Archive for April, 2013


April 12, 2013

Over the years we have covered the distressing difference between how mutual funds’ perform and the poorer results investors in those same funds get. We call it the underperformance gap. It’s not just fees, trading costs and taxes that explain the difference: a huge factor is investor behavior.

The moral to this story is: if you can’t take the heat, stay out of the kitchen and before you invest make sure a fund’s personality matches your own.


Ken Heebner: Bullish on Banking

April 12, 2013

On this week’s CONSUELO MACK WEALTHTRACK, legendary portfolio manager Ken Heebner is known for his big bets and rapid trading at the CGM funds . This week he describes his contrarian views on the U.S. economy and stocks, particularly housing and banking, and why he thinks bonds are so dangerous. Continue Reading »

Ken Heebner Transcript 4/12/2013 #942

April 12, 2013

CONSUELO MACK: This week on WEALTHTRACK, extreme investing with Great Investor, Ken Heebner. Capital Growth Management’s legendary portfolio manager has reached performance peaks and plunged to valley lows over the years. What investments is he scaling now? Find out next on Consuelo Mack WEALTHTRACK.


Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. The bulls are back. U.S. equity funds posted their biggest quarterly inflows in nine years in the first three months of this year. According to TrimTabs Investment Research, $52 billion flowed into U.S. stock mutual funds and ETFs. To put that into context, investors withdrew a total of $87 billion from U.S. stock funds in all of last year. But the renewed interest comes with a twist. Investors are favoring exchange traded funds, the bulk of which represent passive index funds over the mostly actively managed mutual funds.


Over the past year, U.S. equity ETFs saw $80 billion in net inflows, while U.S. stock mutual funds experienced outflows of $120 billion! Investors are voting against active managers because they’ve done so poorly over the last decade. According to InvestmentNews, only 38% of large cap managers beat the S&P 500 over the last ten years, only 31% beat the market over the last five years, and only 18% did so in the past three years. And a tiny 9% of large cap managers beat the market in all three periods.


This week’s guest is a legendary and active mutual fund manager. He is Ken Heebner, co-founder and portfolio manager at Capital Growth Management where he runs three mutual funds: CGM Mutual, Realty, and Focus. Heebner is known for his concentrated holdings, aggressive bets, high turnover, and extreme performance, both on the upside and downside. He reached rock star status among investment professionals with CGM Focus, which was the number one U.S. stock mutual fund for the decade ending in 2007. A dramatic decline in 2008 and a subsequent five year underperformance has caused an investor exodus, but his 10 and 15 year track records are far superior to the markets, and put him in the top one percent of his peers. He won’t discuss his funds specifically, but he has strong views on the markets and investing. I began the interview by asking him why he believes this is an exceptional opportunity for investing in U.S. stocks.


KEN HEEBNER: The United States economy has considerable excess capacity. The economy’s been growing at about two percent. I think that growth rate’s going to accelerate. And we can grow for several years. I furthermore think that when you look at the huge pool of global wealth that’s been created after the Soviet Union collapsed and billions of people became highly productive. We’ve created global wealth that’s searching for a place to invest. And today, looking around the world, the economies of Europe are declining, there’s questions about what kind of growth Japan can continue to do. But in the United States, the growth is going to get stronger because of the positive impact of rising house prices on an economy that tends to grow anyway unless it’s faced with terrible obstacles, of which I do not see one right now.


CONSUELO MACK: Why do you think housing is going to be stronger than the consensus believes?


KEN HEEBNER: I think we have a significant shortage of housing in the United States today. We had a surplus in ’05 but as… as housing started to collapse, we brought production of new houses down to a level far below the annual growth and demand from the population. And as a result of that, we have a shortage and the housing industry is cut back capacity severely. You have it not only in terms of less labor now than they had, but additionally the housing industry takes years to entitle land, develop it into lots, put it in the infrastructure and then start to build houses.


