Thoughts on 3G Capital's LBO of Heinz or "Warrant" Buffett Strikes Again

On Feb 14 (last Thursday), Berkshire and 3G Capital announced that they agreed to acquire food company H.J. Heinz Co. for $23 billion in cash ($72.50 per share, a 20% premium to where the stock closed the day before).

Well, that's what the headlines would have you believe anyway. However, that is not what is happening. My headline is a bit more accurate. I'll explain below.

Initial read

I was pretty busy last Thursday so I didn't pay a whole lot of attention to the acquisition, but as may you know I'm a big Buffett buff and I made a mental note to take a closer look at the numbers at some point in the future. I like to check in on what smart people are valuing businesses at every now and then so I have a good market reference point in my head.

My initial assumption based on the headlines alone was that the deal made sense- Buffett loves these big, high quality brand name companies and Heinz seems to make sense as a piece of the portfolio alongside Wrigley, Coke, and Gillette. I also know Buffett likes to pay a reasonable for a business (read basically any book about him and you'll see some reference to the "margin of safety" concept he learned from Ben Graham) so I assumed that he got a good deal. I haven't really followed Heinz, so I thought that maybe the stock had been neglected and possibly didn't take part in the recent market rally.

Today I revisited the story, pulled open Heinz's last 10-K and realized that I was completely wrong. This was not an old-style Warren Buffett margin of safety "be greedy when others are fearful" acquisition of a great business at a substantial discount to intrinsic value. This was much more what I've come to think of as a "new style" Warren Buffett where he gets to put capital to use at rates no mere mortal can obtain. The price paid for Heinz was not a bargain from what I can see.

The price tag was high - 25x earnings!

Looking at Heinz's 2012 10-K (see page 33 for the income statement), the company earned about $939 million of net income for the year ended April 2012. I opened another couple of 10-Ks to look at the five year history, and net income averaged a bit below $939 million for this period, so I figured it was a pretty good number. Divide the purchase price of $23 billion by $939 million and you'll see the Buffett/3G team paid about 25 times trailing earnings for the company, not a low multiple by any stretch of the imagination. For the sake of comparision, Google sells for a similar multiple, is trading at an all time high, and though I'm getting out of my league here, I think it is considered more of a growth stock. Heinz does not make technology, it makes food products.

Going a few pages further in the 10-K, I figured I'd get a rough sense of what the company's free cash flow is. Take net income of $939 million, add back $300 million of depreciation, $50 million of amortization, deduct CAPEX of $400 million and you're at roughly $900 million of free cash flow. If you pay $23 billion for the company, $900 million of free cash flow equates to roughly a 4% yield. The multiple is still about the same, roughly 25x FCF. I also checked how FCF looked over the past five or six years, and again the average was below the current $900 million number.

I didn't create a DCF model of the company because I'd seen enough at this point and I didn't have the time to put into it, but I think if you do a DCF with some reasonable assumptions, you're not going to get to a $23 billion valuation for the company assuming things continue along as they have in the past.

I believe I read in the press that the price was something along the lines of 8x book value and 14x EBITDA, again generally high multiples (though book value isn't the greatest metric for a company like this).

Berkshire didn't buy the company, it bought half of the equity in the deal, plus high-yielding preferred and warrants as a kicker

Reading past the headlines of the articles, I realized that Berkshire's investment in the company wasn't purely an equity stake (like Buffett's investments in Coke, Gilette, Washington Post etc. that he became famous for). Instead, Berkshire is going to pay $8 billion for preferred stock in Heinz yielding 9%, and invest $4 billion of equity.

In addition, 3G is only investing $4 billion of equity and financing the rest. The company is also going to roll its current $5 billion of debt.

So doing some rough math, when the deal is complete, the capital structure will be something like:

$8 billion of equity
$8 billion of preferred stock
$12 billion of debt ($5 billion existing plus ~7 billion of new debt hence the "LBO")

Oh, and if you dig around, Buffett is also getting warrants to buy shares of the company. ("Warrant" Buffett also has Bank of America warrants, had Goldman warrants, and GE warrants). Terms of these warrants weren't disclosed.

Anyway the upshot of all of this is that if the deal is approved, Heinz will become a private company 50% owned by a PE firm with a history of cost cutting. It will have twice the debt load it had previously and its debt will be downgraded by the rating agencies, but as the LBO story goes, should be able to service the debt over time with steady cash flows thrown off by the business. It will enjoy levered returns for a few years, and then 3G will likely look for an exit, possibly selling its 50% stake to Berkshire. The company may be more profitable at that time.

In the meantime, Berkshire rakes in the 9% dividends on the preferred stock. Don't forget that preferred stock dividends enjoy a very favorable tax deduction for corporate owners, so Berkshire also gets to avoid some taxes it would have been hit by had it acquired Heinz outright.

And those warrants. Berkshire can maybe exercise those warrants someday.

Berkshire's price tag - more like 18x earnings, with upside

My final thought- Berkshire's earnings stream from the company will be as follows:

-$8 billion of preferred stock at 9% yield for $720 million a year in pretax preferred dividends
-Since generally 70% of preferred stock dividends are deductible for corporations, the effective tax rate on these dividends will be approximately 10%, for after-tax preferred dividends of about $650 million.
-Plus, Berkshire's 50% share of the company's earnings. This is a harder number to take a guess at but I'll do some extremely rough late-night math. $939 million of earnings in 2012. Subtract preferred dividends of $720 million and this leaves you with about $220 million of earnings. 2012 earnings include about $300 million of pretax interest expense. Since the debt load of the company is going to roughly double, lets assume interest expense doubles, to $600 million (since the rating will fall to junk, the rate on new debt will likely be higher and the cost of rolling old debt will be higher but im not going to get too precise here). Tax effecting the additional $300 million of interest expense at 30%, you get about a $210 million hit to after tax earnings, reducing the $220 million to $10 million of after-tax earnings. Buffett gets the right to half of that, roughly $5 million
-$650+5 = $655 million of after tax earnings per year
-Buffett invested $12 billion of cash
-This results in a P/E multiple of more like 18x earnings. Better than 25, but still not cheap.

Let me know if I missed something. It's late.

