With commodity prices already at record highs, many people are predicting the resources boom is a bubble ready to burst spectacularly. The commodity sector is notoriously cyclical, and the time to buy is at the bottom of the cycle. We are surely closer to the top of the cycle than the bottom, traditionally seen as the time to sell.
But there are plenty of counterarguments, most of which focus on the insatiable Chinese growth story.
Friday, March 28, 2008
Investing like a girl
So how exactly do women invest? Check out these characteristics of female investors that distinguish them from their male counterparts.
Women spend more time researching their investment choices than men do. This prevents them from chasing "hot" tips and trading on whims -- behavior that tends to weaken men's portfolios.
Men trade 45% more often than women do, and although men are more confident investors, they tend to be overconfident. By trading more often -- and without enough research -- men reduce their net returns. But by trading less often, women get better returns and also save on transaction costs and capital gains taxes.
A study by the University of California at Davis found that women's portfolios gained 1.4% more than men's portfolios did. What's more, single women did even better than single men, with 2.3% greater gains.
Women tend to look at more than just numbers when deciding whether to invest in a company. They invest in companies they feel good about ethically and personally. And companies with good products, good services, and ethics tend to have better long-term prospects -- and face fewer lawsuits.
Women spend more time researching their investment choices than men do. This prevents them from chasing "hot" tips and trading on whims -- behavior that tends to weaken men's portfolios.
Men trade 45% more often than women do, and although men are more confident investors, they tend to be overconfident. By trading more often -- and without enough research -- men reduce their net returns. But by trading less often, women get better returns and also save on transaction costs and capital gains taxes.
A study by the University of California at Davis found that women's portfolios gained 1.4% more than men's portfolios did. What's more, single women did even better than single men, with 2.3% greater gains.
Women tend to look at more than just numbers when deciding whether to invest in a company. They invest in companies they feel good about ethically and personally. And companies with good products, good services, and ethics tend to have better long-term prospects -- and face fewer lawsuits.
Bear Markets
The average bear market since 1940 lasted 386 calendar days (about 13 months) with an average peak-to-trough decline of roughly 30%. According to Bespoke Investment Group, historically, an average 74% of the bear market was complete (in terms of the number of days the bear market lasted) by the time the market hit official bear territory of –20%. In fact, three of the 11 bear markets (1948–1949, 1956–1957 and 2002) ended within 13 days of crossing the –20% threshold while just one hit –20% when the bear market was less than half over (1946–1947).
Getting back to breakeven was a longer path, but the range was wide around the average 1,177 days (3.2 years) it took the market to get back to its old highs. It took the least amount of time after the 1966 bear market and the longest after the most recent 2000–2002 bear market. And remember, the percentage increase on the way back up beats the percentage drop on the way down. After a 30% drop, a return to breakeven represents a 43% move higher. Panicking out at the bottom of bear markets means a lot of missed opportunity on the way back up.
[3/27/08] Beginning on March 6, the Dow lost 515 points over three days, followed by a 417 point surge the next day, then dropped 200 points a few days later, before soaring 420 points two days after that, only to lose nearly 300 points the next day, before jumping over 230 points the day after that!
If your head is spinning and you are wondering what to do now, you are not alone. Those two big 400+ point up days are often seen near market bottoms. In fact, 4 of the best 10 days from 1988-2007 came in the second half of 2002 as the 2000-2002 bear market was reaching its bottom. [via etrade]
Getting back to breakeven was a longer path, but the range was wide around the average 1,177 days (3.2 years) it took the market to get back to its old highs. It took the least amount of time after the 1966 bear market and the longest after the most recent 2000–2002 bear market. And remember, the percentage increase on the way back up beats the percentage drop on the way down. After a 30% drop, a return to breakeven represents a 43% move higher. Panicking out at the bottom of bear markets means a lot of missed opportunity on the way back up.
[3/27/08] Beginning on March 6, the Dow lost 515 points over three days, followed by a 417 point surge the next day, then dropped 200 points a few days later, before soaring 420 points two days after that, only to lose nearly 300 points the next day, before jumping over 230 points the day after that!