And as a result of that, the housing industry is going to be constrained in its ability to meet demand. Today, if you think housing formations are one or two… a million two or a million three a year and housing starts are at $900,000, we’re way below the annual growth and demand, so the shortage is getting more intense every year. The result of this is going to be rising prices. In a lot of parts of the country housing prices are down 25 to 50%. The arithmetic is if we’re going back where we were, they have to go up 50 to 100%. And that’s going to happen sooner rather than later in my opinion. But the impact of this is going to be that the balance sheets of people are going to improve. A lot less people will have their house under water in three years from now. Additionally, a lot of people are going to have significant appreciation in the value of their biggest asset. The consequence is going to be a big increase in consumer confidence and financial strength and the ability to spend.


And the consumer’s going to surprise on the upside over the next several years. We’re starting from a growth rate of two to three percent, depending which economist you talk to. It could be four, it could be five. And that is going to be a magnet for this huge pool of global money.


CONSUELO MACK: So U.S. stocks in particular, I mean we’ve had 100% plus gains in the stock market since the March ’09 lows. We have new records being hit by the S&P and the Dow. So I mean how much more upside is there left in the U.S. stock market?


KEN HEEBNER: When you talk about how much it’s up, the starting point was 680 on the S&P 500, which was the lowest it had been since the depression practically. Therefore… that’s a really low base. The fact of the matter is if earning grow for several years at a 10 or 15% rate of the PE ratio could go up a certain amount, you could see the stock market two or three years from now 50% higher. Now that’s not a huge number and who knows when you have something driven by a huge pool of global wealth and you can catch, you can perceive strong forces pushing a market higher. It’s hard to know how high that could be. Maybe the stock market will get too high four years from now but I’ll deal with that problem when it happens.


CONSUELO MACK: You know, one of the things you’re also known for is identifying big themes. And so one of your big themes then is this housing, resurgence in housing, right?


KEN HEEBNER: I think it’s the single most important factor causing economic activity and the stock market to surprise on the upside.


CONSUELO MACK: So what are some of the other big investment themes that you’re tracking?


KEN HEEBNER: We have consolidation in industries in America and it varies in terms of its importance but you’re talking airlines, rent-a-cars. These are industries where there are a lot fewer companies doing the same thing and that means that margins are going to be higher. Corporate profits are benefitting from very strong productivity growth and low inflation on the labor front. So these are all forces causing profit margins to stay high and go higher than they’ve been.


CONSUELO MACK: Now another industry that you and I had talked about earlier that has gone through a massive restructuring is the banking industry. And you are actually positive about the U.S. banking industry?


KEN HEEBNER: Now here is one where the market has not recognized in the big global banks the very positive changes. What you read in the newspaper is the regulators don’t like these companies, they’re after them, the plaintiff’s attorneys are ganging up on them, there’s tens of billions of dollars of settled claims and future claims against these companies.




KEN HEEBNER: It’s all true. But when you look at the PE ratios of these big banks, they are well below where they’ve ever been. Not ever been, they’re up from the lows, but they’re low by historical standards. They are big beneficiaries of the problems in Europe. They compete with the European banks, which have serious problems, which are remaining strong, which are remaining operative. So there’s market share opportunities and then the banking industry, we now have five banks with about… the five biggest banks have about 50% of the deposits. That’s a level of consolidation we’ve never seen before so that you’ve got a much better profit outlook and you also have low PE ratios.


Now additionally, the regulators have been demanding. But what the regulators have wanted to do was build fortress balance sheets, and they’ve been taking measures against the banks, against the shareholders of the banks to cause the banks to build up equity. Well, they’ve done that. The equity, the ratios of the banks are getting to levels where the regulators might not let the banks go crazy in terms of activities but they’re not going to, they’re going to relax a level of restraint. So that business opportunities are stronger than they’ve been, the pricing power is going to be stronger than it’s been for the banks and the regulators, they’re not going to be generous to the banks, but they’ll be less harsh.


