In seeming contradiction to some of the "value vs. growth" studies noted elsewhere here, Peter Lynch (in his book One Up On Wall Street) states it is preferable to purchase a business at a higher P/E that grows earnings at a higher rate than a lower P/E business that grows earnings at a slower rate.
However the example, as presented in the linked ticonline article (an excellent site by the way), does not demonstrate full [or any] understanding of the issue. Naturally the 15% grower would outperform the 10% grower if the p/e doesn't change! The very reason for buying a low p/e stock is the value investor's expectation that the p/e will rise as the value of the stock is discovered. And the danger of a high growth, high p/e stock is that the p/e cannot be sustained over time.
Let me adjust the example. Let's say the fast grower starts with a p/e of 25 and ends up with a p/e of 20 ten years later. And the low p/e stock starts with a p/e of 8 and ends with a p/e of 12. The 4.05 performance of the fast grower would be cut to 3.24. And the 2.59 performance of the low p/e stock would be boosted to 3.89. In this example, the low p/e stock would outperform the faster grower.
That said, if you can get a high enough sustained growth rate, the faster grower will outperform even with a shrinking p/e ratio. Lynch's actual example is located in the "Some Famous Numbers" chapter, in the section called "Growth Rate". He compares a 20% grower to a 10% grower. The 20% grower handily outperforms the 10% grower even if the p/e shrinks from 20 to 15.
In any case, this interplay between the growth rate and the multiple (p/e here) is at the heart behind the bulk of my investment decisions. The performance of any investment is a function of both growth and value.
Friday, August 19, 2005
Beware of Perfect Earnings
[7/12/05] Another good article referenced from Fat Pitch Financials
I like to look for companies that grow earnings year after year, but earnings can be manipulated. That's why I also like to look at sales and I think I'll start looking more at free cash flow (provided by morningstar). But the point is even those trends don't last forever.
The conclusion: "there are very few really great businesses".
[8/8/05] Gaming a financial statement to meet earnings expectations has its own colorful nomenclature: cookie-jar accounting, channel stuffing and "the big bath."
[8/18/05] Earnings can be manipulated -- and even when they aren't, they can be unintentionally deceptive. No single measure of corporate performance or stock value is perfect or totally tamper- proof. That's why many professional investors look at stocks using several different measures.
I like to look for companies that grow earnings year after year, but earnings can be manipulated. That's why I also like to look at sales and I think I'll start looking more at free cash flow (provided by morningstar). But the point is even those trends don't last forever.
The conclusion: "there are very few really great businesses".
[8/8/05] Gaming a financial statement to meet earnings expectations has its own colorful nomenclature: cookie-jar accounting, channel stuffing and "the big bath."
[8/18/05] Earnings can be manipulated -- and even when they aren't, they can be unintentionally deceptive. No single measure of corporate performance or stock value is perfect or totally tamper- proof. That's why many professional investors look at stocks using several different measures.
a piece of pi from Google
A year after its blockbuster debut as a public company, Google Inc. said Thursday it plans to offer another 14.2 million shares, currently worth about $4 billion, as competition heats up with rivals Yahoo Inc. and Microsoft Corp.
But here's what I found interesting interesting. The exact number of shares to be sold -- 14,159,265 -- happens to be the eight digits beyond the decimal point in the mathematical value Pi. Google's founders, Sergey Brin and Larry Page, were raised by math teachers and studied computer science at Stanford University. (I liked it, but fuddy duddy Kudlow didn't. 8)
But here's what I found interesting interesting. The exact number of shares to be sold -- 14,159,265 -- happens to be the eight digits beyond the decimal point in the mathematical value Pi. Google's founders, Sergey Brin and Larry Page, were raised by math teachers and studied computer science at Stanford University. (I liked it, but fuddy duddy Kudlow didn't. 8)
Monday, August 15, 2005
Don't Invest Like Peter Lynch
What? Peter Lynch is one of the great investors of all time. And much of my investing philosophy is based on his books. But you shouldn't invest like him says FatBoy. Why? Because Lynch is now investing in (gasp) penny stocks!
One of the his picks is Rainmaker Systems. When I look at the numbers, revenue has slid from 61m in 1999 to 15m in 2004. Net income has never been positive. Accordingly the stock has slid above 3 last year to like a quarter earlier this year. It would seem to me that this is a stock to avoid.
So maybe I should be saying, "I don't invest like Peter Lynch" in this situation. But I'd venture to say it's OK to invest like Peter Lynch -- if you're Peter Lynch (or Gordon Gekko)!
One of the his picks is Rainmaker Systems. When I look at the numbers, revenue has slid from 61m in 1999 to 15m in 2004. Net income has never been positive. Accordingly the stock has slid above 3 last year to like a quarter earlier this year. It would seem to me that this is a stock to avoid.
So maybe I should be saying, "I don't invest like Peter Lynch" in this situation. But I'd venture to say it's OK to invest like Peter Lynch -- if you're Peter Lynch (or Gordon Gekko)!
Thursday, August 11, 2005
Unexpected Returns (what drives stock market returns?)
What's the one main driver for stock market returns? It's got to be economic growth, right? Growth is paramount to the increase in stock prices. After all, that's what we're told every single day by the financial media.
Actually, according to a new book by Crestmont Research's Ed Easterling, that's basically wrong. The single biggest determinant of stock market gains is the trend in inflation. His new book, Unexpected Returns: Understanding Secular Stock Market Cycles, is destined to be an investing classic.
Reading further into Bill Mann's review, this book is a follow-up to Mauldin's Bullseye Investing. And if you replace the term "inflation" with the term "p/e" it all becomes a little clearer. The bull market from 1980 to 1999 was driven by a p/e expansion from 7 to 23.
What about now? As expected from a follow-up to Mauldin, the premise is that the current p/e of 20 is still high historically which would would mean a bear market is mathematically likely to follow.
My take is that though the p/e of 20 is high, the current interest rate is still low and so the market isn't all that overvalued if at all. But with the rates still in a general uptrend, that thesis is slowly eroding.
For more, see the article on Vandeberg.
[8/28/05] An article in Barron's makes the same case that "the major determinant of stock-price returns
isn't growth in corporate profits, but rather changes in price-
earnings multiples". I'm trying to verify my own statement above that the p/e expanded from 7 in 1980 to 23 in 1999. The only 23 in the article I see now is that it was the p/e in 1965. Maybe I was confused. Looking at Barra, I see the p/e for the S&P 500 at the end of 1999 was 34. In 1980, it was 9.40. In 1979, it was 7.58. Barra's data goes back to 1977.
[2/23/05] Vitaly Katsenelson looks at Unexpected Returns
Actually, according to a new book by Crestmont Research's Ed Easterling, that's basically wrong. The single biggest determinant of stock market gains is the trend in inflation. His new book, Unexpected Returns: Understanding Secular Stock Market Cycles, is destined to be an investing classic.
Reading further into Bill Mann's review, this book is a follow-up to Mauldin's Bullseye Investing. And if you replace the term "inflation" with the term "p/e" it all becomes a little clearer. The bull market from 1980 to 1999 was driven by a p/e expansion from 7 to 23.
What about now? As expected from a follow-up to Mauldin, the premise is that the current p/e of 20 is still high historically which would would mean a bear market is mathematically likely to follow.
My take is that though the p/e of 20 is high, the current interest rate is still low and so the market isn't all that overvalued if at all. But with the rates still in a general uptrend, that thesis is slowly eroding.
For more, see the article on Vandeberg.
[8/28/05] An article in Barron's makes the same case that "the major determinant of stock-price returns
isn't growth in corporate profits, but rather changes in price-
earnings multiples". I'm trying to verify my own statement above that the p/e expanded from 7 in 1980 to 23 in 1999. The only 23 in the article I see now is that it was the p/e in 1965. Maybe I was confused. Looking at Barra, I see the p/e for the S&P 500 at the end of 1999 was 34. In 1980, it was 9.40. In 1979, it was 7.58. Barra's data goes back to 1977.
[2/23/05] Vitaly Katsenelson looks at Unexpected Returns
Wednesday, August 10, 2005
How reliable are earnings estimates?
[John Mauldin pointed out that] David Dreman pointed out in a study that he conducted from 1982 through 1997 analysts were ON AVERAGE wrong by 200%. (Forbes, July 8, 2002)
Anecdotally though, it seems to me that the majority of estimates are pretty close. It's fairly rare that an earnings surprise is way out in left field. [Just look at the InvestorGuide reported vs. expected earnings for example.] In some cases it happens, so that would skew the averages. Five year estimates may be something different though. It's pretty hard to forecast accurately five years out. For example, a few years ago they were probably forecasting CSCO to earn 40% a year. Now it's more like 15%.
[9/5/08] Dreman studied and wrote a good deal about analysts and their predictive powers (or lack thereof). In his book "Contrarian Investment Strategies," he wrote: "There is only a 1 in 130 chance that the analysts' consensus forecast will be within 5 percent for any four consecutive quarters. . . . To put this in perspective, your odds are ten times greater of being the big winner of the New York State Lottery than of pinpointing earnings five years ahead."
... [Dreman] used it as a reason to invest in beaten-down stocks. For highflying stocks, a good earnings surprise doesn't help that much, because the stock is already riding on great expectations. A negative surprise, however, can send its price plummeting.
Beaten-down stocks, on the other hand, have such low expectations that a negative earnings surprise won't hurt them too much, while a positive earnings surprise can send them soaring. The message for Dreman: Since analysts are often wrong and earnings surprises are frequent, it makes sense to focus on beaten-down contrarian plays.
Dreman tells us, "Earnings performance for 2002's first half was a sorry one. Company after company was forced to lower expectations or restate past results downward. How can the consensus justify such a healthy-looking multiple for the year as a whole? By forecasting a second-half profit boom that gushes up from nowhere: a 48% gain (from a year earlier) in the third quarter and a 45.7% one in the fourth, according to S&P analysts' forecasts. Included in the forthcoming profit explosion, as reported in First Call, are a 127% income increase in technology stocks in the third quarter and a 73% jump in the fourth and a hardly modest 19-fold rise in transportation earnings in the third quarter (mainly airlines), with an even larger gain forecast for the fourth."
Another longer-term study published by the National Bureau of Economic Research shows that analysts typically overstate earnings by at least a factor of 2. From the report: "Analysts predicted a five-year growth for the top 20% of companies to be 22.4% which turned out to be only 9.5%. [The researchers also pointed out the actual return rate should be lower because many companies actually failed over that period.]
They created sample portfolios based upon analysts' forecasts. Predictably, the top portion of the portfolios actually returned only about half of what the analysts predicted: 11% actual versus 22% predicted. "These results suggest that in general caution should be exercised before relying too heavily on long-term forecasts as estimates of expected growth in valuation studies."
