Arithmetic Versus Geometric Returns

As the quote often attributed to Mark Twain goes "It is difficult to make predictions, especially about the future." Nowhere is this statement more relevant than making predictions about the stock market. In a recent discussion of future stock market returns, a 12 percent market return going forward was proposed. What is more dangerous is that an 8 percent withdrawal rate for a retirement portfolio was suggested.

You already know that the roughly 12 percent arithmetic average since 1926 overstates the average return for a longer period because a weighted arithmetic/geometric average using Blume's formula is more appropriate for longer horizons. We should also point out the danger of withdrawing funds. Suppose you started withdrawing 8 percent of your initial portfolio value in 2008, when the market lost about 37 percent. At the end of the year, you only have about 55 percent of your original portfolio left, so you have much less money left to go up with a good market return. Research indicates that a withdrawal of 3 to 5 percent of the initial portfolio value is much more likely to support your retirement withdrawals, even with a 12 percent arithmetic average market.

We would also like to ask you a trivia question: When did the S&P 500 begin? Although you may think 1926 since that is the beginning of the data used in the textbook, Ibbotson and Associates create a proxy for the S&P 500 back to that date. Actually, the S&P 500 was launched on March 4, 1957.

CEO Pay Season

Proxy filings for many major U.S. corporations occur in the spring, which means the top earning CEO list comes out. Larry Ellison, CEO of Oracle, again heads the list, earning $78.4 million during 2013. However, Salesforce CEO Mark Benioff may have been paid more by some measures. Benioff's 2013 pay of $31.3 million puts him as the 8th highest paid CEO, but Benioff's compensation was a staggering 57 percent of Salesforce's cash flow and over 12 percent of sales. And Facebook paid out 11 percent of sales and 20 percent of cash flow. By any measure, these pay packages seem to be an extraordinarily high percentage of sales and cash flow.

Hillshire Becomes Target Rather Than Bidder

Hillshire Brands' potential acquisition of Pinnacle Foods received a fair amount of stockholder criticism. Now, shareholders are seeing a jump in Hillshire's stock price as the company has agreed to talk with Pilgrim's Pride and Tyson Foods after each of those companies have made bids in excess of $6 billion to buy Hillshire. If Hillshire's shareholders decide to vote in favor of either acquisition, they could also vote against the acquisition of Pinnacle Foods, allowing Hillshire to get out of the Pinnacle purchase. If this does happen, Pinnacle would receive $163 million as a breakup fee. 

Bank Of America Tumbles

Bank of America (BAC) announced that it would halt plans to buy back its stock and would not increase its dividend. The change was because BAC found an accounting mistake that reduced its capital by $4 billion. Because of banking regulations, BAC has to receive approval from the Fed to increase dividends or repurchase stock. In a previous attempt to increase dividends, the Fed miscalculated BAC's capital. As you would expect, the news affected the stock price, with a drop of over 6 percent on the day.

Are You A Better Investor Than A 6th Grader?

A 6th grade class from Fargo, North Dakota, recently trounced the competitors in a stock picking competition that included groups from major universities. The students' portfolio included many companies that were familiar to them, including Netflix, Starbucks, and Under Armour. The 6th graders' portfolio had a return of 22 percent since creation, outpacing the McIntire Investment Institute's 18.5 percent return. Maybe these students will be the future Warren Buffett or Peter Lynch. Then again, as one student said, "I think it was sheer luck."

Lands' End Goes It Alone

Sears Holdings spun off Lands' End today, although the new stock was greeted poorly by the market. In early trading, the price of Lands' End stock dropped about 7 percent, while Sears' stock increased about 1.5 percent. Sears had originally purchased Lands' End for about $2 billion in 2002. The move is designed to allow Sears to focus on its core operations. Before the split, Lands' End paid a dividend of $500 million to Sears and the hedge fund run by Eddie Lampert, CEO of Sears, will retain about 49 percent of the stock in Lands' End, about the same percentage it has in Sears Holdings. Although you know that diversification is not a good reason for a merger, the diversification benefit of this particular spin off may be even greater than normal. Sears lost about $1.4 billion last year and there is speculation that the company may be forced into bankruptcy. In the event that Sears does file bankruptcy, the assets of Lands' End will no longer be included in the assets of Sears Holdings.

Corporate Cash Balances Rise

At the end of 2013, nonfinancial U.S. corporations held $1.64 trillion in cash, a 12 percent increase from 2012. Apple's cash hoard reached $158.8 billion, or about 9.7 percent of all corporate cash assets. Additionally, U.S. based multinationals have $1.95 trillion outside of the country. Much of the increase in international cash balances was driven by Microsoft, Apple, and IBM.