says Tobin Smith.
If Barack Obama is leading by 10 points over John McCain going into November, I guarantee you that you’re going to have a sell-off purely for locking in capital gains. I mean, Obama said he wants to go to 28%. Don’t fall for the trap that Obama really thinks he’s going to become president of the United States on a platform. Right now, everybody is pimping for John Edwards’ delegates— they need 235 delegates from Edwards. So right now, Obama sounds like he’s a socialist. You have to assume that when that’s done, whenever Obama is the one who’s the leader in the clubhouse—because Edwards hates Hillary Clinton—once he gets the delegates, then you’ll see that rhetoric move back to the middle.
Alternative energy is going to kick ass. The other thing is you’re going to assume that the Fed is going to be at 2% to 2.25%, which means that financials will do well as soon as they make the turn. And the turn is that you will have clarity on Citibank and the real big guys, we’ll have real transparency. We still do not have transparency.
EQUITIES: Is there one rule of thumb regarding investing?
Smith: You have to understand that there’s no free lunch. If you want a bond rate of return, then buy the bond. If you’re looking for superior return, you have to come to grips with the idea that you’re getting paid extra because you’re willing to ride out the bumps in the road. Many times, investors sort of miss that part.Usually, themost powerful psychological ingredient is the fear of not being greedy enough. The other part is that it’s not profitable, nor is it prudent, to always own growth stocks. The thing about an S-curve change that nobody realizes is, if something’s growing rapidly, it’s also getting to satiation rapidly. If it’s slow growth, it’s going to take a long time.
[roundabout link via Mauldin, who is now appearing in Equities Magazine]
Sunday, July 27, 2008
Tuesday, July 22, 2008
Have financial stocks hit bottom?
Investment strategist Barry Ritholtz wrote in his blog that one reason to doubt that the bottom is in for bank stocks is that The New York Times, The Wall Street Journal and Barron's (the latter two sharing an owner with this newswire) all produced prominent articles on Saturday suggesting the worst was over for financial stocks.
"Can you recall the last time three major media players all picked the bottom in a market or sector on the exact same day -- and were all proven correct?" he asked.
"Can you recall the last time three major media players all picked the bottom in a market or sector on the exact same day -- and were all proven correct?" he asked.
Monday, July 21, 2008
taxing the rich
Washington is teeing up "the rich" for a big tax hike next year, as a way to make them "pay their fair share." Well, the latest IRS data have arrived on who paid what share of income taxes in 2006, and it's going to be hard for the rich to pay any more than they already do. The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.
The nearby chart shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he's going to cut taxes for those at the bottom, but that's also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%.
... If Mr. Obama does succeed in raising tax rates on the rich, we'd also wager that the rich share of tax payments would fall. The last time tax rates were as high as the Senator wants them -- the Carter years -- the rich paid only 19% of all income taxes, half of the 40% share they pay today. Why? Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.
The way to soak the rich is with low tax rates, and last week's IRS data provide more powerful validation of that proposition.
[via john/chucks_angels]
The nearby chart shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he's going to cut taxes for those at the bottom, but that's also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%.
... If Mr. Obama does succeed in raising tax rates on the rich, we'd also wager that the rich share of tax payments would fall. The last time tax rates were as high as the Senator wants them -- the Carter years -- the rich paid only 19% of all income taxes, half of the 40% share they pay today. Why? Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.
The way to soak the rich is with low tax rates, and last week's IRS data provide more powerful validation of that proposition.
[via john/chucks_angels]
Saturday, July 19, 2008
Zacks Rank is wrong
.. 44% of the time. Which means it's right 56% of the time.
Steve Reitmeister explains (video) how this short-term (1 to 3 months) strategy beats the markets despite being wrong nearly half the time.
Steve Reitmeister explains (video) how this short-term (1 to 3 months) strategy beats the markets despite being wrong nearly half the time.
The Bear is Back
If any of us needed further confirmation that things are bad out there, we got the signal right before the July 4 holiday -- the markets officially dipped into bear-market territory. The Dow Jones Industrial Average, Nasdaq Composite, and the S&P 500 Index are all down more than 20% from last fall's highs.
A lot of investors have lost a good chunk of their portfolio since those highs. And with a black cloud hanging over the financial sector, home values continuing to plummet, and gas prices resting comfortably above $4/gallon, the economic outlook is murky at best.
No one will deny that seeing the market fall 20% or more is unsettling. But if you're a truly long-term investor, does it really matter?
The market has endured bear markets before -- 33 of them since the Dow Jones Industrial Average was created. Since 1896, then, the market has dropped more than 20% on 33 separate occasions -- and each time, it recovered to reach new highs.
Sure, the length of time it took the market to recover those losses varied, but in most cases, the year or two directly following the end of the bear market saw a considerable jump in average share prices.
