What wealthy investors are doing that you are not
March 4th, 2014

People often ask, I wonder what the wealthy do with their money? How do they make money? What do they do different from the average person?

Well, based on a study from the Spectrum Group, here is what wealthy investors are doing:

Some 70 percent of wealthy households use a financial adviser regularly to make investment decisions. It is important to find the most informed adviser and not just anyone who calls himself a financial planner or has some other catchy title.

Over my 30-plus years of being in the investment world, I have come across some people who do their own investing. I’m sorry say that there is just no way that your long-term performance is going to be better than my long-term performance. I can’t speak for all advisers, though, because I have seen some bad ones whose performance could have been beaten by my 10-year-old son.

The reason I say that your long-term performance could not beat mine is the amount of time I spend reading quarterly reports, analyzing financial statements and reviewing all the fundamentals of a company, verifying that each business I own is still a good one to hold.

Doing this part time or only when one gets excited about investing is not going to deliver good long-term performance, but will probably give you results that are less desirable — or worse yet, leave you with the feeling that the stock market is too risky and that you should put your money only in the bank.

I often say the stock market is not risky, that it’s the investors make it risky by doing silly things or thinking that they can make a lot of money in a short time.

Two-thirds of the wealthy’s portfolio is made of what is known as investable assets. It is also noted that 25 percent of those assets are invested in managed accounts. The survey didn’t reveal how much is invested in alternative assets; my hope is not much because the performance of most alternative investments pales in comparison to your more normal investments.

Lastly, the survey revealed that 60 percent of the wealthy plan to invest in equities in 2014. The question is, will you follow the rich or will you try to go a different path? I think the rich are wise to be investing in stocks in 2014.

One company that stands out with some strong numbers is Protective Life Corp. (NYSE: PL).

I’m not thrilled with some of its products, such as variable life insurance policies, which I think are sold too much as an investment and not as life insurance, which is what it is. The company has some good valuations such as a 10.7 PE versus the industry at 15.1 and a price-to-book value of 1.1 compared with the industry at 1.7.

Sales for protective life did climb 9.3 percent, which isn’t too bad, but the industry saw its sales increase 15.3 percent. Earnings per share favors the company by a wide margin, coming in at a 33.2 percent increase for the company compared with 10.9 percent for the industry.

While I like to see earnings per share growth, an investor has to be careful and realize this growth could come from cost cutting, high expenses in the previous period — which made the EPS look low on the base year — or share buybacks, which reduce the share count and increase the earnings per share, which is not too bad because those shares usually remain retired.

The return on equity for the company was OK at 9.5, which was above the industry average of 7.9, but I still would like to see the ROE closer to 15 than 10. The net profit margin for Protective Life Corp. was 9.9 percent — more than double the industry average of 4.7.

Looking out to December 2015, the mean of 12 analysts are looking for earnings per share of $5.28, which tells an investor that you’re paying only about 10 times forward earnings for this company.

I should point out that insurance companies generally don’t trade at higher multiples, but that doesn’t mean it can’t happen. Just remember when investing in an insurance company, the stock won’t be as likely to hit a 16.5 times forward multiple very quickly.

The forward growth on earnings looks very good for the company, seeing EPS jump 10.5 percent to $5.28 from the December 2014 EPS of $4.78. I also noticed that over the past 90 days, the December 2015 EPS rose from $5.15 to the current $5.28. The peg ratio is also very attractive at 1.34.

So if one can justify what this company sells, then the numbers tell a pretty good story.

Have a question or a company you'd like me to take a look at? Email me atbrent@wilseyassetmanagement.com.

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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