Smallcap Stock Screen - Investment Ideas

Although I don't recommend most people invest in individual stocks, I do keep a (very) small portion of my investable funds in an account I actively manage. My results have been decent. I have a few stocks I track regularly and have been in and out of them a few times over the years. I've also done some experimenting with options (failure), shorting (great success), and various other securities. At the moment, I'm about 50% cash in the account and have kept my eyes open for potential ideas.


(Note: almost everything (except for a long term holding or 2) in this account and every company mentioned below falls into the category of speculation, not investment. An investment, upon thorough analysis, promises security safety of principal and a satisfactory return.)


Though I try to stay away from the smaller end of the spectrum due to the higher risk I associate with tiny companies, I figured I might run a screen on the small end of the market to see what popped up. To that end, I did a screen of microcap stocks with market caps below $20 million, P/Es below 12x, 5 year average ROEs above 15%, trailing 12 months EPS above zero, and 5 year revenue growth above 10%.


The result was a list of 24 stocks for further investigation.


One thing that immediately stood out to me on the list was the pharmaceuticals. There were four of them on the list with similar sounding names: Huifeng Bio-Pharm (HFGB), Jiangbo Pharma (JGBO), Lotus Pharma (LTUS), and Skystar Bio-Pharm (SKBI). They all had P/E ratios of 1.13 or below and also made me immediately skeptical.


Starting at the beginning, I pulled up a yahoo finance quote on Skystar. The stock trades for $2.15 per share and had a 52 week high/low of $1.39 and $10.58, respectively. All else equal, I'd rather buy a stock at its high than its low, so this was a positive sign. I did a quick calculation and if I bought this stock today at $2.15 a share, then sold it for $10.58, I would make a 392% return. (conversely, the people who bought it at $10.58 and sold it today are looking at an 80% loss).


I also noticed it traded only 580 shares last friday, or about $1,200 of total volume, showing that the stock is very illiquid. If I owned shares of this company and needed to sell for any reason, the lack of potential buyers in the market could mean I would have to take a discount on the prevailing market price to sell them. Though this is a risk, you can also see this as a positive. If a lot of people aren't buying the stock, chances are very few people follow the company and you might notice something others have missed. If the stock ends up being a true winner, people will eventually come around to realize the value of the company


I have no idea what the company does, so I decided to pull up its most recent 10-K. They might as well paint a bird on this thing and fly it above Busch Stadium because it looks like one giant red flag to me. The first page was enough to turn me off, and this rarely happens to me:


"We were incorporated in Nevada on September 24, 1998. We are a holding company that, through our wholly owned subsidiaries in China, Skystar Bio Technology Co.(Skystar Jingzhou) and variable interest entity (“VIE”), Xi’an Tianxing Bio-Pharmaceutical Co., Ltd. (“Xi’an Tianxing”), researches, develops, manufactures, and distributes veterinary health care and medical care products in the People’s Republic of China (“PRC”).

All of our operations are carried out by our subsidiaries in China and Xi’an Tianxing, which the Company controls through contractual arrangements between Xi’an Tianxing and Sida Biotechnology (Xi’an) Co., Ltd. (“Sida”), the wholly owned subsidiary of Fortunate Time International Limited, the wholly-owned subsidiary of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar Cayman”), which became our wholly owned subsidiary in 2005.

Such contractual arrangements are necessary to comply with PRC laws limiting foreign ownership of certain companies.

Through these contractual arrangements, we have the ability to substantially influence Xi’an Tianxing’s daily operations and financial affairs, appoint its senior executives, and approve all matters requiring shareholder approval. As a result of these contractual arrangements, which enable us to control Xi’an Tianxing, we are considered the primary beneficiary of Xi’an Tianxing.

On August 21, 2007, Xi’an Tianxing invested $68,550 (RMB 500,000) to establish Shanghai Siqiang Biotechnological Company Limited (‘Shanghai Siqiang’). Xi’an Tianxing is the 100% shareholder. Shanghai Siqiang serves as a research and development center for Xi’an Tianxing to engage in research, development, production and sales of feed additives and veterinary disease diagnosis equipments."

In addition to Xi’an Tianxing, Skystar Jingzhou also manufactures and distributes veterinary medicines including aquaculture medicines in China."

So Skystar is an Arizona-based holding company that set up a complicated ownership structure to comply with (ie, get around) Chinese restrictions on foreign ownership of companies. The company's main line of business is selling veterinary health care and medical care products in China.

As a general rule, anything involving a Special Purpose Vehicle (SPV) or a Variable Interest Entity (VIE) makes me nervous. VIEs, as Bloomberg puts it, are a "post-Enron version of Special Purpose Vehicles." The fact that Xi'an is a VIE means that Skystar stands to benefit the most from the company, but it does not own more than 50% of the company. Only being able to "substantially influence" rather than "completely control" the company's main subsidiary is a huge red flag for me.

The page also referenced a Cayman Islands based corporation used as part of the ownership scheme.

All of this shit might be on the up-and-up, but the number of huge risks on page 1 of the 10-k are enough to make my head spin, and I haven't even gotten into the specific kinds of products the company sells yet. There's the risk of being tiny, the risk of doing business in China, the risk of not controlling your main source of income, etc. etc. After doing a little further research on the internet, I came across a publication about "Investing and Operating in Restricted Industries in China" It looks like this type of ownership structure has been put in place a number of times and as far as I can tell, it looks like a way for Chinese firms to raise capital from American and other investors.

A few other great tidbits from the 10-k: The company leases a building in China that the chairman owns for about $24,000 a year. The company also had accounting issues: "On December 17, 2010, the Company filed an 8K with the SEC disclosing the termination of Frazer Frost, LLP (“Frazer Frost”) as our independent auditors effective as of December 13, 2010." They replaced their auditors. They identified material weaknesses in their accounting and internal audit functions and finally, they disclosed this:

"Conflicts of interests between the duties of our officers and directors who are also management members of Xi’an Tianxing to our company and  Xi’an Tianxing may arise. As our directors and/or executive officer (in the case of Mr. Lu), they have a duty of loyalty and care to us under U.S.and Cayman Islands law when there are any potential conflicts of interests between our company and Xi’an Tianxing. We cannot assure you, however, that when conflicts of interest arise, these individuals will act completely in our interests or that conflicts of interests will be resolved in our favor. In addition, they could violate their legal duties by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between us and them, we would have to rely on legal proceedings, which could result in the disruption of our business."

