If you want a sense of how badly the Bank of America-Fleet merger will be for BofA shareholders, take a look at BB&T�s fourth quarter earnings report, out yesterday.
That�s right, BB&T. A year ago, recall, the company announced it would buy First Virginia Banks in a deal that wasn�t so different from what BofA has planned: All stock, out-of-market, and at a fat price. And like BofA, BB&T promised aggressive cost cuts and synergies that would keep earnings dilution to a minimum and help enhance shareholder value over the long term.
A dry run for what BofA holders can expect, in other words. If you own BofA, that can�t be encouraging: Yesterday the company reported fourth quarter earnings of 69 cents per share vs 72 cents per share last year, down 4 % and in line with recent expectations.
And if you look behind the numbers, you�ll see they were a mess. In the quarter, the company skimped on its loan-loss provision, saw its mortgage business implode, and made no headway in lowering its bulging post-deal efficiency ratio. In addition, it took a $30 million in merger-related charges--$10 million more than forecast, and promised more to come. And it lowered guidance�again. The company is now pointing analysts to earnings in 2004 of between $2.85 and $2.95 per share. Prior to yesterday, earnings had been $3.00. A year ago, when the First Virginia deal was triumphantly announced, the number was between $3.15 and $3.20.
So from January 21 of last year, the day the merger was announced, BB&T-First Virginia has produced a steady stream of disappointing results and reduced expectations. Over that period, the stock has lagged the S&P 500 by 2,400 basis points.
But wait, you say. How much of the disappointment is really because of this crazy deal, and how much is due to plain old difficult operating environment? That�s exactly the point! Because BB&T and First Virginia are now two eggs that have been scrambled together, it�s impossible to point out where the disappointments really occurred, or why. The combined entity has no extended operating history, outsiders can�t definitively identify inflated expenses here, or a revenue shortfall there. They have to take management�s word. Shortfalls, when they are identified, can only be measured against ex post facto budgets that have been cooked up. Management might even conveniently tuck merger-related expense into operating lines, to further blur the picture. It�s one step short of fantasyland.
So while outsiders can�t prove that the deal caused the shortfall, and while management will deny it, they can be strongly, strongly suspicious.
Which gets me back to BofA. But just because the BBT-FVB egg can�t be unscrambled doesn�t mean investors can�t recognize other scrambled eggs when they see them now! The BB&T-First Virginia omlette didn�t turn out so tasty for investors. And there�s scant reason to think that the BofA-Fleet one will turn out any better.
Masterjoe, I'll try to answer. I salute your approach as one that works for you; it's too mechanical for me. You and I both believe in value but I should clarify that I would never buy something *just because* it's down and I expect it to revert to the mean. Maybe you're braver than I am.
Remember the context of this "help please" thread. We were talking not just about what we as individuals do but how we advise friends and family. I've tried to explain asset allocation to people and it's kind of bloodless (like index funds). Buying Pfizer at a discount because it makes gobs of money and has blockbuster products -- that's something I find people can understand.
On your more specific points --
-- I personally would never buy or recommend junk bonds. My long-term goal in addition to making money is never to lose a minute's sleep over investments. You feel different and that's fine.
-- I believe in diversification, not asset allocation, and I think they're two different things. Asset allocation to me implies forced selling out of one class to buy another. I don't mind if my asset allocation gets temporarily out of whack because one class of my investments has been successful. (Though I'll sell if there's a good *specific* reason to sell a security.)
-- I disagree that the market is efficient in the short term. So as to be relevant here let's get back to banking. I got involved in this discussion even though I neither own nor even like BBT. My position on current market efficiency is the following, and I'll only look forward so as not to be accused of proving something with backwards data. (I think you and I have already proven our value bona fides -- me with Pfizer and you with the junk bond rally.) I like and hold SunTrust but merger speculation is so rampant without specific evidence that I think valuation is stretched. As it nears 76 I'm considering reducing. The near-hysterical level of desperation for a takeout seen on the STI board perfectly reflects why this needs to be considered. By contrast, several other extremely fine banks are perfectly positioned with their franchise values to be takeout candidates someday and thus I consider to be dramatically undervalued. The best examples I know of these are Mercantile Bankshares of Baltimore and Valley National of New Jersey. MRBK and VLY. Thus I rate these long-term buy and hold. The fact that hardly anyone ever mentions "takeover" with these stocks and their message boards are so quiet makes their stories even better :)
"My personal beef with index funds is that I think investors do best when they have a personal conviction on their investments, and there's nothing to have a conviction about with index funds."