Anecdotally though, it seems to me that the majority of estimates are pretty close. It's fairly rare that an earnings surprise is way out in left field. [Just look at the InvestorGuide reported vs. expected earnings for example.] In some cases it happens, so that would skew the averages. Five year estimates may be something different though. It's pretty hard to forecast accurately five years out. For example, a few years ago they were probably forecasting CSCO to earn 40% a year. Now it's more like 15%.
[9/5/08] Dreman studied and wrote a good deal about analysts and their predictive powers (or lack thereof). In his book "Contrarian Investment Strategies," he wrote: "There is only a 1 in 130 chance that the analysts' consensus forecast will be within 5 percent for any four consecutive quarters. . . . To put this in perspective, your odds are ten times greater of being the big winner of the New York State Lottery than of pinpointing earnings five years ahead."
... [Dreman] used it as a reason to invest in beaten-down stocks. For highflying stocks, a good earnings surprise doesn't help that much, because the stock is already riding on great expectations. A negative surprise, however, can send its price plummeting.
Beaten-down stocks, on the other hand, have such low expectations that a negative earnings surprise won't hurt them too much, while a positive earnings surprise can send them soaring. The message for Dreman: Since analysts are often wrong and earnings surprises are frequent, it makes sense to focus on beaten-down contrarian plays.
Sunday, August 07, 2005
The Case for (and against) Investment Newsletters
[10/29/05] Here's another view of investment newsletters performance. The takeaway? They ain't so hot.
* * *
[8/7/05] Even though newsletters traditionally underperform the market, I was suprise to learn that individual investors subscribing to newsletters outperform those that don't subscribe. Well, I guess the Motley Fool folks would be happy to hear that.
I'm not sold on that last paragraph. Though newsletters outperform the average investor and mutual funds generally underperform the market, it does not logically follow that newsletters outperform mutual funds.
[6/1/14 reply to roy] Most newsletters (and mutual funds and individual investors) don't outperform the market.
Question: Recently I've been reviewing a few financial newsletters that provide market advice. I don't trust most of them but have been intrigued by some. Would I just be wasting my money ($200 or $300 a piece) or could I actually see some better than average returns? How does the current downturn in the economy affect the advice offered by these newsletters?
The Mole's Answer: This is an easy one. You'd be much better off just throwing the money in the nearest dumpster than buying these newsletters and risking a big chunk of your nest egg in following the newsletters' advice.
[6/1/14 update] Consider the 51 advisers out of more than 200 on the Hulbert Financial Digest's list who beat the market in the decade-long period that ended April 30, 2012, as measured by the Wilshire 5000 Total Market index, including reinvested dividends.
Of that group, just 11—or 22%—have outperformed the overall market since then.
***
The Reserve Bank of New York also did a broad-ranging study in 1998 which looked at investment newsletters. This paper analyzes the recommendations of common stocks made in the HFD database from 1980 to 1996. They found that newsletters typically recommend 10-16 stocks. They tend to recommend growth rather than value stocks, smaller than the value-weighted average of market capitalizations. They generally encourage much higher turnover of holdings than found among mutual funds.
In terms of performance, they concluded that:
1) Newsletter recommendations do not on average outperform benchmarks based on market capitalization, book-to-market and stock price. Including trading costs (and newsletter costs), newsletters likely underperform.
***
The Hulbert Financial Digest is a monthly newsletter that serves as an impartial, independent reviewer of all the leading stock and mutual fund newsletter services (publications that recommend and advise on what to invest in). Run by editor Mark Hulbert for more than 20 years, over 180 stock recommendation letters are tracked each month, with data going back as far as 1980 for services that have been around that long. Hulbert's tracking and research shows that 80% of these professional stock pickers can't beat the market indices -- which might make you think twice before paying their subscription fees and following their investment advise.
***
Where's my book on newsletters? Here it is. The Wall Street Gurus by Peter Brimelow (1986). Chapter four is on Hulbert.
"At the end of June 1985, after five years of rating the letters, Hulbert's results looked like this (see pages 68 through 75). It would be easy to say that these results were devastating.
Don't invest in newsletter model portfolio
Special to Coloradoan
Fort Collins Coloradoan
October 23, 2005
I first learned of mutual funds in 1956, as a beginning accountant working for a CPA firm in Hammond, Ind.
One of the firm's clients was Dow Theory Forecasts, founded by LeRoy Evans and publisher of Dow Theory Forecasts investment advisory newsletter. Evans wanted to start a mutual fund using his stock-picking skills. He did - the Dow Theory Mutual Fund. Trouble was, in its short life the fund posted a dismal record. Evans retained financial doctorate degrees from Northwestern University to fix the problem. They couldn't and the fund was eventually sold and merged out of business.
Many readers will recognize the name Mark Hulbert, founder of the Hulbert Financial Digest. The digest begin tracking advisory newsletter performance in 1981 and has 25 years of newsletter history.
Hulbert recently conducted an experiment to determine if some newsletter writers really have special stock-picking skills.
He chose newsletter model portfolios at Jan. 1 of each year based solely on their performance in the previous year.
The experiment revealed that if an investor had followed this strategy beginning in 1992, as of the end of August 2005 (14 years and eight months), the investor would have lost an astonishingly 24 percent annualized.
The total nonannualized loss exceeded 98 percent.
What if the investor chose the best performing newsletter model portfolio over five years?
Hulbert says the investor's portfolio would have gained 5.5 percent annualized compared with the 3.9 percent annualized return the investor would have earned by investing in 90-day treasury bills.
Maybe 10-year model portfolios would show better results. They do, returning 9.4 percent annualized, according to Hulbert. "Not bad," you may think. But the Wilshire 5000 index gained 11.9 percent annualized over the same 10-year period.
Hulbert continued his experiment to see how the best performing newsletter model portfolio in 2004 has performed.
That newsletter is published by Hager Technology Research and Hulbert calculates its model portfolio is down 80.3 percent from Jan. 1 through Aug. 31.
I logged onto the newsletter's Web site. The 20-point type headline reads: "It's official. According to the independent audit of the Hulbert Financial Digest, Fredhager.com has the No. 1 performing investment newsletter of 2004, up 154.8 percent."
Now that is impressive. If my math is correct, a $10,000 investment in the fund at the beginning of 2004 was worth $25,480 at year-end 2004. As of Aug. 31, the value had declined 80.3 percent or $20,460 and the $10,000 investment reduced to $5,020. That is some model.
If instead of picking the one-year best performing newsletter model portfolio you chose the best five-year performing model portfolio, Corcoran's Chronicle, you would have been down 10.7 percent at Aug. 31. The Wilshire 5000 index was up 3.1 percent.
The best 10-year model portfolio with an annualized gain of 11.5 percent was recorded by The Prudent Speculator. Its model portfolio, in my opinion, is only for those who would get into a craps game with strangers. Its volatility is unchallenged.
Come to think of it, many investors might do better in a craps game than investing in a newsletter model portfolio.
Personal financial specialist James L. Watt, CPA/PFS, is a fee-only, NAPFA-registered financial adviser. Reach him at jimwatt100@msn.com or 225-1440.
* * *
[8/7/05] Even though newsletters traditionally underperform the market, I was suprise to learn that individual investors subscribing to newsletters outperform those that don't subscribe. Well, I guess the Motley Fool folks would be happy to hear that.
Shortly after the dawn of the stock market, the investment
newsletter industry was born. Today industry sources believe
there are over 2000 investment newsletters (including online
versions) with total annual revenues in the billions. Below we
will discuss the benefits of investment newsletters and how to
find one that best meets your needs.
Benefits of Investment Newsletters
At the end of the day, the reason to subscribe to investment
newsletters comes down to performance. Studies show that
investors who subscribe to newsletters outperform the average
investor. Unfortunately most investors left to their own
devices follow a scattered approach that leads to sub-par
returns. Whereas investors that subscribe to newsletters are
in affect subscribing to a time-tested investment philosophy.
The philosophy is usually based upon sound investing principles
and gives clear buy and sell signals. Most important are the
sell signals since most investors have difficulty selling
stocks at the right time. If their stock picks are down, then
investors will hold on until the price returns to breakeven
(which almost never happens). Or investors try to ride winners
too long and do not lock in profits. Investment newsletters
provide the holistic approach needed to help investors succeed.
Another benefit of newsletters is value. Consider that
investors keep vast amounts of their wealth in mutual funds.
Unfortunately, as most of you already know, 85% of the funds
underperform the market. And for this sub-par performance,
investors pay mutual funds 1.5% of assets. Even a modest sized
portfolio of $50,000 pays $750 in mutual fund management fees
to underperform the market. Note the average newsletter costs
only $250 per year and provides superior results.
-- Zacks, Profit from the Pros, 1/19/05
I'm not sold on that last paragraph. Though newsletters outperform the average investor and mutual funds generally underperform the market, it does not logically follow that newsletters outperform mutual funds.
[6/1/14 reply to roy] Most newsletters (and mutual funds and individual investors) don't outperform the market.
Question: Recently I've been reviewing a few financial newsletters that provide market advice. I don't trust most of them but have been intrigued by some. Would I just be wasting my money ($200 or $300 a piece) or could I actually see some better than average returns? How does the current downturn in the economy affect the advice offered by these newsletters?
The Mole's Answer: This is an easy one. You'd be much better off just throwing the money in the nearest dumpster than buying these newsletters and risking a big chunk of your nest egg in following the newsletters' advice.
[6/1/14 update] Consider the 51 advisers out of more than 200 on the Hulbert Financial Digest's list who beat the market in the decade-long period that ended April 30, 2012, as measured by the Wilshire 5000 Total Market index, including reinvested dividends.
Of that group, just 11—or 22%—have outperformed the overall market since then.
***
The Reserve Bank of New York also did a broad-ranging study in 1998 which looked at investment newsletters. This paper analyzes the recommendations of common stocks made in the HFD database from 1980 to 1996. They found that newsletters typically recommend 10-16 stocks. They tend to recommend growth rather than value stocks, smaller than the value-weighted average of market capitalizations. They generally encourage much higher turnover of holdings than found among mutual funds.
In terms of performance, they concluded that:
1) Newsletter recommendations do not on average outperform benchmarks based on market capitalization, book-to-market and stock price. Including trading costs (and newsletter costs), newsletters likely underperform.
***
The Hulbert Financial Digest is a monthly newsletter that serves as an impartial, independent reviewer of all the leading stock and mutual fund newsletter services (publications that recommend and advise on what to invest in). Run by editor Mark Hulbert for more than 20 years, over 180 stock recommendation letters are tracked each month, with data going back as far as 1980 for services that have been around that long. Hulbert's tracking and research shows that 80% of these professional stock pickers can't beat the market indices -- which might make you think twice before paying their subscription fees and following their investment advise.
***
Where's my book on newsletters? Here it is. The Wall Street Gurus by Peter Brimelow (1986). Chapter four is on Hulbert.
