this make sense?  Is there a way to break the debt cycle that has you putting away less than you could be and paying more than you need to? 

A credit card is a convenient tool…but it can be one of the most expensive.  We commonly meet investors with an ample cash reserve and a significant retirement portfolio yet they carry (non-mortgage) debt month to month.  How do you break the hold debt has on you?  How can you stop paying interest so you can start earning interest on your education accounts and retirement investments instead?  Here are six ways to put more money into your pocket and less into the creditors.

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Your long-term goals and medical condition will dramatically impact the true cost of retirement. In the past, it was common for people to enter retirement facilities such as nursing homes when they were too old to care for themselves or their home. Today, most people intend to stay in their home as long as possible but are willing to consider alternative living arrangements such as retirement communities and assisted living facilities to provide them with sense of community and assistance they need.

As you plan for retirement, you must take into consideration the true cost of retirement housing, in any form. Retirement communities, assisted living or skilled nursing facilities or simply staying in your home are all viable options. The question is what are the likely costs of each of these decisions?

Senior Independent Living Facilities

Long Term Health Care

Skilled Nursing Facilities

Staying Home

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