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The Fool responds: Investing through DRIPs makes a lot of sense for most of us. You do have to keep good records of all your purchases, but you get to invest in many great companies without paying hefty trading commissions. Learn more at www.fool.com/school/drips.htm and from the DRIP Investor newsletter at www.dripinvestor.com . And at www.broker.fool.com , learn about Sharebuilder, which lets you buy stocks for $4 per pop.
Born 37 years ago in San Francisco, where I sold records and jeans, I'm now one of the planet's top specialty retailers, with more than 3,100 stores and annual revenues topping $16 billion. In addition to stores carrying my company name, I also run stores that might seem targeted at babies, retired seamen and politically corrupt, unstable governments. In 2004, I unveiled a new brand, Forth & Towne, to serve women older than 35. I employ more than 150,000 people. My ticker symbol evokes satellite-based navigation systems. Who am I?
You may think of churning as how butter is made. But there's another meaning of the word, and it's worth learning about, as ignoring it can cost you. As the Merriam-Webster dictionary explains, to churn financially is "to make (the account of a client) excessively active by frequent purchases and sales primarily in order to generate commissions."
Take a stroll down Wall Street and listen intently and you might hear the sound of stockbrokers and money managers shaking and shuffling your portfolio. The system is flawed, both for stockbrokers and mutual fund managers; and as a result, the portfolios of individual investors can suffer. Billions of dollars are lost each year due to churning.
Even if your broker is good and has you invested in growing companies, she might still frequently be moving you out of one good company and into another. Each transaction results in a profit for the brokerage -- regardless of how it fares for you.
Churning is also a problem in the mutual-fund industry. Fund managers are so pressured to beat the market over short periods that they can't simply be patient with solid investments that are temporarily doing poorly. Mutual funds that buy and sell often have what is called a high "turnover rate." It shouldn't surprise you that the funds with the highest turnover rates are often those that consistently lose to the market.
Churned investors are hurt by not only excessive commission costs but also taxes. Any stocks you've held for more than a year get taxed at the preferable long-term capital gains rate, which is 15 percent for most people. Short-term gains are taxed at your ordinary income rate, which can be as high as 35 percent, more than twice as much.
So, how would you like to have about one-fifth of your revenue tied to cyclical industries such as automobiles and new housing? That's the case for Illinois Tool Works (NYSE: ITW), and it seems like a lot of people worry more about that 20 percent than the other 80 percent.
This industrial conglomerate's recently reported fourth-quarter results were impressive. Revenue was up 8 percent over year-ago levels, operating income climbed 11 percent and net income rose 12 percent (with earnings per share rising 17 percent).
Maybe that doesn't sound too special to you, but check out some other numbers. Free cash flow was up about 37 percent for the quarter and 24 percent for the full year. Return on invested capital (ROIC) was up to about 20 percent for the fourth quarter -- roughly double the company's estimated cost of capital. Those are numbers that captivate a value investor's heart.
Management has hinted that we might expect more acquisitions during the coming year. Given this company's history of integrating new companies and generating good returns from them (check out that ROIC again), investors should look forward to the new arrivals.
The current stock price doesn't represent a screaming bargain, but given the firm's strong historical cash flow and ROIC performance, it merits a spot on the watch list in the hope of a temporary stock price swoon.
This is cache, read story here
The Fool responds: Investing through DRIPs makes a lot of sense for most of us. You do have to keep good records of all your purchases, but you get to invest in many great companies without paying hefty trading commissions. Learn more at www.fool.com/school/drips.htm and from the DRIP Investor newsletter at www.dripinvestor.com . And at www.broker.fool.com , learn about Sharebuilder, which lets you buy stocks for $4 per pop.
Born 37 years ago in San Francisco, where I sold records and jeans, I'm now one of the planet's top specialty retailers, with more than 3,100 stores and annual revenues topping $16 billion. In addition to stores carrying my company name, I also run stores that might seem targeted at babies, retired seamen and politically corrupt, unstable governments. In 2004, I unveiled a new brand, Forth & Towne, to serve women older than 35. I employ more than 150,000 people. My ticker symbol evokes satellite-based navigation systems. Who am I?
You may think of churning as how butter is made. But there's another meaning of the word, and it's worth learning about, as ignoring it can cost you. As the Merriam-Webster dictionary explains, to churn financially is "to make (the account of a client) excessively active by frequent purchases and sales primarily in order to generate commissions."
Take a stroll down Wall Street and listen intently and you might hear the sound of stockbrokers and money managers shaking and shuffling your portfolio. The system is flawed, both for stockbrokers and mutual fund managers; and as a result, the portfolios of individual investors can suffer. Billions of dollars are lost each year due to churning.
Even if your broker is good and has you invested in growing companies, she might still frequently be moving you out of one good company and into another. Each transaction results in a profit for the brokerage -- regardless of how it fares for you.
Churning is also a problem in the mutual-fund industry. Fund managers are so pressured to beat the market over short periods that they can't simply be patient with solid investments that are temporarily doing poorly. Mutual funds that buy and sell often have what is called a high "turnover rate." It shouldn't surprise you that the funds with the highest turnover rates are often those that consistently lose to the market.
Churned investors are hurt by not only excessive commission costs but also taxes. Any stocks you've held for more than a year get taxed at the preferable long-term capital gains rate, which is 15 percent for most people. Short-term gains are taxed at your ordinary income rate, which can be as high as 35 percent, more than twice as much.
So, how would you like to have about one-fifth of your revenue tied to cyclical industries such as automobiles and new housing? That's the case for Illinois Tool Works (NYSE: ITW), and it seems like a lot of people worry more about that 20 percent than the other 80 percent.
This industrial conglomerate's recently reported fourth-quarter results were impressive. Revenue was up 8 percent over year-ago levels, operating income climbed 11 percent and net income rose 12 percent (with earnings per share rising 17 percent).
Maybe that doesn't sound too special to you, but check out some other numbers. Free cash flow was up about 37 percent for the quarter and 24 percent for the full year. Return on invested capital (ROIC) was up to about 20 percent for the fourth quarter -- roughly double the company's estimated cost of capital. Those are numbers that captivate a value investor's heart.
Management has hinted that we might expect more acquisitions during the coming year. Given this company's history of integrating new companies and generating good returns from them (check out that ROIC again), investors should look forward to the new arrivals.
The current stock price doesn't represent a screaming bargain, but given the firm's strong historical cash flow and ROIC performance, it merits a spot on the watch list in the hope of a temporary stock price swoon.
This is cache, read story here