Dividends Rule

[8/31/07] Famed Wharton finance professor Jeremy Siegel -- you've likely seen him on TV or read his books -- found out something very powerful recently: From 1871-2003, a full 97% of the stock market's return came from reinvested dividends -- only 3% was from capital gains on the original principal!

The case for dividends gets stronger. Dividend stocks have a reputation for safety, but they also have a secret agenda that enriches investors. Rob Arnott, former editor of the Financial Analysts Journal, and Cliff Asness, managing principal at AQR Capital Management uncovered it: Stocks with the highest yields actually show the highest earnings growth over the next decade.

There's more. Ned Davis research found that from 1972 to 2006, S&P 500 stocks not paying a dividend returned 4.1% annually, while dividend payers returned 10.1%!


[6/14/05] says Matthew Emmert, the chief analyst of Motley Fool Income Investor.

Meanwhile, Tom Gardner mentions nothing about dividends.

Quant King

The acknowledged quant king is James Simons, 69, an M.I.T.-trained mathematician with a groundbreaking theory that physicists are using to plumb the mysteries of superstring study and get at the very nature of existence itself. Simons turned his big brain on investing after his math career, founding Renaissance Technologies quant shop. The firm pocketed $1.7 billion in investor fees last year, among the highest in the industry. In return, his clients can reap annual returns of more than 30 percent, according to news reports.

As elegant as the models are, they cannot predict unpredictable events, or human panic, some traders say. Further, some say, too many quant funds are full of myopic brainiacs, overly reliant on their tools.

"Most are idiot savants brought to industrial proportion," Nassim Nicholas Taleb, former quant-jock and bestselling contrarian author, said by phone from Scotland, where he is promoting his new book on improbability, "The Black Swan."

"They are very smart in front of a textbook but not smart enough to understand very elementary things in reality," he said.

Market performance after volatility spikes

[8/23/07] Investors panicked in 1997 during the Asian crisis… but once the fear subsided, stocks shot up something like 20%. Investors then panicked in 1998 (during the Russian bond default/LTCM crisis). Once again, as the fear started to subside, stocks soared. The S&P 500 shot from less than 1,000 to 1,400 in no time.

We had a few more panics… September 11, 2001, of course, but the S&P 500 rallied nearly 20% very quickly – and this was during a bear market! Late 2002-early 2003, as the U.S. invaded Iraq. Once again, as the uncertainty/panic subsided, stocks soared… The S&P 500 ran from 800 to 1,100.

We're in another panic now. But the fear is subsiding…

The Volatility Index (the VIX) is my measure of fear. Some call it the Fear Gauge. On Friday, it closed at 30. On Monday, it closed at 26. Today, it's around 23.

Now I can't guarantee that fear can't jump once again. As you can see from the chart, the Fear Gauge often has more than one spike to "scary" levels.

But if you ask me, I think we're closer to a near-term bottom than a top. I can be completely wrong, of course… The Crash of '87 set a record on the Fear Gauge, and we didn't get a whole lot of advance warning. Just days before the '87 Crash – the worst one-day drop in Wall Street history – the Fear Gauge was right in line with its average for the previous 12 months.

Instead of betting on a decline from here, this is what I see: Based on valuation, stocks are as cheap as they've been in a dozen years. The Fed is about to start cutting interest rates. And if you believe that you've got to be a contrarian to make money, the contrary thing is to believe in stocks when most people don't… and that's now.

[8/20/07] At its recent peak, the Volatility Index (VIX) was up 90% from 50 trading days earlier. Since 1990, there have been only six other periods of such intense short-term volatility. Each time, the S&P 500 was higher one, three and six months later.

How good is Jim Cramer?

[3/15/09] Cramer vs. Stewart

[3/12/09] The Daily Show vs. Jim Cramer

[2/8/09] Cramer's recommendations underperform the market by most measures. From May to December of last year, for example, the market lost about 30%. Heeding Cramer's Buys and Sells would have added another five percentage points to that loss, according to our latest tally.

To his credit, Cramer's Sells "made money" by outperforming the market on the downside by as much as five percentage points (depending on the holding period and benchmark). His Buys, however, lost up to 10 percentage points more than the market.

Our research reveals that the stocks Cramer picks as Buys have been rising versus the market for several days in advance of his show, while his Sells have been falling. This doesn't prove there is a leak in the tight security surrounding CNBC's show. It could merely mean that Cramer and his staff are heavy-footed in their research. Or it could mean that his stocks are primarily momentum plays. That is the network's explanation. "Jim likes to recommend 'what is working'," said CNBC communications vice president Brian Steel in a written response Friday. "So it is no surprise there would be movement in these stocks prior to Jim mentioning them."