If your head is spinning and you are wondering what to do now, you are not alone. Those two big 400+ point up days are often seen near market bottoms. In fact, 4 of the best 10 days from 1988-2007 came in the second half of 2002 as the 2000-2002 bear market was reaching its bottom. [via etrade]
Wednesday, March 19, 2008
Bears Stearns bought for $2
Dow member JPMorgan (JPM $40 1) has acquired the fifth largest US investment bank Bear Stearns (BSC $4) for a dramatically low price of $2.00 per share, or about $236 million. According to the Wall Street Journal, Bear Stearns had a stock market value of $3.5 billion on Friday and was worth $20 billion in January 2007. The fire-sale price of the deal is related to the massive decrease in BSC's client confidence, which prompted a liquidity scare, forcing the brokerage firm to make a decision to sell the firm at any price or face bankruptcy. The Federal Reserve will also assume management of $30 billion of BSC's debt to help JPM finance the deal. A spokesman for China's CITIC Securities said it was unclear regarding the current situation between BSC and JPM and, as well as the prospects of its original proposed $1 billion investment in the struggling brokerage house.
[3/24/08] JPMorgan Chase (JPM $46 1) is reportedly in talks to raise its offer to buy Bear Stearns (BSC $6) from $2 per share to $10 per share in an effort to win over angry Bear Stearns shareholders, according to the New York Times. People familiar with the matter said the Federal Reserve, which must approve any new deal, has thus far balked at the latest price, in part because a sweetened offer may give critics ammunition to argue Bear's shareholders are being rescued. As a result, the Times said efforts to secure a renegotiated agreement could be delayed or collapse. BSC is up sharply. Neither of the parties involved commented.
[3/24/08] JPMorgan Chase (JPM $46 1) is reportedly in talks to raise its offer to buy Bear Stearns (BSC $6) from $2 per share to $10 per share in an effort to win over angry Bear Stearns shareholders, according to the New York Times. People familiar with the matter said the Federal Reserve, which must approve any new deal, has thus far balked at the latest price, in part because a sweetened offer may give critics ammunition to argue Bear's shareholders are being rescued. As a result, the Times said efforts to secure a renegotiated agreement could be delayed or collapse. BSC is up sharply. Neither of the parties involved commented.
Monday, March 10, 2008
Buffett overtakes Gates
Warren Buffett is the richest man on the planet.
Riding the surging price of Berkshire Hathaway (nyse: BRK - news - people ) stock, America's most beloved investor has seen his fortune swell to an estimated $62 billion, up $10 billion from a year ago. That massive pile of scratch puts him ahead of Microsoft co-founder Bill Gates, who was the richest man in the world for 13 straight years.
Gates is now worth $58 billion and is ranked third in the world. He is up $2 billion from a year ago, but would have been perhaps as rich--or richer--than Buffett had Microsoft not made an unsolicited bid for Yahoo! at the beginning of February.
Microsoft shares fell 15% between Jan. 31, the day before the company announced its bid for the search engine giant, and Feb. 11, the day we locked in stock prices for the 2008 World's Billionaires list. More than half of Gates' fortune is held outside of Microsoft shares.
Mexican telecom tycoon Carlos Slim Helú is the world's second-richest man, with an estimated net worth of $60 billion. His fortune has risen $11 billion since last March.
Despite Buffett's meteoric rise, his days as the World's Richest Man are almost certainly numbered. He had long promised to give away his fortune posthumously. But in the summer of 2006 he irrevocably earmarked the majority of his Berkshire shares to charity, most going to the Bill & Melinda Gates Foundation.
Riding the surging price of Berkshire Hathaway (nyse: BRK - news - people ) stock, America's most beloved investor has seen his fortune swell to an estimated $62 billion, up $10 billion from a year ago. That massive pile of scratch puts him ahead of Microsoft co-founder Bill Gates, who was the richest man in the world for 13 straight years.
Gates is now worth $58 billion and is ranked third in the world. He is up $2 billion from a year ago, but would have been perhaps as rich--or richer--than Buffett had Microsoft not made an unsolicited bid for Yahoo! at the beginning of February.
Microsoft shares fell 15% between Jan. 31, the day before the company announced its bid for the search engine giant, and Feb. 11, the day we locked in stock prices for the 2008 World's Billionaires list. More than half of Gates' fortune is held outside of Microsoft shares.
Mexican telecom tycoon Carlos Slim Helú is the world's second-richest man, with an estimated net worth of $60 billion. His fortune has risen $11 billion since last March.
Despite Buffett's meteoric rise, his days as the World's Richest Man are almost certainly numbered. He had long promised to give away his fortune posthumously. But in the summer of 2006 he irrevocably earmarked the majority of his Berkshire shares to charity, most going to the Bill & Melinda Gates Foundation.