I work at least 11 hours a day, 5 days a week. There is no way I am risking my hard earned money on an equity ownership interest in a setup like this. Even if the China operation does make enough money to one day pay some back to shareholders in the US, who knows if they will ever even be able to get the funds out of China without the government intervening? I'm passing on this one. Though the stock quote might go higher in the next few years, to me the risk is not worth the potential reward.

One thing I definitely do give the company credit for being straightforward and disclosing risks in its filing.

I think I've had enough smallcap action for one day. I assume the other pharma companies on this list are similar to Skystar and plan to report back any findings when I get the chance to look into them. Hopefully this gives you a sense for the kinds of things I look for in an investment/speculation. There will be many other pitches to swing at, so I dont mind letting this one go by. In this case, the ownership structure was so risky in my opinion that it didn't even matter what the financials looked like.

A few good reads

I came across a post by Jason Cohen called Rich vs. King in the Real World: Why I Sold my Company for the second time in the past few months today and highly recommend you check it out.

He talks about the way cash in the bank affects your lifestyle and makes the point that the relationship is not linear.

I'm now as jealous of Jason as I am of Scott Adams and his Dilbert Money, but I don't begrudge either of them their well earned financial freedom.

By the way, you are correct- I haven't posted anything in a long time. I'm still keeping up with the markets though. One blog I started reading regularly over the past few years is called Zero Hedge. I recommend you check it out if you're looking for some good reading. They write a lot more than I do and take an interesting, alternate view you won't see on a lot of the big financial news websites.

My comments on the current state of the market are as follows: I haven't seen a truly positive headline in years, gold is shooting through all time highs, interest rates are practically nothing, the dollar continues its decline, the US may default on its treasury debt, yet the equity markets have seen a strong rally since they recently bottomed out in 2009.

I'm most of the way through a pretty good book called More Money Than God: Hedge Funds and the Making of a New Elite (Council on Foreign Relations Books (Penguin Press)). It is a history of hedge funds, tracing managers and styles from the early days of the industry to today. In my opinion, the author has a pretty strong agenda - pushing his viewpoint that hedge funds are good for the economy and shouldn't be strongly regulated - but aside from the few opinion sections, the book is a great read sofar.

Warren Buffett's 2010 Letter to Berkshire Shareholders

So as of a couple of weeks ago, the market was up almost 100% since the 12 year low reached in March 2009. It was also up 7% since the beginning of this year. I have to agree with the headline in the linked article though- this feels like "the unhappiest bull market ever."

Maybe it is just what I focus on, but despite the numbers on the big board, all of the other news seems pretty negative for the average US investor. In fact, it's downright depressing if you think about it. For example, some of the major themes that have pounded into our skulls for the past couple of years are:

1) The FED has been printing money and flooding it into circulation, devaluing the US dollar
2) China's economy is going to overtake the US economy by 2018
3) We are entering a "New Normal" era of low stock returns, low GDP growth, deleveraging, etc. I think this view is most convincingly espoused by Bill Gross and his colleagues at PIMCO
4) The US government has bailed out shareholders at the expense of taxpayers, (more about that here and here, here (it bailed out people who couldnt pay for their mortgages also)). It also put other costly programs into place,
5) Based on pundit's views, state governments are headed for bankruptcy also
6) Stocks are overvalued  - note this is a more recent trend
7) Unemployment is high in the US. We are losing manufacturing jobs hand over fist. We no longer make stuff in the US, we are a "knowledge economy"
8) The rich are getting richer, at the expense of the poor

Oh, not to mention the social security crisis starting now as the baby boomer generation reaches retirement age and global warming (to anyone on either side of the debate, im not taking a stance on global warming, merely saying it is often in the news). These are all off the top of my head.

Combine these with the myriad personal financial problems each of us might be having - job security, sickness, disability, disease, divorce, credit card debt, foreclosure, car repairs, taxes, home maintenance, rent (which is too damn high by the way)- and it seems like the situation is pretty hopeless.

However, among this host of negative news, Warren Buffett's 2010 letter to shareholders arrived this weekend as a beacon of hope.

I suggest you read the letter yourself, but I just wanted to give you my $0.02 and call out some of the more interesting/informative parts of the letter.

Almost right off the bat, Buffett wrote something that you won't hear very often from the talking heads on CNBC in the current unhappy environment:

I agree with Warren and I don't share what seems to be the prevailing sentiment that the US is doomed to failure. This is why I invest the biggest portion of my retirement savings in US equity index funds. Put simply, I believe in the American system.

"Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders

for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

...We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead."

The next part of his letter that I liked (and anyone who has studied Buffett will be familiar with) is the section entitled "Intrinsic Value - Today and Tomorrow." In it, Warren talks about the three components of intrinsic value (which is the only value you should care about), specifically as it relates to Berkshire. You're better off getting the details from his letter, but I'd summarize the components as 1) Investments (stocks, bonds, cash equivalents) 2) earnings from sources other than investments and insurance underwriting and 3) (the most subjective category) "the efficacy with which retained earnings will be deployed in the future." I recommend you check that section out.

The highlight of the letter came near the end, however, in a section entitled "Life and Debt." Buffett reprinted a letter from his grandfather Ernest to his uncle Fred. In the letter, Ernest tells Fred that he has saved him $1,000 cash and is giving it to Fred on his 10th wedding anniversary. Ernest recommends Fred keep this money as a reserve in a safe deposit box so he can easily get at it. He writes "You might feel that this should be invested and bring you an income. Forget it -- the mental satisfaction of having $1,000.00 laid away where you can put your hands on it, is worth more than what interest it might bring..."

I checked an inflation calculator, and $1,000 back in 1939 would be the equivalent of about $15,425 today.

Buffett says they take a similar philosophy at Berkshire and will always keep $10 billion of liquid funds on their balance sheet in extremely safe but low yielding investments such as treasuries and other short term securities. He quoted investment advisor Ray DeVoe who said "More money has been lost reaching for yield than at the point of a gun."

Truer words have never been spoken, and although you hear it from most financial advisors, I'll say it again- build up your own reserve fund and put it somewhere you know you will be able to get at it. You will earn basically nothing for investing in treasuries or in your typical FDIC insured savings account right now, but you will sleep safely at night knowing that a financial setback won't knock you off your feet.

