Wednesday, November 28, 2007

bear and bull cycles

Since 1950, there have been eight declines greater than 20% in the S&P 500. At their worst, the S&P 500 declines since 1950 have twice shrunk the market value of the index by nearly half. The grueling 21-month bear market that began in 1973 cut the index by more than 48% before the beginning of next bull market.

Fortunately, bear markets are only half of the cycle, and a much smaller half at that. The bull phases average over four times the length of the bear phases. And the average gain of 165.7% is a hefty reward for enduring the 33.2% average decline during the bear campaigns.

The Greatest Investment Quotes of All Time

Some of the most profound, insightful thoughts in business aren't that complicated. Heck, a lot of them are clear as day. You might be surprised at how much you can take away from something as simple as a one-line quote.

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
-- Warren Buffett

"Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise."
-- Marty Whitman

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."
-- Warren Buffett

"The four most expensive words in the English language are, 'This time it's different.'"
-- Sir John Templeton

"The stock market is filled with individuals who know the price of everything, but the value of nothing."
-- Philip Fisher

Morningstar's Perspective

Some of the strategies in managing Morningstar StockInvestor's Tortoise and Hare portfolios are definitely not in sync with academia or conventional wisdom.

Saturday, November 24, 2007

Thursday, November 15, 2007

Three Questions

Before making an investment, I think all investors needs to ask themselves the following three questions.

Morningstar projects a 14% return

Let's cut right to the chase: Our research suggests that SPDRs Trust (SPY), an ETF that tracks the S&P 500 Index, will return 14% annualized over the next three years.

Lest you wonder which hat we pulled that number out of, rest assured that there were no wands or seers involved. And because top-down macro forecasting isn't our bag (what…you were expecting the second coming of Bill Gross?), we kept the focus squarely on the stocks in front of us.

As it turns out, that's a lot of stocks--we cover 2,000 companies, including more than 450 of the S&P 500's constituent holdings. Therefore, we can harness the work that our analysts do in evaluating company fundamentals, such as the presence and durability of competitive advantages each business might boast. That work culminates in a fair value estimate that our analysts place on each stock they cover. We can roll up the fair value estimates that our analysts have placed on the S&P 500's holdings and, voilĂ !, come up with a fair value estimate for the index as a whole (1,626.80 as of Nov. 7).

But how does that get us to an expected return? We ordinarily expect a stock's price to converge to fair value over a three-year time horizon. Assuming that we compound our fair value estimate at the cost of equity--which is the minimum compensation that we demand for owning a stock--the expected return represents the return that will cause the stock's price to converge to fair value at some point in the future, not to exceed three years.

Wednesday, November 07, 2007

Seven Traits of Great Investors

Marks Sellers writes there are at least seven traits great investors share that are true sources of advantage. Unfortunately he also believes that they can't be learned once a person reaches adulthood. And "In fact, some of them can't be learned at all; you're either born with them or you aren't."