As described in our "Value vs. Glamour" studies, value stocks have outperformed growth stocks over the long term. But what about commonly used benchmarks? Over the long term, aren't returns for growth and value indices about the same?
This is a research report by the Brandes Institute.
Saturday, October 27, 2007
Thursday, October 25, 2007
which investment style?
Morningstar looked at the performance of broad investment styles over time to see if a particular style had done a better job at helping investors meet this goal. A clear pattern emerged.
One style stood out from the pack. Ibbotson Associates has shown that value stocks have outperformed other styles by a wide margin since 1927. And they've done so consistently, beating all other styles in nearly every decade over the past 80 years. But because of active management and fees, stock performance doesn't always translate into fund performance. In this case it does. More than 70% of value funds topped the Dow Jones Wilshire 5000 in the trailing 10- and 15-year periods. That's a much better record than domestic-equity funds in general, and growth and blend funds in particular.
One style stood out from the pack. Ibbotson Associates has shown that value stocks have outperformed other styles by a wide margin since 1927. And they've done so consistently, beating all other styles in nearly every decade over the past 80 years. But because of active management and fees, stock performance doesn't always translate into fund performance. In this case it does. More than 70% of value funds topped the Dow Jones Wilshire 5000 in the trailing 10- and 15-year periods. That's a much better record than domestic-equity funds in general, and growth and blend funds in particular.
Wednesday, October 24, 2007
David Swensen
[5/26/09] Consuelo Mack interview with David Swensen
[11/26/07] Wisdom from the World's Second-Best Investor
[10/24/07] Yale University has long been renowned for its prowess in the classroom, but it's certainly no slouch in the investing realm, either. In fact, its giant $22.5 billion endowment notched an impressive 28% gain in its most recent fiscal year ending June 2007. And over the past decade, it returned nearly 18% annually, the best showing of any college endowment in the nation. By contrast, the S&P 500 was up only 7% over that period.
The brain behind it all is longtime Yale endowment chief David Swensen. Swensen's route to investment success at Yale has been unconventional (hence the aptly named title of his most-recent book, Unconventional Success). When Yale appointed him to his post in 1985, most college endowments, including Yale's, stuck to a plain-vanilla mix of stocks and bonds. But Swensen believed Yale's portfolio wasn't diversified enough and eventually built stakes in what are now known as alternative investments--private equity (investments in companies that aren't public), hedge funds, and real assets, such as timber, real estate, and oil--that don't move in step with the stock market or each other. Broadening the portfolio beyond stocks and bonds would moderate volatility, Swensen thought. And by mining less-followed areas, he and his analysts would have a better shot at unearthing undiscovered gems.
That plan of attack couldn't be more different than the one advocated by financial planners.
* * *
IN RECENT YEARS investors have eyed burgeoning Ivy League endowments like high school seniors applying to Harvard and Yale with weak grade point averages, low SAT scores and no extracurricular activities: zero chance of getting in. Can you blame them for being envious? In the year that ended June 2006, Yale notched a 22.9% return for a gain of $3.4 billion. Even more impressive is its consistency. Over the past 10 years, which included the market meltdown of 2000 to 2002, Yale has had annualized gains of 17.2%. Harvard, meanwhile, earned a 16.7% return in fiscal 2006 and boasts a 10-year average of over 15%. Of course, Harvard and Yale have long enjoyed formidable advantages, starting with immense wealth and prestige. Even other institutions, many with endowments in the billions of dollars, have been hard-pressed to keep up, let alone individual investors.
Surprisingly, that may be beginning to change. We've taken a close look at these endowments and at the new investment vehicles now available to the rest of us. Our conclusion: Even average investors can mimic Harvard or Yale in their portfolio, with access to some of the Ivy League's most exclusive and esoteric asset classes. We'll show you how and illustrate our method with a model portfolio.
[11/26/07] Wisdom from the World's Second-Best Investor
[10/24/07] Yale University has long been renowned for its prowess in the classroom, but it's certainly no slouch in the investing realm, either. In fact, its giant $22.5 billion endowment notched an impressive 28% gain in its most recent fiscal year ending June 2007. And over the past decade, it returned nearly 18% annually, the best showing of any college endowment in the nation. By contrast, the S&P 500 was up only 7% over that period.
