Hedge fund manager, investment conference impresario and newsletter publisher Whitney Tilson has a terrific piece in the latest edition of his Value Investor Insight in which he does a mea culpa to legendary hedge fund manager Julian Robertson, who quit the business in 2000 at the height of the last round of stock-market insanity.
The mea culpa deals with comments Tilson, a big fan of Warren Buffett, wrote when Robertson threw in the towel. He noted that Robertson and Buffett have different styles, reflected in their portfolios at the time: Buffett likes high-growth companies with high margins, great balance sheets and returns on equity that exceed their cost of capital. Robertson opted for the ultimate value stocks with high debt, low margins, poor returns on equity and erratic growth. "This is a lame collection of companies...which deserve to trade at a low average multiple," Tilson wrote.
Fast-forward to today and, as it turns out, Robertson's 2000 portfolio shows why he, too, is considered a legend: In a period when the S&P 500 slipped 7%, his portfolio boomed by 120% compared with a 38% rise for Buffett's Berkshire Hathaway. Both, Tilson points out, handily beat the market.
Speaking of the markets: Robertson quit because he felt it was too irrational. What does he think now? "Surely you don't see the same degree of irrationality today that existed then?" Tilson asked. "Oh yes sir, I do," Robertson shot back. "There's a more serious bubble today than there was then."
[via Tom@chucks_angels]
Thursday, December 07, 2006
A Rate-Cut Bump
Nothing excites Wall Street more than the possibility of a new round of rate cuts by the Federal Reserve.
Stock market history shows that when the Fed started cutting rates, investors typically received a greater than two-for-one stock price return - in other words, more than a year's worth of stock market advances (based on the average annual gain for the S&P 500, since 1945, of 9%) in six months.
Stock market history shows that when the Fed started cutting rates, investors typically received a greater than two-for-one stock price return - in other words, more than a year's worth of stock market advances (based on the average annual gain for the S&P 500, since 1945, of 9%) in six months.
The Sharpe Ratio
An essential element in evaluating any investment is knowing the level of risk involved. If an investment involves too much risk, then it may not be suitable for your portfolio even if it has the potential for high returns. Conversely, you may be willing to accept lower returns on an investment if its risk level is relatively low.
In order to take risk into consideration, you need to find a way to compare different investments that looks at more than just performance. One measurement, called the Sharpe ratio, can help you incorporate the risk of an investment into its overall return. By looking at the Sharpe ratios of different investments, you can better understand how much of an investment's return comes from the risks it assumes.
In order to take risk into consideration, you need to find a way to compare different investments that looks at more than just performance. One measurement, called the Sharpe ratio, can help you incorporate the risk of an investment into its overall return. By looking at the Sharpe ratios of different investments, you can better understand how much of an investment's return comes from the risks it assumes.
Monday, November 27, 2006
Morningstar Ratings performance
We launched the revised Morningstar Rating for funds in 2002, and each year since then we've updated a study on how the rating has performed. For background, the rating is a quantitative measure of risk-adjusted performance relative to a category over the past three-, five-, and 10-year periods.
Consistent with past studies, the new study shows that 5-star funds tend to outperform 4-star funds and so on. Thus, the biggest performance gap is from 5-star funds to 1-star funds. This was the case when measured by relative performance and the three-year star rating.
*** [9/5/17] ***
While the star rating has inherent limitations given its reliance on past performance, our analysis suggests that it can be a useful starting point for fund research. Indeed, the star rating appears to point investors toward cheaper funds that are easier to own and likelier to outperform in the future, qualities that correspond with investor success.
Consistent with past studies, the new study shows that 5-star funds tend to outperform 4-star funds and so on. Thus, the biggest performance gap is from 5-star funds to 1-star funds. This was the case when measured by relative performance and the three-year star rating.
*** [9/5/17] ***
While the star rating has inherent limitations given its reliance on past performance, our analysis suggests that it can be a useful starting point for fund research. Indeed, the star rating appears to point investors toward cheaper funds that are easier to own and likelier to outperform in the future, qualities that correspond with investor success.
earnings growth to decline?
Earnings have increased at double-digit growth rates for almost five consecutive years--although many agree that earnings growth may be slowing, it's beyond almost everyone's foreseeable horizon that earnings might actually experience a decline.
Yet a look back at history provides insights about the earnings cycle and what is considered to be normal. Despite the statistics about average earnings growth, the business cycle drives periods of surge and stall. And the stall is generally a year or two of outright retreat, rather than smoothly slower growth. As reflected in Figure 1, earnings typically grow handsomely for three to five years, and then decline for a year or two before again growing. That's usually all that it takes to restore the balance.
Yet a look back at history provides insights about the earnings cycle and what is considered to be normal. Despite the statistics about average earnings growth, the business cycle drives periods of surge and stall. And the stall is generally a year or two of outright retreat, rather than smoothly slower growth. As reflected in Figure 1, earnings typically grow handsomely for three to five years, and then decline for a year or two before again growing. That's usually all that it takes to restore the balance.
Sunday, November 26, 2006
why fund managers don't beat the market
Have you ever wondered why the majority of active fund managers fall short of the market? After all, these professionals didn't get to be professionals by being bad investors.
A study done by finance professors Gordon J. Alexander, Gjergji Cici, and Scott Gibson sheds some light on the subject. The study shows that one reason active fund managers have trouble beating the market is their funds' liquidity policies.
A study done by finance professors Gordon J. Alexander, Gjergji Cici, and Scott Gibson sheds some light on the subject. The study shows that one reason active fund managers have trouble beating the market is their funds' liquidity policies.
Friday, November 17, 2006
Trading Systems (technical analysis)
There are many different systems and techniques that traders can learn to help themselves gain an edge in their trading. Some of these are complex, but they do not have to be complex to be good. The 10-day System is probably the simplest one you will ever learn, yet it can be very helpful, especially during choppy markets.
Wednesday, November 15, 2006
Investor Returns
We've all heard horror stories that illustrate investors' tendency to buy high and sell low. But just how bad is investors' timing, really? To answer that question, we took a look at investor returns, also known as asset-weighted returns, which Morningstar recently began calculating for funds in its database.
By factoring in the timing of investors' purchases and sales, investor returns depict the returns earned by the typical investor. In aggregate, the data show that investor returns have generally lagged those of funds' published total returns, which assume a buy-and-hold strategy.
Are the anecdotes about investors' poor timing overblown, based on Morningstar investor returns? No. Although most fund categories' total returns and investor returns were fairly close to one another over the past three- and five-year periods, the gap between the two widened substantially over the trailing 10-year period. That's likely because the 10-year period encompassed the late 1990s' bull run as well as the bear market, and both extremes tended to stimulate poor decision-making.
[10/13/09] CGM Focus (CGMFX) and T. Rowe Price Equity Income (PRFDX) illustrate how volatility affects investor behavior. Both are run by excellent managers (Ken Heebner and Brian Rogers, respectively) who have beaten their peers over the long term. Focus' 10-year annualized return of 19.6% thumps Equity Income's 3.7% yearly return through the end of September 2009--as it should, because Heebner takes much bigger risks than Rogers. Heebner makes huge sector bets, holds only about 20 stocks, and even sells short stocks that he thinks are primed for a fall. Rogers aims for a steady ride by focusing on reasonably priced, dividend-paying stocks.
But consider what investors actually earned. Rogers' clients have kept nearly all of the fund's meager gains, earning an average of 3% annualized over the past 10 years. Heebner's have somehow turned their fund's terrific reported results into an annualized loss of 14%. They managed that feat by piling into CGM Focus after its extraordinary 80% gain in 2007, only to get pummeled when Focus plunged 48% in 2008.
[7/27/12] Among the most interesting data points available on Morningstar.com is investor returns, which reflects actual investor experience with a fund as opposed to how the fund itself performed in isolation.
A fund's total return depicts whatever returns its basket of securities earned from one given point in time to another. But not every investor was on board the fund for the whole time period, and that's what investor returns attempts to capture. We calculate investor returns by using fund inflow and outflow data and applying it to fund performance. We can then see how the average investor fared relative to the fund.
To illustrate how total and investor returns can differ, consider a fund that gains 12% in the first three months of the year, then remains flat for the remainder. Its gain for the entire year is 12%. But what about the investor who, seeing the fund's hot early performance, jumps in during month number four? His or her return for the year is zero. As you can see, the difference between investor return and a fund's total return can be quite dramatic.
Two common themes that emerge here are investors piling into funds with excellent track records that are unable to repeat those strong performances, and investors abandoning funds after sharp downturns and thus missing out on the subsequent rebound.
By factoring in the timing of investors' purchases and sales, investor returns depict the returns earned by the typical investor. In aggregate, the data show that investor returns have generally lagged those of funds' published total returns, which assume a buy-and-hold strategy.
Are the anecdotes about investors' poor timing overblown, based on Morningstar investor returns? No. Although most fund categories' total returns and investor returns were fairly close to one another over the past three- and five-year periods, the gap between the two widened substantially over the trailing 10-year period. That's likely because the 10-year period encompassed the late 1990s' bull run as well as the bear market, and both extremes tended to stimulate poor decision-making.
[10/13/09] CGM Focus (CGMFX) and T. Rowe Price Equity Income (PRFDX) illustrate how volatility affects investor behavior. Both are run by excellent managers (Ken Heebner and Brian Rogers, respectively) who have beaten their peers over the long term. Focus' 10-year annualized return of 19.6% thumps Equity Income's 3.7% yearly return through the end of September 2009--as it should, because Heebner takes much bigger risks than Rogers. Heebner makes huge sector bets, holds only about 20 stocks, and even sells short stocks that he thinks are primed for a fall. Rogers aims for a steady ride by focusing on reasonably priced, dividend-paying stocks.
But consider what investors actually earned. Rogers' clients have kept nearly all of the fund's meager gains, earning an average of 3% annualized over the past 10 years. Heebner's have somehow turned their fund's terrific reported results into an annualized loss of 14%. They managed that feat by piling into CGM Focus after its extraordinary 80% gain in 2007, only to get pummeled when Focus plunged 48% in 2008.
[7/27/12] Among the most interesting data points available on Morningstar.com is investor returns, which reflects actual investor experience with a fund as opposed to how the fund itself performed in isolation.
A fund's total return depicts whatever returns its basket of securities earned from one given point in time to another. But not every investor was on board the fund for the whole time period, and that's what investor returns attempts to capture. We calculate investor returns by using fund inflow and outflow data and applying it to fund performance. We can then see how the average investor fared relative to the fund.
To illustrate how total and investor returns can differ, consider a fund that gains 12% in the first three months of the year, then remains flat for the remainder. Its gain for the entire year is 12%. But what about the investor who, seeing the fund's hot early performance, jumps in during month number four? His or her return for the year is zero. As you can see, the difference between investor return and a fund's total return can be quite dramatic.
Two common themes that emerge here are investors piling into funds with excellent track records that are unable to repeat those strong performances, and investors abandoning funds after sharp downturns and thus missing out on the subsequent rebound.
Monday, November 13, 2006
A Baseball Story
David Gardner was a batboy, Ron Washington an unspectacular weak-hitting middle infielder.
Tuesday, November 07, 2006
Democratic victory could lead to stock selloff
NEW YORK (CNNMoney.com) -- With strong earnings, lower oil prices and a slowing economy to focus on, stock investors haven't exactly been paying attention to Tuesday's congressional elections. But maybe they should be.
Various reports indicate the Republicans are in danger of losing 20 to 35 seats - and their majority - in the House. In the Senate, the GOP is expected to lose at least four seats, in which case they would still be in control, or as many as six, which would swing the Senate to the Democrats.
Either scenario would mean the president and the Congress will no longer be controlled by the same party, aka gridlock. And for stocks, that's a mixed bag.
In the short term, a change in control of at least one of the chambers of Congress would probably spark a stock selloff, investors and market experts said. That's because traditionally Republican Wall Street would seem to prefer to have Republicans in control of Capitol Hill as well as the White House since the party's policies are widely viewed as more big business friendly.
Should the Republicans hold on to both chambers of Congress, "we can anticipate an upward - though likely short-lived - trend" in the market, said David Leblang, a political science professor at the University of Colorado, Boulder.
But in the long term, having either party in full control is not necessarily a good thing. In fact, in the long term, "the market actually likes the executive and legislative branches under different leadership as it reduces any damage coming out of Washington," said John Davidson, president of money manager PartnerRe Asset Management.
That was certainly the case in the 1990s when the pairing of Democrat Bill Clinton in the White House and a Republican-controlled Congress coincided with the longest economic expansion in the history of the United States - the famed tech-driven 90's boom.
A recent Ned Davis Research study suggests the market could weaken between the elections and the end of the year, if the last 104 years are any guide.
That's because 2006 is a mid-term year for a second-term president. In such years, a change in one or both houses of Congress has usually coincided with the Dow gaining in the months leading up to the election, and then sputtering or sliding through the end of the year.
* * *
[S&P's Sam Stovall offers a slightly different viewpoint.]
The mid-term elections are upon us. Control of the Senate and House of Representatives is up for grabs. Even though the Democrats may take control of the House, the odds are long for a total sweep. But as Harry Truman proved in 1948, anything is possible.
Currently, the Republicans control both the executive and legislative branches of the U.S. government. So the obvious question is: What happened to stock prices when one party surrendered partial or total control of Congress? This scenario has occurred six times since 1945 — twice to Democratic presidents and four times to Republican chief executives. Interestingly, Wall Street responded favorably to the change, with the S&P 500 posting an average price advance of 4.8% during November and December of those years (five of the six times, the S&P 500 had a gain for the year). Remember, however, that what worked in the past may not work again in the future.
So, what can investors expect in 2007?
Next year marks the third year of President Bush's second term in office. Historically, stock prices have posted their best performances in the third year of the presidential cycle, rising an average of 18% since 1945 vs. an average of 9% for all four years. What's more, third-year advances have been very consistent, as the S&P 500 climbed 93% of the time (the market was flat in 1947). The last time the "500" declined in the third year was 1939. The fourth year's 8.6% average increase is second highest.
* * *
[11/8/06 Tomorrow's News Today] The U.S. stock market had a solid rally in October and now the major indices might be due for a pause, some technical analysts say.
Merger and acquisition news and solid third-quarter earnings have pushed stocks sharply higher over the last few days.
On Tuesday, the Nasdaq Composite index finished at 2376, roughly three points below its recent five-and-a-half year closing high, hit on Oct. 26. The broad Standard & Poor’s 500 index ended at 1383, only six points lower than its six-year closing high.
Both indices are now looking a little overextended, based on weekly stochastics that measure of how overbought or oversold stocks are, said Katie Townshend, chief market technician at MKM Partners.
Their uptrend off their summertime lows is much too steep to appear sustainable, she said.
Already momentum is beginning to slow in sectors like utitities and real estate investment trusts, she said.
Various reports indicate the Republicans are in danger of losing 20 to 35 seats - and their majority - in the House. In the Senate, the GOP is expected to lose at least four seats, in which case they would still be in control, or as many as six, which would swing the Senate to the Democrats.
Either scenario would mean the president and the Congress will no longer be controlled by the same party, aka gridlock. And for stocks, that's a mixed bag.