[Then again, the times it didn't jump back in a year or two were the ones that really hurt.]
A lot of investors have lost a good chunk of their portfolio since those highs. And with a black cloud hanging over the financial sector, home values continuing to plummet, and gas prices resting comfortably above $4/gallon, the economic outlook is murky at best.
No one will deny that seeing the market fall 20% or more is unsettling. But if you're a truly long-term investor, does it really matter?
The market has endured bear markets before -- 33 of them since the Dow Jones Industrial Average was created. Since 1896, then, the market has dropped more than 20% on 33 separate occasions -- and each time, it recovered to reach new highs.
Sure, the length of time it took the market to recover those losses varied, but in most cases, the year or two directly following the end of the bear market saw a considerable jump in average share prices.
[Then again, the times it didn't jump back in a year or two were the ones that really hurt.]
market sentiment hits bottom?
Financial market turmoil has returned with a vengeance, weighing on the dollar and pressuring global stocks to distressing lows. However, an extreme in negative investor sentiment, a break in oil prices and some better-than-expected bank earnings spurred a rally in stocks this week—led by an impressive comeback in financials.
Stresses in the short-term funding markets are elevated once again, but not to the extent seen in mid-March. The Federal Reserve's aggressive rate cuts and lending facilities appear to be working. The latest market riot revolved around worries about the stability of the broader financial system—specifically the fate of government-sponsored entities (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE).
Together, the GSEs own roughly $1.5 trillion in mortgages and guarantee $3.7 trillion. According to BCA Research, a failure would expose $4.3 trillion in mortgage-backed securities (MBSs) to losses, as well as $1.5 trillion in agency debt to potential default. Of course, the government cannot allow this to happen: An emergency weekend meeting July 12–13 of the Federal Reserve and the U.S. Treasury Department resulted in a plan to keep the GSEs in the "current form," assuaging concerns that they will be allowed to fail.
However, in one of the largest bank failures in U.S. history, the FDIC was forced to take over IndyMac Bancorp (IDMC), which was a large player in the Alt-A and subprime mortgage market. Although the majority of IndyMac's deposits are insured, the bank's failure sparked concerns that many other regional banks could potentially see the same fate.
With many financial institutions scheduled to report second-quarter financial results, investors became increasingly concerned that banks would not be able to raise fresh capital to cover losses—particularly because sovereign wealth funds (SWFs) could potentially shy away after seeing their investments during the past year lose value.
This dour outlook on the financial sector, in combination with still-high oil prices, pressured nearly all investor sentiment measures to below the March-low levels and close to the lows seen in the 1998 Long-Term Capital Management crisis (an infamous Fed-orchestrated bailout) and the 2002 tech bubble. Volume and volatility measures have not registered capitulation levels, but the depressed market and economic sentiment set the market up for a significant bounce. Although more banks and thrifts are likely to fail, calamitous failures (like IndyMac) have historically occurred near market lows.
Remember, it's not just fundamentals that drive stocks and markets but the relationship between fundamentals and expectations. At market lows, the expectations bar has usually been set sufficiently low for fundamentals to hurdle them, even if those fundamentals remain weak in absolute terms.
As panic gives way to the reality that the financial system and federal regulatory bodies are well-equipped to deal with this crisis, and/or if oil prices continue their descent, we see the potential for additional sharp rallies like those we witnessed this week. However, we remain skeptical that an enduring rally is in the offing until inflation pressures ease significantly and the U.S. housing market stabilizes.
Stresses in the short-term funding markets are elevated once again, but not to the extent seen in mid-March. The Federal Reserve's aggressive rate cuts and lending facilities appear to be working. The latest market riot revolved around worries about the stability of the broader financial system—specifically the fate of government-sponsored entities (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE).
Together, the GSEs own roughly $1.5 trillion in mortgages and guarantee $3.7 trillion. According to BCA Research, a failure would expose $4.3 trillion in mortgage-backed securities (MBSs) to losses, as well as $1.5 trillion in agency debt to potential default. Of course, the government cannot allow this to happen: An emergency weekend meeting July 12–13 of the Federal Reserve and the U.S. Treasury Department resulted in a plan to keep the GSEs in the "current form," assuaging concerns that they will be allowed to fail.
However, in one of the largest bank failures in U.S. history, the FDIC was forced to take over IndyMac Bancorp (IDMC), which was a large player in the Alt-A and subprime mortgage market. Although the majority of IndyMac's deposits are insured, the bank's failure sparked concerns that many other regional banks could potentially see the same fate.
With many financial institutions scheduled to report second-quarter financial results, investors became increasingly concerned that banks would not be able to raise fresh capital to cover losses—particularly because sovereign wealth funds (SWFs) could potentially shy away after seeing their investments during the past year lose value.