In any event, these pre-show moves are the probable cause of Cramer's underperformance. As the stocks revert to the market's trend in the weeks after the show, Cramer's followers get hurt.

[10/31/08] Like him or hate him, Jim Cramer gets people's attention. And whether he gets his picks right or wrong, he's done at least one thing that deserves the highest praise. Every night on Cramer's Mad Money program, you'll hear about how Cramer owns some of the stocks he talks about in his charitable trust. He owns a mixed bag of stocks, some up and some down. But regardless of how those picks have done, Cramer deserves the most credit for making the donation to charity in the first place.

[5/14/08] While looking through AOL videos, I happened to put in a search for Jim Cramer and came up with Wizetrade vs. Jim Cramer which is a technical analysis of Jim Cramer's picks of the day (hint: sort by most recent)

[3/7/08] Tracking the performance of Jim Cramer’s Jan 2007 stock picks

[2/27/08] Five mistakes amateurs make

[8/20/07] Does it pay to short Cramer?

[8/9/07] Cramer flips out [via tairbear00@chucks_angels]

[5/31/07] Who does Jim Cramer think he is?

[3/16/07] Is Jim Cramer a rule breaker?

[2/15/07] Track Cramer's top picks at TopStockGuru

[1/15/07] Jim Cramer is a Rule Breaker

[12/5/06] Jim Cramer's 10 Lessons From Success: Some Buy and Sell Rules (excerpted from Jim Cramer's Mad Money: Watch TV, Get Rich)

1. Follow The Street's Lead
   
2. How to be Contrarian
   
3. Wall Street's Often Wrong
   
4. Don't turn your nose up
   
5. Be Politically Savvy
   
6. Learn momentum's rhythm
   
7. The Best Way to Use tips
   
8. A selling formula
   
9. Look out for downturns
   
10. Beware multiple contraction

Jim Cramer's 10 rules from New Mistakes, New Rules: Ten Lessons From My Bad Calls (excerpted from Jim Cramer's Mad Money: Watch TV, Get Rich)

1. Ride the business cycle
   
2. Know the markets
   
3. Do the right homework
   
4. LatAm's always a trade
   
5. Admit it when it's too hard

Bonus: Hold Your Own Lightning Round

[8/3/07] Cramer's Soundboard!

[12/2/06] Booyah Breakdown: Cramerisms

[11/16/06] Buffett watches "Cramer" [from rrlbva@chucks_angels]

[10/23/06] Kiplinger's Personal Finance magazine profiles Cramer

[8/28/06] A review of 'Confessions of a Street Addict'

[8/11/06] Is the market mad?

[5/5/06] CramerWatch.org announces the re-launch of the first, and only, free website that evaluates the stock picks and recommendations of Wall Street guru Jim Cramer, star of MSNBC’s nightly 'Mad Money with Jim Cramer.'

The goal of CramerWatch.org is to impartially review if Cramer is good for investors. The website collects each of Mr. Cramer’s “lightning round” recommendations and tracks the performance of each stock recommendation. The performance of the stock is also compared to the performance of the overall market over 30 days.

The recommendation is also compared to the recommendations of Leonard ‘The Wonder Monkey’ CramerWatch.org’s resident stock picker. Leonard recommends buying or selling stocks that appear on Mr. Cramer’s lightening round by simply flipping a coin. CramerWatch.org shows that randomly buying or selling those picks will actually make the investor more money than following all of Mr. Cramer’s recommendations.

* * *

[4/21/06] Mark Skousen predicts the demise of Jim Cramer

[4/5/06] Cramer vs. the benchmarks

[1/19/06] Munnariz reiterates

[1/13/06] TMFBreakerRick's take on Cramer

[12/21/05] This guy has been unimpressed by Cramer's Actions Alert Plus. His beef seems to be that the portfolio doesn't own several stocks that he says to buy on his show. In particular: GOOG, WFMI, AMGN, DNA. I think a reason might be that Cramer is unable to buy stocks for 7 days after he mentions it on his show (or something like that). That likely handcuffs the Actions Alert portfolio to no end. He does say though the show is worth listening to for free and that Cramer has made him money in the past.

[10/24/05] Cramer makes the cover of BusinessWeek

[10/17/05] Krakower was offering Cramer something all the money in the world can't buy. She would make Jim Cramer a rock star.