In the short term, a change in control of at least one of the chambers of Congress would probably spark a stock selloff, investors and market experts said. That's because traditionally Republican Wall Street would seem to prefer to have Republicans in control of Capitol Hill as well as the White House since the party's policies are widely viewed as more big business friendly.
Should the Republicans hold on to both chambers of Congress, "we can anticipate an upward - though likely short-lived - trend" in the market, said David Leblang, a political science professor at the University of Colorado, Boulder.
But in the long term, having either party in full control is not necessarily a good thing. In fact, in the long term, "the market actually likes the executive and legislative branches under different leadership as it reduces any damage coming out of Washington," said John Davidson, president of money manager PartnerRe Asset Management.
That was certainly the case in the 1990s when the pairing of Democrat Bill Clinton in the White House and a Republican-controlled Congress coincided with the longest economic expansion in the history of the United States - the famed tech-driven 90's boom.
A recent Ned Davis Research study suggests the market could weaken between the elections and the end of the year, if the last 104 years are any guide.
That's because 2006 is a mid-term year for a second-term president. In such years, a change in one or both houses of Congress has usually coincided with the Dow gaining in the months leading up to the election, and then sputtering or sliding through the end of the year.
* * *
[S&P's Sam Stovall offers a slightly different viewpoint.]
The mid-term elections are upon us. Control of the Senate and House of Representatives is up for grabs. Even though the Democrats may take control of the House, the odds are long for a total sweep. But as Harry Truman proved in 1948, anything is possible.
Currently, the Republicans control both the executive and legislative branches of the U.S. government. So the obvious question is: What happened to stock prices when one party surrendered partial or total control of Congress? This scenario has occurred six times since 1945 — twice to Democratic presidents and four times to Republican chief executives. Interestingly, Wall Street responded favorably to the change, with the S&P 500 posting an average price advance of 4.8% during November and December of those years (five of the six times, the S&P 500 had a gain for the year). Remember, however, that what worked in the past may not work again in the future.
So, what can investors expect in 2007?
Next year marks the third year of President Bush's second term in office. Historically, stock prices have posted their best performances in the third year of the presidential cycle, rising an average of 18% since 1945 vs. an average of 9% for all four years. What's more, third-year advances have been very consistent, as the S&P 500 climbed 93% of the time (the market was flat in 1947). The last time the "500" declined in the third year was 1939. The fourth year's 8.6% average increase is second highest.
* * *
[11/8/06 Tomorrow's News Today] The U.S. stock market had a solid rally in October and now the major indices might be due for a pause, some technical analysts say.
Merger and acquisition news and solid third-quarter earnings have pushed stocks sharply higher over the last few days.
On Tuesday, the Nasdaq Composite index finished at 2376, roughly three points below its recent five-and-a-half year closing high, hit on Oct. 26. The broad Standard & Poor’s 500 index ended at 1383, only six points lower than its six-year closing high.
Both indices are now looking a little overextended, based on weekly stochastics that measure of how overbought or oversold stocks are, said Katie Townshend, chief market technician at MKM Partners.
Their uptrend off their summertime lows is much too steep to appear sustainable, she said.
Already momentum is beginning to slow in sectors like utitities and real estate investment trusts, she said.
Sunday, November 05, 2006
A Great Company Can Be a Great Investment
Gary Smith, an economics professor at California's Pomona College, thinks as many informed investors do that despite its triumphs now probably isn't the best time to buy shares of Genius Corp. Why? As Smith himself teaches his students, a great company doesn't necessarily make a great stock. By the time a company and its CEO are touted on the cover of a magazine, everyone already knows about them and how wonderful they are. Their virtues are already factored into the share price, leaving it nowhere to go but down. This is known as the efficient market hypothesis.
That's what makes the results of a study co-authored by Smith called "A Great Company Can Be a Great Investment" all the more surprising. The Pomona professor found that contrary to the efficient market hypothesis certain popular companies that have become household names tend to outperform the broad market.
Smith put together portfolios based on Fortune magazine's annual list of the 10 most-admired companies in the U.S. For the study, Smith took the top-10 companies from 1983 to 2004 and compared those returns with the S&P 500 index's returns. He found that the Fortune portfolio, which usually consisted of big-name blue chips like General Electric (GE), Dell (DELL), Berkshire Hathaway (BRK.A), Starbucks (SBUX) and Microsoft (MSFT), outperformed the S&P 500 by an average of six percentage points during the year following the publication of the list.
The results, Smith says, didn't jibe with his typically contrarian investing outlook. "There may be something to buying stock in great companies, which I never believed before," he says.
[via Russ@value_investment_thoughts]
That's what makes the results of a study co-authored by Smith called "A Great Company Can Be a Great Investment" all the more surprising. The Pomona professor found that contrary to the efficient market hypothesis certain popular companies that have become household names tend to outperform the broad market.
Smith put together portfolios based on Fortune magazine's annual list of the 10 most-admired companies in the U.S. For the study, Smith took the top-10 companies from 1983 to 2004 and compared those returns with the S&P 500 index's returns. He found that the Fortune portfolio, which usually consisted of big-name blue chips like General Electric (GE), Dell (DELL), Berkshire Hathaway (BRK.A), Starbucks (SBUX) and Microsoft (MSFT), outperformed the S&P 500 by an average of six percentage points during the year following the publication of the list.
The results, Smith says, didn't jibe with his typically contrarian investing outlook. "There may be something to buying stock in great companies, which I never believed before," he says.
[via Russ@value_investment_thoughts]
Friday, November 03, 2006
Are growth funds poised to outperform value?
Morningstar shows that growth funds look a lot more like value funds than they did in March 2000.
* * *
Is it time for value to hand the baton to growth? The contrarian in us wants to say yes. Morningstar's large-cap growth category has lagged every domestic diversified stock fund group more often than not during the past six years. Based on performance and the idea that value won't trample on growth indefinitely, it seems reasonable to conclude that large-cap growth funds are ripe for their turn at the head of the pack.
Hold on, though, while we examine a few crucial facts. Large-cap growth funds may indeed be due for a comeback, but as a group they are not screaming buys, according to underlying fundamentals. In fact, large-cap growth funds don't look drastically different from large-cap value funds in some regards.
* * *
Is it time for value to hand the baton to growth? The contrarian in us wants to say yes. Morningstar's large-cap growth category has lagged every domestic diversified stock fund group more often than not during the past six years. Based on performance and the idea that value won't trample on growth indefinitely, it seems reasonable to conclude that large-cap growth funds are ripe for their turn at the head of the pack.
Hold on, though, while we examine a few crucial facts. Large-cap growth funds may indeed be due for a comeback, but as a group they are not screaming buys, according to underlying fundamentals. In fact, large-cap growth funds don't look drastically different from large-cap value funds in some regards.
Tuesday, October 31, 2006
Keep It Simple
Successful investing doesn't require a lot of work, research, or attention. Although you may miss out on the best-performing investments, you can achieve the most important of your financial goals simply by doing two things: saving enough money, and buying sound, diversified investments that provide solid returns.
1927-1923 Chart of Pompous Prognosticators
"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929
[via tairbear00@chucks_angels]
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929
[via tairbear00@chucks_angels]
The Little Book of Value Investing
[2/12/07] The Tweedy, Browne semi-manifesto and roadmap to superior investment returns, What Has Worked in Investing: Studies of Investment Approaches and Characteristics Associated with Exceptional Returns is a wonderful compilation of some of the most important studies of both domestic and international stock market returns. Investors of all levels of experience can benefit from it. It's free as well, which makes it particularly nice for the cost-conscious.
According to the research of Tweedy, Browne, there are five characteristics that tend to mark superior investment opportunities.
[12/21/06] What started with the deceptively simple and entertaining The Little Book That Beats the Market has quickly grown into the "Little Book, Big Profit" series. The second installment comes from another renowned investor and is aptly titled The Little Book of Value Investing.
Author Christopher H. Browne is a managing director at Tweedy, Browne Company, a storied investment firm he joined in 1969. Tweedy, Browne is an esteemed member of the Superinvestors of Graham-and-Doddesville, a designation awarded to a select group of investors that first followed Graham's teachings. Buffett named seven successful investors in a talk given at Columbia University in 1984 to commemorate the 50th anniversary of Security Analysis.
This Little Book is full of references illustrating what it means to be a value investor and why investors should take notice. In Browne's words: "Why value investing? Because it has worked since anyone began tracking returns. A mountain of evidence confirms that the principles of value investing have provided market-beating returns over long periods. And it is easy to do. . Yet in the face of compelling evidence, few investors and few professional managers subscribe to the principles of value investing."
[10/31/06] With all the books in print (200,000 new ones published last year alone), what could Christopher Browne's The Little Book of Value Investing add? Almost nothing -- but that's the point. Innovation is less necessary than the value investing framework. Buying stocks for less than they are worth is an easy concept to grasp. The idea doesn't need much scholarly refinement. Maybe that's why few business schools offer value investing classes.
According to the research of Tweedy, Browne, there are five characteristics that tend to mark superior investment opportunities.
[12/21/06] What started with the deceptively simple and entertaining The Little Book That Beats the Market has quickly grown into the "Little Book, Big Profit" series. The second installment comes from another renowned investor and is aptly titled The Little Book of Value Investing.
Author Christopher H. Browne is a managing director at Tweedy, Browne Company, a storied investment firm he joined in 1969. Tweedy, Browne is an esteemed member of the Superinvestors of Graham-and-Doddesville, a designation awarded to a select group of investors that first followed Graham's teachings. Buffett named seven successful investors in a talk given at Columbia University in 1984 to commemorate the 50th anniversary of Security Analysis.
This Little Book is full of references illustrating what it means to be a value investor and why investors should take notice. In Browne's words: "Why value investing? Because it has worked since anyone began tracking returns. A mountain of evidence confirms that the principles of value investing have provided market-beating returns over long periods. And it is easy to do. . Yet in the face of compelling evidence, few investors and few professional managers subscribe to the principles of value investing."
[10/31/06] With all the books in print (200,000 new ones published last year alone), what could Christopher Browne's The Little Book of Value Investing add? Almost nothing -- but that's the point. Innovation is less necessary than the value investing framework. Buying stocks for less than they are worth is an easy concept to grasp. The idea doesn't need much scholarly refinement. Maybe that's why few business schools offer value investing classes.
Thursday, October 19, 2006
Dividend Aristocrats
[10/19/06] Standard & Poor's launched its Dividend Aristocrats index in May 2005. The index is made up of 57 companies that raise dividends for 25 or more consecutive years. It is distributed among a broad range of industries and split roughly 50/50 between growth and value stocks.
The end result? A well-balanced portfolio of stable, blue-chip cash cows that offers better-than-average returns with less volatility.
-- from a post by cougar3@chucks_angels
The end result? A well-balanced portfolio of stable, blue-chip cash cows that offers better-than-average returns with less volatility.
-- from a post by cougar3@chucks_angels
Stock Picking Shortcuts
Investors can be entranced by “hot new investment strategies” and “shortcuts to beat the market.” Often, such rankings are also based on limited amounts of data, such as the level or consistency of historic growth rates in sales or earnings, or the level of projected earnings growth.
To analyze the predictive capacity of some of these stock-picking shortcuts, we looked at the largest 1,600 U.S. companies by market capitalization over the past 15 years. No silver bullet emerged.
• Forecasts fall flat. Stocks with the highest long-term earnings-per-share growth forecasts underperformed stocks with the lowest earnings-per-share forecasts by over 5% per year.
• History isn’t always prologue. Stocks with the highest five-year historic earnings-per-share growth rates performed no better than stocks with the lowest five-year historic growth rates. The same was true for historic sales-per-share growth rates.
• Stability can be overrated. Stocks with the most stable five-year earnings-per-share growth rates performed about the same as stocks with the most volatile trend lines. The same pattern held for sales-per-share growth rates.
• Even combos fall short. Combination strategies using sales and earnings growth rates, forecasts or stability measures showed no consistent predictive power.
There are two big problems with these shortcuts: They encourage the tendency of individual investors to project long-term trends while ignoring recent events, and most of the data is already accounted for in the prices of the stocks.
[now for the ad]
To develop a better stock selection power ranking, investors need to look beyond easy-to-compute growth rate measures and forecasts that are known to everyone else. They need to dig deeper using more inputs to analyze how that growth was and is being achieved in order to get a more accurate view (versus the consensus) of what that growth is likely to be. Sound complicated? It is. That’s why Schwab came up with its Schwab Equity Ratings to do the homework for you, and to help investors focus on what we believe is important: long-term capital appreciation—not expected or historic earnings growth at any price.
Overall, Schwab Equity Ratings favor healthy companies that are expected to deliver positive earnings surprises not anticipated by the consensus of Wall Street analysts. That means A-rated stocks favor companies exhibiting a stable growth pattern, and we expect them, on average, to keep growing beyond consensus expectations.
By Brian Burda
CFA, Vice President, Schwab Equity Ratings®
Schwab Center for Investment Research®
To analyze the predictive capacity of some of these stock-picking shortcuts, we looked at the largest 1,600 U.S. companies by market capitalization over the past 15 years. No silver bullet emerged.
• Forecasts fall flat. Stocks with the highest long-term earnings-per-share growth forecasts underperformed stocks with the lowest earnings-per-share forecasts by over 5% per year.
• History isn’t always prologue. Stocks with the highest five-year historic earnings-per-share growth rates performed no better than stocks with the lowest five-year historic growth rates. The same was true for historic sales-per-share growth rates.
• Stability can be overrated. Stocks with the most stable five-year earnings-per-share growth rates performed about the same as stocks with the most volatile trend lines. The same pattern held for sales-per-share growth rates.
• Even combos fall short. Combination strategies using sales and earnings growth rates, forecasts or stability measures showed no consistent predictive power.
There are two big problems with these shortcuts: They encourage the tendency of individual investors to project long-term trends while ignoring recent events, and most of the data is already accounted for in the prices of the stocks.
[now for the ad]
To develop a better stock selection power ranking, investors need to look beyond easy-to-compute growth rate measures and forecasts that are known to everyone else. They need to dig deeper using more inputs to analyze how that growth was and is being achieved in order to get a more accurate view (versus the consensus) of what that growth is likely to be. Sound complicated? It is. That’s why Schwab came up with its Schwab Equity Ratings to do the homework for you, and to help investors focus on what we believe is important: long-term capital appreciation—not expected or historic earnings growth at any price.
Overall, Schwab Equity Ratings favor healthy companies that are expected to deliver positive earnings surprises not anticipated by the consensus of Wall Street analysts. That means A-rated stocks favor companies exhibiting a stable growth pattern, and we expect them, on average, to keep growing beyond consensus expectations.
By Brian Burda
CFA, Vice President, Schwab Equity Ratings®
Schwab Center for Investment Research®
Wednesday, October 18, 2006
The Superstar Portfolio
Paul Farrell presents another way to build a well-diversified portfolio. It's very simple: You pick nine winners diversified across Morningstar's nine style boxes.
Here are the four steps you need to follow, once a year:
So check the results of this grand-slam opportunity: If you had invested $10,000 in each of these nine funds a decade ago, your nine-fund portfolio would have enjoyed a fabulous average annual return of 13.4%, which is 50% higher than the S&P 500's 10-year average return of 8.9%!
