Are Dogs Barking In Your Portfolio?

Four reasons to get rid of your dogs. (I still have a few.)

more IV calculators

[7/2/05] Here's a couple more places to check for estimates on your stock's valuation (besides quicken.com, vectorvest, S&P).

ValuePro

Price Check Calculator

[7/27/05] Warren Buffett Intrinsic Value Formula (?)

MarketThoughts.com

It's sort of a blog, but not exactly. Anyway, I found it while doing a search of Buffett and Microsoft and saw some interesting articles here. These guys seem pretty intelligent. Here's a few articles that caught my interest.

The Art of Value Investing

Buffett Bashing in Perspective

Reigning in Fannie Mae

Comments on the Buffett interview at Kansas

A link to the comments of the interview.

1. Buy stuff cheaply
   
2. A big pool of capital makes it harder to earn big returns
   
3. The highest IQ doesn't automatically win
   
4. Do what you love
   
5. Buffett was lucky (and so are many of us)
   
6. The U.S. dollar is spinning down
   
7. Retail is tough to turn around (it won't be easy for Lampert)
   

Interview with Ralph Wanger

Stray from the herd every once in awhile, know when to sell, and understand the stock market is a loser's game.

http://www.howestreet.com/story.php?ArticleId=1376

- from chucks_angels

[10/6/14]  The above link is dead.

Try these.

http://www.trustprofessionals.com/f-digest/2005/2005-07-18-f.html (scroll down to How Losers Win)

http://www.trustprofessionals.com/f-digest/2005/2005-06-13-f.html#wanger

Ralph Wanger was the manager of the Acorn Fund.

growth outperforming

From InvestorGuide Daily comes this thestreet.com snippet.

According to fund tracker Lipper, the average large-cap growth fund rose 3.5% from April through June, compared to 1.4% for the S&P 500 index. Mid-cap growth funds added 3.1% in the quarter, while small-cap growth funds led all categories with a gain of 4.2%. On the value side, small-cap funds also bested the big guys, returning 3.1%. That compares with gains at mid- and large-cap value funds of 2.6% and 1.3%, respectively.

The numbers don't seem to add up. The only class that underperformed was large-cap value. And by only 0.1%. I'm guessing what must have happened was that the large cap funds in the S&P 500 underperformed and weighted down the index (which is cap weighted). So I'm guessing that means stocks like MSFT and CSCO were dragging down the index. Checking the charts though shows both MSFT and CSCO were up in the quarter. More so for CSCO.

Morningstar pans Marketocracy

[11/28/05] I see in this Mauldin letter of some months ago that out of 70,000 investors at marketocracy, only 2% have beaten the S&P both long-term and monthly.

The Marketocracy Fund is run by top 100 managers at Marketocracy. Here's how Ken Kam (the guy who run Marketocracy) describes them.

Wall Street investment houses, says Kam, recruit the wrong people. The top-drawer firms look for high achieving, well spoken generalists from the best business schools. But good investors, Kam says, tend to be savants with a passion. They're nerds. They're freaks. They're too young or too old. They eat junk food and stare at the monitor and perhaps forget to bathe. They live and breathe stocks. They tend to be sector specialists who know the underlying science, product cycles, supply chains and b habits in their sectors."

* * *

[7/18/05] Morningstar has a dim view of the Marketocracy Masters 100 fund. The major beef seems to be the high expense ratio (1.95% according to Yahoo). The other beef is their low opinion of us amateurs.

However looking at the Yahoo chart, MOFQX has actually slightly outperformed the S&P 500 since inception in late 2001. It was well ahead at the end of 2003, but had a miserable 2004 to fall back to near even. Turning to the marketocracy site, it looks even better, outperforming the S&P 500 29.49% to 15.08% (7.34% to 3.92% annualized). What's more, it has a beta of only 0.78 (compared to the S&P 500's 1.00).

Why investors underperform

There seems to be two oft-cited studies explaining why most investors underperform the market.

Barber and Odean looked at the trading activity at a discount broker between February 1991 and December 1996. They broke down the investors into quintiles based on their portfolio turnover. The highest turnover group had a 10% annualized return, while the lowest turnover group had a 17.5% return.