The brain behind it all is longtime Yale endowment chief David Swensen. Swensen's route to investment success at Yale has been unconventional (hence the aptly named title of his most-recent book, Unconventional Success). When Yale appointed him to his post in 1985, most college endowments, including Yale's, stuck to a plain-vanilla mix of stocks and bonds. But Swensen believed Yale's portfolio wasn't diversified enough and eventually built stakes in what are now known as alternative investments--private equity (investments in companies that aren't public), hedge funds, and real assets, such as timber, real estate, and oil--that don't move in step with the stock market or each other. Broadening the portfolio beyond stocks and bonds would moderate volatility, Swensen thought. And by mining less-followed areas, he and his analysts would have a better shot at unearthing undiscovered gems.
That plan of attack couldn't be more different than the one advocated by financial planners.
* * *
IN RECENT YEARS investors have eyed burgeoning Ivy League endowments like high school seniors applying to Harvard and Yale with weak grade point averages, low SAT scores and no extracurricular activities: zero chance of getting in. Can you blame them for being envious? In the year that ended June 2006, Yale notched a 22.9% return for a gain of $3.4 billion. Even more impressive is its consistency. Over the past 10 years, which included the market meltdown of 2000 to 2002, Yale has had annualized gains of 17.2%. Harvard, meanwhile, earned a 16.7% return in fiscal 2006 and boasts a 10-year average of over 15%. Of course, Harvard and Yale have long enjoyed formidable advantages, starting with immense wealth and prestige. Even other institutions, many with endowments in the billions of dollars, have been hard-pressed to keep up, let alone individual investors.
Surprisingly, that may be beginning to change. We've taken a close look at these endowments and at the new investment vehicles now available to the rest of us. Our conclusion: Even average investors can mimic Harvard or Yale in their portfolio, with access to some of the Ivy League's most exclusive and esoteric asset classes. We'll show you how and illustrate our method with a model portfolio.
Saturday, October 20, 2007
John D. Rockefeller
John D. Rockefeller is the wealthiest man the world has ever known. On inflation-adjusted terms, Rockefeller's early-20th-century fortune is estimated by Forbes to be more than $300 billion today -- roughly five times the wealth of today's richest man, Carlos Slim.
Rockefeller quickly learned that the fastest and easiest way to make money was to sell "real" products that every household needed. When he discovered that crude oil could be refined into kerosene, a high-quality illuminating oil for lamps (automobiles and their need for gasoline would come later), Rockefeller saw the opportunity to help every U.S. family light up its house and jumped into the oil business in 1863.
Rockefeller quickly learned that the fastest and easiest way to make money was to sell "real" products that every household needed. When he discovered that crude oil could be refined into kerosene, a high-quality illuminating oil for lamps (automobiles and their need for gasoline would come later), Rockefeller saw the opportunity to help every U.S. family light up its house and jumped into the oil business in 1863.
Monday, October 15, 2007
Sound Investing and Peaceful Sleep
by Ben Stein [via wakywakyisha@chucks_angels]
INVEST FOR THE LONG HAUL If you are a smart long-term investor, do not pay any attention to short-term developments. They are often reported by people whose motivation may be to scare you (screaming about the subprime “crisis”) or to make you giddily greedy (screaming about that one certain stock you should buy to retire rich).
Some articles may scare you into selling, or not buying, at the wrong time, because the worse things are, and the worse the mood of speculators, the better the time to buy. Or some may motivate you to buy in excess — sort of like drinking in excess — at exactly the wrong, “irrationally exuberant” time. The people who write some of these articles often know very little about markets, are way too young to have learned much, have no money to invest anyway or just like to act like big shots with your money.
In the very long run, stock prices plus dividends (in the postwar period) have rewarded patient, long-term, careful accumulation of broad indexes, mutual funds, exchange-traded funds and variable annuities (with a careful eye on fees). They have not rewarded short-term trading. Such trading based on tips seen on television shows — even shows whose hosts are true comic geniuses with bald heads — or read in magazines can be potentially disastrous. The short term is no place for the ordinary investor to trade.
INVEST FOR THE LONG HAUL If you are a smart long-term investor, do not pay any attention to short-term developments. They are often reported by people whose motivation may be to scare you (screaming about the subprime “crisis”) or to make you giddily greedy (screaming about that one certain stock you should buy to retire rich).
Some articles may scare you into selling, or not buying, at the wrong time, because the worse things are, and the worse the mood of speculators, the better the time to buy. Or some may motivate you to buy in excess — sort of like drinking in excess — at exactly the wrong, “irrationally exuberant” time. The people who write some of these articles often know very little about markets, are way too young to have learned much, have no money to invest anyway or just like to act like big shots with your money.