The rest of the letter hit on a number of the usual Berkshire areas: the difficulty of continuing to grow given Berkshire's huge size, the story of how he met Lorimer Davidson at GEICO, reviews of all of Berkshire's businesses, the often meaningless figure known as GAAP net income, Berkshire's culture, repeated requests to spend money at the annual meeting etc...

All in all, another great letter from the Oracle and well worth your time. I like to say that if I was only allowed to read one investment newsletter a year, it would be Buffett's shareholder letter. If you care about investing or saving, do yourself a favor and head over to http://www.berkshirehathaway.com/ and read this year's letter.

If you haven't read the previous years' letters, do that too.  

Richard Bernstein's Investment Guidelines

A blurb in the Wall Street Journal's "Heard on the Street" section caught my eye as I was on my way in to work last week:

"Overheard - Most people gush thanks (or occasionally spit bile) in their farewell address. Richard Bernstein, whose 20 years at Merrill Lynch drew to a close on Wednesday, went 10 steps further. In a final note, having thanked colleagues and clients, the bank's chief investment strategist signed off with 10 guidelines. All are worth remembering, but perhaps the last resonates strongest: 'Leverage gives the illusion of wealth. Saving is wealth.'"

This caught my eye and I made a mental note to see if I could find the complete list of 10. Lo and behold, through the magic of the Internet, I found the guidelines on seeking alpha.

They are the following: 

1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

2. Most stock market indicators have never actually been tested. Most don’t work.

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than income or cash-flow statements.

7. Investors should focus strongly on GAAP accounting and should pay little attention to “pro forma” or “unaudited” financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

I thought these were some pretty good observations. Number 1 definitely hit close to home for me. As I've grown my savings more over time and seen the impact a huge market downturn can have on the value of certain stocks, I've begun to pay a little more attention to income. Although I still believe capital gains are where the big payoff comes from in stocks, income is something tangible and shouldn't be overlooked. Number 5 is pretty important as well... over the past 2 years, people have seen every single asset class in their "diversified" portfolios sink almost in unison. Many were operating under an illusion of diversification and when the tide went out, we saw who wasn't wearing a bathing suit. 

I cocked my head sideways when I read number 4 because I think nothing fuels a bull market more than cheering and a rush to buy. I kind of see his point though. He is saying bull markets are more the result of assets being unfairly punished and undervalued prior to the bull market than the actual enthusiasm during the bull market. In my opinion, you can't have one without the other so this is kind of a circular argument.

This list reminded me of another post I made a while back on nine market lessons from John Dorfman, a Bloomberg columnist who retired a while back. For the sake of completeness and comparison, I list Dorfman's lessons here:

1) Out-of-favor stocks are the best road to capital gains.

2) Don't be swayed by what Wall Street analysts say.

3) High portfolio turnover is not necessary for good results.

4) The investment value of a stock is independent of whether it has been moving up or down.

5) Predicting the market with consistency is extremely difficult.

6) Predicting the economy is probably even harder.

7) High valuations alone aren't a good reason to sell a stock short.

8) High profits alone are no reason to invest in a stock.

9) Dialog with readers was one of the best parts of my experience as a columnist

Maybe one day I'll come up with my own list, but I have no plans to retire anytime soon :)

How Scott Adams Manages His Money

I came across an interesting blog post the other day... it was written by Scott Adams, the creator of Dilbert, describing how he manages his money.

Statements like this make me very jealous: 

"When I first started making serious Dilbert money, I let experts manage half of it, and I managed the rest, as a hedge against both the experts and myself."

Can you imagine making "Dilbert money"? Me neither. I'd imagine Dilbert money amounts to a pretty tidy sum.

But I digress. The part of the post that most interested me was this part: "The experts invested in Enron, Worldcom, and a number of other companies that promptly exploded. The experts reduced their portion of my money by about a third over five years. (The experts work for one of the most respected financial institutions on Earth, by the way.) My own investments did better, precisely because they were more diversified. So now I handle my own investments, probably incompetently."

I smiled when I read that. One of the biggest lessons the current financial crisis has driven home again and again is that nine times out of 10, the so-called "financial experts" aren't worth the paper their MBA degrees are printed on. Tens of examples appear in the papers every day. From the "geniuses" who created the whole mess by engineering clever securities to the Wall Street research analysts who scrambled to lower their price targets and ratings every time the market dropped 15% this year, the majority of "experts" were outed as frauds. If you had followed their advice, you would find yourself extremely poor right now.

I went to school with these people. I worked with them in investment banks and I worked for the companies they peddled their wares to. Half of the time I couldn't follow what they were saying and the other half I couldn't understand why someone would want to take the kinds of risks they were talking about taking, or why someone would want to hedge against the risks they were trying to get them to hedge against. Warren Buffett warned that derivatives were a "ticking time bomb" back in 2003 a warning that put a bad taste in my mouth for the "financial engineering" I was just beginning to get exposed to at the time. Derivatives and complex financial instruments got really popular though. The big stars at the companies I worked for were those who understood the lingo, who could create increasing layers of complexity to get around accounting rules and "redistribute" risk. Incidentally, these kinds of people were also the big stars at Enron. (And ended up being relocated for their troubles). 

I'm getting into rant territory, so I'll stop here. I realize a variation on this theme has been repeated thousands of times over the past hundred years or so. The most recent one I read was Andrew Lahde of Lahde capital, who wrote a similar rant when he recently quit his job. I highly recommend you read the letter he sent to his shareholders- if nothing else, it's quite an entertaining read. (And I think Lahde money would actually make me more jealous than Dilbert money.)

In an interesting twist, Adams ended his blog post with an endorsement for stocks: 

"In order to diversify more, I started migrating money over to the stock market during this recent plunge. The market could go a lot lower still, but this is either the beginning of the end of the United States as we know it, in which case it doesn't matter how I invested, or it is a once-in-a-lifetime stock buying opportunity. It was an easy decision."

Not quite the same reasoning Warren Buffett gave, but an endorsement nonetheless. When America's preeminent corporate cartoonist starts endorsing stocks, is it a buy signal? You make the call.

One final note: I received an email misinterpreting my prior post as "calling a market bottom." Re-read my posts. I would never call a market bottom. My argument is that stocks are selling at more attractive prices now than they were last year, but nobody is treating them that way.

