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On CNBC: Is Amazon Worth $3 Trillion?

Amazon (AMZN) is firing on all cylinders right now. In a market really searching for a growth story, Amazon is providing it.

After smashing earnings estimates last month on the back of better than expected results from Amazon Web Services — and posting its most profitable quarter ever — the news kept on rolling in this week. Amazon is going head to head with Google’s YouTube with Amazon Video Direct. And Amazon’s AWS just inked a deal with Salesforce.com (CRM). Salesforce will build its Internet of Things cloud software to run in AWS.

AWS really is the big story here. Amazon’s “Walmart of the web” retail business has never been a high margin business and probably never will be. But AWS is. It’s Amazon’s most profitable business and also its fastest growing. Amazon’s total sales grew at a 28% clip. But AWS grew at a 64% growth rate and now make up 9% of total sales. As AWS grows into a larger piece of Amazon’s business, Amazon’s margins should improve.

That said, where does Amazon go from here? There has been talk that Amazon might beat Apple and Google to the punch and become the first trillion-dollar company by market cap. One gentleman even went on the record as saying Amazon would be a $3 trillion company by 2025.

But are these realistic numbers?

Today, Amazon is worth a little over $300 billion. Making it to a trillion-dollar market cap would mean more than tripling from here, and a three-trillion-dollar market cap would mean that Amazon stock rose by a factor of 10.

That MIGHT be possible. But with Amazon’s current valuation in nosebleed territory, that’s pretty ambitious. It essentially implies that Amazon will maintain a 28% compound annual growth rate for the next 9 years AND have no valuation multiple compression. I’m not saying that’s impossible. But is it likely? I wouldn’t bet on it.

All of that said, where does Amazon go from here? With few competing growth stories to get investors’ attention right now, I would expect Amazon to continue drifting higher. $800 by year end is realistic barring a major market correction. And Amazon might very well be the first trillion-dollar company at some point in the next 2-3 years.

Amazon looks expensive based on earnings with a trailing P/E ratio of over 500. But using the price/sales ratio, you could argue that Amazon is not unreasonably priced. Amazon trades for about 3 times sales. If Amazon is a retailer, that’s expensive. Walmart (WMT) and Target (TGT) barely fetch 1/6 of that valuation. But if you compare Amazon to tech companies like Microsoft (MSFT) or Google (GOOGL), which trade for 4-6 times sales, Amazon looks downright cheap.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing he had no position in any security mentioned in this article.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Beyond the 401k: Retirement Savings for the Rich

monopoly-man

Let me start by saying that I love the 401(k) plan. It’s the single best wealth accumulation vehicle available to the vast majority of Americans. At today’s contribution limits, you can defer $18,000 of income — and $24,000 if you’re 50 or older — tax free.

That’s great for middle-class Americans, and many can meet those goals with a little bit of discipline. But if you have an annual income of $500,000 or more, that amounts to a paltry savings rate of less than 4%. Any savings above that amount would be subject to punishingly high taxes…and even the dreaded ObamaCare surcharge.

Well, I have good news. If you earn a high income and own your own business (or are paid as a 1099 contractor), you have vastly superior savings options at your disposal. If done right, you can save well over $100,000 per year in tax-sheltered accounts.

This strategy is designed for the self-employed, but it can also work if you work for a paycheck but also earn additional income from a side business or additional contract income. A lot of doctors and consultants would fall under this umbrella.

We all know that the traditional defined benefit pension is dead. The days when your employer guaranteed you an income for life are now something we read about in history books.

Well, that might be true for corporate plans. But there is nothing stopping you from starting your pension for yourself and your spouse.

The One-Man Pension

The best retirement savings strategy is actually a combination of two separate vehicles:

  1. An Individual 401(k) plan with profit sharing
  2. A cash balance defined benefit pension plan

I’ll tackle the Individual (“Solo”) 401(k) plan first. Most investors consider a Solo 401(k) plan to be more or less interchangeable with a SEP IRA.

They’re wrong.

While both plans max out at $53,000 per year in contributions, the Solo 401(k) allows for front loading. I’ll explain with an example. Let’s say your business earns $100,000. With an SEP IRA, you can contribute 20%, or $20,000. This is a profit sharing contribution made on your behalf by your employer…which happens to be you.

With the Solo 401(k), you can make that same profit sharing contribution of $20,000. But you can also defer $18,000 of salary, for a total of $38,000.

