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Personal Finance: Keep the right bonds in your ... - Los Angeles Times
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Posted: 16 May 2010 09:15 AM PDT

It was a frigid February night when United Flight 343 set down at Omaha's Eppley Field. The temperature was 3 degrees and mounds of snow lined the runways. But the weather did not dampen our enthusiasm to hear Warren Buffett's perspectives on the economy, the markets, and anything else that might be on his mind.

Every February Berkshire Hathaway invites a hundred or so Wharton students – MBAs and undergraduates – to visit the firm and listen to "The Oracle of Omaha." You could scarcely find a more focused and excited group of students and Buffett, who delights in mentoring his young admirers, does not disappoint them.

Before he was scheduled to meet with the Wharton students, I was privileged to talk with the chief of Berkshire Hathaway. Some advice to those who meet him for the first time: don't ask him to predict the market– he won't and he doesn't need to. He believes that there are always opportunities to find undervalued stocks and sometimes the entire market is so mispriced that profitable trades await savvy investors.

Threats to Markets

But Buffett did tell me that he thinks that risk premiums are too low and that events like 9-11—or worse – can happen at any time. He said that the probability that a nuclear device could be triggered by a terrorist in Manhattan or in Washington (say, at the Federal Reserve) cannot be ignored and probably is not factored into the market.

I asked Warren whether he would be a buyer if such terrorism struck, and, after a moment of reflection, he said "yes." Despite his concern of terrorism, Buffett maintains a long-term bullish view of American equities.

Buffett also thinks the large and growing U.S. trade deficit is a big threat to the markets. His concerns were one of the reasons he had taken a sizable short position on the dollar several years ago. Although he has since pared his position, he still believes that the U.S. saves too little and consumes too much, paying for these imported goods and services with government debt (which he termed "pieces of paper") that are future claims on our resources. He believes this huge deficit is a threat to the dollar and invites future inflation.

This is one of the few issue on which we disagree. I believe many Asian countries want to run trade surpluses and are perfectly happy to continue buying our government bonds. Certainly the dollar may decline; but the greenback is already cheap when compared against major world currencies on a purchasing power basis. Betting against the dollar is not a sure thing.

Nevertheless, Warren and I totally agree about the foolishness of preventing cross-border mergers, such as the political opposition to the Chinese oil company, CNOOC's bid for Unocal last year. I believe that any actions that discourage the foreign flow of capital have far more serious consequences for our dollar and capital markets than the trade deficit itself.

Buyout Surge

Buffett commented negatively on the recent buyout surge and drew some comparisons with a similar phenomenon in the late 1980s. He criticized private equity that sweeps down and buys firms, "gussies them up," (to use his term) by stripping and leveraging their assets and firing employees, and then spits them out to the public at a higher price.

When Buffett buys a firm, he instead maintains a hands-off management style and allows managers to do the good jobs that they were doing. Although Warren may not pay as much as private equity, he attracts owners who care more about their firm's reputation and their employees than making a few extra dollars on the sale. As a result, Berkshire can buy a dollar's worth of assets for less than one dollar, enhancing Berkshire's value.

Buffett wouldn't say that all buyouts are bad for shareholders. The current craze certainly has not gone as far as the late 1980s, when exotic debt instruments, such as no-cash PIK (paid-in-kind) bonds burst onto the scene. Indeed part of the reason for today's buyout surge is that straight debt is very cheap. Furthermore, there are some firms that should profitably redeploy their assets and may have too much cash on their balance sheets. Nevertheless, owners who want to sell their company intact have an option if they are willing to accept a deal below top price. A good description of Buffett's style can be found by reading how he purchased ISCAR, an Israeli tool manufacturer, in the latest annual report.

Long Term Capital Management

One student asked about Berkshire's role in the Long-Term Capital Management (LTCM) crisis that rocked the financial markets in 1998. It was obvious that Warren wished that he had been able to buy LTCM's positions when the Fed forced a resolution of the crisis that was crippling the government bond market.

The LTCM crisis was a ready-made example of Warren's philosophy of buying firms when the economics was right, yet fear ruled the markets. He noted that "off-the-run" (non-benchmark) government bonds were selling to yield 30 basis points more than the "on-the-run" (benchmark) bonds that were maturing just six months later. He rightly claimed that this made no sense economically.

LTCM had taken a huge leveraged position in these bonds when the spreads were much smaller, but didn't have the collateral to hold on to it when the spread widened. Buffett quoted John Maynard Keynes, who wrote in 1931 that "The market can stay irrational longer than you can stay solvent." As the spread widened, Keynes' dictum became devastatingly relevant for LTCM. But Berkshire, with its huge cash hoard, could withstand the pressure of even more market irrationality before the spread eventually returned to normal.