[9/1/05] CNBC's Raging Bull

[8/8/05] San Francisco Chronicle story (Cramer replied on 8/1 that he has already sold some of those picks that have gone nowhere - he doesn't buy and hold, he buys and homework]

[8/1/05] My answer is he's real good at entertainment. But how good is he at picking stocks?

According to this study, he's right about 50% of the time. (That statistic alone is not necessarily bad. If you let your winners run and cut your losses, you can come out far ahead. I still don't know the actual performance of Cramer's portfolio.)

Here's an earlier New York Post article.

Links:

Mad Money Recaps [3/25/07]

Mad Money (from wikipedia)

Mad Money Recaps

Jim Cramer Mad Money Forum

BOO-YAH BOY AUDIT! [9/15/05]

RealMoney Radio

New York Metro archive

Mad Money Machine, a blog by Paul Douglas Boyer [3/29/06]

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[4/19/05] Jim Cramer's 25 Rules for Investing

[9/5/05] Cramer School

Calculating mutual fund cost basis

[9/24/07] Changes to the law back in 2003 made an already great strategy—holding investments for the long term—a better deal than ever. To recap, realized gains on stocks, bonds and mutual funds held over one year are taxed at the long-term capital gains rate of 15%.1 Short-term gains (on investments held one year or less) are still subject to ordinary income tax, which ranges up to 35%.

Whether short-term or long-term, the gain on your investment is the sale price minus your cost basis, or what you paid. It sounds simple, but calculating your cost basis can be more complex than you might think—and if you calculate it incorrectly, you may overstate your gain and pay more tax than necessary. The accounting method you use to report your cost basis can have a big impact on your tax bill, as well.


[8/18/07] The IRS allows you to use one of four methods when calculating your mutual fund's basis. You'll need to think about this decision before you actually sell anything. Your choice will affect how you treat sales in the future.

• Average cost (single category): Most people (and brokerages) use this method. You add up all of your purchases of the security, including reinvested dividends and capital gains, and divide by the total number of shares you own. To determine whether your gains/losses are short-term or long-term, you assume the oldest shares are sold first. Once you use this method to calculate the cost basis of shares you've sold, you must continue to use this method for the rest of the shares you sell in the future.
  
• Average cost (double category): This is similar to the above method, but first you sort your shares into two categories: those in which your gains and losses are short-term and those in which you have a long-term gain or loss. Then you add up the purchases in each category and divide by the number of shares in each category.
  
• Specific-share identification: This method is a little trickier, but it can also save you money. You specifically tell the brokerage which shares you want to sell and use the cost basis of those specific shares. For example, you may have bought shares of XYZ company five years ago when prices were higher--let's say $15 per share. Then later you bought more shares when the price was lower--say $5 per share. If you specifically tell your brokerage firm to sell the shares that you purchased at $15 and you sell them at $16, you only have to pay tax on the $1 per share of capital gain. If you specified the shares with a $5 cost basis, you'd owe tax on $11 per share.
  
• FIFO (first-in, first-out): If you don't specify a method for calculating your basis, the IRS will assume you're using FIFO. This method assumes that when you sell some of your shares, they are the first shares you bought. If those shares have a lower cost basis, you'll end up owing more in capital gains tax (and vice versa).

When calculating cost basis on stocks, the average cost basis may not be used.

Fed cuts discount rate

Before the commencement of trading, the Federal Reserve announced a cut in the discount rate, the rate at which banks borrow directly from the Fed, by 50 basis points to 5.75% and eased terms, but left the official target for the fed funds rate at 5.25%. In its statement, the Federal Open Market Committee said, "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," emphasizing that "downside risks to growth have increased appreciably."

The FOMC is "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets." The Committee said the move will remain in place "until the Federal Reserve determines that market liquidity has improved materially." Treasury yields have fallen in recent days, with the biggest drop coming at the short end of the curve, while the yield on the 3-month T-bill has plunged over a full-percentage point as investors seek safety from the storm. Treasury prices are mixed following the Fed's move, with prices rising on the short end of the curve, but are lower on the middle and long end as the rise in stocks and the reduction in the discount rate calm jittery nerves.

[Charles Schwab Morning Market View]

Just A Correction?

We hear each day the idle prattle of Wall Street “Buy Side” investors, discussing whether the recent decline in stock prices is just a correction in a healthy market, or whether this is the start of a bear market. Not surprisingly, to a man these ‘experts’ seem to unanimously agree that this is just a correction, and that a bottom is close at hand, not to mention the John Chambers quote that “this is the strongest global economy I’ve ever seen.” In our view, these guys need to have lunch with the Housing Market economists who have been saying the same thing over the last 18 months -- still no bottom there either!