"At the end of June 1985, after five years of rating the letters, Hulbert's results looked like this (see pages 68 through 75). It would be easy to say that these results were devastating.
Saturday, August 06, 2005
How Buffett spends his day
[7/30/05] How does Warren Buffett spend his day? Reading, talking on the phone, and thinking. <!- what do I do? look up these stupid links 8/6/05 -->
"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass.
- Charlie Munger at Berkshire Hathaway's 2000 Shareholder Meeting
[8/31/14 - a slightly different version of the quote: "If you buy something because it's undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard to do. But if you buy a few great companies, then you can sit on your ass. That's a good thing."]
[8/5/05] Buffett succeeds at nothing (also linked at the temperament entry)
[8/5/05] "Lethargy bordering on sloth remains the cornerstone of our investment style" - Berkshire Hathaway 1990 annual report <!- quoted by Jason Yee in the Janus Worldwide 2005 semiannual report -->
[8/13/05] "You make more money sitting on your ass," Marty Whitman indelicately explained to Jim Grant recently.
"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass.
- Charlie Munger at Berkshire Hathaway's 2000 Shareholder Meeting
[8/31/14 - a slightly different version of the quote: "If you buy something because it's undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard to do. But if you buy a few great companies, then you can sit on your ass. That's a good thing."]
[8/5/05] Buffett succeeds at nothing (also linked at the temperament entry)
[8/5/05] "Lethargy bordering on sloth remains the cornerstone of our investment style" - Berkshire Hathaway 1990 annual report <!- quoted by Jason Yee in the Janus Worldwide 2005 semiannual report -->
[8/13/05] "You make more money sitting on your ass," Marty Whitman indelicately explained to Jim Grant recently.
Five Steps to An Organized Financial Life
[1/19/09] What records can you really throw away?
[5/25/06] How long you should keep your financial records
[8/6/05] Advice for keeping your financial documents in order
Dump trash-worth documents
[5/25/06] How long you should keep your financial records
[8/6/05] Advice for keeping your financial documents in order
Dump trash-worth documents
Friday, August 05, 2005
Baidu!
Baidu (BIDU) the Chinese Google opened for trading today. It was up 95.54 to 122.54. (Sell-sell-sell?) How did GOOG do on its first day? On 8/19/94, it was up 15.34 to 100.34. How sad.
[8/10/05] three lessons
Still Bubbling (says the Fed Model?)
Using the median p/e, Arnold Van Den Berg asserted (over a year ago) there is little upside to the market.
When the article was written, the median p/e was 19.5 compared to the highest peak ever at 20.7. So he's saying there is little upside and substantial downside.
However Arnie is using a bond rate of 6.75% in his model which would translates to a 15 p/e. If you take the 10-year tnote rate of 4%, you'd get a p/e of 25. [Today's Schwab Alerts says the 10-year bond yield is now up to 4.4%, the highest in four months. That works out to a p/e of 23.] [Here's one guy, Ed Keon, who interprets the Fed model as being bullish.]
I don't have answers for his other bearish arguments though. The market cap / GNP ratio chart looks especially scary.
In any case, even if the market is high, money can be made in individual situations. As Cramer always says, "there is always a bull market somewhere."
When the article was written, the median p/e was 19.5 compared to the highest peak ever at 20.7. So he's saying there is little upside and substantial downside.
However Arnie is using a bond rate of 6.75% in his model which would translates to a 15 p/e. If you take the 10-year tnote rate of 4%, you'd get a p/e of 25. [Today's Schwab Alerts says the 10-year bond yield is now up to 4.4%, the highest in four months. That works out to a p/e of 23.] [Here's one guy, Ed Keon, who interprets the Fed model as being bullish.]
I don't have answers for his other bearish arguments though. The market cap / GNP ratio chart looks especially scary.
In any case, even if the market is high, money can be made in individual situations. As Cramer always says, "there is always a bull market somewhere."
Monday, August 01, 2005
Orphan Stocks
According to a study that tracked more than 5,000 orphan stocks (stocks that trade under $5) over the course of 11 years, these unloved babes have less than a one-in-eight chance of recovering to above $10. Ever.
Is the run in Small Cap stocks over?
[7/31/06] The latest reign of small-cap outperformance peaked at 85 months in March, closing in on the longest run of outperformance (small caps for 88 months from 1983-1990) since the creation of the Russell indices in 1978. As a result of the weakened relative performance, and not at all surprising, mutual fund flows have followed suit. The Leuthold Group estimates a $3.3 billion net outflow from small-cap equity funds in June, compared to a $1.2 billion net outflow in May.
[7/30/05] Maybe so. But Mauldin may have been a little early as he was writing about it three years ago.
[7/30/05] Maybe so. But Mauldin may have been a little early as he was writing about it three years ago.
Sunday, July 31, 2005
Wednesday, July 27, 2005
more IV calculators
[7/2/05] Here's a couple more places to check for estimates on your stock's valuation (besides quicken.com, vectorvest, S&P).
ValuePro
Price Check Calculator
[7/27/05] Warren Buffett Intrinsic Value Formula (?)
ValuePro
Price Check Calculator
[7/27/05] Warren Buffett Intrinsic Value Formula (?)
Saturday, July 23, 2005
MarketThoughts.com
It's sort of a blog, but not exactly. Anyway, I found it while doing a search of Buffett and Microsoft and saw some interesting articles here. These guys seem pretty intelligent. Here's a few articles that caught my interest.
Comments on the Buffett interview at Kansas
A link to the comments of the interview.
- Buy stuff cheaply
- A big pool of capital makes it harder to earn big returns
- The highest IQ doesn't automatically win
- Do what you love
- Buffett was lucky (and so are many of us)
- The U.S. dollar is spinning down
- Retail is tough to turn around (it won't be easy for Lampert)
Wednesday, July 20, 2005
Interview with Ralph Wanger
Stray from the herd every once in awhile, know when to sell, and understand the stock market is a loser's game.
http://www.howestreet.com/story.php?ArticleId=1376
- from chucks_angels
[10/6/14] The above link is dead.
Try these.
http://www.trustprofessionals.com/f-digest/2005/2005-07-18-f.html (scroll down to How Losers Win)
http://www.trustprofessionals.com/f-digest/2005/2005-06-13-f.html#wanger
Ralph Wanger was the manager of the Acorn Fund.
http://www.howestreet.com/story.php?ArticleId=1376
- from chucks_angels
[10/6/14] The above link is dead.
Try these.
http://www.trustprofessionals.com/f-digest/2005/2005-07-18-f.html (scroll down to How Losers Win)
http://www.trustprofessionals.com/f-digest/2005/2005-06-13-f.html#wanger
Ralph Wanger was the manager of the Acorn Fund.
Monday, July 18, 2005
growth outperforming
From InvestorGuide Daily comes this thestreet.com snippet.
The numbers don't seem to add up. The only class that underperformed was large-cap value. And by only 0.1%. I'm guessing what must have happened was that the large cap funds in the S&P 500 underperformed and weighted down the index (which is cap weighted). So I'm guessing that means stocks like MSFT and CSCO were dragging down the index. Checking the charts though shows both MSFT and CSCO were up in the quarter. More so for CSCO.
According to fund tracker Lipper, the average large-cap growth fund rose 3.5% from April through June, compared to 1.4% for the S&P 500 index. Mid-cap growth funds added 3.1% in the quarter, while small-cap growth funds led all categories with a gain of 4.2%. On the value side, small-cap funds also bested the big guys, returning 3.1%. That compares with gains at mid- and large-cap value funds of 2.6% and 1.3%, respectively.
The numbers don't seem to add up. The only class that underperformed was large-cap value. And by only 0.1%. I'm guessing what must have happened was that the large cap funds in the S&P 500 underperformed and weighted down the index (which is cap weighted). So I'm guessing that means stocks like MSFT and CSCO were dragging down the index. Checking the charts though shows both MSFT and CSCO were up in the quarter. More so for CSCO.
Morningstar pans Marketocracy
[11/28/05] I see in this Mauldin letter of some months ago that out of 70,000 investors at marketocracy, only 2% have beaten the S&P both long-term and monthly.
The Marketocracy Fund is run by top 100 managers at Marketocracy. Here's how Ken Kam (the guy who run Marketocracy) describes them.
[7/18/05] Morningstar has a dim view of the Marketocracy Masters 100 fund. The major beef seems to be the high expense ratio (1.95% according to Yahoo). The other beef is their low opinion of us amateurs.
However looking at the Yahoo chart, MOFQX has actually slightly outperformed the S&P 500 since inception in late 2001. It was well ahead at the end of 2003, but had a miserable 2004 to fall back to near even. Turning to the marketocracy site, it looks even better, outperforming the S&P 500 29.49% to 15.08% (7.34% to 3.92% annualized). What's more, it has a beta of only 0.78 (compared to the S&P 500's 1.00).
The Marketocracy Fund is run by top 100 managers at Marketocracy. Here's how Ken Kam (the guy who run Marketocracy) describes them.
Wall Street investment houses, says Kam, recruit the wrong people. The top-drawer firms look for high achieving, well spoken generalists from the best business schools. But good investors, Kam says, tend to be savants with a passion. They're nerds. They're freaks. They're too young or too old. They eat junk food and stare at the monitor and perhaps forget to bathe. They live and breathe stocks. They tend to be sector specialists who know the underlying science, product cycles, supply chains and b habits in their sectors."* * *
[7/18/05] Morningstar has a dim view of the Marketocracy Masters 100 fund. The major beef seems to be the high expense ratio (1.95% according to Yahoo). The other beef is their low opinion of us amateurs.
However looking at the Yahoo chart, MOFQX has actually slightly outperformed the S&P 500 since inception in late 2001. It was well ahead at the end of 2003, but had a miserable 2004 to fall back to near even. Turning to the marketocracy site, it looks even better, outperforming the S&P 500 29.49% to 15.08% (7.34% to 3.92% annualized). What's more, it has a beta of only 0.78 (compared to the S&P 500's 1.00).
Why investors underperform
There seems to be two oft-cited studies explaining why most investors underperform the market.
Barber and Odean looked at the trading activity at a discount broker between February 1991 and December 1996. They broke down the investors into quintiles based on their portfolio turnover. The highest turnover group had a 10% annualized return, while the lowest turnover group had a 17.5% return.
The other study which seemed to be a popular reference a couple of years ago was made by Dalbar. They looked at mutual fund returns from 1984 through 2000. The average fund returned 14% over that time period. But the typical investor had only a 5% return.
This is apparently an ongoing study. The 1984 through 1996 numbers were 16% and 6%. The 1984 through 2002 numbers were 12.22% and 2.57% (see Halbert below). The latest numbers (apparently 1984 through 2003) are 12.98% and 3.51%.
Here's what Richard Band said about it on his 8/28/03 hotline
[8/14/06] The Odean/Barber studies are mentioned briefly in Belsky and Gilvich's book Why Smart People Make Big Money Mistakes which is excerpted in the book What Do I Do With My Money Now?