Here are the four steps you need to follow, once a year:
- Scan Morningstar's database and pick the top no-load equities in each of the nine "style box" categories, from large-cap growth to small-cap value funds.
- Invest an equal amount in each of the nine funds.
- Save regularly, add new money and stay close to your allocations.
- Then next year scan Morningstar's database again: If the nine funds you already own aren't still near the top, replace them. Otherwise, hang onto your winners.
So check the results of this grand-slam opportunity: If you had invested $10,000 in each of these nine funds a decade ago, your nine-fund portfolio would have enjoyed a fabulous average annual return of 13.4%, which is 50% higher than the S&P 500's 10-year average return of 8.9%!
Tuesday, October 17, 2006
current bull market is four years old
The S&P 500 received official bull market status on May 9, 2003, when it closed at 933.41, more than 20% above the October 9 close. (Standard & Poor's defines a bull market as an advance of at least 20% from the low set during the prior bear market.) Today the S&P 500 is 75.5% higher than it was on October 9, 2002. Yet this milestone, while certainly positive, raises a few questions. For example, how does this bull market stack up with prior bull markets, and how much longer does this bull have to run?
It should be encouraging to people who constantly worry about investing at the top of a bull market that after one year of a new bull market, an average 86% of the prior bear market's decline is recovered. It may also be surprising to learn that, on average, all of the prior bear market's decline, and then some, is recovered by the second year of the new bull market. The bull markets of 1942, 1974, and 2002, which followed bear market declines of more than 45%, are the exceptions.
-- By Sam Stovall, S&P Chief Investment Strategist
It should be encouraging to people who constantly worry about investing at the top of a bull market that after one year of a new bull market, an average 86% of the prior bear market's decline is recovered. It may also be surprising to learn that, on average, all of the prior bear market's decline, and then some, is recovered by the second year of the new bull market. The bull markets of 1942, 1974, and 2002, which followed bear market declines of more than 45%, are the exceptions.
-- By Sam Stovall, S&P Chief Investment Strategist
Friday, October 13, 2006
Momentum Investing from a value perspective
Morningstar's Paul A. Larson explains how a value investor uses "momentum".
Newton's first law of motion essentially states that an object in motion will stay in motion unless acted upon by another force. As applied to stocks, it is my experience that equities also carry momentum, for a little while at least.
No, I don't plan on suddenly switching gears to play the "greater fool" game, buying the market's hottest stocks at high valuations and hoping to sell even higher. Quite the opposite. My plan is to take advantage of this momentum when it causes stocks to not reflect the intrinsic value of the underlying businesses they represent.
Usually a stock starts to fall when a company announces some bad news. But then investors start to get concerned about their paper losses, worrying that they perhaps missed something, and the selling continues. This additional selling begets more selling, with everyone fearful they are about to lose big. Momentum and fear have taken over, and the stock price often disconnects from the fundamentals.
When Mr. Market goes into a panic like this, there are often bargains to be found. We haven't had any screaming panics in the portfolios this year, but do consider Wrigley (WWY). Sure, the company has hit a speed bump with its acquisition of some of Kraft's (KFT) old brands, but is a few pennies in lost (or merely delayed) earnings per share really worth the stock falling by more than $10 per share since the beginning of the year? I think not.
I will also look to take advantage of inertia on the upside. When a stock I own starts to rise merely because it has recently risen and then trades well above our estimate of its intrinsic worth, that is when I will consider selling. (Early year 2000, anyone?) One might say I will attempt to take Warren Buffett's advice and be greedy when others are fearful, and fearful when others are greedy.
Inertia not only applies to things in motion, it also applies to things that are stationary. As Newton's law tells us, an object not in motion will remain not in motion, unless acted upon by another force. But in this case, Newton's first law is not always obeyed by Mr. Market, and the only force that matters in the long run is cash flow. Sometimes, the fundamental forces of an improving competitive position and growing profits apply a strong force on a stock, yet the stock does not move. This is a time to buy.
I've described this scenario before as a "pressure- cooker" situation, and at the moment, there appear to be many opportunities of this type. Take Berkshire Hathaway (BRK.B) and Wal-Mart (WMT), both of which we currently own in the Tortoise Portfolio. These companies have all steadily improved their core businesses and grown their profits in the past couple of years, yet their stocks have a lot of stationary inertia and have not gone much of anywhere in years, only recently showing some signs of life. In my view, it is only a matter of time before the forces created by the cash flow will be felt and these stocks will rise even further.
Newton's first law of motion essentially states that an object in motion will stay in motion unless acted upon by another force. As applied to stocks, it is my experience that equities also carry momentum, for a little while at least.
No, I don't plan on suddenly switching gears to play the "greater fool" game, buying the market's hottest stocks at high valuations and hoping to sell even higher. Quite the opposite. My plan is to take advantage of this momentum when it causes stocks to not reflect the intrinsic value of the underlying businesses they represent.
Usually a stock starts to fall when a company announces some bad news. But then investors start to get concerned about their paper losses, worrying that they perhaps missed something, and the selling continues. This additional selling begets more selling, with everyone fearful they are about to lose big. Momentum and fear have taken over, and the stock price often disconnects from the fundamentals.
When Mr. Market goes into a panic like this, there are often bargains to be found. We haven't had any screaming panics in the portfolios this year, but do consider Wrigley (WWY). Sure, the company has hit a speed bump with its acquisition of some of Kraft's (KFT) old brands, but is a few pennies in lost (or merely delayed) earnings per share really worth the stock falling by more than $10 per share since the beginning of the year? I think not.
I will also look to take advantage of inertia on the upside. When a stock I own starts to rise merely because it has recently risen and then trades well above our estimate of its intrinsic worth, that is when I will consider selling. (Early year 2000, anyone?) One might say I will attempt to take Warren Buffett's advice and be greedy when others are fearful, and fearful when others are greedy.
Inertia not only applies to things in motion, it also applies to things that are stationary. As Newton's law tells us, an object not in motion will remain not in motion, unless acted upon by another force. But in this case, Newton's first law is not always obeyed by Mr. Market, and the only force that matters in the long run is cash flow. Sometimes, the fundamental forces of an improving competitive position and growing profits apply a strong force on a stock, yet the stock does not move. This is a time to buy.
I've described this scenario before as a "pressure- cooker" situation, and at the moment, there appear to be many opportunities of this type. Take Berkshire Hathaway (BRK.B) and Wal-Mart (WMT), both of which we currently own in the Tortoise Portfolio. These companies have all steadily improved their core businesses and grown their profits in the past couple of years, yet their stocks have a lot of stationary inertia and have not gone much of anywhere in years, only recently showing some signs of life. In my view, it is only a matter of time before the forces created by the cash flow will be felt and these stocks will rise even further.
Wednesday, October 11, 2006
Insider's reaction to new market high
How did corporate insiders react last week to the stock market’s new high?
That’s an important question, since insiders presumably know a lot more about their companies’ prospects than do the rest of us. They are a company’s officers, directors and largest shareholders.
The news turns out to be surprisingly good.
This might not be immediately obvious, since the data show that last week they sold $3.20 worth of their companies’ stock for every $1 of stock that they bought, according to the Vickers Weekly Insider Report, a newsletter that keeps track of the insider transaction data reported to the SEC. But, placed in context, this sell-to-buy ratio of 3.20-to-1 is bullish.
A bit of historical perspective helps us to understand why this is so. Perhaps the most important thing to keep in mind is that the average insider almost always sells more of his firm’s stock than he buys. That’s because a big chunk of insiders’ compensation comes in the form of shares. Insiders’ predisposition to sell has become even stronger over the last decade, in fact, because of the increased portion of insiders’ compensation that comes through options.
According to Prof. Nejat Seyhun of the University of Michigan, who has extensively studied insiders’ behavior, the normal ratio of insider selling to insider buying now stands at around 6.5 to 1. The current ratio of 3.2-to-1 therefore represents less selling than average.
The other important piece of historical context to keep in mind is that it is entirely normal for insiders to speed up the pace of their selling as the market rises. This doesn’t mean that they are particularly bearish on their companies’ prospects, but simply reflects their opportunistic behavior to take advantage
of higher prices.
For that reason, according to Vickers, last week we should have “expected ongoing deterioration in the [sell-to-buy] ratio.”
But, in fact, that didn’t happen. The week before last the sell-to-buy ratio was 4.14-to-1, according to Vickers. So in dropping to 3.20-to-1 last week, insiders actually cut back on the pace of their selling as the market reached new highs.
That’s bullish. If insiders as a group felt that the market’s new highs were only temporary, and that a pullback in their companies’ shares was imminent, they presumably would be much heavier sellers right now.
- from Tomorrow's News Today
That’s an important question, since insiders presumably know a lot more about their companies’ prospects than do the rest of us. They are a company’s officers, directors and largest shareholders.
The news turns out to be surprisingly good.
This might not be immediately obvious, since the data show that last week they sold $3.20 worth of their companies’ stock for every $1 of stock that they bought, according to the Vickers Weekly Insider Report, a newsletter that keeps track of the insider transaction data reported to the SEC. But, placed in context, this sell-to-buy ratio of 3.20-to-1 is bullish.
A bit of historical perspective helps us to understand why this is so. Perhaps the most important thing to keep in mind is that the average insider almost always sells more of his firm’s stock than he buys. That’s because a big chunk of insiders’ compensation comes in the form of shares. Insiders’ predisposition to sell has become even stronger over the last decade, in fact, because of the increased portion of insiders’ compensation that comes through options.
According to Prof. Nejat Seyhun of the University of Michigan, who has extensively studied insiders’ behavior, the normal ratio of insider selling to insider buying now stands at around 6.5 to 1. The current ratio of 3.2-to-1 therefore represents less selling than average.
The other important piece of historical context to keep in mind is that it is entirely normal for insiders to speed up the pace of their selling as the market rises. This doesn’t mean that they are particularly bearish on their companies’ prospects, but simply reflects their opportunistic behavior to take advantage
of higher prices.
For that reason, according to Vickers, last week we should have “expected ongoing deterioration in the [sell-to-buy] ratio.”
But, in fact, that didn’t happen. The week before last the sell-to-buy ratio was 4.14-to-1, according to Vickers. So in dropping to 3.20-to-1 last week, insiders actually cut back on the pace of their selling as the market reached new highs.
That’s bullish. If insiders as a group felt that the market’s new highs were only temporary, and that a pullback in their companies’ shares was imminent, they presumably would be much heavier sellers right now.
- from Tomorrow's News Today
Gonzalo Garcia-Pelayo
Garcia-Pelayo is not your average roulette player. In the early 1990s, this Madrid native discovered that certain roulette wheels were not completely random. In fact, they were biased. Because of small imperfections -- tiny flaws in the roulette wheel's gears, differences in the sizes of the pockets, or even an unlevelled floor -- some numbers tended to come up more often than others. Garcia-Pelayo painstakingly recorded the winning numbers on thousands of spins, then conducted a statistical study on this raw data.
By continuously betting on the numbers that his analysis showed came up most often, Garcia-Pelayo turned a 5% disadvantage into a near 15% advantage over the powerful casinos of Europe. What can an individual do with such a favourable proposition? Well, over a span of a just a couple of years, Garcia-Pelayo and his family exploited this edge to win more than two million euro.
By continuously betting on the numbers that his analysis showed came up most often, Garcia-Pelayo turned a 5% disadvantage into a near 15% advantage over the powerful casinos of Europe. What can an individual do with such a favourable proposition? Well, over a span of a just a couple of years, Garcia-Pelayo and his family exploited this edge to win more than two million euro.
the fall season
[10/11/06] Jim Jubak gives five reasons to expect a fourth-quarter rally this year
[9/7/06] Sometimes a market trend is so strong, and so historically reliable, that you should just go with it. That's the case with the market's tendency to slump from late August well into October. Then the market, most years, rallies into the end of the year.
Everyone knows that September is historically the worst month of the year for the stock market, with August and October running close behind. In most years since 1950, after a brief rally into the third week in August, stocks have trended lower into September before making a bottom around the 20th of October that sets up the traditional year-end rally.
[9/7/06] Sometimes a market trend is so strong, and so historically reliable, that you should just go with it. That's the case with the market's tendency to slump from late August well into October. Then the market, most years, rallies into the end of the year.
Everyone knows that September is historically the worst month of the year for the stock market, with August and October running close behind. In most years since 1950, after a brief rally into the third week in August, stocks have trended lower into September before making a bottom around the 20th of October that sets up the traditional year-end rally.
Friday, October 06, 2006
Fortune's Formula
[3/0/07] Munger comments on the Kelly Criterion
[11/2/06] Emil Lee demonstrates how to calculate the Kelly Formula
[10/6/06] Suppose there were a simple and elegant formula that helped you to maximize your long-term investment returns while minimizing the risk of total ruin. Sounds like something you'd like to use for your portfolio, doesn't it? In his recent book, Fortune's Formula, author William Poundstone details the development, use, and criticism of an equation that purports to do just what I have described. It is known as the Kelly Formula.
[11/2/06] Emil Lee demonstrates how to calculate the Kelly Formula
[10/6/06] Suppose there were a simple and elegant formula that helped you to maximize your long-term investment returns while minimizing the risk of total ruin. Sounds like something you'd like to use for your portfolio, doesn't it? In his recent book, Fortune's Formula, author William Poundstone details the development, use, and criticism of an equation that purports to do just what I have described. It is known as the Kelly Formula.
Wednesday, October 04, 2006
Dow's high may draw in investors
By hitting its highest level ever, the Dow Jones Industrial Average may end up heightening awareness and stir interest that will bring new investors in and old ones back.
The DJIA’s feat solidifies the transition between the bear market bubble and the generally more orderly approach that has evolved when it comes to investing. The DJIA, after all, is made up of sturdy blue chip companies and that’s what investors chose in making it the first major stock barometer to recover.
The Standard & Poor’s 500 Index is still off about 200 points away from its peak of 1527.46. And the Nasdaq Composite Index is down about 2801 points from its peak.
It’s been a long road back for the Dow. From Oct. 9, 2002, its lowest point between the last record on Jan. 14 and the new one made on Tuesday, the Dow has gained 4469.08 points, or 61%.
And the Dow’s accomplishment may have major reverberations in terms of aiding the market, some analysts feel.
“People in the financial field live the market day in and day out,” said Art Hogan, chief market analyst at Jefferies. But when the Dow makes a new high people on Main Street start taking note. “They say we’re past the bubble and that can bring
them back in.”
In other words, according to Hogan, “It’s a broad wake-up call. It proves the market is back.”
And aside from more retail-type investors, investors in gold, real estate or other areas may feel the stock market has more appeal.”
And the Dow isn’t done, Hogan said. “I think the market will go higher from here because the dynamic that got us here isn’t going away. We’ve got consistently low energy prices and a Fed that has stopped raising interest rates. Barring some
external forces, this market sees the path of least resistance is to the upside.”
There are others who believe that the Dow’s ascent bodes well for the market.
“From a psychological standpoint it adds confidence and gives investors a sense of security,” said Andre Bakhos, president of Princeton Financial. “The money is telling you that the market is OK.”
Other strategists are hoping the rally will become more broad based.
