In The Headlines

Stock Ownership Among Older Americans Fuels the Wealth Gap

Stock OwnershipU.S. stocks have more than tripled in value since 2009, but the bull market has left a lot of Americans behind. In almost every age group, the share of families owning equities—either directly or through funds and retirement accounts—declined from 2007 to 2016, according to the Federal Reserve’s most recent Survey of Consumer Finances. There is one prominent exception: households headed by someone 75 or older. Almost 49% of those households own stocks, up from 40% in 2007, just before the financial crisis, and about 35% in 2013, as many Americans were still recovering from the wreckage. It is the highest number since the Fed began its triennial report on Americans and their money in 1989.

The top rate of stock ownership, 58%, is among families headed by people 55 to 64, just before traditional retirement age. Retired investors have historically been conservative. While stocks can provide larger returns over the long term, they are prone to dramatic crashes—like the more than 50% drop in the 2007-09 bear market—and an octogenarian does not have decades to wait for a rebound. Retirees often rely on their investments for income and emergency expenses. But the numbers suggest a generational change: Americans who have relied less on traditional pensions and more on 401(k)s and individual retirement accounts are aging into the 75-plus group.

Financial advisers say there is also a particular reason some retirees are choosing stocks now. “There’s a lack of alternatives out there,” says Austin Frye, a financial planner at Frye Financial Center in Aventura, Fla. Yields on bonds are at near-record lows, while the most generous banks pay savers rates of barely 1% per year. As a result, dividend-paying stocks have become popular among seniors because they generate income.

Older investors do not necessarily deserve their reputation for being cautious and risk-averse, says John Grable, a professor of financial planning at the University of Georgia who studies risk tolerance. They “often have more knowledge, experience, and a wider perspective than others,” he says. Almost all investors remember the tech bubble and the financial crisis. Seniors also remember the roaring bull markets of the ’80s and ’90s. Frye says his older clients are “very comfortable with stocks because they’ve been investing in them for a lifetime.”

Older investors have also had more time to build up a nest egg, giving some of them “the financial resources to withstand a potential loss,” Grable says. The wealth gap between the oldest and youngest Americans widened to the largest on record in 2016, with the typical household headed by someone 75 or older boasting a net worth more than 24 times that of one headed by a person under 35.

Why are younger Americans less likely to own stocks today than in 2007? Part of the blame may go to the lingering trauma of the financial crisis. But workers have also faced a sluggish pace of wage growth throughout the economic recovery. That, combined with record levels of student debt, has made it difficult for young households to save and invest at all. While median wealth for the oldest cohort of Americans is up 7% from 2007, it’s down 20% for the youngest, after adjusting for inflation.

As a group, the oldest Americans now have an unprecedented amount of wealth, which many are eager to pass on to future generations of their families. If a retiree’s goal is passing on an inheritance or giving to charity, taking risks in the stock market may be appropriate. For many seniors, however, leaving a legacy ought to be a secondary goal to providing for their own livelihood, says Allan Roth, a financial planner at Wealth Logic LLC in Colorado Springs. And he warns that too many older Americans are placing a dangerous bet by loading up on stocks. “It’s a very risky world,” says Roth. At some point, “markets are going to plunge,” he says, and there’s no guarantee that they’ll recover as quickly as they did after the last two crashes.


  1. – BusinessWeek
  2. – Gallup News

World Book: The Return of the (Print) Encyclopedia?

EncyclopediaWarren Buffett has an eclectic taste in companies. Along with large, thriving businesses such as Geico and the BNSF Railway, he has accumulated a collection of head-scratchers. There is a bowling shoe brand, a maker of vacuum cleaner bags, almost three dozen newspapers, and the manufacturer of Ginsu knives. Then there is World Book. Once sold to millions of American families, its encyclopedias were described by Buffett as “something special” when he acquired the company. And for years he was not wrong. The business mattered enough to break out its earnings in annual reports for his Berkshire Hathaway Inc.—$32 million before taxes in 1990 alone. With the ascent of the personal computer and the internet in the 1990s, sales plunged, but Buffett let the business plod along. As Berkshire grew, World Book’s results became a rounding error.

Yet here more than three decades later, as World Book celebrates its 100th anniversary, its continued existence highlights a quirk of the Berkshire method: One of the world’s greatest investors has created a conglomerate that holds on to a bunch of companies that are well past their prime. “Because of his model, he’s got many more rounding errors in there than he might have wanted,” says Steve Wallman, a longtime Berkshire investor and money manager in Wisconsin. “He’s spent a lot of time around businesses that were dead or were thought to be dead.”