[5/10/08] Mauldin writes more on Why Investors Fail
[7/10/11] links from Cougar3 (3/10/10):
http://tinyurl.com/yamaojt
http://tinyurl.com/yl6xpp5
http://tinyurl.com/2c55wy
Barber and Odean looked at the trading activity at a discount broker between February 1991 and December 1996. They broke down the investors into quintiles based on their portfolio turnover. The highest turnover group had a 10% annualized return, while the lowest turnover group had a 17.5% return.
The other study which seemed to be a popular reference a couple of years ago was made by Dalbar. They looked at mutual fund returns from 1984 through 2000. The average fund returned 14% over that time period. But the typical investor had only a 5% return.
This is apparently an ongoing study. The 1984 through 1996 numbers were 16% and 6%. The 1984 through 2002 numbers were 12.22% and 2.57% (see Halbert below). The latest numbers (apparently 1984 through 2003) are 12.98% and 3.51%.
Here's what Richard Band said about it on his 8/28/03 hotline
It's a scandal nobody in the fund business wants to talk about. The folks from Dalbar, the Boston mutual fund research organization, have just released their latest study showing how well (or poorly) investors fared with their mutual funds. Dalbar analyzes cash flows into and out of the fund industry. For the 19 years from 1984 through 2002, the researchers found that the average equity-fund investor earned a compound return of only 2.57% a year. Meanwhile, the S&P 500 index returned 12.22%.Halbert discussed the Dalbar study in his e-letter. Travis Morien looked at both studies plus a few others.
... The real killer is that too many investors chase "hot" funds. They buy whatever funds have rolled up big profits in the recent past (such as the technology funds in the late 1990s). As a result, the average investor arrives late to the party. Then, turning a mistake into a catastrophe, John Doe and Mary Roe dump the same funds after a stretch of poor performance—generally near the bottom of the market.
[8/14/06] The Odean/Barber studies are mentioned briefly in Belsky and Gilvich's book Why Smart People Make Big Money Mistakes which is excerpted in the book What Do I Do With My Money Now?
[5/10/08] Mauldin writes more on Why Investors Fail
[7/10/11] links from Cougar3 (3/10/10):
http://tinyurl.com/yamaojt
http://tinyurl.com/yl6xpp5
http://tinyurl.com/2c55wy
Sunday, July 17, 2005
The Trouble With Value
According to this study, value stocks (Russell 1000 Value Index) have outperformed growth (Russell 1000 Growth Index) stocks since their creation in December 1978. However at the height of the bubble, growth stocks were far ahead. Over 100% of the outperformance has come in the last five years.
The thesis is that the outperformance may be due to swing back to the growth side.
The thesis is that the outperformance may be due to swing back to the growth side.
Whitney Tilson's principles of sound investing
[7/14/05] First start with the three Ts
[7/17/05] Tilson's guide to rational investment (from brknews)
Saturday, July 16, 2005
Shai's blog
Shai's blog is surging ahead. He has obtained the rights to Warren Buffett's 1998 speech at the University of Florida (1 hour 27 minutes).
Thursday, July 14, 2005
Buffett in a small pool
[6/7/05] If Buffett had a small pool of money (like a measly $10 million), he would apparently be in small caps making 50%+ a year.
What would Munger do if he were running a small pool of capital?
[7/14/05] Here's another link about Buffett making 50% (from Whitney Tilson's principles of sound investing). Tilson says he mentioned it at the 1999 annual meeting.
[7/14/05] One more. Here it says Buffett said it in a Business Week report in 1999. I see that Buffett was the cover story of the July 5, 1999 issue of Business Week and the specific article was titled Homespun Wisdom from the 'Oracle of Omaha'.
[10/10/05] Shai's attempt
[11/14/05] mike_3772 over at chucks_angels observes that there are "two Warren Buffetts. There's the public Buffett telling MBA students to invest in 20 punches and sit on their butts. Buy moats at a reasonable price. Then, there's the private Buffett who's still buying what's cheap and selling it when it gets to reasonable."
What would Munger do if he were running a small pool of capital?
[7/14/05] Here's another link about Buffett making 50% (from Whitney Tilson's principles of sound investing). Tilson says he mentioned it at the 1999 annual meeting.
[7/14/05] One more. Here it says Buffett said it in a Business Week report in 1999. I see that Buffett was the cover story of the July 5, 1999 issue of Business Week and the specific article was titled Homespun Wisdom from the 'Oracle of Omaha'.
"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."
"The universe I can't play in [i.e., small companies] has become more attractive than the universe I can play in [that of large companies]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."
[10/10/05] Shai's attempt
[11/14/05] mike_3772 over at chucks_angels observes that there are "two Warren Buffetts. There's the public Buffett telling MBA students to invest in 20 punches and sit on their butts. Buy moats at a reasonable price. Then, there's the private Buffett who's still buying what's cheap and selling it when it gets to reasonable."
Wednesday, July 13, 2005
25 Years for Ebbers
Former Worldcom CEO is sentenced to 25 years in prison for his part in the $11 billion accounting fraud.
Tuesday, July 12, 2005
The Simpleton Portfolio
Ten years ago, Tom Gardner put together a 10 stock portfolio to hold for a decade. It was a growth portfolio with 9 out of the 10 picks in tech (I own 7 of them). Despite the bursting of the bubble, it performed quite well.
Morningstar has their own Coffee Can Portfolio (from Fat Pitch Financials from cigarbutthunters)
Morningstar has their own Coffee Can Portfolio (from Fat Pitch Financials from cigarbutthunters)
Sunday, July 10, 2005
How to tell if the market is cheap or expensive
Wednesday, July 06, 2005
Buffett plays the odds (and mental mathematics)
[3/2/06] Along the same lines is this excerpt on Bill Nygren from the book Five Key Lessons from Top Money Managers
[11/12/05] brknews passes along this Sanjay Bakshi article about Buffett's game of dice that he proposed to Bill Gates.
[7/6/05] "The bet was the kind that rich golfing buddies like. Investment wizard Warren Buffett's $10 against $20,000 that he wouldn't score a hole-in-one over the three-day outing.
"Eight of us had gotten together to play Pebble Beach, and in a loose moment, after dinner and a couple bottles of wine, I offered the bet," recalled Jack Byrne, [former] chairman of Fireman's Fund. "It was meant as a fun thing, and the other six took me up on it. Everyone except Warren.
"Well, we heaped abuse on him and tried to cajole him - after all, it was only $10. But he said he had thought it over and decided it wasn't a good bet for him. He said if you let yourself be undisciplined in the small things, you'd probably be undisciplined on the large things, too."
-- from Of Permanent Value (1994 edition), Chapter 59
I'm looking for the recent article where Buffett says you don't need a high IQ to succeed in investing. But then the article goes on to cite some head-scratchingly clever mathematical calculations in his head. I seem to recall Buffett referenced Richard Feynman for one of the calculations.
Being stumped, I ventured up the distant mountain to ask The Nameless One. Sure enough he was able to trace it to a chapter in Robert Hagstrom's book The Warren Buffett Portfolio, entitled The Mathematics of Investing.
That chapter is summarized at WallStraits where they talk about GARP, though I fail to see where Hagstrom's book is credited as the source material.
Looking at Feynman's biography, "Surely You're Joking Mr. Feynman!", I fail to find the exact method Buffett used to calculate 99 x 99. But he likely used this multiplication shortcut of breaking down the numbers into more manageable parts.
The chapter on mental mathematics in SYJMF is titled Lucky Numbers. I found a couple of excerpts on the web.
Here's something I just found out after doing a search of SYJMF on the web, it produced a link to MatthewBroderick.net's guestbook. It turns out the Broderick did a movie in 1996 about Feynman called Infinity (three stars from Ebert). Broderick directed it and played the part of Feynman. There's two listings of this DVD on Amazon. Here's the cheaper one.
Bill’s interest in risk and return led him to explore various types of financial risk taking and the average payoffs each offered.
He discovered, for instance, that if you put a dollar in a state lottery,
the state typically keeps fifty cents. Almost everybody comes
away empty-handed, and someone hits a huge home run. If you
bought all the tickets, you would get back only half your money.
Not good odds.
In horse racing, the track keeps between 15 and 20 percent
of your money—better than the lottery, but still a net loss.
At the very positive end of the gambling spectrum, casinos
keep about 1 percent of what you bet at the craps table.
Further up the return/risk scale, you move into the field of
investing, where expected returns are positive. Put money into
high-quality bonds and you will typically earn just a tad above
inflation. It’s a low-risk/low-return venture, but at least the result
is positive, which beats any of the gambling options. Stocks on
average outperform bonds by several percentage points, and the
longer you hold them, the more certain you can be that your returns
will beat other asset classes of investments.
So Bill learned early on that just because a venture is risky
doesn’t mean you should avoid it. Some risks make sense to
take, and investing in stocks is one of them.
[11/12/05] brknews passes along this Sanjay Bakshi article about Buffett's game of dice that he proposed to Bill Gates.
[7/6/05] "The bet was the kind that rich golfing buddies like. Investment wizard Warren Buffett's $10 against $20,000 that he wouldn't score a hole-in-one over the three-day outing.
"Eight of us had gotten together to play Pebble Beach, and in a loose moment, after dinner and a couple bottles of wine, I offered the bet," recalled Jack Byrne, [former] chairman of Fireman's Fund. "It was meant as a fun thing, and the other six took me up on it. Everyone except Warren.
"Well, we heaped abuse on him and tried to cajole him - after all, it was only $10. But he said he had thought it over and decided it wasn't a good bet for him. He said if you let yourself be undisciplined in the small things, you'd probably be undisciplined on the large things, too."
-- from Of Permanent Value (1994 edition), Chapter 59
I'm looking for the recent article where Buffett says you don't need a high IQ to succeed in investing. But then the article goes on to cite some head-scratchingly clever mathematical calculations in his head. I seem to recall Buffett referenced Richard Feynman for one of the calculations.
Being stumped, I ventured up the distant mountain to ask The Nameless One. Sure enough he was able to trace it to a chapter in Robert Hagstrom's book The Warren Buffett Portfolio, entitled The Mathematics of Investing.
That chapter is summarized at WallStraits where they talk about GARP, though I fail to see where Hagstrom's book is credited as the source material.
Buffett has never even owned a calculator. When interviewed about how he does complex calculations in his head, like what is 99 times 99? Buffett immediately answers 9,801, and he jokes that he read the answer in a book about the US atomic bomb project by Nobel laureate in physics, Richard Feynman. (Sure enough, the answer is in the book by Feynman.) When pressed to share his secrets, the interviewer asked Buffett another question, "If a painting goes from $250 to $50 million in value in 100 years, what is the annual rate of return? Again, Buffett instantly answered: "13.0%". When the stunned interviewer asked how he did that, Buffett pointed out that any compound interest table would reveal the answer. The interviewer asked if he memorized the table...Buffett said, "good heavens no, but another way to approach the problem is to go by the number of times it doubles in value ($250 doubles 17.6 times to reach $50 million, or a double every 5.7 years, or about 13% a year)." Simple, Buffett seemed to imply. Not so simple for the rest of us, but fear not, Buffett insists only basic math is needed to be a superior investor!