In our view, the ‘pundits’ arguing that this is just a ‘correction’ are absolutely kidding themselves as there is an overwhelming argument to be made that prices are headed much lower, and within relatively short order. The mistake being made is a complete lack of understanding of the opaque nature of the credit derivatives market.

Simplicity

Mohnish Pabrai has compounded money at 29% annually for eight years in his investment partnership. He recently stated in an interview with the Motley Fool that “Usually two to three variables control most of the outcome. The rest is noise. If you can handicap how those key variables are approximately likely to play out, then you have a basis to do something.” This is such a simple idea but investors do not apply it in their endeavors. Every company has key variables and as Mohnish so eloquently put it “If I find myself reaching for Excel, it is a very strong sign to take a pass.” If one cannot figure out the key variables, look at a different company, do not stray outside one’s circle of competence.

“There are an infinite number of facts that you can learn about a company, but there are usually two or three very important variables that make the company succeed or fail. A lot of Wall Street gets so bogged down in the minutiae and details that it misses these two or three big things that make or break the investment. Part of what worked for me over the years is being able to distinguish what matters from what doesn’t. That’s one of Buffett’s great gifts. He focuses on the critical issues involved in analyzing. I don’t pretend to be able to do it like he does but it’s one of the most important things you can do.” – Wallace Weitz

[9/20/07] From a CIA report, "Once an experienced analyst has the minimum information necessary to make an informed judgment, obtaining additional information generally does not improve the accuracy of his or her estimates. Additional information does, however, lead the analyst to become more confident in the judgment, to the point of overconfidence. [via wreck_of_m_deare@chucks_angels]

even gold doesn't glitter

Given the volatility of stocks and bonds, many investors assume that gold is a smarter investment. If you also want to become a goldbug, you have several options. You might invest in gold stocks or gold mutual funds, but these can be rather volatile, too. You might buy into gold accounts at bullion banks, which require large minimum investments, or gold certificates and pool accounts, which don't. Gold coins or bars might be tempting, but you'll need a safe place to store them.

David Kathman of Morningstar.com has noted that "Returns aren't the point when you're investing in gold; diversification is ... A small amount of gold alongside your stocks can be a stabilizer." But all does not glitter in the world of gold. In his seminal book "Stocks for the Long Run" (McGraw-Hill, $30), University of Pennsylvania finance professor Jeremy Siegel reveals what a dollar invested in various things would have grown to from 1802 to 2001 (yes, nearly 200 years!): stocks, $599,605; bonds, $952; bills, $304; and gold, 98 cents. (Amounts have been adjusted for inflation.)

So, through many wars and economic times even more troubling than those we face today, gold hasn't proven to be a great long-term investment. True, it has zoomed up in recent years to nearly $700 per troy ounce, but that's a level it approached back in the late '70s and early '80s, and it spent most of the intervening years in the $300s and $400s.

In Fortune magazine, David Rynecki noted: "Gold investors are notoriously bad forecasters. From 1985 to 1987, for example, a collapse in the dollar boosted gold 76 percent and had many metalheads predicting an extended rally. Instead the price fell 15 percent the very next year." He adds: "Even bullish gold pros caution the average investor to put no more than 5 percent of a total portfolio into gold-related holdings and say it's safest to invest through funds."

the more research,

Should you spend countless hours researching a stock before buying it, or just a few hours? The common wisdom is that the more time you spend on research, the better your investment results will be. But is this correct?

Not according to studies on the subject. At least two I have seen came to the conclusion that anything more than a cursory review of a company’s prospects is a waste of time. One study looked at whether more information was useful to experienced horse racing gamblers. The researchers first gave the gamblers a few items of relevant information (age of horse, pedigree, jockey, etc) and asked them to predict which horse would win the race.

They then gave out dozens more items of information about the race
and asked the experts to predict again, based on the additional information they had received. The conclusion was that the first few items of information given to them were useful but further information had no effect on the accuracy of their predictions. The gamblers were far more confident about their predictions after receiving more information, but this didn’t translate into accuracy.

Another study showed that sell-side stock analysts, who spend 50-80 hours a week on research and presumably have loads of information at their fingertips, are no better than a monkey with a dart at predicting a company’s five-year earnings growth rate. In fact, they are actually worse than a monkey with a dart because they tend to project the recent past into the distant future, rather than assuming growth will revert to the mean. If the analysts’ projections were simply random, the results may have been closer to reality.

[via pohick2@chucks_angels]