Warren Buffett Recommends Buying American Stocks

I started this post on October 11th and never got around to finishing it. Fortunately, Warren Buffett himself finished it for me with his op-ed in the New York Times on October 16th. I can't say it any better than he did, so I'm not even going to try. Let me first show you what I wrote, then I'll add a link to Buffett's letter.

"I feel like I need to preface anything I write about investing in stocks with the following disclaimers:

1) You should only invest money you can afford to lose in the stock market

2) You should not have a high allocation to stocks if you are close to retirement

3) You should be prepared to see the value of your holdings drop 50% without worrying

That said, I want to make the following statement: now is a good time to buy stocks. And bonds.

How can I say this, when the markets are at 10 year lows and when we've had the worst week in history? Who am I to contradict the headlines?

Let me put it this way: were you happy buying stocks a year ago, when the market was at its peak and the dow was above 14,000? Chances are, you were. (I wasn't.)

When I see Tiffany & Co. selling for $22 a share.. it makes me happy."

I'm not calling a market bottom, and neither is Buffett. That said, people are now fearful and I'm happier in equities right now (see the three disclaimers above) than I am in anything else.

To see how he finished my post for me, I highly recommend you read Warren Buffett's Op-Ed in the New York Times.

What should I do with my 401(k) during the financial crisis?

The headlines are not good right now, for example:

• The New York Times: "Where to keep your cash as investments crash"
• CNN Money: "EU Policymakers worried about shaky financial markets"
• Reuters: "Wide financial sector fears to drive market"
• Bloomberg: "Greenspan says financial crisis may be 'Once in century' event"
• Associated Press "Emergency meeting on Lehman rescue resumes"

Major companies are failing (or at least, their futures are in question), for example:

• Above mentioned Lehman Brothers is frantically looking for a buyer. The company's stock has fallen from a 52-week high near $70 to last Friday's close of $3.78 per share.
• Washington Mutual has fallen from a 52-week high near $40 to Friday's close of $1.75 per share.
• American International Group has fallen from a 52-week high near $70 to last Friday's close of $11.49.
• The list goes on: Fannie Mae, Freddie Mac, Citigroup, Merrill Lynch and others

The fallout has been a decline in stock prices. My 401(k) is down 13% year to date, with the biggest percentage losses coming from the category of my international investments. My international fund is down 23% and my emerging markets fund is down 30%. The S&P 500 index fund which holds the bulk of my assets is down just about 13%. My best performer by far is the fixed income fund That's up 3.7 year to date. My account value is about $63,000, with a loss of approximately $9,000 year to date.

So I'm giving in. On Monday morning I plan to sell everything and put all of my money into the fixed income fund. The stock market is rigged in favor of the rich. I'm going to wait until we hit bottom and then put all of my money back into stocks.

Just kidding. If you've been paying any attention to my posts about my investment philosophy, I am fully prepared for years like the one we're currently having. If you want to put your money in stocks, you have to have the stomach to watch the value of your holdings drop 50% without batting an eyelash. The current market environment is nothing new. Between now and 30 years from now, I expect stocks to perform better than my alternatives: bonds, bank accounts, gold, cash, etc... They are not going to go up every year.

So what should you do? Besides rebalancing if your holdings have strayed 5 percentage points or more from your target allocation, I recommend doing absolutely nothing. Keep buying more stock at cheaper prices. When we have our next inevidable bull market, you'll be happy you did. More importantly, when you retire, you will have more money than you would if you put your money into bonds over the years.

Of course, if you have 5 years or less until retirement, the above does not apply. If you have a long time until retirement, however, rest easy.

I also think this is a great opportunity for active investors. Some great companies are getting battered by the headlines above. Mr. Market is running scared and doing foolish things. I personally don't have the time to study and make individual stock selections, but if you do, I'd imagine you can find some pretty attractive bargains in this market.

What is the best money advice you've ever received?

I recently read an article on Yahoo about the smartest money advice some people ever got and I found it interesting. I always enjoy reading things like that. My favorite was "Don't Follow the Herd" by Robert Schiller:

People do not trust their own judgment but go along with the crowd, even when they can see truth. In a world populated with such people, there are investing opportunities for people who make the effort and do the work see clearly for themselves.

After reading it, I started thinking to myself - what's the best money advice I ever got? I thought back to the books I read that first got me interested in investing years back and all of the Warren Buffett and Peter Lynch nuggets I know by heart. I thought about Peter Lynch's admonishment not to put any money you will need in 3 years or so in the stock market. I thought about Buffett's quote that "investing is most intelligent when it is most businesslike." I thought about a book I read recently- The Richest Man in Babylon by George Clason and the simple investing lessons it offers. (By the way, I liked this book.)

I thought about all of those things, then I realized they weren't really advice, they were just things I read in books. Then I realized the best advice I ever got was the example of my parents while I was growing up. They never had big salaries, but they were frugal and worked hard to send my brothers and sisters and I through school. They never wasted money on fancy things like new cars. They never got me the newest fad in sneakers, and I was always one of the last people to get the new video game console. I didn't like it then, but I appreciate it now.

What is the best money advice you've ever received? I welcome you to share it below. And before you point it out- admittedly, my answer was kind of a cop out but trying to come up with the best single piece of advice I ever received would be kind of like trying to pick the best movie I've ever seen, or the best book I've ever read... way too difficult to pick one but I could rattle off the top 20 or so if I took some time to do it.

To get the juices flowing, here are some more "best money advice" articles, in no particular order:

The Best Financial Advice Ever
Advice from the always-interesting Free Money Finance
The Best Investment Advice I Ever Received - this one is a link to a book on Amazon that I'm thinking about either getting or borrowing from the library. Check out the "Search Inside" feature for some previews.

Profiting From the Bear Stearns Trade

So we all know that JP Morgan offered to buy Bear Stearns for $2 a share a week or so ago. And by now we also know that JP Morgan increased its bid to $10 a share a few days ago.

This seems like one of the easiest "quick buck" trading opportunities I've seen in a long time, for anyone brave enough to have acted on it. When the initial $2 bid came out, it was so grossly low that many people (myself included) initially thought it was a typo. Bear Stearns employees thought it was crazy, many analysts thought it was crazy, media pundits thought it was crazy, and the market also thought it was crazy... bidding up the stock so it traded at or around the $6 a share level (give or take a few).