CONSUELO MACK: So interesting. So we’re talking about Citigroup and we’re talking about J.P. Morgan Chase and we’re talking Wells Fargo, Bank of America, the big banks that you think everyone has completely discredited, you think there’s opportunity there.


KEN HEEBNER: And I’d throw Morgan Stanley in and Goldman Sachs. Now admittedly Goldman Sachs is opaque because they don’t really tell us how they make their money. So on that one you’ve just got figure they’re as smart as they’ve always been and they won’t tell us anymore about how they make their money than they did three or four years ago but that they’ll keep doing what they’ve always done.


In the case of Morgan Stanley, you have a company which has focused on wealth management and which was able to buy Solomon Smith Barney from Citigroup when the regulators were pressuring Citigroup to strengthen its balance sheet on extremely favorable terms. And this is a business, which commands a 20 PE in general, asset management, whereas I don’t think the global banking business because of all the issues will… it doesn’t have that high a PE but now half the revenues in Morgan Stanley come from wealth management. So you’re not only going to see surprising earnings but you’re also going to see the potential for a very substantial PE upgrade. And people don’t like the company. They say…


CONSUELO MACK: They sure don’t.


KEN HEEBNER: And they… it may be that Mr. Gorman does not have the most winning personality, I don’t know, but I think he’s a very smart guy and I think he’s making all the right moves. And he’s focused on the shareholder.


CONSUELO MACK: You have a very high turnover in your portfolios at Capital Growth Management. So how do you as an investor reconcile these long term trends that you’re seeing with your very distinctive style of rapid fire trading?


KEN HEEBNER: Well, in terms of individual stocks, I have a very aggressive sell discipline. If a company does not meet my expectations, it gets sold.




KEN HEEBNER: Quickly. But there are companies where they perform and they stay in the portfolio. So in reality a portion of the portfolio is turning over faster than the average and there’s not a lot of stocks, but some of the stocks, the ones that really turn out to surprise me on the upside… when I buy a stock it never works exactly as I think. It either get better or worse but the ones that get worse go out and there’s a few that get so much better that they stay there for a number of years.


CONSUELO MACK: That’s so interesting because a number of people that I’ve talked to before I interviewed you said… and we’ve asked them what’s the question that you want to ask Ken Heebner. And one of the questions is how does he describe his investment style?


KEN HEEBNER: I look for situations where I think the fundamentals are a lot better than everybody else thinks they are. I wish there were more of them. I’d say the big investment banks are in that category today. If you ask me about home builders, it’s a more mixed picture because the stocks are way off their lows, there has been acceptance of the idea in the investment community that the home building industry is going to have strong volume growth and strong pricing over the next several years. But here I think the results are going to be much stronger than people think. People are looking at what the gross margins were at the top and I think those gross margins are going to be exceeded because the supply demand relationships in this business for new homes are going to be far stronger the next several years than they were at the peak of the bubble. That doesn’t mean we’ll be producing more houses. We don’t get to that level of production.


But the imbalances of supply and demand are so substantial and the consolidation in the home building industry is significant enough that the pricing power of the homebuilders will be far stronger in the next several years than it was at the peak of the bubble and therefore higher margins. And the margins were 25% back then. That’s not… you look around business where there’s a tight supply demand relationship, 25% is a low gross margin for that kind of environment.


CONSUELO MACK: How do you view the airline industry, which Warren Buffet said he won’t ever touch again, but we’ve seen tremendous consolidation?


KEN HEEBNER: Now the airline industry is… that’s a very interesting question. Six months ago, I would have told you people don’t believe consolidation is going to benefit this industry. Well, in December, in Boston when you’re having a dinner for investors, people don’t want to come out. Well, in December, I went to a dinner and there were a dozen people there and all the biggest investment companies… this is for an airline analyst, and all the biggest investment companies were represented there. And I said well gosh, this is not an industry that people are skeptical about. So I have mixed feelings toward the airline industry today.