This dour outlook on the financial sector, in combination with still-high oil prices, pressured nearly all investor sentiment measures to below the March-low levels and close to the lows seen in the 1998 Long-Term Capital Management crisis (an infamous Fed-orchestrated bailout) and the 2002 tech bubble. Volume and volatility measures have not registered capitulation levels, but the depressed market and economic sentiment set the market up for a significant bounce. Although more banks and thrifts are likely to fail, calamitous failures (like IndyMac) have historically occurred near market lows.
Remember, it's not just fundamentals that drive stocks and markets but the relationship between fundamentals and expectations. At market lows, the expectations bar has usually been set sufficiently low for fundamentals to hurdle them, even if those fundamentals remain weak in absolute terms.
As panic gives way to the reality that the financial system and federal regulatory bodies are well-equipped to deal with this crisis, and/or if oil prices continue their descent, we see the potential for additional sharp rallies like those we witnessed this week. However, we remain skeptical that an enduring rally is in the offing until inflation pressures ease significantly and the U.S. housing market stabilizes.
Wednesday, July 16, 2008
Bombay near capitulation?
[7/13] Indian ADR's got the hammering of their life at the Nasdaq/NYSE Friday last, slicing 13 per cent off the market cap of Infosys, 7 per cent for ICICI Bank and 4 per cent for HDFC Bank. Banks, Real Estate and Technology stocks should be the key contributors to a possible enmasse selling this Monday, as investors move out in droves towards the EXIT gates.
-Conditions are now set for a mass capitulation beginning July 14, 2008 and getting close to a situation where the Buyer's side will become non-existent.
[via Maverick@investwise]
-Conditions are now set for a mass capitulation beginning July 14, 2008 and getting close to a situation where the Buyer's side will become non-existent.
[via Maverick@investwise]
Tuesday, July 15, 2008
To the rescue of Fannie and Freddie
The Bush administration hastily arranged the dramatic Sunday evening rescue of Fannie Mae and Freddie Mac after Wall Street executives and foreign central bankers told Washington that any further erosion of confidence could have a cascading effect around the world, officials said on Monday.
Treasury Secretary Henry M. Paulson Jr. and other top officials were warned, after Fannie and Freddie lost nearly half their stock market value on Friday morning, that any more turmoil threatened to reduce the value of trillions of dollars of the companies’ debt and other obligations, which are held by thousands of domestic and foreign banks, pension funds, mutual funds and other investors, government officials said.
The warnings of a potential systemic failure led to the resulting rescue package, and one of the most striking — though unspoken — regulatory shifts in modern times. For decades, Treasury secretaries and Federal Reserve chairmen have insisted that the government did not stand behind the debt of Fannie and Freddie. But the safety net Mr. Paulson announced on Sunday sends the opposite message: that the government is determined not to let either one fail.
The plan calls on Congress to give officials the power to inject billions of dollars into the beleaguered companies through investments and loans. Until the plan is adopted, the Federal Reserve has agreed to let the companies have access to its so-called discount lending window, a move that most regard as a symbolic gesture intended to show the markets that the government stands ready to help the companies if they need cash.
Treasury Secretary Henry M. Paulson Jr. and other top officials were warned, after Fannie and Freddie lost nearly half their stock market value on Friday morning, that any more turmoil threatened to reduce the value of trillions of dollars of the companies’ debt and other obligations, which are held by thousands of domestic and foreign banks, pension funds, mutual funds and other investors, government officials said.
The warnings of a potential systemic failure led to the resulting rescue package, and one of the most striking — though unspoken — regulatory shifts in modern times. For decades, Treasury secretaries and Federal Reserve chairmen have insisted that the government did not stand behind the debt of Fannie and Freddie. But the safety net Mr. Paulson announced on Sunday sends the opposite message: that the government is determined not to let either one fail.
The plan calls on Congress to give officials the power to inject billions of dollars into the beleaguered companies through investments and loans. Until the plan is adopted, the Federal Reserve has agreed to let the companies have access to its so-called discount lending window, a move that most regard as a symbolic gesture intended to show the markets that the government stands ready to help the companies if they need cash.
Saturday, July 12, 2008
Six in a row
It's clear that the "crisis of confidence" in Fannie Mae (FNM) and Freddie Mac (FRE) was a prime factor in driving the stock market down this week to its sixth weekly loss in a row (Standard & Poor's 500 index).
Losing streaks of this length are rare. In fact, the last run of six down weeks ended at the major market bottom in October 2002. However, I still firmly believe that we're due for a bounce any day now, although the market will probably come back and "test" today's lows later in the summer.
-- Richard Band
Losing streaks of this length are rare. In fact, the last run of six down weeks ended at the major market bottom in October 2002. However, I still firmly believe that we're due for a bounce any day now, although the market will probably come back and "test" today's lows later in the summer.