Friday, March 07, 2008
January barometer
Does the weak start to the year portend a down year for the market in 2008? The so-called “January Barometer,” which posits that as January goes, so goes the year, would suggest that it does.
First recognized by Yale Hirsch in 1972, the January Barometer appears to be an especially good predictor when the market is up in January. In the 58 years since 1950, the S&P 500 has been up in January 37 times. Of those years, the S&P has been up for the year 34 times, or more than 90% of the time.
On the downside, the correlation is not as strong, but the market direction in January is still predictive of the direction of full-year results more often than not. In the 21 years since 1950 that the S&P 500 has been down in January, it has finished the full year down 12 times, or a little more than half the time.
When the market is very weak in January, as it was this year, the odds rise that the year itself will also be down. Following the 10 worst Januarys since 1950, the S&P 500 was down for the year seven times. Those are higher odds of a down year than we like to see.
On the other hand, in those same 10 worst Januarys, the S&P 500 was down an average of 5.5% for the month, but only down an average of 5.8% for the full year. So, most of the damage for the year was done in the first month, and from there, the market was about flat for the rest of the year.
First recognized by Yale Hirsch in 1972, the January Barometer appears to be an especially good predictor when the market is up in January. In the 58 years since 1950, the S&P 500 has been up in January 37 times. Of those years, the S&P has been up for the year 34 times, or more than 90% of the time.
On the downside, the correlation is not as strong, but the market direction in January is still predictive of the direction of full-year results more often than not. In the 21 years since 1950 that the S&P 500 has been down in January, it has finished the full year down 12 times, or a little more than half the time.
When the market is very weak in January, as it was this year, the odds rise that the year itself will also be down. Following the 10 worst Januarys since 1950, the S&P 500 was down for the year seven times. Those are higher odds of a down year than we like to see.
On the other hand, in those same 10 worst Januarys, the S&P 500 was down an average of 5.5% for the month, but only down an average of 5.8% for the full year. So, most of the damage for the year was done in the first month, and from there, the market was about flat for the rest of the year.
Saturday, March 01, 2008
Avoid these investment mistakes
Whether it's the Dutch tulip craze of the 17th century, the dot-com mania of the late 1990s, or the most recent rush into real estate, there's no shortage of examples of investors behaving irrationally.
In the world of traditional economists and finance professors, though, that's not supposed to happen. If investors are rational decision-makers, then emotion-driven bubbles shouldn't be possible. Yet human weaknesses can limit our ability to think clearly. Many studies of investor behavior have shown that investors are too willing to extrapolate recent trends far into the future, too confident in their abilities, and too quick (or not quick enough) to react to new information. These tendencies often lead investors to make decisions that run counter to their own best interests.
... According to several studies, overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade. And all that trading can be hazardous to your wealth, as University of California, Berkeley professors Brad Barber and Terrance Odean put it in their 2000 study of investor trading behavior. The study looked at approximately 66,000 households using a discount broker between 1991 and 1996 and found that individuals who trade frequently (with monthly turnover above 8.8%) earned a net annualized return of 11.4% over that time, while inactive accounts netted 18.5%. Investors who traded most often paid the most in brokerage commissions, taking a huge bite out of returns.
In the world of traditional economists and finance professors, though, that's not supposed to happen. If investors are rational decision-makers, then emotion-driven bubbles shouldn't be possible. Yet human weaknesses can limit our ability to think clearly. Many studies of investor behavior have shown that investors are too willing to extrapolate recent trends far into the future, too confident in their abilities, and too quick (or not quick enough) to react to new information. These tendencies often lead investors to make decisions that run counter to their own best interests.
... According to several studies, overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade. And all that trading can be hazardous to your wealth, as University of California, Berkeley professors Brad Barber and Terrance Odean put it in their 2000 study of investor trading behavior. The study looked at approximately 66,000 households using a discount broker between 1991 and 1996 and found that individuals who trade frequently (with monthly turnover above 8.8%) earned a net annualized return of 11.4% over that time, while inactive accounts netted 18.5%. Investors who traded most often paid the most in brokerage commissions, taking a huge bite out of returns.
Morningstar performance
[Pat Dorsey writes] As an investor, I have always valued candor very highly when assessing both CEOs and portfolio managers. So, I will be as candid as possible in reviewing the overall performance of our stock picks in 2007: We had a bad year. Our 5-star calls underperformed just about any relevant benchmark, and they also posted poor absolute returns.