One thing I would ask you to consider is a top down, asset allocation approach. In this context, I would argue that personal conviction about index funds is not really important. Rather, personal conviction about asset class selection is - with index funds offering an inexpensive way to obtain asset class exposure with minimized cost.
For example, lets say that your personal portfolio is a standard 60/40 equity/fixed allocation. For arguments sake, let's say in late 2002, you were looking at the fixed income allocation in your portfolio(to keep this point as brief as possible I will focus on only one segment).
Within fixed income in late 2002, you would have noticed(with some research) that High Yield/Lower Credit Quality Bonds were over 3 standard deviations cheap relative to A rated/Higher Quality Bonds. If you believe in reversion to the mean, you would jump on the chance to gain exposure to the high yield sector at a time like that- and if you did act, you were handsomely rewarded relative to the risk that you undertook.
The overall point that I am trying to make is that the markets are so efficient, that opportunites are available for only a short period of time. When dealing with a limited time frame and limited resources to research the vast sea of actively managed products/expense comparisons etc...index funds provide an easy and inexpensive tactical opportunity for investors who are looking to execute strategy using a top down asset allocation approach.
Any comments are appreciated. Just trying to offer another viewpoint.
"...more power to you and the people to whom you give advice."
I think the key here is "give you advice". What that really means is, this ain't easy and the same plan doesn't always work. I'm sure that the articles/studies about the advantages of index investment paying higher returns over time are correct by definition. What they don't speak to is that in a given year, some advisors/funds will be on "top." Others will be at the bottom who may have been on top last year. That, plus many others will create an "average" that will be similar to a broad based index fund.
I apologise if the following sounds like a commercial - it's really not intended to be. In fact, I won't mention their name agian, but the reason I chose ________ to manage most of my investments in my later years of life was because of the way they constantly test the money managers they have in each type investment, changing to the better performers if appropriate. And yes, I know the old argument that everybody picks the hot hand just in time for them to fall off the face of the earth, but these guys don't rely on Forbes or Morningstar to crown their picks. They do their own ongoing research and make decisions accordingly. I often receive notice that they have changed a money manager in one of their sector portfolios. When was the last time you saw that in one of your managed funds? And since they always have 3-5 seperate advisors for each "fund", they get some additional protection/performance that way.
Goal is not to be at the top of performance pile - I do that on my own with my fun money portfolio ;~) - but to beat the "averages" time in and time out. So far, they've done a good job. That's fund investing I guess, but with a diversification that lends itself to individual thought and constant testing on individual manager performance.
That's where the bulk of my money is, so I can do other things in my retirement.
Just IMHO of course. Your milage may vary...
No, of course I can't share all that except to say that I strongly believe in diversification.
Careful, Fan, I didn't say the point of doing things my way was to beat an index. You and I completely agree on one thing -- the point is winning. And in my case, I mean that *absolutely* -- the only performance measure that counts is did you actually make money on your portfolio? Did you actually make a given investment (or sell it) at the right time? Comparisons against anything else are only theory.
In other words, the question back to you is this: Did your "40 something children" (ongoing inside joke on this board) ACTUALLY invest in index funds, hold on through the storm of the last few years (or add more), and come out on top? When I said index funds don't provide an emotional hook for bad times, this is what I meant. You can't just cite an index and say if you didn't beat it, your investments are not valid. Unless you ACTUALLY put real money on the index for the measurement period in question, it's a meaningless argument that doesn't factor in human behavior realistically.
On the other hand, if your advice WAS taken in this manner, great -- more power to you and the people to whom you give advice.
Come back to me after you've read the article and Ellis' book "Winning the loser's game". Investing is about wining.
By the way would you be willing to share your equity/fixed income/cash ratio and your % gains/losses last 5 years vs. the indexes to support your point? I'll be happy to reciprocate.
Fan -- We have points of agreement & disagreement. Since we're at risk of dragging off-topic, let me address 3 of your ideas and leave it at that.
1. Index funds. Of course I agree with you and understand that you use/recommend them to work against the otherwise inefficient nature of mutual funds (on expenses, money flows, etc.) My personal beef with index funds is that I think investors do best when they have a personal conviction on their investments, and there's nothing to have a conviction about with index funds. Thus I worry that if I recommend them to a friend, they won't have any emotional recourse against giving into market sentiment at the wrong time. I realize that this is largely philosophical though, so I certainly respect your approach as one that works for a lot of people.