“Oil dropping below $60 is helping the general market psychology and drawing money towards financials and technology again,” said Barry Hyman, equity market strategist at EKN Financial Services. “As long as that psychology develops that way its going be hard to sell off the market.”
That said, some traders aren’t convinced that the Dow’s record will have a wide impact.
-- from Tomorrow's News Today
The DJIA’s feat solidifies the transition between the bear market bubble and the generally more orderly approach that has evolved when it comes to investing. The DJIA, after all, is made up of sturdy blue chip companies and that’s what investors chose in making it the first major stock barometer to recover.
The Standard & Poor’s 500 Index is still off about 200 points away from its peak of 1527.46. And the Nasdaq Composite Index is down about 2801 points from its peak.
It’s been a long road back for the Dow. From Oct. 9, 2002, its lowest point between the last record on Jan. 14 and the new one made on Tuesday, the Dow has gained 4469.08 points, or 61%.
And the Dow’s accomplishment may have major reverberations in terms of aiding the market, some analysts feel.
“People in the financial field live the market day in and day out,” said Art Hogan, chief market analyst at Jefferies. But when the Dow makes a new high people on Main Street start taking note. “They say we’re past the bubble and that can bring
them back in.”
In other words, according to Hogan, “It’s a broad wake-up call. It proves the market is back.”
And aside from more retail-type investors, investors in gold, real estate or other areas may feel the stock market has more appeal.”
And the Dow isn’t done, Hogan said. “I think the market will go higher from here because the dynamic that got us here isn’t going away. We’ve got consistently low energy prices and a Fed that has stopped raising interest rates. Barring some
external forces, this market sees the path of least resistance is to the upside.”
There are others who believe that the Dow’s ascent bodes well for the market.
“From a psychological standpoint it adds confidence and gives investors a sense of security,” said Andre Bakhos, president of Princeton Financial. “The money is telling you that the market is OK.”
Other strategists are hoping the rally will become more broad based.
“Oil dropping below $60 is helping the general market psychology and drawing money towards financials and technology again,” said Barry Hyman, equity market strategist at EKN Financial Services. “As long as that psychology develops that way its going be hard to sell off the market.”
That said, some traders aren’t convinced that the Dow’s record will have a wide impact.
-- from Tomorrow's News Today
Monday, October 02, 2006
The Harvard advantage
Begin with what "everyone knows" -- that a Harvard graduate will, by virtue of possessing a Harvard diploma, get better job offers, earn a higher salary, and become more of a success in life than a graduate of ACME University. But according to a landmark study published in 1999 by Princeton economist Alan Krueger and Mellon Foundation researcher Stacy Dale, the accepted wisdom has the facts completely backwards. Elite colleges don't make successful students -- successful students apply to elite colleges.
To dig down to the truth of the matter, Krueger and Dale collected admissions data from students who entered college in 1976 at a range of schools, both prestigious and less so, from all across the nation. Fast-forwarding 20 years, the researchers examined the salaries that these students were earning in 1996. They focused their study on two groups of students, both of which had applied to and been accepted by elite colleges. Students from the first group -- let's call them the "Ivies" -- accepted the offers, graduated, and entered the workforce carrying their Ivy League sheepskins. In contrast, the "non-Ivies" were also accepted, but turned the elite colleges' offers down and chose to enter more modest schools (with more modest price tags.)
Result: There was essentially no difference between the salaries earned by the two groups of students. To the contrary, the Ivy student who entered college with a 1,200 SAT in 1976 was, on average, earning about $1000 per year less than the non-Ivy student with the same SAT score. The same non-Ivy student who had turned the elite school down.
Conclusion: Smart kids tend to choose elite schools. But if kids are already smart, whether they choose to "go Ivy" or not makes no difference to their success later in life.
To dig down to the truth of the matter, Krueger and Dale collected admissions data from students who entered college in 1976 at a range of schools, both prestigious and less so, from all across the nation. Fast-forwarding 20 years, the researchers examined the salaries that these students were earning in 1996. They focused their study on two groups of students, both of which had applied to and been accepted by elite colleges. Students from the first group -- let's call them the "Ivies" -- accepted the offers, graduated, and entered the workforce carrying their Ivy League sheepskins. In contrast, the "non-Ivies" were also accepted, but turned the elite colleges' offers down and chose to enter more modest schools (with more modest price tags.)
Result: There was essentially no difference between the salaries earned by the two groups of students. To the contrary, the Ivy student who entered college with a 1,200 SAT in 1976 was, on average, earning about $1000 per year less than the non-Ivy student with the same SAT score. The same non-Ivy student who had turned the elite school down.
Conclusion: Smart kids tend to choose elite schools. But if kids are already smart, whether they choose to "go Ivy" or not makes no difference to their success later in life.
The Billionaire Strategy
[10/12/06] Last week, Foolish colleague Tim Hanson revealed some of the secrets of the world's billionaires. Surely his findings were obvious to most: Master investors make oodles of money, especially those who faithfully follow a strategy that plays to their inherent strengths.
What he didn't mention is that entrepreneurs dominate the same list of Forbes billionaires, including five of the top 10.
[10/2/06] What does the Forbes 400 tell you about the correct strategy to use to become a billionaire?
What he didn't mention is that entrepreneurs dominate the same list of Forbes billionaires, including five of the top 10.
[10/2/06] What does the Forbes 400 tell you about the correct strategy to use to become a billionaire?
Monday, September 25, 2006
Wall Street Losers
If there were a Bad Trade Hall of Fame, Brian Hunter would have just secured himself a prominent spot.
Losing $5 billion in a week will do that.
Hunter lost that amount earlier this month, according to The Wall Street Journal, making big, risky bets on natural gas prices for coming winters.
Losing $5 billion in a week will do that.
Hunter lost that amount earlier this month, according to The Wall Street Journal, making big, risky bets on natural gas prices for coming winters.
Friday, September 22, 2006
The Trader's bell curve
Writes Price Headley, "MOST OF YOUR TRADES ARE GOING TO BE MEDIOCRE AT BEST. The huge homeruns are few and far between. But, you'll have enough of them over time to generate some big profits."
Thursday, September 21, 2006
hot stock tips
[9/25/06] The title of a paper by Laura Frieder and Jonathan Zittrain gets right to the point: “Spam Works: Evidence from Stock Touts and Corresponding Market Activity.”
Incredibly, while Internet users will readily delete emails touting Free Medz and good deals on V-i-a-g/ra, investors have plenty of time to read the email touts, find the ticker symbol, and buy the touted stock.
The authors reviewed a sample of Pink Sheet stocks touted in more than 75,000 emails. After all that number crunching, they concluded that the stocks went up on heavy volume the day they were touted. Stocks also showed unusual strength the day before the spamming as the spammers were no doubt buying into the names they were about to blast around the Internet. In the days following the big spam day, the stocks went down as the spammers continued selling and volume from new buyers dried up.
[9/21/06] According to a recent study of more than 1.8 million investment spam messages by Laura Frieder of Purdue University and Jonathon Zittrain of the University of Oxford, the purpose of investing spam is to provide enough liquidity for those touting the stock to sell their shares at a profit. For the hypesters, average returns from the day before the spam was sent to the day of heaviest touting was as much as 6%. What if you were one of the ones who received the spam and decided to "take a flyer" when you got the email? Your average loss would be as much as 8%.
[4/19/06] Have you ever wondered if you're missing out on a great investment opportunity by NOT investing in the "hot" stock tips you receive in your e-mailbox?
Joshua Cyr decided to find out. On May 5, 2005, he decided to track what would happen if he purchased 1000 shares of every stock for which he received a hot stock tip via spam.
Naturally, he didn't actually waste money on this experiment. Instead, he just pretended to buy the stocks and kept track of their value on a website he created (so he never actually bought the stocks). He simply tracked what would have happened if he had actually purchased these stocks based on the stock tips.
Joshua expected that he'd get temporary, short-term windfalls on all these stocks and then see big losses. What he found instead surprised him. Almost ALL of the stocks went up a few cents at most, and then dropped dramatically the next day. So, no short term windfalls.
Joshua tracks the stocks real time at his site, so you can see how he's doing at any moment.
Incredibly, while Internet users will readily delete emails touting Free Medz and good deals on V-i-a-g/ra, investors have plenty of time to read the email touts, find the ticker symbol, and buy the touted stock.
The authors reviewed a sample of Pink Sheet stocks touted in more than 75,000 emails. After all that number crunching, they concluded that the stocks went up on heavy volume the day they were touted. Stocks also showed unusual strength the day before the spamming as the spammers were no doubt buying into the names they were about to blast around the Internet. In the days following the big spam day, the stocks went down as the spammers continued selling and volume from new buyers dried up.
[9/21/06] According to a recent study of more than 1.8 million investment spam messages by Laura Frieder of Purdue University and Jonathon Zittrain of the University of Oxford, the purpose of investing spam is to provide enough liquidity for those touting the stock to sell their shares at a profit. For the hypesters, average returns from the day before the spam was sent to the day of heaviest touting was as much as 6%. What if you were one of the ones who received the spam and decided to "take a flyer" when you got the email? Your average loss would be as much as 8%.
[4/19/06] Have you ever wondered if you're missing out on a great investment opportunity by NOT investing in the "hot" stock tips you receive in your e-mailbox?
Joshua Cyr decided to find out. On May 5, 2005, he decided to track what would happen if he purchased 1000 shares of every stock for which he received a hot stock tip via spam.
Naturally, he didn't actually waste money on this experiment. Instead, he just pretended to buy the stocks and kept track of their value on a website he created (so he never actually bought the stocks). He simply tracked what would have happened if he had actually purchased these stocks based on the stock tips.
Joshua expected that he'd get temporary, short-term windfalls on all these stocks and then see big losses. What he found instead surprised him. Almost ALL of the stocks went up a few cents at most, and then dropped dramatically the next day. So, no short term windfalls.
Joshua tracks the stocks real time at his site, so you can see how he's doing at any moment.
Wednesday, September 20, 2006
The Presidential Election Cycle
[9/20/06 Keith Fitz-Gerald] In case you’re not familiar with it, the Presidential Effect suggests that the second year of any president’s term, regardless of party affiliation, is the least productive in terms of how the financial markets move. Years three and four, on the other hand, are the better performing ones and are typically made possible by all of the free money promises that get made during the election process by both parties. These promises then get translated into market gains.
According to the Stock Trader’s Almanac, the 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28%. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6%).
On average, since 1914, the Dow has jumped a whopping 50% from the bottom it hits in the second year to the top in the third year. This bounce ties in with other statistics that show the second and third years of the four-year cycle tend to be the best for stock markets as the party in power gears up for the following year’s election by trying to keep investors happy.
[7/5/06] Martin Zweig makes this observation in the Zweig Fund quarterly report.
"Based on statistics, there may be trouble ahead of the market. According to Standard and Poor's, the S&P 500 Index has lost 2% on average in second quarters of second years of presidential terms since 1945. Third quarters show average losses of 2.2%. Given the historically weaker mid-year trend, we will proceed cautiously."
[3/31/06] as the first quarter of 2006 ends stocks are smack in the midst of what is notoriously the most dangerous year of the U.S. political cycle -- Year Two of a presidential term. Of the 12 declining years endured by the Standard & Poor's 500 Index since 1960, a check of my Bloomberg indicates, six occurred in the second year of a presidential administration. Those included the punishing declines of 24 percent in 2002, 30 percent in 1974, and 13 percent in 1966.
On top of that, we're nearing the part of any year, from the end of April through October, that has gained a reputation as most difficult for stocks. Recall the boardroom adage, ``Sell in May and go away.''
[3/29/06] Liz Ann Sonders takes a look at the current presidential cycle.
[3/22/06] Looking ahead, there is one slight possible negative for the market relating to the presidential election cycle. Statistically, the postelection year and the mid-term year, which we are now in, have not been great years. Based on historical performance, the next pre-election year (2007) and election year (2008) would turn out to be better years according to this cycle.
While we are not strongly supportive of this particular thesis, data going back to 1949 indicates a significant market bottom occurs about every four years. Our last market bottom was in 2002 and it’s possible we may experience the next bottom in 2006. However, we are far from convinced that this will be the case.
-- Martin Zweig in the Zweig Fund annual report
[11/17/04] Several studies purportedly show that presidential elections do indeed affect the stock market and that the best times to own stocks are the two years before an election. Conversely, stocks apparently do not do as well during the first two years of a presidential term. One study, for example, shows that from 1941 to 1995, every bear market but one has occurred in the first or second year of a president's term; none have occurred during the last year, right before an election.
According to the Stock Trader’s Almanac, the 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28%. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6%).
On average, since 1914, the Dow has jumped a whopping 50% from the bottom it hits in the second year to the top in the third year. This bounce ties in with other statistics that show the second and third years of the four-year cycle tend to be the best for stock markets as the party in power gears up for the following year’s election by trying to keep investors happy.
[7/5/06] Martin Zweig makes this observation in the Zweig Fund quarterly report.
"Based on statistics, there may be trouble ahead of the market. According to Standard and Poor's, the S&P 500 Index has lost 2% on average in second quarters of second years of presidential terms since 1945. Third quarters show average losses of 2.2%. Given the historically weaker mid-year trend, we will proceed cautiously."
[3/31/06] as the first quarter of 2006 ends stocks are smack in the midst of what is notoriously the most dangerous year of the U.S. political cycle -- Year Two of a presidential term. Of the 12 declining years endured by the Standard & Poor's 500 Index since 1960, a check of my Bloomberg indicates, six occurred in the second year of a presidential administration. Those included the punishing declines of 24 percent in 2002, 30 percent in 1974, and 13 percent in 1966.
On top of that, we're nearing the part of any year, from the end of April through October, that has gained a reputation as most difficult for stocks. Recall the boardroom adage, ``Sell in May and go away.''
[3/29/06] Liz Ann Sonders takes a look at the current presidential cycle.
[3/22/06] Looking ahead, there is one slight possible negative for the market relating to the presidential election cycle. Statistically, the postelection year and the mid-term year, which we are now in, have not been great years. Based on historical performance, the next pre-election year (2007) and election year (2008) would turn out to be better years according to this cycle.
While we are not strongly supportive of this particular thesis, data going back to 1949 indicates a significant market bottom occurs about every four years. Our last market bottom was in 2002 and it’s possible we may experience the next bottom in 2006. However, we are far from convinced that this will be the case.
-- Martin Zweig in the Zweig Fund annual report
[11/17/04] Several studies purportedly show that presidential elections do indeed affect the stock market and that the best times to own stocks are the two years before an election. Conversely, stocks apparently do not do as well during the first two years of a presidential term. One study, for example, shows that from 1941 to 1995, every bear market but one has occurred in the first or second year of a president's term; none have occurred during the last year, right before an election.
