The markets have changed so much...
One of the biggest changes is information overload. I remember not too long ago when we couldn't get enough...
When I first started investing in college, getting a copy of a company's annual report was tricky. You had to hope your local library carried a couple of reports from the biggest companies.
And if you were searching for a smaller company's annual report, you were usually out of luck. Shareholders could request one through the mail and the postman would bring it to your door. But you'd have to wait a few weeks until it was delivered.
I treated a company's annual report like gold. Early in my investing days, I'd go to a broker's office to peruse single-sheet Value Line newsprint on each company. The page was crammed with years of data plus the latest quarterly results and analytics.
This was how investors got their information before the Internet exploded in popularity. Today, just about everyone can get thousands of pages of company documents within minutes if you hop on Yahoo Finance or a company's investor relations website.
Turn on the news and you'll get soundbites on how markets around the world are trading or see scrolls updating you on how much stocks have moved that day.
It's overwhelming. It can feel impossible to know where to turn for good investment information and advice, especially if you want to beat the pros on Wall Street.
Even I'm not a stranger to that feeling.
More than a decade ago, I met one of the smartest guys I know – so smart, in fact, that after our first meeting, I would have given him all of my money to manage. (He wasn't managing money, but I thought he was that good.)
For years, Joel Litman's research was reserved for only the highest echelons of investment management. Now, he shares it with readers all over the world.
According to Joel, Wall Street has been keeping the most successful investments to itself for decades. And it's able to do this legally through an obscure set of regulations.
If you're able to see the real, true financial numbers behind a stock – which is what Joel's system allows him to do – he says there's always a moneymaking opportunity, in any market... bull or bear.
But right now, Joel says that there's a much bigger problem than a bear market headed our way... It could turn out to be a kind of massive financial "heist" you've likely never considered before, with an opportunity hidden within that's far greater than anything you could make on gold, ordinary stocks, bonds, or cryptocurrencies...
Keep your questions coming our way at [email protected]. We read every e-mail. Here are some of the things on your minds this week...
Q: What are your thoughts on all those brain-training apps? – R.N.
A: You've likely seen those ads for smartphone apps that claim to boost your memory by playing games. However, no hard evidence suggests this is true. The problem is, these games don't actually challenge your mind enough, and the tasks usually don't translate into practical uses.
Consider the popular app Lumosity... In its early days, Lumosity claimed its games can reverse Alzheimer's disease and improve memory and focus. Early on, it made millions ($23.7 million in 2012 alone). It all sounded impressive, but when more than 70 scientists tested its theories, they didn't find evidence to support these claims. The company had to pay a $2 million fine in 2016 over unsubstantiated claims in Lumosity ads. Then it made its promises vaguer – and went right back to selling its app.
Don't waste your time and money on a bogus game. Instead, there's an easy, proven way to improve your memory... Getting physical exercise increases oxygen flow to the brain and allows hormones to be released that help brain cells grow. So if you're looking for a great way to keep your mind sharp, put down your phone and get moving. You can also try the "neurobics" exercises I share right here.
Q: Please explain the difference between preferred stocks and corporate bonds. – L.D.
A: Simply put, a corporate bond is a loan made to a company. Companies need capital to run and grow their businesses. To raise capital, they can either issue new shares of their stock or borrow money. One way to borrow money is by issuing bonds.
Bonds are usually initially sold in increments of $1,000. That's called their face value, or "par." So a company looking to raise $500 million will issue 500,000 bonds, each with a par value of $1,000 per bond. The company has to pay back the full $1,000 par value on the bond's stated maturity date.
In addition to paying you the $1,000 par value – also known as the bond's "principal" – at maturity, the company also must pay you interest along the way. (Without interest, investors would have no incentive to lend money to companies only to receive their initial capital later.)
Interest is determined by each bond's stated coupon rate. The coupon rate is based on the par value. It's a fixed rate that doesn't change. For example, a bond with an 8% coupon means that you are entitled to receive interest of $80 every year ($1,000 par value times 8% = $80). Bondholders are typically paid interest twice per year... In this example, you'd receive $40 interest payments every six months.
Just like stocks, a bond's market price fluctuates. It can trade for far more or far less than its $1,000 par value.
But unlike common stock (the opposite of a preferred stock, which we'll get to shortly), once you buy a bond, you are locking in your return. So the price fluctuations are less important. And the company is legally obligated to repay a bond. It must pay you the entire $1,000 par value of every bond at maturity, regardless of how much you paid for the bond. It's also legally obligated to pay you all the interest owed along the way, and on time... Failure to do so can force a company into bankruptcy. This legal obligation is what separates bonds from stocks – and it's what makes them much, much safer.
Another important difference is that bonds are higher in the capital structure than stocks. That just means that if a company is going through bankruptcy, bond investors get paid before common-stock investors from the sale of the company's assets. (Historically, they tend to recover around $0.40 on the dollar of their investments, on average.) Meanwhile, folks who own shares of common stock almost always get completely wiped out.
Preferred stocks, meanwhile, are considered hybrid securities: They have some characteristics of bonds – for example, they deliver fixed-income payments to shareholders, and a company can retire them at a predetermined "callable" price – and some characteristics of common stocks.
Preferred shares are a form of debt that trades on public stock exchanges. They are highly liquid securities and can be easily bought and sold, just like common stock.
But preferreds also represent bond-like security. Should bankruptcy happen, preferred-stock shareholders have claims against the assets of the companies – like a bond. Although their claim is a lower priority than those of traditional bondholders... it's a greater measure of security than common-stock shareholders have. (Their claims come at the end of the line.) However, most preferred shareholders lack voting rights, something common-stock shareholders do enjoy.
You can find prices for preferred shares on free sites like Yahoo Finance. You always want to compare the current price to the callable price. If a company can buy back its shares for $25 (the callable price), you wouldn't want to pay much more than $25 for them.
What We're Reading...
- Did you miss it? This is how your give your brain a workout.
- Something different: Your favorite color is probably blue.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
June 10, 2022