2. Money managers vs. us individuals. First I agree with you that there are exceptional managers and those are worth what you pay them. But those aside, I still disagree with you that professionals are better because they have time and knowledge to do the work, etc. I know that *sounds* logical but I think the writings of Peter Lynch and quite a number of others prove conclusively that it just ain't so. There are all kinds of pressures that these people are under that we individuals do not have to deal with. Done correctly, individual investing is very rewarding and that's presumably what these message boards are set up to help with (though looking at the boards of the megacaps really makes me wonder).
3. Technical risks like sector rotation. This is most important. Far from my ignoring it, this kind of thing is *exactly* the trading stuff that I believe individuals are constantly being intimidated into believing is stacking the deck against them, when precisely the opposite is true. It's an opportunity! Let the professionals run like sheep out of a good stock before I finish my meeting on something else entirely! The key question for individual investors is not what information is out there, but what's your reaction to it? I brought up the Pfizer example before so I'll return to it. The pros apparently rotated out of pharma in 2003. That left Pfizer almost a ridiculous buy (or accumulate) at $30. I'm not going to post anything on these boards that I wouldn't act on, so I'll let you read between the lines from here on. The point is, there's been such an air of conspiracy about the market since the corporate scandals and the Spitzer stuff began that I see investors constantly psyching themselves out by believing the worst when in fact opportunity is all around them. Work against this mindset, friends! You'll be happier for it!
Thanks for a civilized discussion, to both you and others who participated in this thread.
Play the keys,
Thanks for the clarification, but let me respond:
"gives this advice to people in general" - I was thinking of the Doc since I addressed him, I do think it holds generally with a few exceptions for unusual analyticals with lots of time.
Second, stock picking by individuals is not more cost effective or efficient long term as the article states.
Third,Money flows make no difference to index funds because they aren't buying and selling individual stocks..they mirror the index as "Spidrs" mirror the S&P.
Fourth, most fund managers don't beat the market..another point for the indexers. But I have known and worked with a number of money managers and lost some friends in the Trade Center and they are smarter and spend more time on research and talking to companies than you or I unless you're a fund manager.
Fifth, You're absolutely right about dollar cost averaging, but wrong to think I suggested turning money over to just any advisor. Index funds cost only .25 to .50 of 1%. I never suggested a 1-2%+ of assets advisor.
Sixth, you've ignored sector rotation risk in individual stock picking. When a "lead steer" analyst or manager decides to get out of metals and go to financials or any other sector switch the funds switch before individuals can get off the golf course or out of an all-day meeting to find out what's happening.
Lastly, always look up a fund on Fundalrm.com or morningstar to see how they compare to peers..there are many articles on how to pick a fund you can find in any financial publication.
And in an efort to be somewhat brief and hit the high notes this and my earlier post was a broad brush treatment. Someone posted the site for the full article which I believe is worth some thought. I like it as confirmation of investment conclusions I had reached from my own business experience some years back.
Your response to my "Plain Vanilla post led me feel I hadn't adequately supported some of my points. All IMHO.
Stock; 40+ year old I should have said but you knew that. Frank Russell is a good outfit; handles big money..I know a Rep in Raleigh & they do a good job; I just prefer Vanguard's array of funds and lower expense ratio. 1% saved in a 2% inflation environment is a big deal.
I agree, playing as entertainment with money you don't need is an educated gamble & I've done that too with BB&T between 32 & 38. But I suspect the frustration we see expressed by younger investors than us is simply a search for the best path through the investment jungle and the "Plain Vanilla Strategy" is the answer in my view which allows these folks to spend their time on what they do best and lets their selected pro (mutual fund) pick the individual stocks. Just riding with the market is a long term winner with an index like Balanced index fund or Total stock market which mirrors ths Wilshire 5000 (large, med. and small cap, growth and value which takes sector rotation risk out of the picture). And this is worth exactly what you pay for it, but works for me and maybe will help someone else.
And to confirm back to you, Ellen, provided that one doesn't get lost in the squiggles and sentiment, I definitely prefer stocks to mutual funds (though I have both) provided you understand in your own mind why your stock is being bought at a particular price.
How about that, a message board dispute clarified and resolved by both parties. Wish I could see more of that.