Insurance Company Analysts-- Rare on Wall Street

                 

Beware of Wall Street’s insurance advice. Companies make annual filings with their various home-state insurance departments. Very few, if any, securities analysts can understand these intricate documents. Therefore, few are capable insurance analysts.

                       

I rarely have found anyone on the Street giving advice on insurance company securities who has taken the trouble to truly learn how to understand the policies the companies write, and the reserves behind them. Unfortunately, this lack of Wall Street insurance knowledge persists, based on commentaries I see in the media.

                       

The earnings and book values they spout must, therefore, always be suspect. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Understanding Corporate Income Statements

                  

I repeat: Most investors never bother to read a corporate prospectus. That’s one of the reasons why I suggest they don’t buy individual stocks, but that they instead employ low-cost mutual funds that invest in indexes.

                       

But in the event that they do buy individual issues, another of the items to review on a 10-K would be the come Statement; a report of sales, expenses and profits.

                       

Ideally, you want to see a trend of rising sales and earnings. The 10-K shows three years of results, and a a five-year summary. Look for the trend in net earnings.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Read the Corporate Prospectus

  

Most investors never bother to read a corporate

prospectus. That’s one of the reasons why I suggest they don’t buy individual stocks, but that they instead use low- cost mutual funds that invest in securities indexes.

                       

In the event that they do read a prospectus--few are able to understand what’s inside.

                       

In that case, they ought to try to review the first part of the 10-K. The latter provides a review of what the company does or makes,and where. It also goes into a discussion of customers and competitors.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Stock Market Future Prospects

                

The Congressional Budget Office has indicated from its studies that U.S. economic growth will average a little more than 2% a year over the next 70 years. It had been about 3.5%, from the 1950s on.

                       

There are many reasons why estimates for future economic growth are dismal, including our enormous debt which must be serviced. Moreover, it’s highly likely future interest costs will be very much higher than they are today.

                       

The specter of inflation all this imposes makes stock market growth difficult. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Usefulness of Short Selling

                      

In a previous report I mentioned the usefulness of short selling; selling borrowed securities, in the hope of buying back the borrowed security at a lower price in the future.

                       

Without short selling, markets would become overvalued and would not be priced as rationally as they generally are.

                                           

However, during financial meltdowns or other emergencies which may affect markets from properly functioning, it may be necessary to temporarily stop such trading.

                       

The SEC has placed restrictions on the use of short selling after a security is off a stipulated amount on the day. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

           

Costly Securities Advice

                     

I always comment on the high cost of financial advisory services, as much as 25%, 30% and more of actual earnings from an investment portfolio, though the fee looks harmless when set at 1% or 1 1⁄2% of total assets. (Calculate the simple math and see for yourself.)

                       

But the Wall Street folks keep piling on layers of advisers, even advisers who select overseers of advisers. Each layer of costs adds up, while the victim (the supposedly hapless client) thinks he or she is being well-advised. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

A Financial Adviser’s Test

               

Want a quick test of someone who considers himself a financial guru? Ask about buying bonds with the threat of inflation. When he starts talking TIPS, (for inflation-protected Treasury bonds) without asking how long you intend to hold the bonds, he has flunked the first step.

                                           

Then ask him to fully explain the duration principle behind the purchase of bonds. And how the usage of duration can overcome the effects of inflation. Chances are he will flub that too. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)