Looking at Feynman's biography, "Surely You're Joking Mr. Feynman!", I fail to find the exact method Buffett used to calculate 99 x 99. But he likely used this multiplication shortcut of breaking down the numbers into more manageable parts.
99 x 99 = (100 - 1) x (100 - 1)
= 100 x 100 - 100 - 100 + 1
= 10,000 - 200 + 1
= 9,800 + 1
= 9,801
The chapter on mental mathematics in SYJMF is titled Lucky Numbers. I found a couple of excerpts on the web.
Here's something I just found out after doing a search of SYJMF on the web, it produced a link to MatthewBroderick.net's guestbook. It turns out the Broderick did a movie in 1996 about Feynman called Infinity (three stars from Ebert). Broderick directed it and played the part of Feynman. There's two listings of this DVD on Amazon. Here's the cheaper one.
Monday, June 27, 2005
The Double-Play
[8/3/17] Jeff Auxier looks for double-plays too (don't know what he means by triple-play though)
[2/14/06] Seth Jayson chimes in with a couple of made-up examples.
[6/27/05] Nathan Parmelee writes about the Davis Double-Play, a situation where a company's earnings and p/e expand. I always thought it was a Peter Lynch concept (GARP), but perhaps not so. In any case, that's the kind of potential situations that I like to look for too.
Here's another way to word it. Buy relentless growers when they're cheap. (Another advertisement for Phil Durrell's letter.)
[2/14/06] Seth Jayson chimes in with a couple of made-up examples.
[6/27/05] Nathan Parmelee writes about the Davis Double-Play, a situation where a company's earnings and p/e expand. I always thought it was a Peter Lynch concept (GARP), but perhaps not so. In any case, that's the kind of potential situations that I like to look for too.
Here's another way to word it. Buy relentless growers when they're cheap. (Another advertisement for Phil Durrell's letter.)
Friday, June 24, 2005
methods in valuing stocks
While researching DDM and DCF, I was led to moneychimp which led me to this article on valuing stocks, eBay in particular. It was interesting to note the different methods available and the assumptions that must be made in using them.
... Then while googling moneychimp, I stumbleupon.
Wednesday, June 22, 2005
AmeriTrade buys TD Waterhouse
will now become the largest online broker. I wonder if my commission rate will go down?
Tuesday, June 21, 2005
Sunday, June 19, 2005
To Everything There Is A Season
After taking some profits on PRASX Thursday, I dusted off Lichello's How To Make $1,000,000 In The Stock Market. Chapter 4 caught my eye. It was titled "The Reliefer Who Made A Fortune In The Stock Market" which was about a man on welfare who turned his $71 welfare checks into $21,000. (I suppose that was a lot of money back whenever the story was written -- especially considering that a year's worth of those welfare checks comes out to less than a grand).
Then I picked off my shelf John Train's The Craft of Investing and found a similar note. In the appendix is a chapter called "The Man Who Never Lost".
Searching google, I see this chapter is reprinted in the book What Do I Do With My Money Now?
Turning to "Beating The Street", Lynch writes
One farmer is rich, the other poor, but they both have the same harvest ... It is not the size of the harvest, but the price you paid for the seed.
... Money is the seed, the stock is the soil. You do not plant in the fall, you do not harvest in the spring ... If you plant in the proper season, then even a small amount of seed will bring many crops.
Then I picked off my shelf John Train's The Craft of Investing and found a similar note. In the appendix is a chapter called "The Man Who Never Lost".
He equated stocks with buying a truckload of pigs. The lower he could buy the pigs, when the pork market was depressed, the more profit he would make when the next seller's market would come along.
... He took a farming approach to the stock market in general. In rice farming there is a planting season and a harvesting season; in his stock purchases and sales, he strictly observed the seasons.
Searching google, I see this chapter is reprinted in the book What Do I Do With My Money Now?
Turning to "Beating The Street", Lynch writes
After the Great Correction, when 508 points were shaved from the Dow Jones average in a single day, a symphony of experts predicted the worst, but as it turned out, the 1000-point decline in the Dow (33 percent from the August high) did not bring on the apocolypse that so many were expecting. It was a normal, albeit server, correction, the latest in a string of 13 such 33 percent drops in this century.The book was written in 1993. The Dow declined from near 12000 at the beginning of 2000 to near 7000 in 2002. So I'd say that qualifies as number 14. I won't even mention that the Nasdaq declined from 5000 to around 1100 in a little over two years.
The next 10 percent decline, which may already have occurred since I've written this, will be the 41st in recent history, or, if it happens to be a 33 percent decline, the 14th. In Magellan's annual reports, I often reminded the shareholders that such setbacks were inevitable.
The story of the 40 percent declines continue to comfort me during gloomy periods when you and I have another chance in a long string of chances to buy great companies at bargain prices.
Thursday, June 16, 2005
Berkshire IV
jkish who maintains intrinsivaluator says Berkshire is trading at 83% of IV. (That's the conservative calculation. His webpage defaults to the optimistic IV of 153860, so at the current price of 83,520, it would be 54%.)
The discussion conjectures that if BRK can grow IV at 8% a year and can close the gap on IV in three years, that would work out to a 15% compounded return.
should you listen to the news?
Though Ritholtz says no, in the second breath he says it can be a great contrary indicator.
So in my book that means yes. He also references an article by Gary B. Smith which found that after an initial response to disastrous news, "the markets resume whatever their prior trend was". In other words, buy on bad news, assuming that the prior trend was up.
Tuesday, June 14, 2005
Saturday, June 11, 2005
Apprenticed Investor
There is more to investing than just picking stocks explains Barry Ritholtz in a new column.
Wednesday, June 08, 2005
Who is Nicolas Darvas?
I came across this guy's book, How I Made $2,000,000 in the Stock Market as an Amazon recommendation probably because I had bought William O'Neil's book years ago.
Who is he? He was ballroom dancer who turned $25,000 into $2.25 million between 1956 and 1958 and made the cover of Time Magazine.
*** [4/14/10]
I bought this book from Borders on the mainland when I went up to California for Timmy's graduation. I recently posted it on paperbackswap and somebody requested it. But now I see you can get it on the web for free (though I still kind of find a book more convenient than reading it on the web. Well maybe if I had a Kindle or IPad..
Who is he? He was ballroom dancer who turned $25,000 into $2.25 million between 1956 and 1958 and made the cover of Time Magazine.
*** [4/14/10]
I bought this book from Borders on the mainland when I went up to California for Timmy's graduation. I recently posted it on paperbackswap and somebody requested it. But now I see you can get it on the web for free (though I still kind of find a book more convenient than reading it on the web. Well maybe if I had a Kindle or IPad..
Monday, June 06, 2005
Thursday, June 02, 2005
Sunday, May 29, 2005
Sunday, May 22, 2005
Three Weeks Tight
Keep an eye out for the "three weeks tight" chart pattern. This means the stock has closed virtually at the same price for three straight weeks or even longer. Studies of big winners show it can appear virtually anywhere throughout the run-up.
I wonder what they're saying about the WMT five year tight pattern?
Saturday, May 21, 2005
You ain't missed nothing yet
Jim Cramer's top 10 "you ain't missed nothing yet" stocks (stocks that should have moved up but haven't yet) as seen on his 5/18/05 show.
Here's Cramer's somewhat overlapping list of stocks that it's not too late to buy. (Actually it's the same ten in a somewhat different order.)
10. ZMH
9. CMCSA
8. UNH
7. MCD
6. ADP
5. C
4. CD
3. YHOO
2. INTC
1. UPS
Here's Cramer's somewhat overlapping list of stocks that it's not too late to buy. (Actually it's the same ten in a somewhat different order.)
McDonald's (MCD)
Citigroup (C)
Comcast (CMCSA)
UnitedHealth Group (UNH)
Automative Data (ADP)
Cendant (CD)
Yahoo! (YHOO)
Zimmer (ZMH)
Intel (INTC)
United Parcel (UPS)
Monday, May 16, 2005
When is big too big?
Speaking of large-caps, Bill Miller writes on why he tends to avoid the largest cap stocks citing a paper from J.B.S. Haldane.
In 1927, British biochemist J.B.S. Haldane published a volume called Possible Worlds and other essays. In it was a paper titled ''On Being the Right Size.'' Haldane begins that essay by noting that differences of size are the most obvious differences among animals, but that little scientific attention seems to be paid to them. ...
Perhaps more pertinent to readers of this piece is that Haldane's essay offers insights into why we own none of the top five companies sized by market capitalization in the S&P 500, and why Internet stocks may be better values than conventional thinking might assume [and why Miller owns AMZN vs. WMT].
Small- and mid-cap managers explain that their universe of companies can grow faster than very large companies. Large-cap managers note that smaller companies are riskier and have higher failure rates than very large enterprises, perhaps negating whatever advantage may arise from the putatively faster growth rate. Small animals have shorter life spans, in general, just as small companies do. Is that a coincidence?
When is big too big, anyway? How much, if any, of a disadvantage is GE's market capitalization of $288 billion? Is it a coincidence that GE, Microsoft, Wal-Mart, Pfizer, and Exxon, the top five companies in the S&P 500 by market capitalization, all are worth between $244 and $288 billion, despite their being in five different businesses?
Saturday, May 14, 2005
Is the market currently overvalued or undervalued?
According to Morningstar's fair value ratings (which uses a DCF analysis), the S&P 500 is currently worth 1212 as compared to its price of 1170 (so I'm guessing the calculations are as of May 11). So by this measure, it is 3% undervalued. This compares to late December, when the fair value estimate was 1160 when the market was trading north of 1200, 4% overvalued.
Interestingly, the largest 25 stocks are now 10.9% undervalued. While the smallest 250 stocks are 5.3% overvalued. This compares to the December numbers, when the largest 25 were only 3.2% undervalued and the smallest 250 were 19% overvalued.
Six of those largest 25 stocks have 5-star Morningstar ratings (meaning they are the most undervalued). They are MSFT, WMT, AIG, KO, UPS, and HD. BRK.B also has a five star rating. (Though BRK.B is not in the S&P 500, it would be the 12th largest company if it were.)
(Note: the article was referenced in a post over in the Chucks_Angels group.)
Add 2% to your performance
Mauldin presents Rob Arnott's study that cap weighted indices underperform [link corrected 12/2/15, only 10-1/2 years later, it had been pointing to oprah.com] almost any other index you can think of.
[6/10/05] Here's Nathan Parmalee's take.
