The Street.com excerpted some of the more salient quotes from Grantham's recent newsletter. From their site:
"While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent. One, unsurprisingly, is legendary value investor Jeremy Grantham - the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham ... has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
"'Everything is in bubble territory,' he says. 'Everything. The bursting of this bubble will be across all countries and all assets.'
"'From Indian antiquities to modern Chinese art,' he wrote in a letter to clients this week following a six-week world tour, 'from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!'
So, does he counsel you to run for the hills? No. Their study of bubbles suggests there is a short but dramatic "exponential" phase before the bubble bursts. He writes:
"My colleagues suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."
Saturday, April 28, 2007
Wednesday, April 25, 2007
The Big House
Investors looking for stock-picking tips might find the answer right at home—not their own, but where chief executives live.
A new study makes the case that there is a strong correlation between executives’ home buying behavior and stock performance. The bigger the CEO home, the worse the company’s stock fares, according to two academic researchers. They also found that companies with CEOs living in more modest abodes often see their shares outperform.
A new study makes the case that there is a strong correlation between executives’ home buying behavior and stock performance. The bigger the CEO home, the worse the company’s stock fares, according to two academic researchers. They also found that companies with CEOs living in more modest abodes often see their shares outperform.
Earnings slowdown
Corporate profits have, until recently, been on a tear. From the second quarter of 2002 through the third period of 2006, the S&P 500 posted 18 straight quarters of double-digit increases in year-over-year operating earnings. The fourth quarter of 2006, however, slowed to an 8.9% rise, and Standard & Poor's equity analysts don't see another double-digit quarter until at least the end of this year.
Friday, April 20, 2007
DCA or lump sum?
Dollar-cost averaging -- the practice of making an investment in regular intervals over an extended period of time, rather than all at once -- is a favorite recommendation of full-service brokers, an occasional subject of lively debate on the Fool's message boards, and a technique that has found some favor among Fool writers. Yet there's a growing body of academic research that claims to show that dollar-cost averaging is largely ineffective in practice, and may even be harmful to your financial well-being under some circumstances.
Last year, Texas A&M University finance professor John G. Greenhut looked at various academic studies of DCA, hoping to be able to explain why the strategy continued to be popular despite a growing body of evidence that it didn't work -- and why a few studies had, contrary to the majority of the research, found DCA to be a successful approach on occasion. His analysis is complicated (as you'll see if you click that link), but the gist of his conclusion is that lump-sum investing (abbreviated as "LS" in his article) is the better approach most of the time -- i.e., when the market is trending upward -- and that illustrations showing DCA at an advantage almost always use hypothetical stock-price patterns that don't match real trends.
Last year, Texas A&M University finance professor John G. Greenhut looked at various academic studies of DCA, hoping to be able to explain why the strategy continued to be popular despite a growing body of evidence that it didn't work -- and why a few studies had, contrary to the majority of the research, found DCA to be a successful approach on occasion. His analysis is complicated (as you'll see if you click that link), but the gist of his conclusion is that lump-sum investing (abbreviated as "LS" in his article) is the better approach most of the time -- i.e., when the market is trending upward -- and that illustrations showing DCA at an advantage almost always use hypothetical stock-price patterns that don't match real trends.
Tuesday, April 17, 2007
Gurufocus Strategies
[4/29/07] This is the second article in the series that we study the strategies on how to use Gurus’ ideas to achieve outstanding gains over long term. This study is for the Most Weighted Portfolio, which has returned 26.5% since incepted in Jan. 2006.
The Most Weighted Portfolio consists of the top 25 stocks with the highest combined weightings in the aggregated portfolios of Gurus. The combined weightings are defined as the total of the positions of a stock in Gurus’ portfolio. For instance: if Guru A holds 17% of WMT in his holding, and Guru B holds 5%, and Guru C holds 4%. The combined weighting of WMT is defined as 17+5+4=26. The portfolio is rebalanced once every 12 months. The last rebalance was Jan. 4, 2007.
[4/13/07] When we started GuruFocus, the first questions we have were: does it really work?
As GuruFocusers know, most of GuruFocus reports on the Gurus’ picks and portfolios have a time lag of 1-4 months from time the trades are made, except the Real Time Picks we have created for Premium Members. Does it make sense to buy what Gurus bought several months ago? If you are a believer of value investing, it does. Sure, a lot of times the stock prices have gone up after the Gurus bought. But there are about equal number of times the prices went down. This means that you can buy the stocks Warren Buffett or Martin Whitman have bought and pay less than what they have paid. Does that sound a good deal? It should.
We have created Guru Bargains portfolio to prove that. The portfolio was incepted in June 2006, and the stocks were selected from those Gurus have bought during the first quarter of 2006, and have the biggest price declines since the Gurus have bought. How did these stocks do? Miserably! By the end of 2006, this portfolio underperformed S&P500 by more than 20%!
The Most Weighted Portfolio consists of the top 25 stocks with the highest combined weightings in the aggregated portfolios of Gurus. The combined weightings are defined as the total of the positions of a stock in Gurus’ portfolio. For instance: if Guru A holds 17% of WMT in his holding, and Guru B holds 5%, and Guru C holds 4%. The combined weighting of WMT is defined as 17+5+4=26. The portfolio is rebalanced once every 12 months. The last rebalance was Jan. 4, 2007.