It would have been easy to place a bet on an increased bid by buying the stock or the calls after the initial announcement and selling them after the bid went to $10.

"If it was so easy, why didn't you do it, moneyman?"

Well for one, I'm really not a trader by nature. I do have a small trading account so that I can nibble here and there, but I don't have any cash in the account right now. For another, it would have been very risky. In hindsight it's pretty easy to have seen this coming, but before an offer comes out in writing, you're treading on thin ice. If the market had taken a nosedive, or if the due diligence process showed some more skeletons in Bear's closet, that increased bid may have never materialized.

Still, I follow the stock market pretty closely and this was one of those rare situations where it seems like EVERYBODY saw it coming. I'm sure plenty of people profited from the Bear Stearns trade over the past week or so. Even so- many, many more lost their shirts in Bear Stearns stock over the past few years, most notably the employees, most of whom will be laid off sometime in the near future.

401(k) In the Red

I have to admit, it's a strange experience to log in and see my 401(k) balance squarely in the red. My total portfolio has lost 9.6% of its value sofar this year, with my small-cap funds (13% of my current balance) down about 14%, my index fund (60% of my current balance) down 9.5%, my international funds down about 7% and my fixed income fund (3% of my current balance) up .3%.

Everything is down except for my fixed income fund. If you recall from my 2006 year in review, I historically haven't even had any fixed income allocation in my retirement account. However, I added some in '06, my reasoning being that "I decided to put a small amount of my retirement money in a fixed income fund purely for the sake of diversification so that in the years when equities are in the red (and I know these years are coming!), I will be able to look at my portfolio and see that at least one of my investments is up. The fixed income fund underperformed my stock investments this year, returning 5%."

I guess that time has come! These days, I almost wish I'd put even more into the fixed income fund back then :)

In a way, I am thoroughly entertained by everything going on in the market right now. It was easy to see we were in the midst of a housing bubble, and it was even easier to see that we were in the midst of a credit bubble. I've written about both over the past few years. For people in my age group, these are the second and third bubbles we've had the fortune of observing (the first being tech stocks in the late 1990s). I guess the moral of the story is that if it seems too good to be true (housing prices increasing 20+% every year, tech stocks increasing 50%+ per year, credit being incredibly easy to obtain), stay away from it. If you time it right in the short term you might do well, but you have to get out at the right time. I don't think anyone out there can time markets successfully on a consistent basis, so you're better off not even trying.

By the way, a brief update on Moody's: the stock is sitting right near a 52 week low just under $34 a share. I don't want to jinx it, but I have been picking some up in my trading account. Remember its extremely risky to put money into individual stocks. I'm only investing an amount I could comfortably lose without losing any sleep. MCO reports earnings in the early part of next month and I anticipate some reaction (positive or negative) to the reported earnings as well as the outlook. If you take a step back from the current environment you'll see a company generating good free cash flow and high margins. As long as it survives the current significant threats, I think the company will continue to show great returns and hopefully the market will reward this.

How Many Ounces of Gold Does It Take to Buy the Average House?

Investmenttools.com has some pretty interesting housing price graphs. One of them shows how many ounces of gold it has taken to buy the average house over the years.

Another shows how many shares of the Dow Jones Industrial Average it takes to buy the average house. It's interesting to note that chart looks very different from how many US dollars it takes to buy the average house. Back around 1980, it looks like it would have taken about 110 shares of the DJIA to buy the average house, whereas now it is more like 22 shares. This shows how much stock price increases have outpaced housing price increases over the past 25 years or so.

As a side note- amid all of the doom and gloom, the index fund that 60% of my 401(k) contributions are going into has returned 8.7% this year. It seems like the sky was falling for some reason or another every week this year (primarily because of subprime headlines). All of the resets, the foreclosures, the dollar falling etc... and yet a stock market index fund still quite handily beat returns on most other financial products such as CDs and savings accounts. Thanks to my modest allocation to international and emerging markets funds (up about 16% and 50%, respectively), my overall 401(k) portfolio is up 11.3% on the year. Not too shabby.

The State of the Markets

So what are the current key themes in the market? I'll tell you what I have my eye on lately:

1) The subprime mortgage fallout and its continued impact on the financial markets. Lately the big news is I-Bank writedowns. Merrill Lynch happened to report its earnings a little later than some of its peers, but I'm sure there are more Merrill-type announcements to come. Citigroup is getting rid of Chuck Prince, Merrill tossed Stan O'Neal (and paid him a ridiculous $160 million to leave), and there's more to come.

2) The decline of the dollar. I think it now costs about $1.05 to buy a Canadian Loonie (Canadian Dollar). It's still falling against the Euro and other major currencies as well.

3) The ridiculous performance of emerging markets. My emerging markets mutual fund is up over 50% this year, on top of gains in the 30% area for the past few years. These things are really overheating. China's stock market has also seen a tremendous rise and it really reminds me of NASDAQ 1999 (ie a bubble).

4) Commodity prices. Oil is somewhere around $95 a barrel now. It's gone up like a rocket in the past couple of years. Gold hit $810 an ounce this week, its highest level since 1980.

Financial stocks have been selling off lately. I don't recommend investing in individual stocks, but if you dabble in the market like I do, you might want to take a look at Moody's Corp. (NYSE: MCO), which has fallen to what I consider to be tantalizing levels in the low $40 per share range. For a long term investor, this might be one of those rare opportunities to pick up shares of a company that enjoys a unique, semi-monopoly position in its market. Of course, it has it's share of risks. Securities issuance has fallen dramatatically in certain segments of the market, and there's always a regulatory threat hanging over the company. I believe Warren Buffett's Berkshire Hathaway owns some MCO shares, based on some things I've read.

The Cost of Market Timing

I've come across a bunch of studies that show how costly it is to try to time the market by buying and selling stocks in the hopes of buying "low" and selling "high," and they've been very convincing. I've never come across such a clear example as what happened in my own 401(k) account not too long ago.

On September 17th of this year, the value of my 401(k) was $52,000. I had enjoyed an ok 6.6% return for the year, based on the strong performance of my international funds and the pretty good performance of my domestic equity index funds. The common stock index fund that represents 60% of my assets in that account was up 6.1% on the year.

Those of you who follow the Fed pretty closely will remember what happened on September 18th. Ben Bernanke cut the discount rate and the fed funds by 50 basis points, 25 more basis points than forecast, and the market ate it up. I posted briefly on it here.