Strategy Performance
Validea has been keeping model portfolios of their various strategies since 2003. Leading the way is their Validea Hot List, followed closely by Martin Zweig and David Dreman [link from screenvestor of MFI, 9/18/06]
AAII has backtested various stock screens going back to 1998. Zweig is second again. O'Shaughnessy's Tiny Titans leads the way. [link from Michael Gallagher of MFI, 9/14/06]
AAII has backtested various stock screens going back to 1998. Zweig is second again. O'Shaughnessy's Tiny Titans leads the way. [link from Michael Gallagher of MFI, 9/14/06]
Saturday, September 16, 2006
Bears
[9/15/96] (Mauldin writes] The market, my various mentors have all told me, is designed to cause the most pain to the largest number of people. And while I am not in pain, the recent move up in the various market indices is certainly not in keeping with my thoughts that the economy is going to slow down and thus should exert downward pressure on the equity markets. Has the world transitioned to a kinder, gentler Mr. Market?
... this statistic from Paul Robinson: What happens when you have 3-plus years without a 10% correction in either the S&P 500 or DJIA? On March 15th, 2006 the market sustained 3 full years without a substantial sell-off from a 6-month high. This long a bull run has occurred only 3 other times in the past 100-plus years of market history and led to an average decline of 18.5% between the 3 occurrences.
In summary, I think it is too early to throw in my bearish towel. A slowdown means that earnings are not going to grow as fast as currently projected. That means some disappointments may (will?) be coming our way in the next few quarters.
Disappointments are the stuff that makes for bear markets.
[7/27/06, via investwise] Dr. Marc Faber says "Most asset markets including stocks and commodities are extremely overbought, and there is far too much speculation in all investment markets. Therefore, severe downside volatility, also in precious metals, should not be surprising in the period directly ahead.
... we can say that, yes, the Dow has been in a bull market since October 2002 in dollar terms, but it has been in a bear market in gold terms. This is an important point to understand. In case we should experience continuous monetary inflation, which could lift, over time, all asset prices such as stocks, real estate, and commodities, some asset classes will increase more in value than others."
* * *
[6/15/06] There are market bears--and then there's Barry Ritholtz. Some might call him one of the grizzliest forecasters on the Street. Although the Dow Jones Industrial Average came close to its all-time high of 11,722.98 earlier this year, Ritholtz expects the Dow to finish the year at 6,800. He's also forecasting that the Standard & Poor's 500 Index and Nasdaq will lose more than 25%.
[via investwise]
* * *
But even Ritholtz may not be as bearish as Doug Casey who believes that another depression is practically inevitable. On the bright side, he hasn't totally given up hope. "Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it's done."
... this statistic from Paul Robinson: What happens when you have 3-plus years without a 10% correction in either the S&P 500 or DJIA? On March 15th, 2006 the market sustained 3 full years without a substantial sell-off from a 6-month high. This long a bull run has occurred only 3 other times in the past 100-plus years of market history and led to an average decline of 18.5% between the 3 occurrences.
In summary, I think it is too early to throw in my bearish towel. A slowdown means that earnings are not going to grow as fast as currently projected. That means some disappointments may (will?) be coming our way in the next few quarters.
Disappointments are the stuff that makes for bear markets.
[7/27/06, via investwise] Dr. Marc Faber says "Most asset markets including stocks and commodities are extremely overbought, and there is far too much speculation in all investment markets. Therefore, severe downside volatility, also in precious metals, should not be surprising in the period directly ahead.
... we can say that, yes, the Dow has been in a bull market since October 2002 in dollar terms, but it has been in a bear market in gold terms. This is an important point to understand. In case we should experience continuous monetary inflation, which could lift, over time, all asset prices such as stocks, real estate, and commodities, some asset classes will increase more in value than others."
* * *
[6/15/06] There are market bears--and then there's Barry Ritholtz. Some might call him one of the grizzliest forecasters on the Street. Although the Dow Jones Industrial Average came close to its all-time high of 11,722.98 earlier this year, Ritholtz expects the Dow to finish the year at 6,800. He's also forecasting that the Standard & Poor's 500 Index and Nasdaq will lose more than 25%.
[via investwise]
* * *
But even Ritholtz may not be as bearish as Doug Casey who believes that another depression is practically inevitable. On the bright side, he hasn't totally given up hope. "Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it's done."
Tuesday, September 12, 2006
Current Account Balances
This is an interesting list from the CIA world fact book:A Rank Order of Current Account Balances...
http://tinyurl.com/eseet
[from chucks_angels]
[9/14/06] [Bill Bonner writes] Fallen into our hands is a report from the CIA, ranking nations in order of their current account balance. The current account, we remind readers, is like the operating statement of a business or an individual. Income must exceed outflow or your upkeep is your downfall. The difference between what comes in and what goes out, if it is positive, accumulates as though it were a profit. If it is negative, it builds up - but not necessarily, in the form of debt.
Last in line are the nations of the Anglo-Saxon, English-speaking debt-based empire! New Zealand has a deficit of nearly $10 billion. Then, South Africa...and India...and Australia all have deficits too. Among the major former colonies of the British Empire, only Canada seems to have any sense. It runs a surplus. The others are all debtors. The UK itself is third from the bottom with a $57 billion negative current account balance.
For no reason we can think of, the penultimate on the list is Spain. And then comes the worst of all...the United States of America, with a current account balance of a minus $829 billion.
Add up all the deficits of the entire world and you get a figure barely half of the U.S. total.
The U.S. economy makes up a quarter of the world total...that it should have more than half of the world's current account deficits is a spectacular success - only made possible by its great wealth and status.
[I guess that's one way of looking at it.]
http://tinyurl.com/eseet
[from chucks_angels]
[9/14/06] [Bill Bonner writes] Fallen into our hands is a report from the CIA, ranking nations in order of their current account balance. The current account, we remind readers, is like the operating statement of a business or an individual. Income must exceed outflow or your upkeep is your downfall. The difference between what comes in and what goes out, if it is positive, accumulates as though it were a profit. If it is negative, it builds up - but not necessarily, in the form of debt.
Last in line are the nations of the Anglo-Saxon, English-speaking debt-based empire! New Zealand has a deficit of nearly $10 billion. Then, South Africa...and India...and Australia all have deficits too. Among the major former colonies of the British Empire, only Canada seems to have any sense. It runs a surplus. The others are all debtors. The UK itself is third from the bottom with a $57 billion negative current account balance.
For no reason we can think of, the penultimate on the list is Spain. And then comes the worst of all...the United States of America, with a current account balance of a minus $829 billion.
Add up all the deficits of the entire world and you get a figure barely half of the U.S. total.
The U.S. economy makes up a quarter of the world total...that it should have more than half of the world's current account deficits is a spectacular success - only made possible by its great wealth and status.
[I guess that's one way of looking at it.]
Thursday, September 07, 2006
How To Lose Money
It sounds contrary, but understanding how you lose money is what will make you a successful investor. Because you will lose money.
There are three ways of thinking when it comes to losers. Two of them will help you retire to a life of leisure; the other will help you retire to a life of dog food.
There are three ways of thinking when it comes to losers. Two of them will help you retire to a life of leisure; the other will help you retire to a life of dog food.
Wednesday, September 06, 2006
Two Fools
The Motley Fool hosted its first teleseminar, an event in which Fool co-founders David and Tom Gardner, along with GreenLight masters Shannon Zimmerman and Dayana Yochim, spoke to 1,000 Fools nationwide and shared their Foolish wisdom on the art and science of buying and selling.
Getting Started: What To Look For
How to determine when the price is right
Going against the grain
Emotions and investing
Getting Started: What To Look For
How to determine when the price is right
Going against the grain
Emotions and investing
What Is Value Investing?
[From DEEPWEALTH:]<!- via investwise -->
In a great book and a must-read for investors, “What is Value Investing?”, the author, Lawrence A. Cunningham, writes about the many traditions of value investing.
“Value investing is partly a state of mind. It is characterized by habitually relating the price of a stock to the value of the underlying business. Basic principles of fundamental analysis are the tools. They arise from three traditions.
Benjamin Graham's margin of safety principle is the first one. It requires assurance that a stock's price is substantially below its estimated value. The test requires conducting a full business analysis. To begin, value investors use simple filters that narrow the range of candidates to those that an investor understands and can evaluate (commonly known as a circle of competence).
John Burr Williams refined value investing's second core tradition. This quantitative tradition requires estimating a company's intrinsic value measured by the present value of its probable future cash flows, conservatively estimated using current data. This principle captures the intuition that a dollar in hand today is worth more than a dollar paid in the future.
Philip A. Fisher added value investing's third tradition. This qualitative tradition requires the diligent investor to find a company exhibiting strong long-term prospects. These are indicated by characteristics creating a business franchise, such as consumer loyalty, unmatched brand-name recognition, and formidable market power. Also relevant are high-quality managers who can be counted on to channel the franchise's rewards to the company's shareholders.
Warren E. Buffett is the consummate and best-known integrator of these three traditions. Buffett practices a comprehensive method of value investing. He refers to the exercise simply as investing, viewing the modifier "value" as redundant. Other disciples weight the components differently, producing a range of value investing styles. All are united by appreciating the difference between price and value.
In a great book and a must-read for investors, “What is Value Investing?”, the author, Lawrence A. Cunningham, writes about the many traditions of value investing.
“Value investing is partly a state of mind. It is characterized by habitually relating the price of a stock to the value of the underlying business. Basic principles of fundamental analysis are the tools. They arise from three traditions.
Benjamin Graham's margin of safety principle is the first one. It requires assurance that a stock's price is substantially below its estimated value. The test requires conducting a full business analysis. To begin, value investors use simple filters that narrow the range of candidates to those that an investor understands and can evaluate (commonly known as a circle of competence).
John Burr Williams refined value investing's second core tradition. This quantitative tradition requires estimating a company's intrinsic value measured by the present value of its probable future cash flows, conservatively estimated using current data. This principle captures the intuition that a dollar in hand today is worth more than a dollar paid in the future.
Philip A. Fisher added value investing's third tradition. This qualitative tradition requires the diligent investor to find a company exhibiting strong long-term prospects. These are indicated by characteristics creating a business franchise, such as consumer loyalty, unmatched brand-name recognition, and formidable market power. Also relevant are high-quality managers who can be counted on to channel the franchise's rewards to the company's shareholders.
Warren E. Buffett is the consummate and best-known integrator of these three traditions. Buffett practices a comprehensive method of value investing. He refers to the exercise simply as investing, viewing the modifier "value" as redundant. Other disciples weight the components differently, producing a range of value investing styles. All are united by appreciating the difference between price and value.
Tuesday, September 05, 2006
Centenarian looks overseas
Aug. 30 (Bloomberg) -- Albert H. Gordon took over Kidder, Peabody & Co. in 1931, turned it into an underwriting leader on Wall Street, and saw opportunities overseas before many rivals.
He's still looking abroad at the age of 105.
After eight decades as an executive and investor that spanned from the roaring 1920s to the age of terrorism, Gordon says he's ``bearish'' on U.S. stocks partly because of the $8.41 trillion national debt. He prefers shares of companies such as Canada's EnCana Corp., Wal-Mart de Mexico SA de CV and Petroleo Brasileiro SA.
``At least three-quarters of whatever I own is foreign stocks,'' he says from his Manhattan apartment overlooking the East River.
He's still looking abroad at the age of 105.
After eight decades as an executive and investor that spanned from the roaring 1920s to the age of terrorism, Gordon says he's ``bearish'' on U.S. stocks partly because of the $8.41 trillion national debt. He prefers shares of companies such as Canada's EnCana Corp., Wal-Mart de Mexico SA de CV and Petroleo Brasileiro SA.
``At least three-quarters of whatever I own is foreign stocks,'' he says from his Manhattan apartment overlooking the East River.
we've struck oil
NEW YORK (CNNMoney.com) -- Chevron and its partners have successfully extracted oil from a test well in the deep waters of the Gulf of Mexico, an achievement that could be the biggest breakthrough in domestic oil supplies since the opening of the Alaskan pipeline.
The news sent oil prices lower, with U.S. light crude for October delivery sinking 69 cents to $68.50 on the New York Mercantile Exchange.
The announcement helped dampen fears that oil supplies would be swamped by growing global demand, a concern that helped lift oil to record highs this summer, unadjusted for inflation.
But experts cautioned that relief at the pump from the breakthrough is many years away.
The news sent oil prices lower, with U.S. light crude for October delivery sinking 69 cents to $68.50 on the New York Mercantile Exchange.
The announcement helped dampen fears that oil supplies would be swamped by growing global demand, a concern that helped lift oil to record highs this summer, unadjusted for inflation.
But experts cautioned that relief at the pump from the breakthrough is many years away.
Saturday, September 02, 2006
Reading between those for-sale signs
The latest housing numbers seem like they could be a turning point. A real estate crash might not be the most likely outcome, but it certainly seems legitimate to think about what one would look like.
Wednesday, August 30, 2006
buy low or buy high?
[1/28/07] A stock trading near its 52-week high may not seem like much of a bargain. But research suggests it may still add plenty of value to your portfolio.
That's because stocks near their highs tend to climb still higher over the next six to 12 months. (The reverse is also true: Stocks near their 52-week lows tend to slide lower.)
The main reason for this phenomenon: The market usually underreacts to good news when a stock is near its 52-week high. That's because investors who are taught to "buy low and sell high" get skittish as stocks near their recent peaks and - in the short run - they hesitate to bid up prices furthers. But the reluctance doesn't last forever.
"Eventually the impact of the news wins out and the stock's price trends up," says Thomas George, a finance professor at the University of Houston's Bauer College of Business. Dr. George and colleague Chuan-Yang Hwang pioneered research about the 52-week high as a predictor of future performance.
Greg Forsythe, senior vice president of equity ratings at Charles Schwab, says his clients are just as reluctant as many professional traders to buy stocks near their recent peaks. His response, in some cases: The stock price may be higher than it was a few months ago, "but it's low relative to where it should be."
Mr. Forsythe urged clients to consider selected stocks near their highs in a November 2005 newsletter. He picked eight stocks that had Schwab's highest rating for potential outperformance - based on factors including earnings quality and valuation - and that were close to their recent peaks. Over the following twelve months, the group of stocks gained 22%, compared with the Dow Jones Industrial Average's 13% advance for the same period.
The accompanying table lists five stocks that last week held Schwab's top rating and were near their 52-week highs.
There are some "momentum" investors - on the lookout for companies with recent outsidezed stock returns - who do use 52-week highs to spot possible targets. And, to be sure, some stocks near their 52-week highs may be unattractive and overpriced relative to the companies' earnings and prospects. For instance, stocks near their 52-week highs that have Schwab's lowest ratings include Las-Vegas-based station Casinos (STN) and auto-parts company Amerigon (ARGN).
Proximity to the high is perhaps best used as a tiebreaker that helps investors choose among a handful of stocks with good potential. If you have three equally attractive stocks, the one closest to its high is likely to be a "better performer and to perform more quickly" than the others, says Schwab's Mr. Forsythe.
[8/30/06] What goes down tends to go down some more.
This has been shown in several studies that are sliced, diced, and summarized by noted NYU finance professor Aswath Damodaran in Chapter 8 of his book Investment Fables.
In these studies, when you measure time in terms of months, stocks that have gone up tend to keep going up. In other words, winners keep winning. And vice-versa. So when people advise you not to try to "catch a falling knife," they're not being silly -- they're playing the smart odds.
However, when time is measured in terms of years, the contrarian strategy begins to pay off. Oft-referenced work by Fama and French found that the contrarian strategy is far more successful for five-year returns than for one-year returns. Moreover, it works better for smaller companies than large ones.