I think there has been huge consolidation and I think it is a better business, but the crowd seems to see that, so it’s a toughie. But basically the view that the airline industry is attractive because the consolidation is not a contrarian view. So that takes some of the juice out of the argument for me. I mean, but if you said that about a big bank, no, no, people don’t want to own those.


CONSUELO MACK: So no one’s going to the bank analyst meetings.


KEN HEEBNER: Yeah, I haven’t been to any dinners for banks. And when I… if I go to one, I’ll say well, I don’t know, too many people agree with me, I’m getting nervous.


CONSUELO MACK: So the Heebner indicator is what the attendance is at an analyst…


KEN HEEBNER: Well, I wouldn’t put it that way, there’s a lot more to it than that. But like when this one firm is telling me oh, people are getting comfortable with that, with owning airlines. The generalists are coming to… are starting to… are asking questions of the analyst. Normally we just get the airline analyst at the big buy side companies. Now the generalists are asking questions. And I don’t like to hear that.


CONSUELO MACK: Let me ask you about another characteristic that you’re known for, and that is having a very concentrated portfolio. So… and you’ve been investing like that for a long time Instead of being broadly diversified like a lot of other money managers are, you really are focused. So why is that? What led you to that?


KEN HEEBNER: What I … I look at the risk/reward ratio. I look at all the things we’re talking about. And all situations are not created equal. Usually there’s a half dozen or 10 that stand out that are… where the risk/reward is really stacked in favor of the buyer. And they’re the ones I want in my portfolio. There’s another 20 or 30 or 40 that I want to own, but it’s… the fact that there often are some really exceptional risk/reward ratios out there when I look at it, and so I want to give those as much of a weight in the portfolio as I can. And so that’s why I concentrate.


When I first started out as an assistant portfolio manager in 1973, they handed me a portfolio with 70 stocks. And as I studied them I could see that a couple of them looked really good and the others weren’t as good. So why hold the ones that weren’t as good? Now the side effect is volatility that exceeds everybody else’s portfolio. And if someone wants to be close to the market for a month or a quarter in their performance, my portfolios… they don’t want to get anywhere near my portfolios. And you can’t… and they’re very… and you get short term performance or even for a year or a two at a time, which is so out of sync with everybody else’s portfolio that people say well, there’s something different here and I don’t like it. But I believe it creates the greatest long-term opportunity.


CONSUELO MACK: Because it’s so interesting, somebody described you as… your performance, which has been extraordinary over the years as extreme performance. So looking at the financial crisis for instance… were there any lessons that you learned from the financial crisis in running portfolios?


KEN HEEBNER: There is a very interesting case, because my portfolios were heavily concentrated in commodity-oriented stocks. When I took those positions, for instance when I believed in the early 00s that the price of oil was going to go over 30 and keep going, no one agreed with me. But by the time we got to ’07, people thought it was going… well, in July of ’08, Goldman Sachs came out and said the price of oil is going… they recommended oil stocks with the price of $147. Goldman Sachs had a dinner and there were 25 people there to hear why we ought to, why the oil price was a buy at $147. So I should have come back from that dinner and said wait a minute, I should get nervous here because too many people agree with me.


CONSUELO MACK: So where, what are you nervous about right now? It’s the bond market, right, that you think is very dangerous?


KEN HEEBNER: That’s right. I would guess that if somehow you could have a dinner for people about bonds, you’d have 100 people at the dinner. The problem for bonds is that interest rates have been driven to the current level by fears of weak economic activity which I think are unfounded and the buying of the central banks around the world. The United States has been doing it heavily. It never done … our government has never been a massive buyer of bonds in the last 50 years the way they are today.


Now the Japanese are doing it. The ECB has talked about it on conditional terms and bought some sovereign bonds. However, global economic activity is going be growing, inflation is rising and the way to look at bonds is three… there should be a 300%, a three percentage point premium over the long-term risk-free bond should sell at 300 basis points above the inflation rate. Well, I think the inflation rate globally is one or two percent, it’s going higher. So long term, 30-year bonds bought a yield of four to five percent.