[4/13/07] When we started GuruFocus, the first questions we have were: does it really work?
As GuruFocusers know, most of GuruFocus reports on the Gurus’ picks and portfolios have a time lag of 1-4 months from time the trades are made, except the Real Time Picks we have created for Premium Members. Does it make sense to buy what Gurus bought several months ago? If you are a believer of value investing, it does. Sure, a lot of times the stock prices have gone up after the Gurus bought. But there are about equal number of times the prices went down. This means that you can buy the stocks Warren Buffett or Martin Whitman have bought and pay less than what they have paid. Does that sound a good deal? It should.
We have created Guru Bargains portfolio to prove that. The portfolio was incepted in June 2006, and the stocks were selected from those Gurus have bought during the first quarter of 2006, and have the biggest price declines since the Gurus have bought. How did these stocks do? Miserably! By the end of 2006, this portfolio underperformed S&P500 by more than 20%!
Sunday, April 08, 2007
Reacting to market declines
Nothing ignites the fear of losing one's hard-earned money like a violent, short-term stock market correction. For many investors — even those with a long-term perspective — the natural human reaction to a sudden plunge in the stock market is to reduce or liquidate one's exposure, with the goal of trying to stem further loss of capital and soothe a rattled mind.
Since 1926, the stock market had a positive return in 58 out of 81 calendar years-or nearly three out of every four years. Because the long-term trend of the stock market has been upward, one must also recognize that there are significant opportunity risks accorded with trying to accurately time the market's peaks and valleys in search of outsized gains. The odds are stacked against successfully timing short-term market fluctuations, particularly because long-term investors must also effectively time their re-entry.
An examination of historical flows to U.S. stock mutual funds and the performance of the U.S. stock market reveals that, on average, individual investors have done a poor job of market timing. In general, they tended to increase their exposure to stocks just prior to a sell-off, and reduce their holdings ahead of a period of stellar appreciation. For example, investors allocated a record $219 billion in net new money to stock mutual funds during the 12-month period ending October 31, 2000, which preceded a decline of 27% for the S&P 500® Index throughout the following year. Another example of poor timing took place soon thereafter. After three straight years of stock market declines, flows turned negative (redemptions exceeded sales) during the 12-month period to February 28, 2003. However, from that point on throughout the next year, the S&P 500 rallied 35%. In other words, most investors were selling out of equity funds prior to a significant rebound and at exactly the time when they would have benefited the most by owning a higher percentage of stocks.
Some of the best periods to have entered the stock market have been during periods of particularly gloomy sentiment and market turbulence. Since 1926, the best five-year return in the U.S. stock market began in May 1932-in the midst of the Great Depression-when stocks rallied 367% (See table below). The next best five-year period (when the stock market rose 267%) began in July 1982 amid an economy in the midst of one of the worst recessions in the post-war period, featuring double-digit levels of unemployment and interest rates. Investors might use these lessons from history to remember that staying fully invested can give them an opportunity to fully participate in the market's long-term upward trend. Waiting until the backdrop feels "safe" to make an investment in stocks has historically not been a good method of achieving future returns. Many of the best periods to invest in stocks have been those environments that were among the most unnerving.
[The entire article is here.]
Since 1926, the stock market had a positive return in 58 out of 81 calendar years-or nearly three out of every four years. Because the long-term trend of the stock market has been upward, one must also recognize that there are significant opportunity risks accorded with trying to accurately time the market's peaks and valleys in search of outsized gains. The odds are stacked against successfully timing short-term market fluctuations, particularly because long-term investors must also effectively time their re-entry.
An examination of historical flows to U.S. stock mutual funds and the performance of the U.S. stock market reveals that, on average, individual investors have done a poor job of market timing. In general, they tended to increase their exposure to stocks just prior to a sell-off, and reduce their holdings ahead of a period of stellar appreciation. For example, investors allocated a record $219 billion in net new money to stock mutual funds during the 12-month period ending October 31, 2000, which preceded a decline of 27% for the S&P 500® Index throughout the following year. Another example of poor timing took place soon thereafter. After three straight years of stock market declines, flows turned negative (redemptions exceeded sales) during the 12-month period to February 28, 2003. However, from that point on throughout the next year, the S&P 500 rallied 35%. In other words, most investors were selling out of equity funds prior to a significant rebound and at exactly the time when they would have benefited the most by owning a higher percentage of stocks.
Some of the best periods to have entered the stock market have been during periods of particularly gloomy sentiment and market turbulence. Since 1926, the best five-year return in the U.S. stock market began in May 1932-in the midst of the Great Depression-when stocks rallied 367% (See table below). The next best five-year period (when the stock market rose 267%) began in July 1982 amid an economy in the midst of one of the worst recessions in the post-war period, featuring double-digit levels of unemployment and interest rates. Investors might use these lessons from history to remember that staying fully invested can give them an opportunity to fully participate in the market's long-term upward trend. Waiting until the backdrop feels "safe" to make an investment in stocks has historically not been a good method of achieving future returns. Many of the best periods to invest in stocks have been those environments that were among the most unnerving.
[The entire article is here.]