[12/2/15] Here's a more recent article by Arnott (summary: not a fan of cap-weighted indices)
It guess it sort of makes sense from a value perspective. When a stock goes up in price then it's automatically becomes higher weighted in the index. But what you should be doing is sell some when the stock price goes up and buy more when the stock price goes down, all other things being equal. Or from the value investor perpective, sell some when the price overruns its value and buy more when the price underrepresents its value.
[12/2/15] And (via roberts420) another article by Arnott
[6/10/05] Here's Nathan Parmalee's take.
[12/2/15] Here's a more recent article by Arnott (summary: not a fan of cap-weighted indices)
It guess it sort of makes sense from a value perspective. When a stock goes up in price then it's automatically becomes higher weighted in the index. But what you should be doing is sell some when the stock price goes up and buy more when the stock price goes down, all other things being equal. Or from the value investor perpective, sell some when the price overruns its value and buy more when the price underrepresents its value.
[12/2/15] And (via roberts420) another article by Arnott
Well, I diverged from my main point, which was that over the
15-year period 2000-2014 a blindfolded monkey outperformed the S&P 500
index by an annualized 8 percentage points, with an annualized return of 12%
versus 4% for the S&P. I then got
off onto how I would weight the holdings in an index fund if I were not
weighting by market cap. Would I use
equal weightings, fundamental weighting (weighting by sales, earnings and cash
flow), volatility weighting or what?
Robert Arnott published an amusing article on this question
in which he backtested 13 non-market-cap weighted index funds over the period
1964-2012. All 13 outperformed the
market cap weighted S&P 500 index. Of
the 12 funds that were not equal weighted he found that in 11, including his
own, the performance was improved if the fund inverted their weightings, i.e., if
they instead weighted the most heavily weighted holdings the least. In his own case, the fundamental index, the
fund as weighted outperformed the S&P 500 by an annualized 2 percentage
points, but when the weightings were inverted it outperformed the S&P 500
index by an annualized 4.5 percentage points.
We all have to decide how to weight the holdings in our
portfolio, whether we are constructing an index fund or managing our personal
portfolio. The question is, “How do we
choose our weightings?” Most individuals
and professional portfolio managers alike choose weightings qualitatively. We estimate the expected return for each
stock, the potential downside, and, importantly, our confidence in our analysis
for each stock. Then we decide on a
weighting. The question is, “How well do
our weightings correlate with the future returns of our individual holdings,
and is there a way to improve our return by weighting differently?”
Friday, May 13, 2005
Is that growth stock a good bet?
TMF Bane presents an example on how he might decide whether to place his bet
Wednesday, May 11, 2005
valuing Walgreen
According to VectorVest's methodology, Walgreen looks attractive, despite having a relatively high p/e and PEG (30 and 1.9 according to quicken.com).
Looking at the VectorVest report, it doesn't look quite as attractive to me. The report says it's "only" fairly valued with a current value of 47.97 compared to its current price of 43.78. It's given an excellent RS (relative safety) rating, but only fair relative timing, and is rated a hold.
Looking at the VectorVest report, it doesn't look quite as attractive to me. The report says it's "only" fairly valued with a current value of 47.97 compared to its current price of 43.78. It's given an excellent RS (relative safety) rating, but only fair relative timing, and is rated a hold.
Thursday, May 05, 2005
Three investors in an uncertain market
What Bill Nygren, Bill Miller, and Wally Weitz are doing in this market.
Saturday, April 30, 2005
The Stock Clock
Schwab's Jeffrey Mortimer, in a 2004 issue (September or October?) of Schwab Investing Insight, uses the concept of a stock clock to illustrate the market cycle. He believes "we're around 9 o'clock, when the economic recovery is gathering steam as investors climb a wall of worry".
Writing now in the March 2005 issue, Mortimer still maintains we're still around 9 o'clock and are in a bull market that still has another leg to go.
How long do these cycles take. Back to the earlier issue, Mortimer says it take as little as three years or as long as a decade. It's been five years so far since the last top. "It's possible we could stay at 9 o'clock for a long time."
Friday, April 29, 2005
EV/FCF > P/E
Nathan Parmalee says, like a batting average, the p/e ratio is a limited statistic. He prefers onbase percentages and enterprise value-to-free cash flow, as well as discounted cash flow analysis
Tuesday, April 26, 2005
Spotting earnings disappointments and surprises
How to Spot Potential Earnings Disappointments: There is no sure
fire way to spot stocks that will fail during earnings season.
However, there are ways to improve your odds. In general, stocks
that have disappointed in past quarters are more likely to
disappoint in future quarters. Plus stocks that have seen lower
expectations leading up to their announcement date also tend to
fall short of the mark more often. The clues to both of these
items can be found on the Estimates research report. Here is
the link to see that page for IBM and you can go from there to
research any of your stocks http://at.zacks.com/?id=1504.
fire way to spot stocks that will fail during earnings season.
However, there are ways to improve your odds. In general, stocks
that have disappointed in past quarters are more likely to
disappoint in future quarters. Plus stocks that have seen lower
expectations leading up to their announcement date also tend to
fall short of the mark more often. The clues to both of these
items can be found on the Estimates research report. Here is
the link to see that page for IBM and you can go from there to
research any of your stocks http://at.zacks.com/?id=1504.
How to Spot Potential Earnings Surprises: This is the inverse
story from above. Those stocks that have reported positive
surprises in the past are more likely to do so in the future. In
addition, earnings estimate increases leading into earnings
season is a very good indication as well. However, the simplest
way to find these winners is by following the Zacks Rank which
concentrates on these same variables. You can either look at the
full list of Zacks #1 Ranked stocks at
http://at.zacks.com/?id=1551. Or screen for Zacks #1 Ranked stocks with the highest past earnings surprises through our
custom screener at http://at.zacks.com/?id=1535.
Saturday, April 23, 2005
Bezos speaks
In Amazon's 2004 annual report, Jeff Bezos presents an example of how looking at earnings (vs. free cash flow) can be dangerously misleading.
The example is admittedly contrived, but maybe this Bezos guy might know what he's doing.
The example is admittedly contrived, but maybe this Bezos guy might know what he's doing.
Friday, April 22, 2005
Mauldin looks into the future
Mauldin talks about
The Innovation Cycle
Secular Bull and Secular Bear Markets
Human Psychology
What Will Change
Demography
Sunday, April 17, 2005
Buying when they say sell
As has been the case in past years, stocks with large proportions of "sell" recommendations from Wall Street analysts have lately performed better than those with plenty of "buy" or "hold" ratings and no sell ratings at all.
Wednesday, March 23, 2005
Friday, March 18, 2005
S&P changes weightings
Standard & Poor's will change the weighting of many of its shares
Standard & Poor's on Friday will make one of the most significant changes to the prestigious S&P 500 index of stocks since its inception 80 years ago.
The S&P 500, a widely followed barometer of how the stock market is doing, will, after the market's close that day, change the weightings of many of its shares, effectively reducing the influence that some carry and increasing the clout of others.
S&P will make the same changes to its SmallCap 600 and MidCap 400 indexes.
All three indexes are "market-weighted," meaning their biggest stocks, by market capitalization, move the indexes more than those with lower market caps.
Under the new initiative, called the "full float adjustment," S&P aims to increase liquidity, or ease of trading, by reducing the influence of stocks with a lot of shares that are not publicly traded for reasons of their being held by a founding family or a government entity.
Saturday, March 05, 2005
Thursday, March 03, 2005
Traits of Successful Money Managers
What Whitney Tilson has learned from studying successful money manager.
How did I find this story? It came from Tilson's article Where Are the Superinvestors?
Which came from Hedge Funds Explained.
Which was in yesterday's The Motley Fool's Foolwatch newsletter.
How did I find this story? It came from Tilson's article Where Are the Superinvestors?
Which came from Hedge Funds Explained.
Which was in yesterday's The Motley Fool's Foolwatch newsletter.
Wednesday, February 09, 2005
Sunday, February 06, 2005
Invest Like You Mean It
TMF Edible asserts that it doesn't matter where you stand (as far as value vs. growth investing), as long as you do, in fact, take that stand and do it with conviction and aplomb.
Monday, January 31, 2005
Saturday, January 29, 2005
Friday, January 28, 2005
Thoughts for Phil Carret
Another giant of investing, though less well known, is Phil Carret. Carret started Pioneer, one of the first mutual funds, in 1928. His average annual return, calculated from 1928 to 1974, is estimated to be a solid, market-beating 14%. (That's enough to increase an investment's value 50-fold over 30 years.) Carret died in 1998 at the age of 101, but he left behind many thoughts on how to invest successfully.
Monday, January 24, 2005
Saturday, January 22, 2005
A Value Screen
Joseph Piotroski has devised a screen that has beaten the market by 7.5% over a 21-year period.
It chooses companies with low price-to-book value that are profitable, declining debt, and improving operational efficiency.
I suppose it makes sense, but it differs a bit from the kind of stocks that I look for. I don't worry about declining debt. If the debt is already zero, how can it decline? Improving efficiency is obviously good. But I'm satisfied if a company can sustain a steady level of efficiency year after year.
It chooses companies with low price-to-book value that are profitable, declining debt, and improving operational efficiency.
I suppose it makes sense, but it differs a bit from the kind of stocks that I look for. I don't worry about declining debt. If the debt is already zero, how can it decline? Improving efficiency is obviously good. But I'm satisfied if a company can sustain a steady level of efficiency year after year.
Sunday, January 16, 2005
focusing on portfolio management
Whitney Tilson claims "the overwhelming majority of great investors that I'm aware of practice "focus investing".
Focus investing means buy infrequently, but buy big. On the other hand, a big hit to one stock in a focused portfolio will have a big impact. In that case, one should diversify. Russ Towne comments further in his blog.
Focus investing means buy infrequently, but buy big. On the other hand, a big hit to one stock in a focused portfolio will have a big impact. In that case, one should diversify. Russ Towne comments further in his blog.
Thursday, January 13, 2005
Saturday, January 08, 2005
Pigs of the Dow
This year's Pigs of the Dow.
http://tinyurl.com/3nt3f
Merck at minus 30.4%
Intel at minus 27.0%
General Motors at minus 25.0%
Pfizer (NYSE: PFE) at minus 23.9%
Coca-Cola (NYSE: KO) at minus 17.9%
http://tinyurl.com/3nt3f
Mauldin's 2005 forecast
The economy is going to be good, so I don't think we see the start (yet) of the next major bear leg, although this year will mark the high for what I think will be many years. This will be a frustrating year for stock market investors. You can always do well if you are a good individual stock picker, but broad indexes and mutual funds are not the place to be. The market is a sideways to down market, with the risk to the downside as we get toward the end of the year and a possible recession on the horizon in 2006.
And not to put too fine a point on it, I still think we are in a long term secular bear market. In a few years, we will look back and realize this was a bear trap - another sucker rally.
http://www.investorsinsight.com/article.asp?id=jm010705
What did he say last year?