The other study which seemed to be a popular reference a couple of years ago was made by Dalbar. They looked at mutual fund returns from 1984 through 2000. The average fund returned 14% over that time period. But the typical investor had only a 5% return.

This is apparently an ongoing study. The 1984 through 1996 numbers were 16% and 6%. The 1984 through 2002 numbers were 12.22% and 2.57% (see Halbert below). The latest numbers (apparently 1984 through 2003) are 12.98% and 3.51%.

Here's what Richard Band said about it on his 8/28/03 hotline

It's a scandal nobody in the fund business wants to talk about. The folks from Dalbar, the Boston mutual fund research organization, have just released their latest study showing how well (or poorly) investors fared with their mutual funds. Dalbar analyzes cash flows into and out of the fund industry. For the 19 years from 1984 through 2002, the researchers found that the average equity-fund investor earned a compound return of only 2.57% a year. Meanwhile, the S&P 500 index returned 12.22%.

... The real killer is that too many investors chase "hot" funds. They buy whatever funds have rolled up big profits in the recent past (such as the technology funds in the late 1990s). As a result, the average investor arrives late to the party. Then, turning a mistake into a catastrophe, John Doe and Mary Roe dump the same funds after a stretch of poor performance—generally near the bottom of the market.

Halbert discussed the Dalbar study in his e-letter. Travis Morien looked at both studies plus a few others.

[8/14/06] The Odean/Barber studies are mentioned briefly in Belsky and Gilvich's book Why Smart People Make Big Money Mistakes which is excerpted in the book What Do I Do With My Money Now?

[5/10/08] Mauldin writes more on Why Investors Fail

[7/10/11] links from Cougar3 (3/10/10):
http://tinyurl.com/yamaojt
http://tinyurl.com/yl6xpp5
http://tinyurl.com/2c55wy

The Trouble With Value

According to this study, value stocks (Russell 1000 Value Index) have outperformed growth (Russell 1000 Growth Index) stocks since their creation in December 1978. However at the height of the bubble, growth stocks were far ahead. Over 100% of the outperformance has come in the last five years.

The thesis is that the outperformance may be due to swing back to the growth side.

Whitney Tilson's principles of sound investing

[7/14/05] First start with the three Ts

[7/17/05] Tilson's guide to rational investment (from brknews)

Shai's blog

Shai's blog is surging ahead. He has obtained the rights to Warren Buffett's 1998 speech at the University of Florida (1 hour 27 minutes).

Buffett in a small pool

[6/7/05] If Buffett had a small pool of money (like a measly $10 million), he would apparently be in small caps making 50%+ a year.

What would Munger do if he were running a small pool of capital?

[7/14/05] Here's another link about Buffett making 50% (from Whitney Tilson's principles of sound investing). Tilson says he mentioned it at the 1999 annual meeting.

[7/14/05] One more. Here it says Buffett said it in a Business Week report in 1999. I see that Buffett was the cover story of the July 5, 1999 issue of Business Week and the specific article was titled Homespun Wisdom from the 'Oracle of Omaha'.

"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."

"The universe I can't play in [i.e., small companies] has become more attractive than the universe I can play in [that of large companies]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."

[10/10/05] Shai's attempt

[11/14/05] mike_3772 over at chucks_angels observes that there are "two Warren Buffetts. There's the public Buffett telling MBA students to invest in 20 punches and sit on their butts. Buy moats at a reasonable price. Then, there's the private Buffett who's still buying what's cheap and selling it when it gets to reasonable."

25 Years for Ebbers

Former Worldcom CEO is sentenced to 25 years in prison for his part in the $11 billion accounting fraud.

The Simpleton Portfolio

Ten years ago, Tom Gardner put together a 10 stock portfolio to hold for a decade. It was a growth portfolio with 9 out of the 10 picks in tech (I own 7 of them). Despite the bursting of the bubble, it performed quite well.

Morningstar has their own Coffee Can Portfolio (from Fat Pitch Financials from cigarbutthunters)

How to tell if the market is cheap or expensive

There are many methods to measure whether the market is currently over or under priced. The problem is they all give different answers.

Here's a bottoms-up analysis.

Buffett plays the odds (and mental mathematics)

[3/2/06] Along the same lines is this excerpt on Bill Nygren from the book Five Key Lessons from Top Money Managers

Bill’s interest in risk and return led him to explore various types of financial risk taking and the average payoffs each offered.