Buffett contends that this loyalty helps him buy more companies. The conglomerate, he has said, has no “exit strategy” for the businesses it buys—it does not flip acquisitions for a quick profit. “That’s one reason why Berkshire is usually the first—and sometimes the only—choice for sellers and their managers,” he wrote to shareholders in 2003. And it is hard to argue with Buffett’s success: A hundred dollars invested in Berkshire when he took control in 1965 is worth more than $2 million today. For the people running these companies, though, it creates a challenge. How do you rally staff at a business that’s faded and is in search of relevance?

At World Book, this task has fallen to Jim O’Rourke, a 46-year-old media executive who joined three years ago. World Book is still published in paper form—you can buy it for $999—though the company long ago shifted focus to selling online subscriptions to libraries and schools. It also publishes books besides encyclopedias. But that is not exactly a growth strategy. O’Rourke is trying to draw consumers back. In August the company launched a mobile app and online portal called World Book WOW that packages its voluminous content, along with e-books and games, for third- to eighth-graders. It costs $7.95 a month, and so far more than 10,000 have subscribed. “My main competitor is distraction—kids playing Xbox games, Snapchat,” says O’Rourke, who sports an Apple Watch and works in an uncluttered office with views of the Chicago River.

When the first edition of the World Book came out in 1917, its illustrations were as cutting-edge as today’s virtual-reality video games. By the late 1950s, the company was printing more than half a million sets a year, many of which were sold door to door. At one point the sales force numbered more than 40,000. And then there were the publicity stunts: In the 1960s the publisher sponsored a search for the Loch Ness Monster in Scotland and sent explorer Sir Edmund Hillary on a nine-month expedition to Mount Everest to look for the Yeti. That neither creature was ever found did nothing to lessen the buzz such spectacles created.

In the late 1970s, Scott Fetzer Co., a small conglomerate in Ohio best known for Kirby vacuum cleaners, bought World Book. The marriage wasn’t so strange: Kirby, like World Book sets, were sold door to door and had steep price tags. Families often financed the purchase of both products, and providing loans was a lucrative side business. That combination piqued Buffett’s interest, and in 1985 he bought the company. World Book, he noted at the time, racked up more sales in the U.S. than its four largest competitors combined. Then came the onslaught: first CD-ROMs such as Microsoft Corp.’s Encarta and later the rise of Wikipedia. World Book had become the “most difficult problem” for Berkshire, Buffett wrote as early as 1996. By the time O’Rourke arrived, the publisher was a shadow of its former self. The company still stubbornly printed its flagship encyclopedia and annual updates called Year Books, even though Encyclopaedia Britannica had announced two years earlier that it would no longer issue a print edition.

It is early, but O’Rourke has been getting results. Margins have improved over the past three years, in part because of cost-cutting. Revenue is also up, climbing 9% last year, he says, while declining to give the amount. Operating income has grown 40 percent since the end of 2014. Still, it is tough to compete with the latest from Silicon Valley when you are a 100-year-old publisher with an owner who is unlikely to plow a lot more money into the business. A bit of help is coming from an unlikely source: After decades of declines, sales of print encyclopedias rose last year and are projected to do so again. Why? It does not hurt that World Book is the last of its kind, a multivolume encyclopedia that is updated each year. “As long as we’re profitable doing it and we continue to publish a great product,” O’Rourke says, “We’re going to keep doing it.”


  1. – Bloomberg

The Good News Is . . .

Good News• Orders for non-defense capital goods excluding aircraft, usually seen as a measure of business spending plans, rose 0.3% in October. Orders for the so-called core capital goods surged 2.3% in September. Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, advanced 1.1% in October. Core capital goods shipments increased 1.3 percent in September. Business spending on equipment increased at its fastest pace in three years in the third quarter. That is helping to underpin manufacturing, which makes up about 12% of the U.S. economy
• John Wiley & Sons Inc., global research and learning company, reported earnings of $1.03 per share, an increase of 32.1% over year-earlier earnings of $0.78 per share. The firm’s earnings topped the consensus estimate of analysts by $0.21. The company reported revenues of $451.7 million, an increase of 6.1%. Management attributed the results to growth in its research and publishing segments, as well as strengthening its education services / online business.
• CVS Health said that it has agreed to buy Aetna for about $69 billion in a deal that would combine the drugstore giant with one of the biggest health insurers in the United States and has the potential to reshape the nation’s healthcare industry. The transaction reflects the increasingly blurred lines between the traditionally separate spheres of a rapidly changing industry. It represents an effort to make both companies more appealing to consumers as health care that was once delivered in a doctor’s office more often reaches consumers over the phone, at a retail clinic or via an app. The merger would establish a new way of delivering care, with nurses, pharmacists, and others available to counsel people about their diabetes or do the lab work necessary to diagnose a condition. Under the terms of the deal, CVS will pay about $207 a share. Roughly $145 a share of that would be in cash, with the remainder of newly issued CVS stock.