Of course, we’re talking about high-income earners, and both the Solo 401(k) and the SEP IRA max out at $53,000 on incomes of $265,000.

So, if you earn $265,000 or more, the SEP IRA and Solo 401(k) are interchangeable, right?

Wrong!

If you save via a Solo 401(k), you are also eligible to contribute to a defined benefit plan. If you save via a SEP IRA, you cannot.

This brings me to the second prong of the retirement plan, the single-person defined benefit plan. Yes, you can actually make a traditional pension plan…for yourself. There are administrative fees involved, and you’ll want to hire a professional to draft the plan documents and monitor compliance. But doing all of this opens the door to massively increase your retirement savings.

Contribution levels here depend on your age and other actuarial assumptions, but this is how they shake out:

 

2016 Maximum Contributions to Cash Balance Pension

AgeMaximum Contribution
Source: Dedicated Defined Benefit Services
65$244,500
60$236,800
55$184,600
50$143,900
45$112,200
40$87,500
35$68,300

Putting It All Together

Combining the Solo 401(k) with the cash balance defined benefit plan is a little complicated, so I can’t stress enough the importance of hiring a knowledgeable pro to set it up correctly. But here are the basics.

Normally, you can contribute $18,000 in salary deferral and 20% of profits to a Solo 401(k) plan up to a maximum of $53,000. But if you also contribute to a cash balance pension plan, your profit sharing percentage gets bumped from 20% to 6%. That effective drops your $53,000 contribution to $33,900 if you’re under 50 and $39,900 if you’re 50 or older.

But here’s where it gets fun. If you’re 65 years old, your combined contribution to the Solo 401(k) and cash balance pension is a whopping  $284,400 ($244,500 cash balance + $39,900 401(k) plan). The numbers get smaller the younger you get, but at age 35 you can still contribute a not-too-shabby $102,200.

Is There A Downside?

So, stashing away multiple hundreds of thousands of dollars per year sounds pretty great, right? What’s the catch?

Believe it or not, there really isn’t one. There are costs, of course. Expect to pay $2,000 to $3,000 in administrative expenses. And you need to have a fairly consistent income in order to make this work, as there can be penalties for failing to make contributions. So the plan is clearly not for everyone.

But if you are a high-income American desperate to shield some of your savings from the tax man, this is the best combination I’ve seen.

Charles Sizemore is the principal of Sizemore Capital Management. If you are interested in the savings vehicles discussed in this article, contact his office.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Choosing the Best Online Brokerage Account

The quality of brokerage account services has really come a long way over the past 20 years, even while costs have shrunk to almost nothing. If you’re paying more than about $10 per trade… frankly, you’re doing it wrong.

Whether your beat is day trading or long-term stock trading, there has never been a better time to be an investor. Today, your biggest challenge is simply choosing where to open your brokerage account. There are so many quality brokers, it can be a little overwhelming.

Let’s take a look at some of the major players to break down the good, the bad, and the ugly.

BrokerCost per tradeMinimum depositDRIPAccess to foreign marketsNotes
Charles Schwab$8.95$1,000YesADRs and Canadian stocksSolid all-around broker and a good choice for casual traders
E*Trade$9.99$500YesExtensiveReasonable prices and good international access
Fidelity$7.95$2,500YesExtensiveA worthy competitior with an elegant and easy to use website
Interactive Brokers$0.005 per share, $1 minimum$10,000NoExtensiveBest for professional traders and managers. Lowest margin rates and best inventory of stocks for shorting
Scottrade$7.00$2,500YesADRs and Canadian stocksSolid option for casual traders and professionals alike
TD Ameritrade$9.990YesADRs Very solid all-around broker; added sophistication and social sharing with thinkorswim
TradeKing$4.95$0YesADRsSophisticated setup, best overall mobile experience
TradeStation$4.99$5,000NoADRsCost prohibitive $99.99 platform fee on accounts smaller than $100,000

Charles Schwab

I’ll start with Charles Schwab, the granddaddy of discount brokers. Four decades ago, Schwab effectively brought investing to the masses, making it easy and affordable for regular people to open a brokerage account. And today, Schwab remains an excellent option for ETF, bond and stock trading and mutual funds.

Charles Schwab is a good choice for a beginning investor or for an investor that trades relatively infrequently. Customer service is solid, and Schwab’s website interface is easy to navigate. The cost per trade is a modest $8.95, and the minimum to open a brokerage account is only $1,000. Schwab offers dividend reinvestment, which is a major plus for long-term investors.