He discovered, for instance, that if you put a dollar in a state lottery,
the state typically keeps fifty cents. Almost everybody comes
away empty-handed, and someone hits a huge home run. If you
bought all the tickets, you would get back only half your money.
Not good odds.

In horse racing, the track keeps between 15 and 20 percent
of your money—better than the lottery, but still a net loss.
At the very positive end of the gambling spectrum, casinos
keep about 1 percent of what you bet at the craps table.

Further up the return/risk scale, you move into the field of
investing, where expected returns are positive. Put money into
high-quality bonds and you will typically earn just a tad above
inflation. It’s a low-risk/low-return venture, but at least the result
is positive, which beats any of the gambling options. Stocks on
average outperform bonds by several percentage points, and the
longer you hold them, the more certain you can be that your returns
will beat other asset classes of investments.

So Bill learned early on that just because a venture is risky
doesn’t mean you should avoid it. Some risks make sense to
take, and investing in stocks is one of them.

[11/12/05] brknews passes along this Sanjay Bakshi article about Buffett's game of dice that he proposed to Bill Gates.

[7/6/05] "The bet was the kind that rich golfing buddies like. Investment wizard Warren Buffett's $10 against $20,000 that he wouldn't score a hole-in-one over the three-day outing.

"Eight of us had gotten together to play Pebble Beach, and in a loose moment, after dinner and a couple bottles of wine, I offered the bet," recalled Jack Byrne, [former] chairman of Fireman's Fund. "It was meant as a fun thing, and the other six took me up on it. Everyone except Warren.

"Well, we heaped abuse on him and tried to cajole him - after all, it was only $10. But he said he had thought it over and decided it wasn't a good bet for him. He said if you let yourself be undisciplined in the small things, you'd probably be undisciplined on the large things, too."

-- from Of Permanent Value (1994 edition), Chapter 59

---

I'm looking for the recent article where Buffett says you don't need a high IQ to succeed in investing. But then the article goes on to cite some head-scratchingly clever mathematical calculations in his head. I seem to recall Buffett referenced Richard Feynman for one of the calculations.

Being stumped, I ventured up the distant mountain to ask The Nameless One. Sure enough he was able to trace it to a chapter in Robert Hagstrom's book The Warren Buffett Portfolio, entitled The Mathematics of Investing.

That chapter is summarized at WallStraits where they talk about GARP, though I fail to see where Hagstrom's book is credited as the source material.

Buffett has never even owned a calculator. When interviewed about how he does complex calculations in his head, like what is 99 times 99? Buffett immediately answers 9,801, and he jokes that he read the answer in a book about the US atomic bomb project by Nobel laureate in physics, Richard Feynman. (Sure enough, the answer is in the book by Feynman.) When pressed to share his secrets, the interviewer asked Buffett another question, "If a painting goes from $250 to $50 million in value in 100 years, what is the annual rate of return? Again, Buffett instantly answered: "13.0%". When the stunned interviewer asked how he did that, Buffett pointed out that any compound interest table would reveal the answer. The interviewer asked if he memorized the table...Buffett said, "good heavens no, but another way to approach the problem is to go by the number of times it doubles in value ($250 doubles 17.6 times to reach $50 million, or a double every 5.7 years, or about 13% a year)." Simple, Buffett seemed to imply. Not so simple for the rest of us, but fear not, Buffett insists only basic math is needed to be a superior investor!

Looking at Feynman's biography, "Surely You're Joking Mr. Feynman!", I fail to find the exact method Buffett used to calculate 99 x 99. But he likely used this multiplication shortcut of breaking down the numbers into more manageable parts.

99 x 99 = (100 - 1) x (100 - 1) 
        = 100 x 100 - 100 - 100 + 1
        = 10,000 - 200 + 1
        = 9,800 + 1
        = 9,801

The chapter on mental mathematics in SYJMF is titled Lucky Numbers. I found a couple of excerpts on the web.

Here's something I just found out after doing a search of SYJMF on the web, it produced a link to MatthewBroderick.net's guestbook. It turns out the Broderick did a movie in 1996 about Feynman called Infinity (three stars from Ebert). Broderick directed it and played the part of Feynman. There's two listings of this DVD on Amazon. Here's the cheaper one.