  1. – Reuters
  2. – CNBC
  3. – John Wiley & Sons, Inc.
  4. – NY Times Dealbook

Planning Tips

Guide to Valuing Rental Properties

Rental PropertiesIncome from investment-related property is at a historical high these days. Rents are offering increasing revenue streams. But before getting into the real estate rental game, how do you go about making evaluations? Below is a brief guide to some ways to value high-level rental property. Be sure to consult with your financial advisor to determine if investing in rental properties is appropriate for your situation.

The Sales Comparison Approach – The sales comparison approach (SCA) is one of the most recognizable forms of valuing residential real estate. This approach is simply a comparison of similar homes that have sold or rented over a given time period. Most investors will want to see an SCA over a significant time frame to glean any potentially emerging trends. The SCA relies on attributes to assign a relative price value. Price per square foot is a common and easy to understand metric that all investors can use to determine where their property should be valued. In other words, if a 2,000-square-foot townhouse is renting for $1/square foot, investors can reasonably expect income in that ballpark, if comparable townhouses in the area are going for that too. Keep in mind that SCA is somewhat generic. That is, every home has a uniqueness that is not always quantifiable. Buyers and sellers have unique tastes and differences. The SCA is meant to be a baseline or reasonable opinion and not a perfect predictor or valuation tool for real estate. It is also important for investors to use a certified appraiser or real estate agent when requesting a comparative market analysis. This mitigates the risk of fraudulent appraisals, which became widespread during the 2007 real estate crisis.

The Capital Asset Pricing Model – The capital asset pricing model (CAPM) is a more comprehensive valuation tool. The CAPM introduces the concepts of risk and opportunity cost as it applies to real estate investing. This model looks at potential return on investment (ROI) derived from rental income and compares it to other investments that have no risk, such as United States Treasury bonds or alternative forms of investing in real estate, such as real estate investment trusts (REITs). In a nutshell, if the expected return on a risk-free or guaranteed investment exceeds potential ROI from rental income, it simply does not make financial sense to take the risk of rental property. With respect to risk, the CAPM considers the inherent risks to rent real property. For example, all rental properties are not the same. Location and age of property are key considerations. Renting older property will mean landlords will likely incur higher maintenance expenses. A property for rent in a high-crime area will likely require more safety precautions than a rental in a gated community. This model suggests factoring in these risks before considering your investment or when establishing a rental pricing structure.

The Income Approach – The income approach focuses on what the potential income for rental property yields relative to initial investment. The income approach is used frequently for commercial real estate investing. The income approach relies on determining the annual capitalization rate for an investment. This rate is the projected annual income from the gross rent multiplier divided by the current value of the property. So if an office building costs $120,000 to purchase and the expected monthly income from rentals is $1,200, the expected annual capitalization rate is: ($1,200 x 12 months) ÷ $120,000 = .12  or 2%. This is a very simplified model with few assumptions. More than likely there are interest expenses on a mortgage. Also, future rental incomes may be less or more valuable five years from now than they are today. Many investors are familiar with the net present value of money. Applied to real estate, this concept is also known as a discounted cash flow. Dollars received in the future will be subject to inflationary as well as deflationary risk and are presented in discounted terms to account for this.

The Cost Approach – The cost approach to valuing real estate states that property is only worth what it can reasonably be used for. It is estimated by combining the land value and the depreciated value of any improvements. Appraisers using this method often espouse the “highest and best” use to summarize the cost approach to real property. For example, consider property zoning. If the prospective property is not zoned “residential,” its value is reduced since the developer will incur significant costs to get rezoned. It is considered most reliable when used on newer structures and less reliable for older properties. It is often the only reliable approach when looking at special use properties.

Using the Valuation Concepts Together – Most serious investors will look at components from all of these valuation methods before making a rental decision. Learning these introductory valuation concepts should be a step in the right direction to getting into the real estate investment business. Then, once you have found a property that can yield you a favorable amount of income, find a favorable interest rate for your new property using a mortgage calculator. Using this tool will also give you more concrete figures to work with when evaluating a prospective rental property.


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  3. – Investopedia
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