Unfortunately, Warren was never able to consummate the deal. He had been invited by Bill Gates to vacation in Alaska when the crisis broke and it was hard to negotiate such a deal on a cell phone. Eventually the banks holding the collateral made a deal with LTCM and Berkshire didn't have a chance to top their offer.

Warren is philosophical about the loss of this opportunity, noting it was the most expensive vacation he ever took. "Bill Gates cost me about $3 billion," he shrugged. But that incident certainly has not soured their friendship and didn't prevent him from giving the Bill and Melinda Gates Foundation the lion's share of his wealth.

Priorities

One of the students asked Warren whether, despite his many successes, he ever made a mistake. Buffett said that fortunately most of his mistakes were small, noting his ill-fated purchase of Dexter Shoe in 1993, a buy that was made far more costly when he paid for this money-losing company with Berkshire stock.

But Warren does not stew about past mistakes. He wisely counsels that anything that happens to your finances is secondary to the important things in life – picking a suitable and compatible mate, developing a relationship with your children, and doing something that you enjoy.

After watching Warren interact with all the students, it is easy to see that he is not only the world's best investor; he is also a consummate mentor. Although the students come to hear Warren Buffett for his financial wisdom, they come away with an appreciation of how financial success fits into a broader perspective on life. Cold and snowy Omaha could not take away from the wealth of ideas and warm feelings that were generated at Berkshire that day.

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Personal Finance: Keep the right bonds in your ... - Los Angeles Times

Posted: 16 May 2010 02:13 AM PDT

Investors, made nervous by two years of roller-coaster performance in the stock market, have been pouring money into bond funds over the last year, seeking a haven for their assets.

But if interest rates start to rise next year — as most expect they will — these mutual funds that hold bonds may not look quite as profitable, experts say.

"As rates go up, bond prices come down," says Steve Huber, head of portfolio strategies for fixed income at T. Rowe Price, a big mutual fund company in Baltimore. "The longer the maturities on your bonds, the bigger the risk you're taking."

If interest rates were to rise by 1 percentage point, the price of a 30-year U.S. Treasury bond would decline by 14.13%, according to a T. Rowe Price analysis. The price decline on a 10-year bond would be about half that, the company says.

Price declines on shorter-term Treasury bonds would be more modest — roughly 2% for a note with a two-year maturity and 4.5% for one with five years to go before the principal would be repaid. Naturally, if rates rise more, bond prices drop even more.

Yet investors need bonds as part of their portfolio, even in an environment of rising interest rates, experts concur. The question is, how do you buy bonds that won't get trashed as interest rates rise? Here are some types of bonds to consider.

Look for a step-up. A number of issuers sell bonds that offer a fixed price for a set stretch of time, stepping up to better rates later, said Marilyn Cohen, author of "Bonds Now!" and chief of investment strategy at Envision Capital Management in Beverly Hills.

For instance, a new Fannie Mae "step-up" bond offers a 2% yield until November of 2011 but promises to pay 5% after that. The rate would rise to 6% in 2015 and to 7% in 2020. The catch? If market interest rates rise faster than the "step-up" on this bond, you're stuck with the lower rate and no way to sell without taking a hit on the bond's principal value.

Do you get the benefit of an above-market rate if market interest rates rise more slowly than the "step-up" schedule on the bond? Probably not, Cohen said. If interest rates are lower than the promised rate on the bond, the issuer has the right to "call" — or pay back — investors at any time, she said.

Check out floating rates. Corporate borrowers also issue some floating-rate debt that pays a variable interest rate based on an index, such as the London Interbank Offered Rate, or LIBOR, said Ann Benjamin, managing director and chief investment officer at Neuberger Berman, a New York-based investment firm.

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Personal Finance: How to shop for health care insurance - Sacramento Bee

Posted: 16 May 2010 12:04 AM PDT

Buying health insurance is no one's idea of fun.

But for many folks who have lost a job, just graduated from college or maxed out their COBRA, it's a necessity.

One of those is 60-year-old Nancy Thompson of Camino, who lost her shipping office job at Sierra Pacific's mill last year. This month, the COBRA health coverage from her former employer ran out.

Determined to stay covered, she went shopping for health insurance – online – and found it an unpleasant experience.

Using one of the many comparison sites for health insurance, she started filling out her online application. "It was overwhelming. There were so many questions and I started feeling uncomfortable," said Thompson. "I didn't even finish filling it out."

That's when the e-mails, phone calls and letters started arriving from brokers or agents eager to sign her up.

