When would Buffett sell?

When would Warren Buffett sell a business? (and many other items)

Three Weeks Tight

Keep an eye out for the "three weeks tight" chart pattern. This means the stock has closed virtually at the same price for three straight weeks or even longer. Studies of big winners show it can appear virtually anywhere throughout the run-up.

I wonder what they're saying about the WMT five year tight pattern?

You ain't missed nothing yet

Jim Cramer's top 10 "you ain't missed nothing yet" stocks (stocks that should have moved up but haven't yet) as seen on his 5/18/05 show.

10.  ZMH
 9.  CMCSA
 8.  UNH
 7.  MCD
 6.  ADP
 5.  C
 4.  CD
 3.  YHOO
 2.  INTC
 1.  UPS

Here's Cramer's somewhat overlapping list of stocks that it's not too late to buy. (Actually it's the same ten in a somewhat different order.)

McDonald's (MCD)
Citigroup (C)
Comcast (CMCSA)
UnitedHealth Group (UNH)
Automative Data (ADP)
Cendant (CD)
Yahoo! (YHOO)
Zimmer (ZMH)
Intel (INTC)
United Parcel (UPS)

Intel's three challenges

Intel is attempting a right hand turn under new boss Paul Otellini.

When is big too big?

Speaking of large-caps, Bill Miller writes on why he tends to avoid the largest cap stocks citing a paper from J.B.S. Haldane.

In 1927, British biochemist J.B.S. Haldane published a volume called Possible Worlds and other essays. In it was a paper titled ''On Being the Right Size.'' Haldane begins that essay by noting that differences of size are the most obvious differences among animals, but that little scientific attention seems to be paid to them. ...

Perhaps more pertinent to readers of this piece is that Haldane's essay offers insights into why we own none of the top five companies sized by market capitalization in the S&P 500, and why Internet stocks may be better values than conventional thinking might assume [and why Miller owns AMZN vs. WMT].

Small- and mid-cap managers explain that their universe of companies can grow faster than very large companies. Large-cap managers note that smaller companies are riskier and have higher failure rates than very large enterprises, perhaps negating whatever advantage may arise from the putatively faster growth rate. Small animals have shorter life spans, in general, just as small companies do. Is that a coincidence?

When is big too big, anyway? How much, if any, of a disadvantage is GE's market capitalization of $288 billion? Is it a coincidence that GE, Microsoft, Wal-Mart, Pfizer, and Exxon, the top five companies in the S&P 500 by market capitalization, all are worth between $244 and $288 billion, despite their being in five different businesses?

Is the market currently overvalued or undervalued?

According to Morningstar's fair value ratings (which uses a DCF analysis), the S&P 500 is currently worth 1212 as compared to its price of 1170 (so I'm guessing the calculations are as of May 11). So by this measure, it is 3% undervalued. This compares to late December, when the fair value estimate was 1160 when the market was trading north of 1200, 4% overvalued.

Interestingly, the largest 25 stocks are now 10.9% undervalued. While the smallest 250 stocks are 5.3% overvalued. This compares to the December numbers, when the largest 25 were only 3.2% undervalued and the smallest 250 were 19% overvalued.

Six of those largest 25 stocks have 5-star Morningstar ratings (meaning they are the most undervalued). They are MSFT, WMT, AIG, KO, UPS, and HD. BRK.B also has a five star rating. (Though BRK.B is not in the S&P 500, it would be the 12th largest company if it were.)

(Note: the article was referenced in a post over in the Chucks_Angels group.)

Add 2% to your performance

Mauldin presents Rob Arnott's study that cap weighted indices underperform [link corrected 12/2/15, only 10-1/2 years later, it had been pointing to oprah.com] almost any other index you can think of.

[6/10/05] Here's Nathan Parmalee's take.

[12/2/15] Here's a more recent article by Arnott (summary: not a fan of cap-weighted indices)

It guess it sort of makes sense from a value perspective. When a stock goes up in price then it's automatically becomes higher weighted in the index. But what you should be doing is sell some when the stock price goes up and buy more when the stock price goes down, all other things being equal. Or from the value investor perpective, sell some when the price overruns its value and buy more when the price underrepresents its value.

[12/2/15] And (via roberts420) another article by Arnott

Well, I diverged from my main point, which was that over the 15-year period 2000-2014 a blindfolded monkey outperformed the S&P 500 index by an annualized 8 percentage points, with an annualized return of 12% versus 4% for the S&P.  I then got off onto how I would weight the holdings in an index fund if I were not weighting by market cap.  Would I use equal weightings, fundamental weighting (weighting by sales, earnings and cash flow), volatility weighting or what?

Robert Arnott published an amusing article on this question in which he backtested 13 non-market-cap weighted index funds over the period 1964-2012.  All 13 outperformed the market cap weighted S&P 500 index.  Of the 12 funds that were not equal weighted he found that in 11, including his own, the performance was improved if the fund inverted their weightings, i.e., if they instead weighted the most heavily weighted holdings the least.  In his own case, the fundamental index, the fund as weighted outperformed the S&P 500 by an annualized 2 percentage points, but when the weightings were inverted it outperformed the S&P 500 index by an annualized 4.5 percentage points.

http://rvwinvesting.com/wealth-wisdom/RAFI_Monkey_Paper.pdf

We all have to decide how to weight the holdings in our portfolio, whether we are constructing an index fund or managing our personal portfolio.  The question is, “How do we choose our weightings?”  Most individuals and professional portfolio managers alike choose weightings qualitatively.  We estimate the expected return for each stock, the potential downside, and, importantly, our confidence in our analysis for each stock.  Then we decide on a weighting.  The question is, “How well do our weightings correlate with the future returns of our individual holdings, and is there a way to improve our return by weighting differently?” 

Is that growth stock a good bet?

TMF Bane presents an example on how he might decide whether to place his bet

valuing Walgreen

According to VectorVest's methodology, Walgreen looks attractive, despite having a relatively high p/e and PEG (30 and 1.9 according to quicken.com).

Looking at the VectorVest report, it doesn't look quite as attractive to me. The report says it's "only" fairly valued with a current value of 47.97 compared to its current price of 43.78. It's given an excellent RS (relative safety) rating, but only fair relative timing, and is rated a hold.

eBay has never looked cheap

but it still has risen 16 times in value in the last 6-1/2 years

Three investors in an uncertain market

What Bill Nygren, Bill Miller, and Wally Weitz are doing in this market.