Streetwise

Lauren Rudd

Sunday, May 25, 2014

Freedom's Sacrifices and When Do You Sell

Memorial Day is upon us once again and for many it will simply be a day off from work and a time to drag out the barbeque grill. Yet, as I point out each year at this time, the day should be a somber reminder of those who sacrificed their lives to ensure our freedom.

Unfortunately, the devastating impact of armed conflict has a way of fading from memory. Few are left who can recount the untold horrors of the Holocaust. A younger but graying generation pushes remembrances of the sickening sweet smell of Napalm and burning flesh ever deeper into the dark recesses of their minds.

Nonetheless, the jarring impact of seeing young soldiers with missing limbs should not only unleash a gushing torrent of emotion, but hopefully will act as a constant reminder of the seemingly never ending violence that takes place across the globe in the name of peace...oh and yes religion.

You are probably wondering how those comments relate to investing on Wall Street. They do not...except to point out that Memorial Day is an excellent time to once again reflect on the phrase, “Not what your country can do for you but what you can do for your country.”

Unfortunately, Wall Street’s supercilious attitude is only upended only by its unvarnished self-indulgence. Moreover, the financial largess that now floats freely within the Temples of Wall Street is unlikely to ever make its way to Main Street.

Which brings us to the more germane topic that I also traditionally address at this time of the year, when and what to sell. Too often the subject is exploited with generalized and often erroneous terms such as, "the market is going up, sell," or "the market is going down, sell."

Deciding when and what to sell is generally an investor’s most vexing decision. Given that it is Memorial Day weekend, may I once again suggest you contemplate the words penned over a century ago by Catherine Lee Bates in "America the Beautiful." She wrote, "Confirm thy soul in self-control." In other words unemotional investment decisions and if you own a stock that you would not buy today then perhaps this is an appropriate time to sell.

If analyzing investments is not your strong suite, consider limiting yourself to those companies that have been increasing dividends for 10 or more years consecutively and have an intrinsic value per share that is 10 to 15 percent above the market price. Using those criteria General Electric (GE) would certainly be a sell candidate.

Specifically, GE has a current intrinsic value using the ValuePro.net discounted cash flow to the firm model of $3.80. A discounted earnings model yields an intrinsic value of $0.65. Finally, it does not have an uninterrupted series of increased dividends over a period of ten or more years.

Next on my to-sell list would be bonds and bond funds. Few would dispute the hypothesis that interest rates are going to move higher over the next 6-12 months. As a result the market value of bonds and bond funds will decline precipitously because bond prices and interest rates vary inversely.

My final sell idea is my least favorite investment: any and all mutual funds (401k plans excepted). While most funds do not exceed the S&P 500, the really nasty issue is fees and expenses.

According to the Investment Company Institute, the mutual fund trade group, mutual fund fees average 1.44 percent on equity funds, 1.02 percent on bond funds and 0.24 percent on money market funds. Fees for emerging-market funds or alternative-investment funds can be more than 2 percent.

Mr. John Bogle, who founded Vanguard, has pointed out that a mutual fund expense ratio understates the total costs investors pay. In addition to the expense ratio, investors need to look at transaction fees, sales charges and the "drag" of a fund manager who holds assets in cash.