Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

One of the things I always encourage investors to do is question any opportunity that presents itself. If it is a mutual fund, read the prospectus. If it is an annuity, ask whether the fees and restrictions justify the return and stream of income. If it is a stock or corporate bond, look at the financial statements.

There is a lot that can be learned by asking why and investigating the answer, rather than relying simply on what corporate executives say. Though most executives are honest, some have tried to cover up negative business trends by manipulating financial reports or creating questionable metrics. These tricks have led investors astray.

Fortunately, it is often very easy to uncover questionable accounting practices if you know where to look for them. To give you a starting point, I reached out to Howard Schilit, author of “Financial Shenanigans” (McGraw-Hill, 2010). Howard responded with an article describing the financial metrics that are often presented in a misleading manner. It starts on page 6.

Another challenge in protecting your wealth is to properly manage family finances. Beyond the traditional budget are topics such as inheritance and caring for a parent. Gregory Salsbury provides suggestions for managing these issues in a new book, “Retirementology: Rethinking the American Dream in a New Economy” (FT Press, 2010). An excerpt starts on page 11.

Several members have asked for articles that discuss alternative means of generating portfolio income. Given that, in mid-July, yields on the 10-year Treasury note fell below 3% and yields on the two-year note were at a record low, I am not surprised by these requests. Two articles address this topic.

Michael Thomsett, who recently published the 8th edition of “Getting Started in Options” (John Wiley & Sons, 2010), discusses the benefits and risks of covered calls. Covered calls are options an investor sells on stocks he already owns. Income is realized from the sale of the options contract, though, in exchange, the investor loses the opportunity for potential appreciation in the stock. Other factors to consider are explained starting on page 14.

John Deysher, who manages the Pinnacle Value Fund PVFIX, wrote an update to his 2007 AAII Journal article on preferred stocks. A preferred stock is a hybrid security that provides a stream of dividend payments. Unlike common stock, it only conveys limited voting rights, but unlike bonds, there is no maturity date at which the income stream stops. John explains the rewards and risks of preferred stock on page 19.

This month’s Investment Offerings column covers what could be the start of a new trend, converting mutual funds to exchange-traded funds ETFs. Huntington Asset Advisors’ request to the SEC to allow such a conversion is discussed on page 23.

Those of you who like to actively trade stocks will be interested in Wayne Thorp’s screening article. Wayne unveils a new strategy based on Grant Henning’s book, “The Value and Momentum Trader” (John Wiley & Sons, 2010). The complex strategy seeks high-volume stocks that are in the midst of a strong upward trend. Henning then narrows this list down by seeking out companies with both earnings growth and low valuations. Wayne’s article starts on page 24.

AAII Founder and Chairman James Cloonan recently observed that virtually all stock-oriented mutual funds now have negative three-year returns. He discusses the market environment and the impact it is having on the rules he uses to manage the Model Mutual Fund Portfolio on page 30.

A few AAII members have asked recently about the Baltic Dry Index, which has been mentioned in the financial press and on a popular television show. This measure of shipping rates fell for 35 consecutive trading days between June and July. In response, I included a special piece in this month’s Briefly Noted section about the factors that contributed to the drop and the index’s usefulness as an economic indicator. You can find it on page 4.

The popular Beginning Investor and First Cut columns will be back in next month’s issue.

Wishing you prosperity, Charles

Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


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