CONSUELO MACK: And you’re known for taking a big short position against the 30-year treasury bond.


KEN HEEBNER: Yeah, I have shorted the 30-year treasury but the first point I want to make is in no way do I have any hesitation about the credit of the United States of America. I think our country’s got a great future and I think we’re going to solve our fiscal problems. I believe that with inflation moving up from a two percent level, the bond should yield five percent or more. If it yields three or less, I think the price of the bond is going to decline and it’s going to decline far more than the coupon of three percent. Now when is this going to happen to the extent that… when you get these excesses and these bubbles, the timing is very hard and it’s very painful because they keep going up… if you’re short, it goes up in your face. But I think when the reward comes, it’ll be very substantial.


CONSUELO MACK: It’s going to be very substantial if you’re shorting, it’s going to be hurt a lot if you’re long bonds, which a lot of investors are.


KEN HEEBNER: Right. And investors tend to be very comfortable buying something that’s been going up in price, that’s given them a successful experience. And the bond, I remember when treasury bonds yielded 15% in 1981.


CONSUELO MACK: And no one wanted to get near them.


KEN HEEBNER: And no one… and I was recommending treasury bonds in 1981 and I remember being called in to the board of trustees… had their law firm and they were debating whether buying these bonds at 15% yield was too risky to put in a fund. And they ultimately let me do it, but here we are and the long-term bond yields less than three, and I think that the investors who’ve had a great experience in the bond market have been buying bonds among other reasons because they’ve had a great total return experience driven by price as well as coupon. And when the price starts to go down and they start to look at losses, they’re going to exit. So I think that bonds are a bad place to be and I think that money’s going to go into stocks.


CONSUELO MACK: We’ll leave it there. Ken Heebner from Capital Growth Management. Thank you so much for joining us on WEALTHTRACK.


At the conclusion of every WEALTHTRACK, we give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: make sure you and your investments match, in substance, style, and personality.


Over the years we have covered the distressing difference between how mutual funds perform and the poorer results investors in those same funds get. We call it the underperformance gap. It’s not just fees, trading costs, and taxes that explain the difference. A huge factor is investor behavior. Ken Heebner’s CGM Focus fund is a classic example.


Over the last decade, the fund delivered impressive double digit annualized returns, outpacing the market. But according to Morningstar’s calculations, investors in the fund had a far less positive experience, a big underperformance gap. Investors poured into the fund after one of its fantastic winning streaks, and then bailed out in droves after its dramatic decline in 2008. Thus, investors completely missed the great long term performance. The moral of this story is: if you can’t take the heat, stay out of the kitchen. And before you invest, make sure a fund’s personality matches your own.


Next week we’re going to talk to someone we think is a next generation Financial Thought Leader. We have a rare interview with Ben Inker, co-head of asset allocation at investment management firm GMO. If you’ve missed any of our past Great Investor or Financial Thought Leader guests, you can find them on our website,, and get some personal insights into what makes them tick in our WEALTHTRACK Extra feature. In the meantime, thank you so much for taking the time to visit with us. Have a great week, and make it a profitable and a productive one.


Harold Evensky: The Questions You Should Ask Your Financial Advisor

April 5, 2013
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Harold Evensky: Afraid of Outliving Your Retirement Savings?

April 5, 2013

You are not alone! Recently we learned some distressing news about the state of retirement finances from the acknowledged experts in the field, the Employee Benefit Research Institute.

EBRI, as it is called, released its 23rd annual “Retirement Confidence Survey” which gauges the views and attitudes of both working-age and retired Americans. Even with the economy improving, the state of retirement planning and preparedness has not. The percentage of workers confident about having enough money for a comfortable retirement is essentially unchanged from the record lows of 2011. One of EBRI’s most shocking findings was the lack of even a short-term financial cushion for many. Only 50% of workers and 52% of retirees say they could definitely come up with $2,000 if an unexpected need arose within the next month. Continue Reading »

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