The Nasdaq closed 2004 at 2175.44 after closing 2003 at 2003.37.
http://www.2000wave.com/article.asp?id=mwo010904
And not to put too fine a point on it, I still think we are in a long term secular bear market. In a few years, we will look back and realize this was a bear trap - another sucker rally.
http://www.investorsinsight.com/article.asp?id=jm010705
What did he say last year?
This is a momentum market. The best way I can summarize my views is to tell you of a bet I made today. It is a small amount, to be sure, but ego is on the line. Let me emphasize this is a guess. I have no "model" or crystal ball.The S&P closed 2004 at 1211.92 after closing 2003 at 1111.92. Exactly 100 points!
If you add the closing year end numbers of the S&P 500 and NASDAQ together, I took the under for the year. That means I think the combined price of the indexes will decline. If the S&P 500 does indeed rise, I expect the NASDAQ to fall more. I would also take the over for May, as a further rally may be in the future. I think a continuation of this rally is quite possible, as earnings should do well, and investors seem to be happy with the short-term. But the upside does not seem to me to be all that great. I would buy value and yield and have a trailing stop loss. How close would depend upon your own particular circumstance.
It might be more helpful to give you the opinion of Richard Bernstein, the Chief Strategist for Merril Lynch, who sees the S&P 500 at 1010 at the end of the year. The technical analysts at UBS see a first half rally and a second half decline.
The Nasdaq closed 2004 at 2175.44 after closing 2003 at 2003.37.
http://www.2000wave.com/article.asp?id=mwo010904
Saturday, January 01, 2005
wildly overpriced stocks
Should you actually stay away from wildly overpriced stocks?
According to Jeremy Siegel, if you'd invested $1,000 in 1957 in the 100 stocks in the S&P with the highest price-to-earnings ratios, and rebalanced annually, you'd have had $56,700 by 2003; if you'd bought the 100 stocks with the lowest P/Es, you'd have had $425,700. [The S&P 500 index was created in 1957.]
[this article also appeared in the December 2004 issue of Money magazine]
According to Jeremy Siegel, if you'd invested $1,000 in 1957 in the 100 stocks in the S&P with the highest price-to-earnings ratios, and rebalanced annually, you'd have had $56,700 by 2003; if you'd bought the 100 stocks with the lowest P/Es, you'd have had $425,700. [The S&P 500 index was created in 1957.]
[this article also appeared in the December 2004 issue of Money magazine]
Thursday, December 30, 2004
Thursday, December 23, 2004
Great Companies
What Makes a Great Company Great?
When examining a company in which to possibly invest, make sure that the firm is a first-class operation. Here are some marks of great companies.
Powerful brands. Think of well-known brand names in America or, better yet, around the world. Brands such as Coca-Cola (NYSE: KO), General Electric (NYSE: GE), Nokia (NYSE: NOK), McDonald's (NYSE: MCD), Ford (NYSE: F), and Disney (NYSE: DIS) fit the bill. If most people don't yet know a company's name, then it still has a lot of work to do building its brand.
Significant products or services. Look for a company that's selling something people really need or really want. Pharmaceutical companies, for example, manufacture products that people will buy whether they're flush with funds or strapped for cash. Firms such as Apple Computer (Nasdaq: AAPL) and Starbucks (Nasdaq: SBUX) offer consumers things they love. Also appealing are repeat-purchase products -- things people buy over and over again -- such as express mail delivery, cheeseburgers, and shampoo, instead of items bought only sporadically, such as cars or trash compactors.
Strong competitive position. Ideally, a company will have advantages over its peers. These can include brand value, economies of scale (if it's making so much that its costs per item are relatively low), and bargaining power. (Wal-Mart (NYSE: WMT), for example, is so big that it usually calls the shots.)
Consistent, reliable earnings and sales growth, and robust profit margins. Look for sales and earnings to have increased steadily over past years, suggesting that management is planning and executing well. Stack your company's gross, operating and net profit margins up against those of its competitors to see who's wringing the most value out of each dollar of sales.
Lots of potential. A stellar past isn't enough. Make sure the company has much potential for growth. Is it expanding abroad? Is it coming out with exciting new products or services? Are its offerings taking the country by storm? Is it spending significantly on research and development?
Finally, consider how well you know the company and industry and how much you'd enjoy keeping up with its developments. A firm might have enormous potential, but if reading about it puts you to sleep, it might not be the best addition to your portfolio.
-- from The Motley Fool Investing Basics newsletter, 12/21/04
Tuesday, December 21, 2004
Friday, December 17, 2004
the stock screens of Kevin Matras
Every week, Zacks presents a stock screen by Kevin Matras. It always touts a very back-tested high return. (I suppose if it didn't output a high return, they wouldn't present it.) As far as I remember, the screen always has the Zacks ranks as one of the criteria (makes sense) and usually an indicator that the stock is moving up (momentum), so as such they probably should all be viewed as short term (three to six months or so) screens. This week's screen looks interesting.
Since I don't do short-term trading, I have never tried any of these screens. But they do look like they have potential if you stick to the system.
[6/15/05] How have the picks done?
AKS has gone from about 14 to about 7
BABY went from about 8 to 10.5
CIB went from about 12 to 16
TZIX went from about 9 to about 13.5
UHC went about 15 to near 24 today
All in all, it looks like the strategy worked out despite one pick losing 50% of its value.
"Cheap stocks and Big Returns"
This screen is one of Kevin Matras' favorites for when he's
looking for low priced stocks. The premise behind this screen
was to try and find cheap stocks (stocks at or less than $15)
that were trading at (or consolidating) just under their 52
week high, in an effort to `get on board' before they broke-out
to new highs.
In other words, Kevin wanted the stocks to be near their highs,
but most of all, he was looking for stocks that had been turned
back from their recent highs, had consolidated their advances
on their trek higher to those highs and were just now starting
to make a run at the 52 week high again.
Kevin is a big fan of getting into basing patterns (relatively
narrow trading bands) after an uptrend has been established.
Especially near recent price highs, since stocks making new
highs tend to make even higher highs.
He has found this screen to be an ideal strategy for finding
low priced stocks with a high probability of success.
Parameters:
- It searches for stocks trading at or below $15.
- They also have to have a Zacks Rank of 1.
- They have to be trading within 10% of the 52 Week high.
(Expressed as Current Price / 52 Week High greater than or
equal to .90) (Simply put, Kevin is looking for stocks high up
in their uptrend.)
- The % Price Change over the last 4 weeks has to be greater
than or equal to 10% but not more than 20%. (Kevin is looking
for stocks on the move, but not ones that have moved so much,
so quickly, a correction could be in store. Since 10% seems to
get people's attention while follow-thru at 20% typically
signals the beginning of a `trend' or a `breakout', Kevin
wanted to be alerted BEFORE a breakout was seen.
- And lastly, for good measure, he wants the Beta to be less
than or equal to 2. (Active stocks are good, but wildly
volatile ones are not.)
Results:
Kevin ran a series of tests over the last 4 year time span
(2001, 2002, 2003, and YTD 2004 -- thru 11/26/04) as well as a
series of tests for each of the last 4 years individually. He
rebalanced the portfolio every four weeks and started each run
on a different start date so each test would be rebalanced over
a different set of four-week periods. (This was done to
eliminate coincidence and verify robustness.)
Over the last 4 years, this strategy has shown an average
annualized gross return of 66.9% with an average win ratio
(winning periods divided by the total number of periods) of
74%. And it holds on average of only 3-5 stocks in your
portfolio each month.
In 2001, the average annualized gross return was 53.5%, with an
average win ratio of 71%. (This year's avg. # of stocks held
per period was 8.)
In 2002, the average annualized gross return was 36.2%, with an
average win ratio of 70%. (4 stocks / avg. per period.)
In 2003, the average annualized gross return was 167.2%, with
an average win ratio of 87%! (3-5 stocks on average.)
And so far, 2004's YTD (thru 11/26/2004) average annualized
gross return is up 45.5%, with an average of 3 stocks per run.
(The S&P is up 7.9% comparatively.)
As of Mon., 12/13/04, 5 stocks had qualified. They are
AKS AK Steel Holding Corp.
BABY Natus Medical, Inc.
CIB Bancolombia.
TZIX TriZetto Group, Inc.
UHCO Universal American Financial Corp.
Note: Even though this screen will generally produce on average
of 3-5 stocks per period, there will be times where literally
no stocks will qualify due to the narrowness of the parameters.
Tip: Since this screen has such a great track record and such a
high success rate, if nothing comes through on Kevin's first
pass, he'll run it day after day, until the screen spots
something.
(This is one of the reasons why Kevin runs so many backtests
using different start dates in my analysis. He wants to make
sure that the strategy has a history of picking good stocks
`at any time'.)
Since I don't do short-term trading, I have never tried any of these screens. But they do look like they have potential if you stick to the system.
[6/15/05] How have the picks done?
AKS has gone from about 14 to about 7
BABY went from about 8 to 10.5
CIB went from about 12 to 16
TZIX went from about 9 to about 13.5
UHC went about 15 to near 24 today
All in all, it looks like the strategy worked out despite one pick losing 50% of its value.
Sunday, December 12, 2004
How to Value Stocks (DCF)
[9/21/06] Tim Beyers runs through a DCF calculation
[12/12/04] VectorVest explains their methodology of valuing stocks. (Warning: contains math.)
VectorVest's formula
This Discounted Cash Flow Calculator explains the methodology behind it
David Meier explains DCF
[5/11/05] Another explanation
Quicken's intrinsic value calculation
[12/12/04] VectorVest explains their methodology of valuing stocks. (Warning: contains math.)
VectorVest's formula
This Discounted Cash Flow Calculator explains the methodology behind it
David Meier explains DCF
[5/11/05] Another explanation
Quicken's intrinsic value calculation
Friday, December 10, 2004
types of investors
What type of investor are you? (see mia 9/14/04)
Or you could be a monster (see mia 10/28/04 comments on PLB)
Or you could be a monster (see mia 10/28/04 comments on PLB)
Durrell interviews Dreman
Dreman talks about overreaction
Dreman is still bullish on MRK and FNM
[5/28/06] see also David Dreman and the Long View
Dreman is still bullish on MRK and FNM
[5/28/06] see also David Dreman and the Long View
Monday, November 29, 2004
Four value investors
Four value investors: Marty Whitman, Chris Browne, Jean-Marie Eveillard, Mario Gabelli gather in New York City
Tuesday, November 23, 2004
two questions
Two questions to ask when deciding on a investment
- Is this a high-quality company that I'd love to own a piece of?
- Is the price right to buy it now?
Sunday, November 21, 2004
Average Broker Recommendation
Zacks.com is first and foremost a free resource to help you make more profitable stock picks. In this space each week, we will provide insights into various tools and data points provided on Zacks.com, and how to use them to improve your portfolios performance.