Frustrated, she opted to purchase a $541-a-month Aetna policy from a Citrus Heights insurance broker who came to her home. (Her husband, who is retired, has his own health coverage through Medicare.)

Her experience isn't unique.

"It can be a very onerous process," said Sam Gibbs, senior vice president of eHealthinsurance.com, a Mountain View-based online insurance website. "You have to fill out extensive medical questionnaires about doctor visits, prescriptions. … It takes some time and throws a lot of people off."

Many individuals qualify for a policy instantly, he said, but for those with complicated medical histories, "it can take weeks to get an answer back."

Despite the difficulties, most people can't risk going without insurance. Here's a rundown on how to look.

Try the group

Group plans usually offer the most affordable premiums. Pursue coverage offered by your employer, spouse, college alumni, professional or other membership group, such as AARP.

If your COBRA benefits are expiring, you might consider the state's program, Cal-COBRA, which covers individuals who lost their jobs at small companies (up to 19 employees), as well as those who exhausted their federal COBRA benefits. For details, go to www.healthhelp.ca.gov or call (888) 466-2219.

Call a broker

Whether it's done online, by phone or in person with an agent, consumers should do some homework before contacting a broker.

"Before handing over your personal information, it doesn't hurt to spend 45 seconds to check and see if a broker or agent is licensed or in good standing," said Darrel Ng, spokesman for the state Department of Insurance.

To check a broker's status, go to www.insurance.ca.gov (click on "Consumers") or call (800) 927-HELP.

The Department of Insurance's site also has a handy list of toll-free phone numbers and websites of the nearly 70 health insurance companies licensed in California, ranked by market share. There's also a scorecard to compare quotes from different insurers.

Online shopping

Sites like ehealthinsurance.com or myinsuranceexpert.com let you sort plans by deductible, premium price or other categories.

Pay attention to what's covered. The lowest premium, for instance, may carry a high deductible (the amount you spend out of pocket before insurance starts paying). And it may not include much or any coverage for prescriptions and hospital stays.

When we typed in a price quote for a single, nonsmoking female, age 27, for instance, there were 124 choices, ranging from a $54-per-month Anthem Blue Cross premium ($5,000 deductible and $40 office visits) to a $375-per-month Health Net premium (no deductible and $25 office visits).

But those premium quotes could change once your medical history is factored in.

"If you're young and very healthy, you may get a rate that is less than what's quoted. But if you're older and have medical conditions, you may have a rate that's slightly higher," said Gibbs.

HSAs

A Health Savings Account, or HSA, is tied to an insurance plan, where you set aside pre-tax dollars to pay for medical expenses. It's a high-deductible but low-premium plan. Since any unused amount rolls over every year and earns interest, HSAs are considered tax-free savings accounts, similar to an IRA, that can build up toward retirement or future medical bills.

High-risk pools

Starting in September, insurers will no longer be able to deny coverage because of pre-existing conditions.

Until then, people with such conditions still have options. The state currently covers up to 7,100 individuals and families under the Major Risk Medical Insurance Program, known as "Mister Mip." It's at www.mrmib.ca.gov.

California is setting up a second high-risk pool, funded with $761 million in federal health care overhaul funds. It will cover those who have been denied medical coverage and have been uninsured for at least six months.

"We're going to get it up and running as quickly as we can, because we recognize the need," said Jeanie Esajian, a deputy director with the state Managed Risk Medical Insurance Board.

Premium rates are still under discussion and will vary, depending on age and region. For more details, go to: http:www.hhs.gov/ociio/initiative/hi_risk_pool_facts.html

The 'Blue Book'

Another alternative is to pay cash and ask for a "fair price" from your doctors or medical providers, using the "Healthcare Blue Book," a medical pricing guide ranging from surgery to dental and eye care procedures.

It's especially helpful for those with high deductibles who are paying out-of-pocket and looking for affordable options. According to the Blue Book, prices quoted are the average amount that providers accept from insurers.

Some providers will discount a price if you ask. Details are at www.healthcarebluebook.com.

Overall, finding health insurance takes some diligence.

Thompson, who still gets one or two e-mails a week from insurers seeking her business, said she feels secure with the $2,500-deductible policy she purchased earlier this month.

"Thank God we've saved and can afford insurance," she said. "But what about the ones who can't?"

Have a personal finance question? Contact The Bee's Claudia Buck at (916) 321-1968.

Five Filters featured article: The Art of Looking Prime Ministerial - The 2010 UK General Election. Available tools: PDF Newspaper, Full Text RSS, Term Extraction.

Search for share prices - Yahoo Finance

Posted: 16 May 2010 09:15 AM PDT