When I checked my 401(k) balance at the end of the day on Sept. 18, it was worth about $53,330, a gain of $1,330. My return was now 10.3% on the year, as the equity index fund rose to a 10.4% return on the year (International stocks hadn't had a chance to respond to the cuts during the day so they underperformed, relatively speaking).

What a difference a day makes. If I hadn't been invested on the 18th, I would have been kicking myself. Of course, there will be days the market takes a big hit in the other direction and I would have been better off with my money in cash, but I believe the big long-term trend is higher and I'm willing to take some volatility along the way in order to build a big nest egg for my retirement. (And based on what's happening with social security, it looks like I will definitely need a big one.)

I guess the moral of the story is, yet again, don't try to time the market. You'll miss out on the big days.

What if the doom and gloom scenarios come true?

If you're an American and you've read the newspaper, or Web sites, or heard people talking lately, chances are you're aware of the major "doom and gloom" economic themes that have surfaced over the past couple of years, and in many cases, intensified over the past few months.


I would put them into three broad categories, which are all interrelated. The first is the housing market collapse, the second is turmoil in the credit markets affecting the international financial markets, and the third is the decline of the dollar (which many say is caused by the budget deficit).


As I was driving home from Dunkin Donuts on a cool Sunday morning in New York City, I passed a bank and recalled a story I'd read the previous Friday describing an old fashioned "run on the bank" that happened in England last week. I thought to myself "What if all of these dire predictions come true?"


I don't think everything is going to collapse like everyone says it will. The US economy has survived a huge number of similar scares in the past and over time our standard of living has increased, stocks have gone up, and people who have worked hard and had some luck have been able to become successful. I consider myself one of these people. For as much as I feel like I'm priced out of the home buying market, I am fortunate enough to have worked my way through college and grad school and into a relatively high paying job as compared to average salaries thorughout the country as a whole.


However, as a thought exercise, I wondered, if someone knew now that all of these things were going to come to fruition, what could they do in advance of the coming crash?

Problem: The declining value of the US dollar.

Fallout: USD paper money is nearly worthless. As confidence in the dollar declines, it will take more dollars to buy the same amount of goods and stores will raise prices to the extent that it would take a barrel full of them to buy a loaf of bread. The government will print up even more dollars and compound the problem. Your bank accounts and 401(k)s, which are denominated in dollars, are worth nothing. Banks fail and depositors lose their life savings.

What you can do now: Put half of your savings in non-USD denominated accounts and buy gold and other assets that will not depreciate along with the dollar. One place to open up an account denominated in a foreign currency is Everbank. Research the economies of different countries, but if I was going to put money into 3 currencies right now, I would probably pick the Canadian dollar, the Australian dollar, and Japanese yen, with other candidates being the Euro and the New Zealand dollar. Put another portion of your savings into gold. I did an entire post about buying gold that you might want to take a look at.

This Motley Fool article has another suggestion- buying stock in companies whose earnings are denominated in foreign currencies in order to squeeze more gains out of the weakening dollar.

Problem: The rising price of oil.


Fallout: It becomes prohibitively expensive to use oil. You won't be able to heat your house in the winter. You won't be able to afford to drive a car.

What you can do now: Investigate moving to a more temperate climate, such as the southern part of the country, where you won't need heating oil. Start riding your bike to work to strengthen your leg muscles and increase your aerobic capacity. Buy shares in an oil company, oil futures or oil HLDRS, so that when the price of the commodity increases, the value of your holdings also increases. Explore the use of solar power (which looks expensive now, but won't when oil doubles or triples). Maybe give one of these solar showers a shot.


Problem: Falling Housing Prices


Fallout: The value of your home drops. The value of your investment property drops. You don't want to live there anymore, and nobody wants to buy it from you. You can't sell it for enough money to pay off your mortgage.

What you can do now: First of all, let me just say that if you bought a house you couldn't afford, you're dumb. If you're fortunate enough to be able to keep up the payments and just live there, then don't worry about the value of your house declining. If you're not selling or buying something, you don't care about what its value is, you care about the cost of ownership. So, ignore the news about home prices if you like living there and can make your payments.

If you have to sell for some reason, I can't really think of anything special beyond the basic real estate ideas to increase your home's curb appeal and stage it etc...

The other thing you can do now is to carefully evaluate real estate prices and mortgage options BEFORE you buy a house. Don't pay the ridiculous prices. Don't get an adjustable-rate mortgage that can reset to a rate that will be unaffordable for you. Put simply: don't buy something you can't afford.

Those are just some brief thoughts I had. Of course you can also just go the direct route of shorting the dollar, buying oil and gold, buying credit default swaps (if you have enough money- these products are more for institutional investors), and shorting the stocks of home builders and mortgage lenders. I'm sure there are a ton of other options. If you think of any good ones, or disagree with the above feel add comments on this post.

Fed Cuts Discount Rate

The Federal reserve cut the discount rate by a surprising 50 basis points today (most people were only expecting 25 basis points). You can see more detail on bankrate.com's fedwatch page. I was sitting front of a live market feed when the announcement came out. I highly recommend this if you follow the market at all. It's one of the few things you're pretty sure will make stocks move, happens in the middle of the day, and you know well in advance that a rate decision (one way or another) is coming at that time. Stocks soared and volume took off.

I don't have strong feelings one way or another. I thought they might cut 50 basis points due to all of the doom and gloom financial stories that have been going around lately. I hoped they wouldn't lower the rate at all because it seems like people have this crazy expectation that investments they own shouldn't have to go down in value and that Fed rate cuts exist to protect them from losses.

Anyway, my advice doesn't change: keep contributing to your retirement accounts.

Market Turmoil

I love the recent market turmoil. Yes, the value of my 401(k) has been going down, but I am not looking to access those funds for another 30 years or more, so I don't give a toss about these little intra-year selloffs. The DJIA broke through 14,000 a few weeks ago, and it closed under 13,000 yesterday for the first time in a while. People are flocking to invest their money in treasury bonds, causing yields to drop. There is also some speculation that if the market weakness keeps up, the Fed will lower interest rates at its next meeting.