Average Broker Recommendation
Perhaps the most often used (and abused) stock research item is
the Average Broker Recommendation (ABR). Lets dig into the ABR
and learn how to employ this information to make better
investment decisions.
What is the ABR? It is a simple statistic that tries to
synthesize all Wall Street research into an easy to digest form.
Lets take a look at the example of the ABR for General Electric
(GE). Currently there are 17 brokerage firms that have a rating
on GE with 10 Strong Buys, 3 Buys, 4 Holds and 0 Sells. Now we
layer on a weighting system from 1 to 5 with Strong Buy being a
1. This adds up as follows
10 Strong Buys x 1 = 10
3 Buys x 2 = 6
4 Holds x 3 = 12
0 Sell x 4 = 0
0 Strong Sells x 5 = 0
Total points = 28
28 Total Points divided by 17 brokerage firms with ratings =
1.65 ABR
On the surface an ABR of 1.65 sounds pretty good as it is saying
that the average brokerage firm believes that GE is somewhere
between a Strong Buy and a Buy. However, before you place your
life savings in this stock you may want to read this next
paragraph
The ABR of a stock is virtually worthless in helping you pick
good stocks. Hows that? The usual assumption by investors is
that the better the ABR (closer to 1) the more likely they are
to profit with the stock. However, our studies over the years
show a very minor correlation between ABR and results. In fact,
when the market is going poorly, the stocks with the best ABRs
dramatically underperform the stocks with the worst ABRs.
We dont know the exact reason why this is the case, but the
general assumption is that when everyone on the street is
recommending a stock, then it will probably be priced too high
and more likely to fail miserably on any bad news. Conversely,
an out of favor stock will probably already be trading at a
steep discount and any turnaround will create a nice bounce for
the stock.
So, now youre probably thinking to yourself the key to eternal
happiness is to find stocks with the worst ABRs. Unfortunately
we dont recommend that either because over the long haul these
stocks will underperform the average stock (meaning that both
the best and worst ABR stocks underperform the market).
The good news is that we have indeed found an effective way to
invest using the ABR. Our research has uncovered that stocks
with the biggest positive change in ABR over the last month will
outperform the market. We call this the Piggyback Strategy.
Here are the results of the test for the 10 year stretch from
April 1992 to March 2002
Top 10% of ABR Changes = 18.3% average annual return
Average Stock = 10.7% average annual return
Bottom 10% of ABR Changes = 0% average annual return.
There are some great free resources on Zacks.com to take
advantage of these changes in ABR to find some potential winners
as well as stocks to avoid.
Pre-Defined Screen: Best Change in Avg. Broker Rec 1 Week
http://at.zacks.com/?id=1501
Pre-Defined Screen: Worst Change in Avg. Broker Rec 1 Week
http://at.zacks.com/?id=1502
Profit Tracks: Upgrades and Revisions Strategy. These are stocks
that are enjoying both positive estimate revisions and brokerage
rating upgrades. This strategy has handily beat the market over
the last 4 years. Learn more at http://at.zacks.com/?id=1503
Analyst Recommendations Research Report: This research report
gives details on the break down of recommendations for any
stock. Here is a link to view the report for GE. Once there you
can enter any ticker symbol to get the Analyst Recommendations
report for the stock you want. http://at.zacks.com/?id=1504
Want more insight on the Piggybacking Strategy? Mitch Zacks
covers it in detail in his critically acclaimed book Ahead of
the Market. To learn more about this book and special 30%
discount go here http://at.zacks.com/?id=1505
-- From Profit from the Pros - 9/22/04
Average Broker Recommendation
Perhaps the most often used (and abused) stock research item is
the Average Broker Recommendation (ABR). Lets dig into the ABR
and learn how to employ this information to make better
investment decisions.
What is the ABR? It is a simple statistic that tries to
synthesize all Wall Street research into an easy to digest form.
Lets take a look at the example of the ABR for General Electric
(GE). Currently there are 17 brokerage firms that have a rating
on GE with 10 Strong Buys, 3 Buys, 4 Holds and 0 Sells. Now we
layer on a weighting system from 1 to 5 with Strong Buy being a
1. This adds up as follows
10 Strong Buys x 1 = 10
3 Buys x 2 = 6
4 Holds x 3 = 12
0 Sell x 4 = 0
0 Strong Sells x 5 = 0
Total points = 28
28 Total Points divided by 17 brokerage firms with ratings =
1.65 ABR
On the surface an ABR of 1.65 sounds pretty good as it is saying
that the average brokerage firm believes that GE is somewhere
between a Strong Buy and a Buy. However, before you place your
life savings in this stock you may want to read this next
paragraph
The ABR of a stock is virtually worthless in helping you pick
good stocks. Hows that? The usual assumption by investors is
that the better the ABR (closer to 1) the more likely they are
to profit with the stock. However, our studies over the years
show a very minor correlation between ABR and results. In fact,
when the market is going poorly, the stocks with the best ABRs
dramatically underperform the stocks with the worst ABRs.
We dont know the exact reason why this is the case, but the
general assumption is that when everyone on the street is
recommending a stock, then it will probably be priced too high
and more likely to fail miserably on any bad news. Conversely,
an out of favor stock will probably already be trading at a
steep discount and any turnaround will create a nice bounce for
the stock.
So, now youre probably thinking to yourself the key to eternal
happiness is to find stocks with the worst ABRs. Unfortunately
we dont recommend that either because over the long haul these
stocks will underperform the average stock (meaning that both
the best and worst ABR stocks underperform the market).
The good news is that we have indeed found an effective way to
invest using the ABR. Our research has uncovered that stocks
with the biggest positive change in ABR over the last month will
outperform the market. We call this the Piggyback Strategy.
Here are the results of the test for the 10 year stretch from
April 1992 to March 2002
Top 10% of ABR Changes = 18.3% average annual return
Average Stock = 10.7% average annual return
Bottom 10% of ABR Changes = 0% average annual return.
There are some great free resources on Zacks.com to take
advantage of these changes in ABR to find some potential winners
as well as stocks to avoid.
Pre-Defined Screen: Best Change in Avg. Broker Rec 1 Week
http://at.zacks.com/?id=1501
Pre-Defined Screen: Worst Change in Avg. Broker Rec 1 Week
http://at.zacks.com/?id=1502
Profit Tracks: Upgrades and Revisions Strategy. These are stocks
that are enjoying both positive estimate revisions and brokerage
rating upgrades. This strategy has handily beat the market over
the last 4 years. Learn more at http://at.zacks.com/?id=1503
Analyst Recommendations Research Report: This research report
gives details on the break down of recommendations for any
stock. Here is a link to view the report for GE. Once there you
can enter any ticker symbol to get the Analyst Recommendations
report for the stock you want. http://at.zacks.com/?id=1504
Want more insight on the Piggybacking Strategy? Mitch Zacks
covers it in detail in his critically acclaimed book Ahead of
the Market. To learn more about this book and special 30%
discount go here http://at.zacks.com/?id=1505
-- From Profit from the Pros - 9/22/04
Friday, November 19, 2004
Thursday, November 18, 2004
Phil Knight steps down
Phillip Knight will step down as CEO of Nike. Will remain chairman of the board.
Wednesday, November 17, 2004
betting on Lampert
My latest buys were Kmart and Sears this morning as detailed in my stockmarketeers group. The success of this transaction will lie on Edward Lampert's ability to find value in the combining of the two companies. Given his track record, I'd give him a better than 50-50 shot.
Here's more on Lampert.
New York Times story
More on the merger from fool David Meier.
Morningstar's Pat Dorsey chimes in with this analysis
Here's more on Lampert.
New York Times story
More on the merger from fool David Meier.
Morningstar's Pat Dorsey chimes in with this analysis
Saturday, November 06, 2004
Presidential Rally
The market has rallied furiously in the last couple of weeks pushed up in the last few days by the Bush victory. The Dow has gone from oversold to overbought with an RSI of 69.6 and stochastics of 93.28. While some are looking for a breakout, this hasn't happened the last three times it rallied from a valley. I'm looking to take some profits on overweighted positions that have run up in the rally.
Friday, October 22, 2004
early Halloween
The market took a hit today as the Dow fell 108 to 9758, the Nasdaq tanked 38 to 1915, and the S&P 500 lost 11 to 1096. The Dow is at the lower end of a declining channel line and RSI is down to 30.7. It could be ready to bounce like it did the previous three times. The $SPX and $COMPQ don't look as oversold. The RSI for the Nasdaq is flat neutral at 50.0.
Here's Band's take, excerpted from his hotline.
Here's Band's take, excerpted from his hotline.
Halloween comes early to Wall Street! Stock prices declined again this week, with the headliner Dow Jones Industrial Average closing today at a new low for 2004. Record oil prices are clearly spooking investors.
But is the picture really so haunting? We don’t think so. For one thing, the NASDAQ actually gained a couple of points on the week. Relative strength by the tech-heavy NASDAQ has occurred at several important bottoms in the past two years. We also believe the election uncertainty is starting to lift, which should help the market. We continue to look for a final low very soon, to be followed by good November-December rally.
Thursday, October 21, 2004
Catch The Low
from Richard Band's Journal
CATCH THE LOW
October 20, 2004, 10:28 am EDT
The stock market is forming a good, tradable bottom in here. Within the next couple of days -- probably well before the election results are known -- Wall Street should make its peace with the political forces at work and move on to the traditional post-election relief rally.
What makes me so sure there’s a rally coming? I’ve kept an eagle eye on one of the market’s most reliable contrary indicators -- the behavior of the traders in the options pits. Whatever investors may say to pollsters or the media, the options data tell us what folks are doing with their money.
Truth is, the options players have been buying an exceptional number of puts (downside bets) lately, compared with calls. In fact, we’re seeing essentially the same degree of pessimism that prevailed at the lows in March, May and August this year -- even though the major market indexes are hovering comfortably above those lows.
I foresee a rally of 5%-7%, maybe a little more, on the S&P 500 by year-end or early 2005.
CATCH THE LOW
October 20, 2004, 10:28 am EDT
The stock market is forming a good, tradable bottom in here. Within the next couple of days -- probably well before the election results are known -- Wall Street should make its peace with the political forces at work and move on to the traditional post-election relief rally.
What makes me so sure there’s a rally coming? I’ve kept an eagle eye on one of the market’s most reliable contrary indicators -- the behavior of the traders in the options pits. Whatever investors may say to pollsters or the media, the options data tell us what folks are doing with their money.
Truth is, the options players have been buying an exceptional number of puts (downside bets) lately, compared with calls. In fact, we’re seeing essentially the same degree of pessimism that prevailed at the lows in March, May and August this year -- even though the major market indexes are hovering comfortably above those lows.
I foresee a rally of 5%-7%, maybe a little more, on the S&P 500 by year-end or early 2005.