If you are a fairly active trader

The only real downside to Schwab is that its international offerings are a little limited. You have access to ADRs and Canadian stocks, but not much else overseas.

E*Trade

E*Trade was an early pioneer in online stock trading, and it remains a very strong competitor today. Commissions are very reasonable at $9.99 per trade, and the minimum to open a brokerage account is only $500. (If you have less than $500 to invest, you probably have no business opening a brokerage account.)

E*Trade’s ease of use make it a very solid option for a beginning investor, but its range of products make it a viable choice for an active trader as well. E*Trade offers a broad selection of mutual funds and ETF. bond, and stock trading. Among all the brokers reviewed here, E*Trade also has some of the best exposure to international markets if your stock trading takes you overseas.

And finally, for the buy-and-hold investors out there, E*Trade offers automatic dividend reinvestment.

Fidelity

Fidelity has really come a long way in recent years. Not that long ago, Fidelity was almost exclusively a mutual fund shop. It’s not a place you would have normally gone to open a brokerage account. But today, Fidelity offers a very competitive product at a very reasonable price. Fidelity charges a very modest $7.95 per trade and has a $2,500 minimum deposit to open. Fidelity also offers extensive access to foreign markets and automatic dividend reinvestment for long-term investors.

For a beginning investor, Fidelity is a fine option, as its interface is easy to use. But for an experienced market veteran, Fidelity also has a robust enough platform to get the job done well.

Interactive Brokers

I can’t tell you which broker is the “best” because what works for one investor might not work for another. But I can definitely tell you which broker is best for me, and that would be Interactive Brokers.

If you’re into day trading or active stock trading, Interactive Brokers is almost always going to be the cheapest option for you. Stock trades are $0.005 per share with a minimum commission of $1 per trade. For a hypothetical 6 stock trades and two options trades per month, you’d be paying just $20 by Barron’s estimates.

If you short stocks or trade on margin regularly, then Interactive Brokers is the only obvious choice. Interactive Brokers is in a class of its own in terms of inventory of stocks available to short, and its margin rates are the lowest by far. Margin rates can get as low as 0.5%, though most investors will likely pay closer to 1.7%. As a frame of reference, margin rates at most of the other brokers are well over 7%.

But Interactive Brokers is not just the cheapest option. It’s also one of the best for experienced traders. You have unrivaled access to foreign markets as well as futures and foreign exchange. And Interactive Brokers also gives you access to complex order types that most brokers do not offer (market on close, market on open, pegged to midpoint, etc.)

Is there anything not to like?

Interactive Brokers’ Trader Workstation is designed for a professional investors, so it can be difficult for a beginner investor. I would go so far as to say that a beginner investor could get themselves into trouble with it.

Interactive Brokers also has a higher minimum deposit than most at $10,000, and it doesn’t offer dividend reinvestment. And if you don’t do at least $10 per month in trading, you’re subject to a $10 per month maintenance fee (this is waived on accounts greater than $100,000.)

So, if you’re an experienced, active trader, Interactive Brokers is a fine choice for your brokerage account. If you’re a novice or an infrequent trader that focuses more on dividend reinvestment, then it might not be best for you.

Scottrade

I might always be a little partial to Scottrade because that is where I opened my first brokerage account. It remains a very decent competitor today, with good customer service, and easy to use interface, and very modest stock trading commissions at $7 per trade.

The minimum deposit, at $2,500, is also very reasonable, and Scottrade has an interesting twist on dividend reinvestment. Rather than reinvest your dividends into the company that pays them, you can opt to automatically reinvest them elsewhere. For example, you can automatically reinvest your Microsoft (MSFT) dividend in Apple (AAPL), or vice versa.

Scottrade has also beefed up its trading tools for day traders and more active traders with its ScottradeELITE program. Its exposure to foreign markets is limited to ADRs and Canadian stocks, but overall, Scottrade is a very decent broker for beginners and pros alike.

TD Ameritrade

TD Ameritrade is a solid all-around option for your brokerage account. In addition to offering reasonable commissions at $9.99 per trade, TD Ameritrade has a large branch network, good customer service, and a website that is extremely easy to navigate. All of this makes TD Ameritrade a good option for a beginning investor.