* * *
[8/25/06] Barry Ritholtz at The Big Picture had a recent comment about never buying a 52 week low. As you might expect, such absolutes simply don’t exist in trading.
Here’s fellow RealMoney.com columnist James “quant-jock” Altucher’s take:
I took all Nasdaq 100 stocks since 1996, including stocks that have been deleted from the index (to avoid survivorship bias). What happens if you buy stocks hitting 52-week lows that are trading for greater than $5 (avoiding penny stocks) and sell them one quarter later?
The results actually demonstrate that, over this period, the odds were on your side to outperform the market if you bought stocks at 52-week lows. The average return per trade was 7.34% (over 662 trades), including wins and losses. This far outperforms the average return per quarter of the Nasdaq during this period of 2.6%.
Some 60% of the trades turned out favorably and 40% were failures.
This would seem to run counter to O'Shaughnessy's What Works On Wall Street which found that buying stocks with the worst 1-year price performance turned out to be the worst strategy in the whole book.
The difference could be the universe of stocks looked at. Altucher looked at the Nasdaq 100 while O'Shaughnessy used the CompuState database which had about 3500 stocks on average. It could well be that the smaller companies chosen had a higher percentage of companies headed for bankruptcy. The "Large Stocks" did decidedly better that the All Stocks universe, but still underperformed the Large Stock universe.
* * *
What Works on Wall Street (Chapter 15) looked at stocks with the best and worst 1-year price changes.
The stocks with the best 1-year price appreciation outperformed the All Stock universe by 2-to-1.
The stocks with the worst 1-year price appreciation widely underperformed the All Stock universe beating it only 11 of the 43 years reviewed and only once on 39 5-year periods.
Conclusion: buy the stocks with the best 1-year relative strength.
* * *
However another study found that the momentum strategy is a relatively short effect, the biggest gains were over the next year. Momentum doesn't seem to affect the stock after a year.
* * *
Tweedy Browne's study What Has Worked In Investing (page 43) cites a study which the 35 worse and 35 best performing stocks over the last five years. The worst performing stocks over the preceding five-year period produced average cumulative returns of 18% in excess of the market index 17 months after portfolio formation, a compound annual return in excess of the market index of 12.2%. The best performing stocks over the preceding five years produced average cumulative returns of about 6% less than the market index after 17 months, a compounded annual negative return of 4.3% versus the market index.
* * *
In summary, the above studies indicate that buy high works in the short term (about a 1 year period), while buy low works in the longer term.
-- written up after the Tweedy Browne study was uploaded at magicformulainvesting
* * *
[5/28/06] In the June 2006 SmartMoney, Jaack Hough cites a study by George and Hwang which looked at stocks within 5 percent of their 52-week highs and lows (rather than the top six month gainers and losers that the Jagadeesh and Titman study looked at). This would for example exclude stocks that was up 60% for six months though it has backed off 15% from the high. Again, these stock beat the overall market but "strong returns kept rolling in for at least five years".
I'd say this strategy would have worked quite well in 1998 and 1999, but pretty poorly in 2000. So value would have to figure in somewhere.
Hough looked at stocks with PEG <= 1 and trading within 5% of their 52-week highs. The screen came out with the following stocks. ABK (79.70), ACO (28.28), PLCE (56.22), DFG (51.00), EBF (19.38), GS (158.12), KAI (22.37), LEH (144.82), NE (81.44).
That's because stocks near their highs tend to climb still higher over the next six to 12 months. (The reverse is also true: Stocks near their 52-week lows tend to slide lower.)
The main reason for this phenomenon: The market usually underreacts to good news when a stock is near its 52-week high. That's because investors who are taught to "buy low and sell high" get skittish as stocks near their recent peaks and - in the short run - they hesitate to bid up prices furthers. But the reluctance doesn't last forever.
"Eventually the impact of the news wins out and the stock's price trends up," says Thomas George, a finance professor at the University of Houston's Bauer College of Business. Dr. George and colleague Chuan-Yang Hwang pioneered research about the 52-week high as a predictor of future performance.
Greg Forsythe, senior vice president of equity ratings at Charles Schwab, says his clients are just as reluctant as many professional traders to buy stocks near their recent peaks. His response, in some cases: The stock price may be higher than it was a few months ago, "but it's low relative to where it should be."
Mr. Forsythe urged clients to consider selected stocks near their highs in a November 2005 newsletter. He picked eight stocks that had Schwab's highest rating for potential outperformance - based on factors including earnings quality and valuation - and that were close to their recent peaks. Over the following twelve months, the group of stocks gained 22%, compared with the Dow Jones Industrial Average's 13% advance for the same period.
The accompanying table lists five stocks that last week held Schwab's top rating and were near their 52-week highs.
Cigna (CI) $130The case for buying stocks near their highs may seem counterintuitive, especially since investors are usually counseled not to chase performance when it comes to individual mutual funds and fund categories - high-yield bonds, for example, or technology stocks. But the research shows individual stocks that are near their highs can sustain that momentum through the next 12 months.
Hasbro (HAS) $28
Hewlett-Packard (HPQ) $42
International Business Machines IBM) $97
Prudential Financial (PRU) $88
There are some "momentum" investors - on the lookout for companies with recent outsidezed stock returns - who do use 52-week highs to spot possible targets. And, to be sure, some stocks near their 52-week highs may be unattractive and overpriced relative to the companies' earnings and prospects. For instance, stocks near their 52-week highs that have Schwab's lowest ratings include Las-Vegas-based station Casinos (STN) and auto-parts company Amerigon (ARGN).
Proximity to the high is perhaps best used as a tiebreaker that helps investors choose among a handful of stocks with good potential. If you have three equally attractive stocks, the one closest to its high is likely to be a "better performer and to perform more quickly" than the others, says Schwab's Mr. Forsythe.
[8/30/06] What goes down tends to go down some more.
This has been shown in several studies that are sliced, diced, and summarized by noted NYU finance professor Aswath Damodaran in Chapter 8 of his book Investment Fables.
In these studies, when you measure time in terms of months, stocks that have gone up tend to keep going up. In other words, winners keep winning. And vice-versa. So when people advise you not to try to "catch a falling knife," they're not being silly -- they're playing the smart odds.
However, when time is measured in terms of years, the contrarian strategy begins to pay off. Oft-referenced work by Fama and French found that the contrarian strategy is far more successful for five-year returns than for one-year returns. Moreover, it works better for smaller companies than large ones.
* * *
[8/25/06] Barry Ritholtz at The Big Picture had a recent comment about never buying a 52 week low. As you might expect, such absolutes simply don’t exist in trading.
Here’s fellow RealMoney.com columnist James “quant-jock” Altucher’s take:
I took all Nasdaq 100 stocks since 1996, including stocks that have been deleted from the index (to avoid survivorship bias). What happens if you buy stocks hitting 52-week lows that are trading for greater than $5 (avoiding penny stocks) and sell them one quarter later?
The results actually demonstrate that, over this period, the odds were on your side to outperform the market if you bought stocks at 52-week lows. The average return per trade was 7.34% (over 662 trades), including wins and losses. This far outperforms the average return per quarter of the Nasdaq during this period of 2.6%.
Some 60% of the trades turned out favorably and 40% were failures.
This would seem to run counter to O'Shaughnessy's What Works On Wall Street which found that buying stocks with the worst 1-year price performance turned out to be the worst strategy in the whole book.
The difference could be the universe of stocks looked at. Altucher looked at the Nasdaq 100 while O'Shaughnessy used the CompuState database which had about 3500 stocks on average. It could well be that the smaller companies chosen had a higher percentage of companies headed for bankruptcy. The "Large Stocks" did decidedly better that the All Stocks universe, but still underperformed the Large Stock universe.
* * *
What Works on Wall Street (Chapter 15) looked at stocks with the best and worst 1-year price changes.
The stocks with the best 1-year price appreciation outperformed the All Stock universe by 2-to-1.
The stocks with the worst 1-year price appreciation widely underperformed the All Stock universe beating it only 11 of the 43 years reviewed and only once on 39 5-year periods.
Conclusion: buy the stocks with the best 1-year relative strength.
* * *
However another study found that the momentum strategy is a relatively short effect, the biggest gains were over the next year. Momentum doesn't seem to affect the stock after a year.
* * *
Tweedy Browne's study What Has Worked In Investing (page 43) cites a study which the 35 worse and 35 best performing stocks over the last five years. The worst performing stocks over the preceding five-year period produced average cumulative returns of 18% in excess of the market index 17 months after portfolio formation, a compound annual return in excess of the market index of 12.2%. The best performing stocks over the preceding five years produced average cumulative returns of about 6% less than the market index after 17 months, a compounded annual negative return of 4.3% versus the market index.
* * *
In summary, the above studies indicate that buy high works in the short term (about a 1 year period), while buy low works in the longer term.
-- written up after the Tweedy Browne study was uploaded at magicformulainvesting
* * *
[5/28/06] In the June 2006 SmartMoney, Jaack Hough cites a study by George and Hwang which looked at stocks within 5 percent of their 52-week highs and lows (rather than the top six month gainers and losers that the Jagadeesh and Titman study looked at). This would for example exclude stocks that was up 60% for six months though it has backed off 15% from the high. Again, these stock beat the overall market but "strong returns kept rolling in for at least five years".
I'd say this strategy would have worked quite well in 1998 and 1999, but pretty poorly in 2000. So value would have to figure in somewhere.
Hough looked at stocks with PEG <= 1 and trading within 5% of their 52-week highs. The screen came out with the following stocks. ABK (79.70), ACO (28.28), PLCE (56.22), DFG (51.00), EBF (19.38), GS (158.12), KAI (22.37), LEH (144.82), NE (81.44).
The Future for Investors
A book review of Jeremy J. Siegel's book The Future for Investors: Why the Tried and the True Triumph over the Bold and the New.
The Inside Value Approach (an advertisement)
[3/23/07] Conviction is perhaps the most important factor in investing
[11/15/06] Virtually all of the greatest investors -- Warren Buffett, Benjamin Graham, Charles Munger, John Neff, Walter Schloss -- earned their fortunes by following value principles. They've done so well not because value stocks have grown faster than so-called growth stocks. Instead, they've triumphed because stocks are priced largely based on their expected growth rates. More often than not, those expectations are wrong.
[10/30/06] David Meier looks for falling prices and rising returns
[9/5/06] methods of valuing companies
[8/30/06] The only two things that matter in investing
[7/20/06] Growth or value: which is the best way?
[7/14/06] Richard Gibbons tells value investors to buy growth stocks
[5/14/06] David Meier says that turnarounds are better path to multibagers
[5/2/06] It may take time to beat the market with value investing
[4/17/06] Richard Gibbons follows three important rules
[4/11/06] Nathan Parmalee on the P/E ratio
[4/10/06] David Meier's triple double
[4/5/06] Seth Jayson hunts for value
[3/14/06] David Meier points out examples of bad growth, good growth, and great growth.
[2/24/06] Richard Gibbons warns value investors that temporary bad news is sometimes not so temporary
[2/9/06] Richard Gibbons presents Three Simple Rules
[2/3/06] Buy ugly, but not too ugly
[1/24/06] Two paths to profits: Rule Breakers vs. Inside Value
[1/13/06] The Inside Value team looks for relentless growers.
[1/6/06] Durrell says turnarounds are right under your nose.
[12/23/05] There's a good reason why many wealthy folks could credibly be described as "cheap".
[12/21/05] How to beat Inside Value
[12/18/05] Seth Jayson says wiggles give you opportunities for profits.
[12/9/05] Jim Gillies gives his definition of "value" investing.
[12/3/05] Jim Gillies discusses Stern Stewart's trademarked concept of Economic Value Added. Or EVA = [ROIC – WACC] * IC.
[11/3/05] Richard Gibbons says to buy strong companies when blood is in the streets
[10/29/05] Richard Gibbons talks about buying companies in crisis.
[10/28/05] Seth Jayson talks about Buffett's Stealth Values which are strong companies that are neither dirt-cheap or expensive.
[11/24/05] Tim Beyers learns four lessons from the bubble
[9/15/05] Chuck Saletta again
[8/29/05] The evolution of Richard Gibbons
[8/29/05] Invest like you shop (Chuck Saletta's turn to write the ad)
[8/18/05] In this article/advertisement, Richard Gibbons explains the Inside Value newsletter approach to selecting stocks. Here's my summary: find a great company, then buy it cheap.
[5/6/05] A Patient Investor's Guide to Profit
[11/15/06] Virtually all of the greatest investors -- Warren Buffett, Benjamin Graham, Charles Munger, John Neff, Walter Schloss -- earned their fortunes by following value principles. They've done so well not because value stocks have grown faster than so-called growth stocks. Instead, they've triumphed because stocks are priced largely based on their expected growth rates. More often than not, those expectations are wrong.
[10/30/06] David Meier looks for falling prices and rising returns
[9/5/06] methods of valuing companies
[8/30/06] The only two things that matter in investing
[7/20/06] Growth or value: which is the best way?
[7/14/06] Richard Gibbons tells value investors to buy growth stocks
[5/14/06] David Meier says that turnarounds are better path to multibagers
[5/2/06] It may take time to beat the market with value investing
[4/17/06] Richard Gibbons follows three important rules
[4/11/06] Nathan Parmalee on the P/E ratio
[4/10/06] David Meier's triple double
[4/5/06] Seth Jayson hunts for value
[3/14/06] David Meier points out examples of bad growth, good growth, and great growth.
[2/24/06] Richard Gibbons warns value investors that temporary bad news is sometimes not so temporary
[2/9/06] Richard Gibbons presents Three Simple Rules
[2/3/06] Buy ugly, but not too ugly
[1/24/06] Two paths to profits: Rule Breakers vs. Inside Value
[1/13/06] The Inside Value team looks for relentless growers.
[1/6/06] Durrell says turnarounds are right under your nose.
[12/23/05] There's a good reason why many wealthy folks could credibly be described as "cheap".
[12/21/05] How to beat Inside Value
[12/18/05] Seth Jayson says wiggles give you opportunities for profits.
[12/9/05] Jim Gillies gives his definition of "value" investing.
[12/3/05] Jim Gillies discusses Stern Stewart's trademarked concept of Economic Value Added. Or EVA = [ROIC – WACC] * IC.
[11/3/05] Richard Gibbons says to buy strong companies when blood is in the streets
[10/29/05] Richard Gibbons talks about buying companies in crisis.
[10/28/05] Seth Jayson talks about Buffett's Stealth Values which are strong companies that are neither dirt-cheap or expensive.
[11/24/05] Tim Beyers learns four lessons from the bubble
[9/15/05] Chuck Saletta again
[8/29/05] The evolution of Richard Gibbons
[8/29/05] Invest like you shop (Chuck Saletta's turn to write the ad)
[8/18/05] In this article/advertisement, Richard Gibbons explains the Inside Value newsletter approach to selecting stocks. Here's my summary: find a great company, then buy it cheap.
[5/6/05] A Patient Investor's Guide to Profit
Monday, August 28, 2006
Remember the bubble
[8/25/06] A review of Roger Lowenstein's book 'Origins of the Crash'
[12/19/05] Jeremy Grantham studied 28 financial bubbles, ALL of which eventually
reverted to the mean. (from chucks_angels)
[12/17/05] Tulips should serve as a reminder to us investors of the dangers of speculation.