In the very long run, stock prices plus dividends (in the postwar period) have rewarded patient, long-term, careful accumulation of broad indexes, mutual funds, exchange-traded funds and variable annuities (with a careful eye on fees). They have not rewarded short-term trading. Such trading based on tips seen on television shows — even shows whose hosts are true comic geniuses with bald heads — or read in magazines can be potentially disastrous. The short term is no place for the ordinary investor to trade.
Saturday, October 13, 2007
What's the market worth?
According the Morningstar, the Dow is 6.4% undervalued and the S&P 500 is 4.2% undervalued.
Friday, October 12, 2007
P/E expansion and contraction
Vitaliy Katsenelson writes in "Active Value Investing"
...I wanted to see what would happen to the average P/E of each quintile if I bought each quintile in the beginning of the range-bound market (January 1966) and sold it at the end in December 1982...The highest-P/E quintile exhibited a P/E compression of 50.3 percent. The P/E of the average stock dropped from 29.3 in 1966 to 14.6 in 1982. That portfolio generated a total annual return of 8.6 percent. The lowest-P/E quintile to my surprise had a P/E expansion of 34.8 percent. Yes, you read it right. The P/E of the average stock in my lowest-P/E quintile actually went up from 11.8 to 15.8 throughout the range-bound market. That portfolio produced a nice bull market-like total annual return of 14.16 percent...
see also
Tweedy Browne's What Has Worked In Investing (page 23)
According to What Works on Wall Street, low PERs worked well with big stocks, but not with small stocks.
...I wanted to see what would happen to the average P/E of each quintile if I bought each quintile in the beginning of the range-bound market (January 1966) and sold it at the end in December 1982...The highest-P/E quintile exhibited a P/E compression of 50.3 percent. The P/E of the average stock dropped from 29.3 in 1966 to 14.6 in 1982. That portfolio generated a total annual return of 8.6 percent. The lowest-P/E quintile to my surprise had a P/E expansion of 34.8 percent. Yes, you read it right. The P/E of the average stock in my lowest-P/E quintile actually went up from 11.8 to 15.8 throughout the range-bound market. That portfolio produced a nice bull market-like total annual return of 14.16 percent...
see also
Tweedy Browne's What Has Worked In Investing (page 23)
According to What Works on Wall Street, low PERs worked well with big stocks, but not with small stocks.
Wednesday, October 10, 2007
Reminiscences of the 1987 Crash
Fast-forward 20 years later, and here we sit, facing the crash's 20th anniversary. It's no wonder the history books are out and comparisons are being made between today's environment and that of two decades ago. Yes, it's natural to reminisce on anniversaries, but the comparisons between then and now are somewhat eerie. However, a resultant prediction of a pending crash would still be difficult to make, notwithstanding the chart below showing the simple Dow chart patterns for the two periods.
You have probably seen this chart, as it's made its way into many an investment blog and newsletter. What many fail to add, however, is that although the price movement comparison is quite similar, the percentage change for the two periods is not at all similar.
You have probably seen this chart, as it's made its way into many an investment blog and newsletter. What many fail to add, however, is that although the price movement comparison is quite similar, the percentage change for the two periods is not at all similar.
Wednesday, October 03, 2007
Panic No. 12
David Dreman 10.15.07, 12:00 AM ET
The capital markets have suffered mightily in the mortgage meltdown. Mortgage-backed securities--whether backed by nasty subprime loans, slightly better Alt A ones or even highly rated borrowings, have sunk. Junk bonds, often linked to MBSs, are hard to float. Private equity deals, frenetic not so long ago, are iffy now that high-yield funding is harder and costlier to provide.
That has introduced intense fear to stock- and fixed-income investors worldwide. Despite the Federal Reserve's half-point reduction in mid-September, there's still a lurking suspicion that more bad news lies ahead. What will happen when all those adjustable-rate mortgages reset upward in months to come, plunging more strapped homeowners into default? Are we approaching a financial meltdown that will take everything, including the stock market, into a dizzying drop not seen since the bear market of 2000--02?
Yes, it's bad now and could take many months to unwind, hurting swarms of investors who were suckered into going for sky-high returns of MBSs without examining the ridiculously poor security behind them. Ditto some of the convoluted securities that bundle them called collateralized debt obligations. The mortgage problem also could put a dent into economic growth for a while. But as all good value investors know, dire times bring opportunities. The long-term trend of the stock market is up.