I think that falling yields bring up an interesting scenario for someone with an ING Direct or an Emigrant Direct savings account. If the fed does lower rates, there's a good chance that these banks will lower the interest rates they credit on their savings accounts and the interest rates they offer on their CDs. If you think that this is going to happen, and you have some cash that you aren't going to need for a year or so, you might want to think about putting your money into a one-to-two year CD right now to lock in the higher rates.

I won't say that's definitely the move you should make right now because I don't even try to forecast the way interest rates will move in the next year given how impossible that stuff is to predict with any reliability. All I'm saying is this is something that could happen and you might want to consider doing with a portion of money that you're not going to need for the next year or two. I'm still debating doing it myself, but I don't think rates are going to fall dramatically.

Just wanted to mention one other thing. A stock that I wish I'd bought a long time ago, Moody's Corp (NYSE: MCO) has fallen on hard times lately. Moody's is basically a monopoly-type business, the kind of business that Warren Buffett loves (and he owns a good chunk of MCO stock as well). Investors have sort of been losing confidence in Moody's and other rating agencies lately due to percieved conflicts of interest and quality of ratings. (Do a search for "constant proportion debt obligations" and "moody's" to see an example of this.) It bears further investigation!

Anyway, don't worry about the market's decline. Just watch as you accumulate even more shares of your S&P Index fund.

Fast Money is one of the worst shows on TV

I've posted about this before, but the show "Fast Money" with Dylan "The Rat" Ratigan is definitely still one of the worst shows on television.

I happened to be flipping by it tonight and the guys were laughing about the Chinese exec that hung himself due to high levels of lead paint in certain toys. The big bald headed guy made a comment along the lines of how 'those high product quality standards wouldn't fly in the US' or something like that. They were all chuckling.

I watch a few minutes of this show every now and then and all it is is a bunch of trumped-up sensationalism. At least Cramer knows what he's talking about. Dylan Ratigan is just a complete loser who knows absolutely nothing about investing. I don't know what kind of person would watch this show and bet on stocks because of it, but I'm guessing it might be the same kind of person that hangs out at the off track betting place all day.

I just had to rant here. This show is CNBC's blatant attempt at capturing ratings by making a show in the style of Jim Cramer's Mad Money, but it is just a big pile of crap. None of the guys really know what they're talking about, they don't give any real recommendations, they only talk about short-term things, and Dylan "The Rat" Ratigan is not only unlikeable, he's also ridiculously unqualified to be running a show like that.

Do yourself a favor- do not watch this show.

A slower paced show, but one that is much more worthy of your time because it actually discusses business issues and strategy, I happened by an episode of "Digital Age" this weekend where the host interviewed Mary Meeker on Google and the future of the Internet. If you have a few minutes, this episode is available on YouTube, and it's worth watching. The host sort of freaked me out a bit with his incredibly stiff face and delivery, but Meeker's insights are really great. You can access this episode of the show here.

Glad my down payment savings are in cash/Some current investment ideas

The recent market turbulence has made me even happier that I keep the bulk of my down payment savings in an ING direct account. I currently have about $128,000 in deposits at ING Direct, the vast majority of which is in my Electric Orange account earning a 5.30% APY. Sure, this isn't a fantastic return, but this is money I am going to need within the next couple of years in order to make a down payment on a house, pay for moving expenses, new furniture, etc... When the market slides, I can be glad that no matter what, when I went to my account balance on August 11 (this morning), I would have about $180 in interest accrued to me. If I don't add to my balance, it goes up by about $500 a month due to interest earnings.

Of course, I do have a big chunk of my networth in the market, but this is mainly my retirement savings, which I think will do better in stocks over the next 30 years than it would do in a savings account or in fixed income instruments.

My thoughts on the recent market turmoil? I am not very worried. Markets fluctuate, sometimes dramatically. Don't turn into a lemming and follow the market off of the cliff (if that's where it ends up going). If you invest in individual stocks, however, let the gloom and doom work to your advantage. Get greedy when other people run scared. If you see a great company being unfairly punished, buy some stock or add to your position.

I think that over the next year or two, there is going to be a really good buying opportunity for some of the homebuilders such as Lennar, DR Horton, Pulte Homes etc... It could be right now, it could be next week, or it could be a year from now. I can't predict that with any certainty, however, I can definitely say that there is a considerable amount of uncertainty over these companies right now. I dipped my toe into the water by buying some long dated DR Horton options that are currently worth about 50% less than I paid for them a few months ago (allthough they do not expire for another couple of years, so they might turn out to be a smart purchase yet!) I was definitely early in buying those options, and as Bill Miller put it recently- being early is sometimes the same thing as being wrong.

If you're interested in looking into investing in homebuilders, I recommend you read this article about Bill Miller's early call on buying these stocks.

There are a few good quotes in there, notably:

Investing in an industry or company amid its worst performance in years or
decades can, though not always, prove quite profitable if the performance isn't
measured in days or months, Miller said.

"The headlines today are all about this being the worst housing market
since the early 1990s. Had you bought housing stocks during that previous period
of duress, you would have made many times your money and handily outperformed
the market over the subsequent decade," he said.

Another company I've had my eye on lately is Universal Technical Institute (NYSE:UTI), a small cap company (about $500m market cap) that runs automotive training schools and has a contract with NASCAR. The Motley Fool introduced me to this one. I haven't had a chance to look into it too much, but over the past week or so, the stock has taken a big hit that seems less related to the company's prospects than it does to the overall market decline. It's definitely worth further investigation.

Markets Head South

We haven't seen market declines like this since February. As I noted recently, interest rates are rising. This has pushed treasuries up to 5%, and as a result will or has already pushed up rates on everything else that is based off of treasuries (mortgages, car loans, personal loans etc...).

In theory, this makes people sit back and say to themselves "Self, the stock market has been going gangbusters for a while, maybe that guaranteed 5% yield is a good deal for now. I'm going to sell my stocks and buy me a bond instead."

Should you do this with your 401(k)?

My answer is no. If you have at least 5-10 years before you retire, you have a long term outlook and you should own some stocks. If you have only 5-10 years, you shouldnt be heavily weighted in stocks, but I don't see the current weakness as a reason to sell.

If you have like 30 years before you retire (like me), just keep your contributions pouring in. You won't regret it as your money compounds over the next 30 years.

Stock prices and bond yields both currently reflect a ton of optimism. A bit of pessimism every now and then is a healthy thing.