[3/14/05] Looking back at the bursting of the bubble
[12/19/05] Jeremy Grantham studied 28 financial bubbles, ALL of which eventually
reverted to the mean. (from chucks_angels)
[12/17/05] Tulips should serve as a reminder to us investors of the dangers of speculation.
[3/14/05] Looking back at the bursting of the bubble
Finding your 'latte factor'
You may have heard of the "latte factor," which states that by skipping the daily stop for a $3 coffee, you can save hundreds, even thousands of dollars, a year. But if don’t drink that much coffee anyway and are still short on savings, what do you do?
Since many Americans are higher in credit card debt than they are in bank account balances, figuring out one’s own latte factor is crucial to keeping spending under control. That means paring down the shopping list and accepting the fact that your "wants" are far more numerous than your "needs."
Since many Americans are higher in credit card debt than they are in bank account balances, figuring out one’s own latte factor is crucial to keeping spending under control. That means paring down the shopping list and accepting the fact that your "wants" are far more numerous than your "needs."
Tuesday, August 22, 2006
The Hot Product
We analyze all kinds of companies to find opportunities for the long-term investor. One category that can be a challenge sometimes is the firm with a hot product on its hands. The product is usually something new that is generating a lot of hype and excitement. Soon enough all the "cool" people have the item and the sky's the limit on the new opportunity.
With excitement comes risk, however, as stock prices shoot up and attract investors at the peak of expectations. Then the realities of the marketplace hit. Some investors get caught at the top, unaware of the white-knuckle ride back down that will soon commence.
With excitement comes risk, however, as stock prices shoot up and attract investors at the peak of expectations. Then the realities of the marketplace hit. Some investors get caught at the top, unaware of the white-knuckle ride back down that will soon commence.
Sunday, August 20, 2006
How Bad Can It Get?
investors who bought the Dow at the peak of the market in 1929 had lost roughly 89% of their investment only three years later. They broke even, in real terms, in 1954 -- 25 years later. If you include dividends in the mix, it's a bit better. In that case, the breakeven year was 1945.
Let's look at a more recent example -- the market's fall from its highs in 2000. From peak to trough, the Nasdaq fell 79%. Investors who bought at the peak broke even in ... well, actually, they're not at breakeven yet. The S&P 500 fared better, with investors losing "only" 50%.
Let's look at a more recent example -- the market's fall from its highs in 2000. From peak to trough, the Nasdaq fell 79%. Investors who bought at the peak broke even in ... well, actually, they're not at breakeven yet. The S&P 500 fared better, with investors losing "only" 50%.
Friday, August 11, 2006
The Congressional Fund
Weekdays in August are a good time to own stocks. The end of October isn't bad either. Christmas can be fine for equities as well.
What these dates have in common is that they are times when Congress isn't in session. Back in 1991, a Wall Streeter named Eric Singer noticed that equities that year tended to do better when lawmakers weren't in Washington. He published an op-ed in Barron's proposing that the correlation was no coincidence.
Later, he looked at a wider timeframe and went around the squash courts of New York telling people he might write a book about his thesis. Now Singer is going one step further. He has created a hedge fund, Singer Congressional Fund. Its goals include making money from the Congressional calendar.
What these dates have in common is that they are times when Congress isn't in session. Back in 1991, a Wall Streeter named Eric Singer noticed that equities that year tended to do better when lawmakers weren't in Washington. He published an op-ed in Barron's proposing that the correlation was no coincidence.
Later, he looked at a wider timeframe and went around the squash courts of New York telling people he might write a book about his thesis. Now Singer is going one step further. He has created a hedge fund, Singer Congressional Fund. Its goals include making money from the Congressional calendar.
How the Fed Affects You
By now, you have probably heard that the Federal Reserve chose on Tuesday to leave the federal funds interest rate unchanged after having made 17 consecutive increases over the past two years.
Perhaps the most confusing thing about Fed announcements is why they really matter. The Federal Reserve isn't a bank that has individual customers, so the rates the Federal Reserve charges or pays don't have a direct impact on any one person. However, because many financial institutions deal directly with the Federal Reserve on an ongoing basis, changes at the Fed do rapidly work their way across the spectrum of banks, lending institutions, and investment companies, and then they eventually reach your bills and account statements.
Perhaps the most confusing thing about Fed announcements is why they really matter. The Federal Reserve isn't a bank that has individual customers, so the rates the Federal Reserve charges or pays don't have a direct impact on any one person. However, because many financial institutions deal directly with the Federal Reserve on an ongoing basis, changes at the Fed do rapidly work their way across the spectrum of banks, lending institutions, and investment companies, and then they eventually reach your bills and account statements.
The Secrets of Nine-Figure Fortunes
Todd Wenning writes, "In a previous job, I helped manage a few nine-figure fortunes -- which was intimidating at first. I mean, an errant mouse click while making a multimillion-dollar trade and you're fired. But eventually the sweats subsided, and I learned the secrets behind this enormous wealth."
How did they do it?
In two easy steps ...
How did they do it?
In two easy steps ...
Wednesday, August 09, 2006
Benefiting from a pause
NEW YORK (Money Magazine) -- The Federal Reserve decided Tuesday not to raise interest rates for the first time in more than two years, noting that economic growth had "moderated."
So which sectors are likely to do well now? A recent study from Citigroup looked at the past five runs of Fed rate hikes and examined how stocks performed in the 12 months following each final rate increase.
What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.
That's because consumers continue buying medicine, drinking soda and paying their electric bill, regardless of the state of the economy.
One-year gain after Fed stops raising rates
Financials: + 24.7%
Health Care: + 23.4%
Consumer Staples: + 17.6%
S&P 500: + 9.9%
* * *
[8/22/06] The above seems to contradict this fact ""Since the Fed's inception in 1913, the average historical DJIA return after the Fed's terminal interest-rate hike is negative (i.e., the DJIA goes down, not up), 4, 6, 8, 10 and 12 months thereafter."
So which sectors are likely to do well now? A recent study from Citigroup looked at the past five runs of Fed rate hikes and examined how stocks performed in the 12 months following each final rate increase.
What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.
That's because consumers continue buying medicine, drinking soda and paying their electric bill, regardless of the state of the economy.
One-year gain after Fed stops raising rates
Financials: + 24.7%
Health Care: + 23.4%
Consumer Staples: + 17.6%
S&P 500: + 9.9%
* * *
[8/22/06] The above seems to contradict this fact ""Since the Fed's inception in 1913, the average historical DJIA return after the Fed's terminal interest-rate hike is negative (i.e., the DJIA goes down, not up), 4, 6, 8, 10 and 12 months thereafter."
Friday, August 04, 2006
Growth Investors
[8/16/06] 2 Things I Learned From Philip Fisher (by Tim Beyers)
[8/4/06] Just as there is Benjamin Graham for value investors, there is Philip Fisher for growth disciples.
[8/4/06] Just as there is Benjamin Graham for value investors, there is Philip Fisher for growth disciples.
Sunday, July 30, 2006
companies buying back shares
[9/19/07] Fools duel dividends vs. buybacks
[5/2/07] Studies found that the stocks of the companies that buy back 5-10% of their total shares on average gain 6.8% more than the companies that do not buy back shares. Dilutions from the increases in the number of shares outstanding result in poorer stock performance over long term.
[12/18/06] At well-run companies, buybacks benefit shareholders by increasing dividend growth potential. But a dollar spent on buying back shares is not the same as a dollar paid out in dividends. For those seeking income, buybacks are far less attractive than dividends.
[12/14/06] On a purely theoretical level, it shouldn't make a big difference whether or not a company pays dividends. If earnings are distributed to investors in the form of dividends, the recipients must choose how to reinvest those payments. Many investors participate in dividend reinvestment programs, which automatically use any dividends they receive to purchase additional shares of stock. On the other hand, if a company retains its earnings instead of paying a dividend, the value of the company should be higher by the amount of cash the company kept. The company can reinvest the money in its business operations or perform capital-structure transactions, such as paying down debt or repurchasing stock.
In reality, however, many investors prefer dividend-paying stocks, and many companies have responded to that preference by continuing to pay substantial dividends. Part of that preference may be simply because dividends represent real money, rather than an abstract paper value.
[12/5/06] Stock buybacks are huge.
Through the first nine months of this year, big U.S. corporations spent a record $325 billion snapping up some of their outstanding shares, according to Standard & Poor's. That's up 33% from the same time last year, and more than double the $130 billion spent on buybacks during the first nine months of 2004.
To put those figures in perspective, consider that total operating earnings for S&P 500 companies through the end of the third quarter was $590 billion. In other words, the biggest companies spent more than half their earnings power retiring their shares.
[12/3/06] Dueling Fools: dividends vs. buybacks
[9/29/06] Share repurchases can be great value creators for investors -- if done for the right reasons. But be careful, because some repurchases are undertaken just to offset option dilution.
[8/25/06] Standard & Poor's Corp. of New York is warning investors about distortions in corporate earnings due to high levels of treasury stock and cash held on balance sheets.
Yesterday, S&P announced that share buybacks in the second quarter had reached a record $116 billion for S&P 500 companies.
For 20% of these firms, the reduced number of shares outstanding caused a "significant boost to earnings-per-share" in the quarter, said Howard Silverblatt, S&P senior index analyst, in a statement.
Although helpful for per-share earnings, share buybacks combined with large amounts of interest-earning cash could cause problems in predicting results for many companies, the research firm said.
[8/20/06] Many Americans need to look for ways to curb their spending. Big U.S. companies have the opposite problem.
The piles of cash and stockpile of repurchased shares at these companies have hit record levels and continue to grow along with corporate earnings, creating challenges for the executives who must decide how to allocate all that capital.
While some investors carp about managers hoarding cash rather than building their businesses, data show companies have in fact been reinvesting in themselves. Some are also acquiring other companies, although these deals are often smaller in scope than the takeovers executed in the go-go late 1990s, as executives don't want to undertake expensive deals that could hamper investor returns for years to come.
The cash figures are also becoming so large that they are skewing some of the yardsticks used to gauge corporate performance. For example, with more companies seeing bigger portions of their bottom line accounted for by interest income, it becomes harder for Main Street investors to gauge how well some corporate managers are running core operations.
* * *
[7/30/06] The companies in the Standard & Poor's 500 index have reported 16 straight quarters of double-digit earnings growth. If upcoming reports show that this spectacular growth continued in the second quarter, earnings per share may be pushed into double digits not because of stellar performance, but thanks to share buybacks and higher interest rates.
Share buybacks have become a big-money endeavor. The cash-laden companies in the S&P 500 spent 45 percent of their capital expenditures on stock buybacks last year, which was especially significant because capital expenditures were on the upswing. Thanks to buybacks, the S&P 500 companies now hold 10 percent of their market value in company-owned stock, according to Howard Silverblatt, senior index analyst at S&P. Companies have never bought back this much stock before, Silverblatt said.
[5/2/07] Studies found that the stocks of the companies that buy back 5-10% of their total shares on average gain 6.8% more than the companies that do not buy back shares. Dilutions from the increases in the number of shares outstanding result in poorer stock performance over long term.
[12/18/06] At well-run companies, buybacks benefit shareholders by increasing dividend growth potential. But a dollar spent on buying back shares is not the same as a dollar paid out in dividends. For those seeking income, buybacks are far less attractive than dividends.
[12/14/06] On a purely theoretical level, it shouldn't make a big difference whether or not a company pays dividends. If earnings are distributed to investors in the form of dividends, the recipients must choose how to reinvest those payments. Many investors participate in dividend reinvestment programs, which automatically use any dividends they receive to purchase additional shares of stock. On the other hand, if a company retains its earnings instead of paying a dividend, the value of the company should be higher by the amount of cash the company kept. The company can reinvest the money in its business operations or perform capital-structure transactions, such as paying down debt or repurchasing stock.
In reality, however, many investors prefer dividend-paying stocks, and many companies have responded to that preference by continuing to pay substantial dividends. Part of that preference may be simply because dividends represent real money, rather than an abstract paper value.
[12/5/06] Stock buybacks are huge.
Through the first nine months of this year, big U.S. corporations spent a record $325 billion snapping up some of their outstanding shares, according to Standard & Poor's. That's up 33% from the same time last year, and more than double the $130 billion spent on buybacks during the first nine months of 2004.
To put those figures in perspective, consider that total operating earnings for S&P 500 companies through the end of the third quarter was $590 billion. In other words, the biggest companies spent more than half their earnings power retiring their shares.
[12/3/06] Dueling Fools: dividends vs. buybacks
[9/29/06] Share repurchases can be great value creators for investors -- if done for the right reasons. But be careful, because some repurchases are undertaken just to offset option dilution.
[8/25/06] Standard & Poor's Corp. of New York is warning investors about distortions in corporate earnings due to high levels of treasury stock and cash held on balance sheets.
Yesterday, S&P announced that share buybacks in the second quarter had reached a record $116 billion for S&P 500 companies.
For 20% of these firms, the reduced number of shares outstanding caused a "significant boost to earnings-per-share" in the quarter, said Howard Silverblatt, S&P senior index analyst, in a statement.
Although helpful for per-share earnings, share buybacks combined with large amounts of interest-earning cash could cause problems in predicting results for many companies, the research firm said.
[8/20/06] Many Americans need to look for ways to curb their spending. Big U.S. companies have the opposite problem.
The piles of cash and stockpile of repurchased shares at these companies have hit record levels and continue to grow along with corporate earnings, creating challenges for the executives who must decide how to allocate all that capital.
While some investors carp about managers hoarding cash rather than building their businesses, data show companies have in fact been reinvesting in themselves. Some are also acquiring other companies, although these deals are often smaller in scope than the takeovers executed in the go-go late 1990s, as executives don't want to undertake expensive deals that could hamper investor returns for years to come.
The cash figures are also becoming so large that they are skewing some of the yardsticks used to gauge corporate performance. For example, with more companies seeing bigger portions of their bottom line accounted for by interest income, it becomes harder for Main Street investors to gauge how well some corporate managers are running core operations.
* * *
[7/30/06] The companies in the Standard & Poor's 500 index have reported 16 straight quarters of double-digit earnings growth. If upcoming reports show that this spectacular growth continued in the second quarter, earnings per share may be pushed into double digits not because of stellar performance, but thanks to share buybacks and higher interest rates.
Share buybacks have become a big-money endeavor. The cash-laden companies in the S&P 500 spent 45 percent of their capital expenditures on stock buybacks last year, which was especially significant because capital expenditures were on the upswing. Thanks to buybacks, the S&P 500 companies now hold 10 percent of their market value in company-owned stock, according to Howard Silverblatt, senior index analyst at S&P. Companies have never bought back this much stock before, Silverblatt said.
Thursday, July 27, 2006
Peak Oil
[8/9/06: Mauldin writes about Peter Tertzakian's book A Thousand Barrels a Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World] Once peak oil occurs, then the historic patterns of world oil demand and price cycles will cease. In recent years, the realization of price stability has depended on the effectiveness of nations belonging to the Organization of the Petroleum Exporting Countries (OPEC) to adjust for the production increases and lags of the non-OPEC nations.