But TD Ameritrade also has quite a few tools that make it appealing to advanced stock traders as well. Its thinkorswim platform, which can be thought of as sort of a collaborative social media for investing, is popular with do-it-yourselfers and professionals alike.

An underappreciated selling point of TD Ameritrade is that they are a little more accommodating than most discount brokers when it comes to housings non-traditional assets. If you invest in hedge funds, private REITs or other non-traded investments, TD is more likely than most of the rest to be able to actually hold them.

TradeKing

TradeKing is unique in that they were the first broker to really take a “mobile first” approach to design. Every broker I review here has at least functional smartphone and tablet apps, but in every other case the mobile experience is considered something of an afterthought. Not so with TradeKing. So, if mobile trading is a critical need for you, TradeKing is one you should seriously consider.

TradeKing also competes with TD Ameritrade’s thinkorswim in its social sharing capabilities.

Pricing is very reasonable at $4.95 per trade with no minimum to open an account. International trading is somewhat limited.

TradeStation

TradeStation is a popular option for active stock trading and day trading, and its users tend to be sophisticated investors. As with Interactive Brokers, TradeStation is definitely built with a professional trader in mind. TradeStation’s trading software is arguably even better than that of Interactive Brokers in terms of its customization, capabilities and tools. And TradeStation has the best backtesting tools on the market, hands down. If you want to build a trading system, TradeStation is generally your best option.

Commissions are very reasonable at $4.99 per trade, and investors have access to stocks, options, futures and forex all in a single brokerage account. But TradeStation can get very expensive if you have less than $100,000 in your account. Smaller accounts are subject to a $99.99 per month platform fee to use the trading software.

Access to international markets is also limited to ADRs.

But overall, if you have an account with at least $100,000 and you want a sophisticated trading setup, TradeStation is a very strong competitor.

Disclosures: I currently use Interactive Brokers and TD Ameritrade as my primary custodians.

Charles Sizemore is the principal of Sizemore Capital Management.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The 60/40 Portfolio Is Dead. Here Is Its Replacement

 

Why Invest in Alternatives?

You probably have a good grasp of why diversification is important. Throwing out the financial jargon, it essentially boils down to not putting all of your eggs in one basket. But it also gets a lot more sophisticated than that. Many investors feel that they have adequate diversification because their assets are spread across several stocks or mutual funds. And to an extent, they are right. Owning multiple stocks reduces the risk of downside from any single position.

But there is also a major problem with this: Correlation.

If Apple and Microsoft stock prices were to move together in lockstep, you wouldn’t be getting much in the way of diversification by owning both. And in a real bear market, virtually all stocks drop together.

True diversification means owning assets that do not move together. Investment A can go up, down or sideways, and it should have little or no impact on Investment B.

This is where the beauty of an alternative portfolio comes into play. A carefully constructed alternative portfolio will have assets that are minimally correlated to each other and to the stock market as a whole.

Why the 60/40 Portfolio is Dead

Alternative assets weren’t particularly popular in 1980. There is a reason for that. Back then, traditional bonds offered a respectable return. A blended 60/40 portfolio of stocks and bonds offered a solid expected return.

Flash forward to to present day. At current bond yields, investors will be lucky to get a 2% return in bonds. And compounding the situation, stocks are also expensive by historical measures and priced to deliver sub-par returns.

Slide3

Note: The Stock Earnings Yield is the inverse of the price/earnings ratio. The “Implied portfolio return” is a weighted average of the 10-year Treasury yield and the stock earnings yield. This is intended to be a rough approximation for future asset returns and is not intended to be a precise forecast. As always, past performance is no guarantee of future results.

 

Accepting a traditional asset allocation is accepting the possibility for disappointing returns in the years ahead. If you want better performance, we need to look elsewhere.

While ordinary investors have traditionally invested in stocks, bonds and CDs, wealthy investors and institutions have always had a broader allocation.Consider the case of the Harvard University endowment fund.

As of 2015, the Harvard endowment fund had only 33% of its funds in stocks. It has another 18% in private equity and 12% in real estate. The rest is spread across everything from timberland to absolute returns hedge funds. Let’s stop and ask an obvious question: If it’s good for trustees of Harvard, might it not also be good for you?

Harvard_Endowment

Source: Harvard Endowment Allocation http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf

 

Not all of the alternative investments discussed will be appropriate for all investors. But we believe strongly that every investor can benefit from a proper allocation to alternative investments.

Charles Sizemore is the principal of Sizemore Capital Management.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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