Since coming to Wall Street in the late 1960s, I have been through seven such crises. Somehow, the market survived them and thrived. Look back even further to the period following the end of World War II, and sure enough, you'll find that pattern holding in four more market spills. Beginning with the first postwar panic, resulting from the 1948--49 Berlin blockade, stocks have tumbled only to come roaring back to new highs. The worst market break came in 1973--74, during a nasty recession and the Arab oil embargo. The most recent was the dot-com slide, which began in March 2000 and ended in late 2002. The Nasdaq Composite, heavy with tech names, still has not regained the ground lost in that crash, but the broad indexes have.
During each crisis investors felt confused, uncertain and panicky. They believed nothing in their previous experience could help them cope with the ominous new world they faced. "Sell, sell, sell," their inner worrywarts advised. "Save your capital before it's too late."
This almost always turned out to be a bad move. Selling in a crisis is foolish. Yes, if you had sold the S&P 500, say, a year into the bear market, in March 2001, you would have avoided another 28% decline before it hit bottom. But would you have had the wisdom to get back into stocks a year and a half later? I don't know of anyone advising an exit in March 2001 who also switched to a bullish stance in fall 2002. And if you had sold in March 2001, and stayed out, you would have missed an opportunity. Since then the stock market has returned 46% (including dividends). On average, for each of the dozen crises, the market was up 36% one year after the low point, 44% after two years.
Today's stock market remains solid with good fundamentals and many cheap stocks at hand. The ongoing liquidity crisis must be handled gingerly, of course. Commit your capital slowly as several more shocks must be absorbed before a broad market rally begins.
The capital markets have suffered mightily in the mortgage meltdown. Mortgage-backed securities--whether backed by nasty subprime loans, slightly better Alt A ones or even highly rated borrowings, have sunk. Junk bonds, often linked to MBSs, are hard to float. Private equity deals, frenetic not so long ago, are iffy now that high-yield funding is harder and costlier to provide.
That has introduced intense fear to stock- and fixed-income investors worldwide. Despite the Federal Reserve's half-point reduction in mid-September, there's still a lurking suspicion that more bad news lies ahead. What will happen when all those adjustable-rate mortgages reset upward in months to come, plunging more strapped homeowners into default? Are we approaching a financial meltdown that will take everything, including the stock market, into a dizzying drop not seen since the bear market of 2000--02?
Yes, it's bad now and could take many months to unwind, hurting swarms of investors who were suckered into going for sky-high returns of MBSs without examining the ridiculously poor security behind them. Ditto some of the convoluted securities that bundle them called collateralized debt obligations. The mortgage problem also could put a dent into economic growth for a while. But as all good value investors know, dire times bring opportunities. The long-term trend of the stock market is up.
Since coming to Wall Street in the late 1960s, I have been through seven such crises. Somehow, the market survived them and thrived. Look back even further to the period following the end of World War II, and sure enough, you'll find that pattern holding in four more market spills. Beginning with the first postwar panic, resulting from the 1948--49 Berlin blockade, stocks have tumbled only to come roaring back to new highs. The worst market break came in 1973--74, during a nasty recession and the Arab oil embargo. The most recent was the dot-com slide, which began in March 2000 and ended in late 2002. The Nasdaq Composite, heavy with tech names, still has not regained the ground lost in that crash, but the broad indexes have.
During each crisis investors felt confused, uncertain and panicky. They believed nothing in their previous experience could help them cope with the ominous new world they faced. "Sell, sell, sell," their inner worrywarts advised. "Save your capital before it's too late."
This almost always turned out to be a bad move. Selling in a crisis is foolish. Yes, if you had sold the S&P 500, say, a year into the bear market, in March 2001, you would have avoided another 28% decline before it hit bottom. But would you have had the wisdom to get back into stocks a year and a half later? I don't know of anyone advising an exit in March 2001 who also switched to a bullish stance in fall 2002. And if you had sold in March 2001, and stayed out, you would have missed an opportunity. Since then the stock market has returned 46% (including dividends). On average, for each of the dozen crises, the market was up 36% one year after the low point, 44% after two years.
Today's stock market remains solid with good fundamentals and many cheap stocks at hand. The ongoing liquidity crisis must be handled gingerly, of course. Commit your capital slowly as several more shocks must be absorbed before a broad market rally begins.