This is leading to what Tertzakian calls a "break point."
"Although the stakes have never been greater, the history of energy shows that a time of crisis is always followed by a defining break point, after which government policies, and social and technological forces, begin to rebalance the structure of the world's vast energy complex. Break points are crucial junctures marked by dramatic changes in the way energy is used.
"During the break point and the rebalancing phase that follows (which can last for 10 to 20 years), nations struggle for answers, consumers suffer and complain, the economy adapts, and science surges with innovation and discovery. In the era that emerges, lifestyles change, businesses are born and fortunes are made."
[8/3/06] The reason for high oil prices: speculation?
[7/27/06] LONDON (Reuters) -- Oil prices will soar to well over $100 a barrel and stay high as part of a sustained commodities bull run that has another 15 years of life, billionaire U.S. investor Jim Rogers told Reuters in an interview.
"We're going to have high oil prices for a very long time. The surprise is going to be how high it goes," Rogers said.
Reiterating earlier comments that oil prices would hit at least $100 a barrel, he said: "It will be much more than $100 before the bull market is over."
[via Maverick of investwise 7/14/06]
[6/2/06] Is the oil boom over?
[12/18/05] The Energy Department is projecting $57 oil in 25 years (up from their $31 projection last year).
[8/22/05] The term "peak oil" (also known as "Hubbert Peak Theory") was first used by M. King Hubbert, a geophysicist with Royal Dutch Shell (NYSE: RD). In 1956, Hubbert predicted that U.S. oil production would reach a peak between the late 1960s and early 1970s, from which point production rates would forever decline.
Hubbert's prediction proved accurate in 1970, when U.S. production peaked at 11.3 million barrels per day -- a point from which production has been declining ever since. According to the Department of Energy, the United States produced 7.8 million barrels per day in 2003, representing a 31% drop in production from the peak. With oil now at $66 per barrel, there are plenty of "experts" applying the Hubbert theory to say that world oil production is peaking.
[5/2/05] What We Now Know about peak oil
This is leading to what Tertzakian calls a "break point."
"Although the stakes have never been greater, the history of energy shows that a time of crisis is always followed by a defining break point, after which government policies, and social and technological forces, begin to rebalance the structure of the world's vast energy complex. Break points are crucial junctures marked by dramatic changes in the way energy is used.
"During the break point and the rebalancing phase that follows (which can last for 10 to 20 years), nations struggle for answers, consumers suffer and complain, the economy adapts, and science surges with innovation and discovery. In the era that emerges, lifestyles change, businesses are born and fortunes are made."
[8/3/06] The reason for high oil prices: speculation?
[7/27/06] LONDON (Reuters) -- Oil prices will soar to well over $100 a barrel and stay high as part of a sustained commodities bull run that has another 15 years of life, billionaire U.S. investor Jim Rogers told Reuters in an interview.
"We're going to have high oil prices for a very long time. The surprise is going to be how high it goes," Rogers said.
Reiterating earlier comments that oil prices would hit at least $100 a barrel, he said: "It will be much more than $100 before the bull market is over."
[via Maverick of investwise 7/14/06]
[6/2/06] Is the oil boom over?
[12/18/05] The Energy Department is projecting $57 oil in 25 years (up from their $31 projection last year).
[8/22/05] The term "peak oil" (also known as "Hubbert Peak Theory") was first used by M. King Hubbert, a geophysicist with Royal Dutch Shell (NYSE: RD). In 1956, Hubbert predicted that U.S. oil production would reach a peak between the late 1960s and early 1970s, from which point production rates would forever decline.
Hubbert's prediction proved accurate in 1970, when U.S. production peaked at 11.3 million barrels per day -- a point from which production has been declining ever since. According to the Department of Energy, the United States produced 7.8 million barrels per day in 2003, representing a 31% drop in production from the peak. With oil now at $66 per barrel, there are plenty of "experts" applying the Hubbert theory to say that world oil production is peaking.
[5/2/05] What We Now Know about peak oil
Monday, July 24, 2006
Check back in 10 years
Morningstar's Pat Dorsey takes his shot at Ten Stocks for the Next Ten Years. Hopefully he'll do better than the New York Times did in 2000. The stocks are AMGN, CSG, DELL, EBAY, FAST, JNJ, JPM, MA, MDT, SYY.
Thursday, July 13, 2006
The Ultimate Buy-and-Hold Strategy
In theory, a “perfect” investment strategy would be cheap, easy to implement and risk-free. It would make you fabulously rich in about a week. Tax-free, of course. We haven’t found that combination, and we don’t expect to. But the Ultimate Buy-and-Hold Strategy is the best real-world substitute that we’ve found.
The Ultimate Buy-and-Hold Strategy produces higher returns than the investments most people hold. It does so at lower risk, with minimal transaction costs. It’s mechanical, so it does not depend on finding the right guru to make the right predictions about an individual company, the market or the economy. You will never again have to rely on financial publications for articles with headlines like “The 10 Funds You Should Own Now.”
Even though this strategy is based on the finest academic research available, it’s simple and easy to understand. If I had to sum it up in one sentence, I’d do it this way:
The Ultimate Buy-and-Hold Strategy uses no-load index funds to create a sophisticated asset allocation model with worldwide diversification and the addition of value stocks and small-cap stocks to a traditional large-cap growth stock portfolio.
If you think you already know what that means and you’re tempted to skip the rest of this article, I hope you won’t. The evidence I’m about to show you is compelling, and I hope you’ll let me present it.
-- Paul Merriman, Merriman Capital Management, FundAvice.com
[8/17/14 - 2014 update]
The Ultimate Buy-and-Hold Strategy produces higher returns than the investments most people hold. It does so at lower risk, with minimal transaction costs. It’s mechanical, so it does not depend on finding the right guru to make the right predictions about an individual company, the market or the economy. You will never again have to rely on financial publications for articles with headlines like “The 10 Funds You Should Own Now.”
Even though this strategy is based on the finest academic research available, it’s simple and easy to understand. If I had to sum it up in one sentence, I’d do it this way:
The Ultimate Buy-and-Hold Strategy uses no-load index funds to create a sophisticated asset allocation model with worldwide diversification and the addition of value stocks and small-cap stocks to a traditional large-cap growth stock portfolio.
If you think you already know what that means and you’re tempted to skip the rest of this article, I hope you won’t. The evidence I’m about to show you is compelling, and I hope you’ll let me present it.
-- Paul Merriman, Merriman Capital Management, FundAvice.com
[8/17/14 - 2014 update]
Wednesday, July 12, 2006
The average S&P 500 stock
[7/12/06] The S&P 500 index is now trading at 14.5 estimated 2006 earnings with a forecast of 12% earnings growth in 2006. [That sounds pretty reasonable to me.]
-- Markets Are Never Wrong?, James Holloway, Vice President S&P Editorial
[4/20/05] Right now the average S&P 500 company sports a return on equity of 20%. It's priced at 19 times free cash flow and 20 times trailing 12 months' earnings. It's expected to grow those earnings at just under 13%. (And for those of you punching away at your calculators, yes, the average company is therefore selling at a PEG of more than 1.5, and so is by traditional metrics overpriced.) Finally, the average company pays a historically tiny 2% dividend.
Actually that average company sounds pretty good to me.
[updated 7/18/05] 18 times free cash flow, 19 times trailing earnings.
-- Markets Are Never Wrong?, James Holloway, Vice President S&P Editorial
[4/20/05] Right now the average S&P 500 company sports a return on equity of 20%. It's priced at 19 times free cash flow and 20 times trailing 12 months' earnings. It's expected to grow those earnings at just under 13%. (And for those of you punching away at your calculators, yes, the average company is therefore selling at a PEG of more than 1.5, and so is by traditional metrics overpriced.) Finally, the average company pays a historically tiny 2% dividend.
Actually that average company sounds pretty good to me.
[updated 7/18/05] 18 times free cash flow, 19 times trailing earnings.
The Gospel of Wealth
"The Gospel of Wealth" was an essay written by Andrew Carnegie in 1889 that described the responsibility of philanthropy by the new upper class of self-made rich. The central thesis of Carnegie's essay was the peril of allowing large sums of money to be passed into the hands of persons or organizations ill-equipped mentally or emotionally to cope with them. As a result, the wealthy entrepreneur must assume the responsibility of distributing his fortune in a way that it will be put to good use, and not wasted on frivolous expenditure. The very existence of poverty in a capitalistic society could be negated by wealthy philanthropic businessmen.
Carnegie based his philosophy on the observation that the heirs of large fortunes frequently squandered them in riotous living rather than nurturing and growing them. Even bequeathing one's fortune to charity was no guarantee that it would be used wisely, since there was no guarantee that a charitable organization not under one's direction would use the money in accordance with one's wishes. Carnegie disapproved of charitable giving that merely maintained the poor in their impoverished state, and urged a movement toward the creation of a new mode of giving which would create opportunities for the beneficiaries of the gift to better themselves. As a result, the gift would not be merely consumed, but would be productive of even greater wealth throughout the society.
-- link from brknews, 7/2/06
Carnegie based his philosophy on the observation that the heirs of large fortunes frequently squandered them in riotous living rather than nurturing and growing them. Even bequeathing one's fortune to charity was no guarantee that it would be used wisely, since there was no guarantee that a charitable organization not under one's direction would use the money in accordance with one's wishes. Carnegie disapproved of charitable giving that merely maintained the poor in their impoverished state, and urged a movement toward the creation of a new mode of giving which would create opportunities for the beneficiaries of the gift to better themselves. As a result, the gift would not be merely consumed, but would be productive of even greater wealth throughout the society.
-- link from brknews, 7/2/06
Monday, July 10, 2006
cash is king for balance sheet strength
Investors are often told to look for companies that have a "strong balance sheet," and one of the measures they often use is the ratio of long-term debt to stockholders' equity. Unfortunately, Schwab research has found that such debt ratios of little use as stock selection tools.
Historically, stocks with little or no long-term debt have not outperformed market averages. Not surprisingly, the stock market is generally too efficient to reward metrics in such widespread use.
But that's not to say that balance-sheet strength is irrelevent for stock selection. An alternative indicator that many investors tend to overlook is a company's cash liquidity level as an indicator of future returns.
The ratio of cash and marketable securities to market capitalization as a measure of balance-sheet strength is simple and intuitive, but apparently not fully appreciated by the market. Among the 3200 largest U.S. companies (excluding financial firms, whose cash balances are largely offset by short-term liabilities), a simulated portfolio containing the 5% of stocks with the most cash have historically delivered an annual buy-and-hold return of about 24% versus 14% for the average stock ranked over the period 1986-2005. While past returns don't guarantee future results, the potential power of this simple indicator is intriguing.
One note of caution in researching the investment merits of firms with lots of cash on the balance sheet: it's critical to understand where the cash came from. The Statement of Cash Flows (found in a firm's annual 10-K report) is a great tool for this purpose because it reveals the sources of recent changes in a firm's cash balance.
For example, a firm generating positive cash flows from operations is preferable as this is a sign of a healthy business. On the other hand, a firm whose high cash balance stems from recent financoing efforts such as share offerings or debt issues, or from investing activities such as the sale of a business unit, is much less interesting as these sources of cash flow tend to be one-time shots.
-- Greg Forsythe, On Investing Magazine, Fall 2005
The article goes on name several stocks worthy of further research, all of which have positive and growing cash flow from operations: ASF, AET, AGYS, IMN, SFA (Scientific Atlanta has since been acquired by Cisco), UNTD.
Historically, stocks with little or no long-term debt have not outperformed market averages. Not surprisingly, the stock market is generally too efficient to reward metrics in such widespread use.
But that's not to say that balance-sheet strength is irrelevent for stock selection. An alternative indicator that many investors tend to overlook is a company's cash liquidity level as an indicator of future returns.
The ratio of cash and marketable securities to market capitalization as a measure of balance-sheet strength is simple and intuitive, but apparently not fully appreciated by the market. Among the 3200 largest U.S. companies (excluding financial firms, whose cash balances are largely offset by short-term liabilities), a simulated portfolio containing the 5% of stocks with the most cash have historically delivered an annual buy-and-hold return of about 24% versus 14% for the average stock ranked over the period 1986-2005. While past returns don't guarantee future results, the potential power of this simple indicator is intriguing.
One note of caution in researching the investment merits of firms with lots of cash on the balance sheet: it's critical to understand where the cash came from. The Statement of Cash Flows (found in a firm's annual 10-K report) is a great tool for this purpose because it reveals the sources of recent changes in a firm's cash balance.
For example, a firm generating positive cash flows from operations is preferable as this is a sign of a healthy business. On the other hand, a firm whose high cash balance stems from recent financoing efforts such as share offerings or debt issues, or from investing activities such as the sale of a business unit, is much less interesting as these sources of cash flow tend to be one-time shots.
-- Greg Forsythe, On Investing Magazine, Fall 2005
The article goes on name several stocks worthy of further research, all of which have positive and growing cash flow from operations: ASF, AET, AGYS, IMN, SFA (Scientific Atlanta has since been acquired by Cisco), UNTD.
Sunday, July 09, 2006
The Changing Face of Growth Investing
While an appealing case can be made in general for growth investing, managers agree that investors have to be more careful than usual in identifying companies that offer superior growth potential.
There are increased concerns that some traditional growth sectors such as pharmaceuticals and technology, as well as some companies that have been considered leading growth companies in the past, may face slower growth prospects in the future.
Robert Sharps, manager of the Institutional Large-Cap Growth Fund, believes that various growth companies, such as those operating in areas like food and beverage, household products, and pharmaceuticals, “just don’t have the sort of growth prospects now that they once did. Technology is another sector that will not grow the way it has. It already accounts for 50% of total capital expenditures, compared with 10% in the past. It’s basically finished taking share of such expenditures. Companies like IBM, Cisco Systems, and Intel face more significant growth challenges.
“So, you have to be more selective and look for companies that haven’t already consolidated their industry and don’t already have massive share of their market and very high (profit) margins already. That might include sectors like biotechnology, HMOs, or Internet-oriented companies —- stocks like eBay, Yahoo!, Gilead Sciences, and UnitedHealth Group.
-- T. Rowe Price Report, Spring 2005
There are increased concerns that some traditional growth sectors such as pharmaceuticals and technology, as well as some companies that have been considered leading growth companies in the past, may face slower growth prospects in the future.
Robert Sharps, manager of the Institutional Large-Cap Growth Fund, believes that various growth companies, such as those operating in areas like food and beverage, household products, and pharmaceuticals, “just don’t have the sort of growth prospects now that they once did. Technology is another sector that will not grow the way it has. It already accounts for 50% of total capital expenditures, compared with 10% in the past. It’s basically finished taking share of such expenditures. Companies like IBM, Cisco Systems, and Intel face more significant growth challenges.
“So, you have to be more selective and look for companies that haven’t already consolidated their industry and don’t already have massive share of their market and very high (profit) margins already. That might include sectors like biotechnology, HMOs, or Internet-oriented companies —- stocks like eBay, Yahoo!, Gilead Sciences, and UnitedHealth Group.
-- T. Rowe Price Report, Spring 2005