-- Richard Band
Freddie and Fannie in Freefall
The dike might be cracking on the U.S. financial system and U.S. regulators are trying to figure out how to make sure it doesn't burst.
Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the behemoth caretakers of U.S. home ownership financing, are looking increasingly unstable. Their demise would spell disaster, and the U.S. cannot allow that to happen.
The market went nuts this week as former St. Louis Fed President Albert Poole suggested that Freddie Mac is technically insolvent. What does the market think? As of Friday morning, Fannie and Freddie stock were down 53% and 64%, respectively ... just this week!
Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the behemoth caretakers of U.S. home ownership financing, are looking increasingly unstable. Their demise would spell disaster, and the U.S. cannot allow that to happen.
The market went nuts this week as former St. Louis Fed President Albert Poole suggested that Freddie Mac is technically insolvent. What does the market think? As of Friday morning, Fannie and Freddie stock were down 53% and 64%, respectively ... just this week!
IndyMac fails
WASHINGTON (Reuters) - U.S. banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history.
California-based IndyMac, which specialized in a type of mortgage that often required minimal documents from borrowers, became the fifth U.S. bank to fail this year as a housing bust and credit crunch strain financial institutions.
The federal takeover of IndyMac capped a tumultuous day for U.S. markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac.
IndyMac will reopen fully on Monday as IndyMac Federal Bank under Federal Deposit Insurance Corp supervision, but tensions ran high as customers at a branch at its Los Angeles-area headquarters read a notice in the window saying it was closed.
California-based IndyMac, which specialized in a type of mortgage that often required minimal documents from borrowers, became the fifth U.S. bank to fail this year as a housing bust and credit crunch strain financial institutions.
The federal takeover of IndyMac capped a tumultuous day for U.S. markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac.
IndyMac will reopen fully on Monday as IndyMac Federal Bank under Federal Deposit Insurance Corp supervision, but tensions ran high as customers at a branch at its Los Angeles-area headquarters read a notice in the window saying it was closed.
Friday, July 11, 2008
upgraded broker ratings
I'm sure a lot you have experienced the pleasure of waking up and finding that a covering broker upgraded their rating on one of your stocks.
I'm also guessing that you probably experienced the opposite, and found that one of the brokers downgraded your stock.
While nobody can perfectly guard against downgrades (or forecast all upgrades), it's important to know how the market reacts. Therefore, you can stay in your upgraded winners (or buy if you're on the fence) and consider getting out if a downgrade comes your way.
When I'm screening for new stocks, I like to look for companies that have recently seen a broker rating upgrade. Tests have proven that stocks with broker rating upgrades outperform those that don't get upgraded and really outperform those that get downgraded.
-- Kevin Matras, Zacks.com
I'm also guessing that you probably experienced the opposite, and found that one of the brokers downgraded your stock.
While nobody can perfectly guard against downgrades (or forecast all upgrades), it's important to know how the market reacts. Therefore, you can stay in your upgraded winners (or buy if you're on the fence) and consider getting out if a downgrade comes your way.
When I'm screening for new stocks, I like to look for companies that have recently seen a broker rating upgrade. Tests have proven that stocks with broker rating upgrades outperform those that don't get upgraded and really outperform those that get downgraded.
-- Kevin Matras, Zacks.com
Wednesday, July 09, 2008
Reinvigorating the PEG ratio
Marc Gerstein ran a series of backtests to examine different strategies using the PEG ratio.
Even the gurus are down
If you haven't been having a great time in the market since last spring, you may take some consolation by seeing how many 'fund managers of the year' and other top-notch investors have been faring over the recent past. Even Warren Buffett is now in negative territory for both the 6 and 12-month periods just ended.
[via g66k]
[via g66k]
Tuesday, July 08, 2008
Sir John Templeton
Sir John Templeton, a Tennessee-born investor and philanthropist who amassed a fortune in global stocks and gave away hundreds of millions of dollars to foster understanding in what he called "spiritual realities," died on Tuesday in Nassau, the Bahamas, where he had lived for decades. He was 95.
His death, at Doctors Hospital in Nassau, was caused by pneumonia, said Don Lehr, a spokesman for the Templeton Foundation.
The foundation awards the Templeton Prize, one of the world's richest, and sponsors conferences and studies reflecting the founder's passionate interest in "progress in religion" and "research or discoveries" on the nebulous borders of science and religion.
In a career that spanned seven decades, Sir John dazzled Wall Street, organized some of the most successful mutual funds of his time, led investors into foreign markets, established charities that now give away $70 million a year, wrote books on finance and spirituality and promoted a search for answers to what he called the "Big Questions" — realms of science, faith, God and the purpose of humanity.
Along the way, he became one of the world's richest men, gave up American citizenship, moved to the Bahamas, was knighted by the Queen of England and bestowed much of his fortune on spiritual thinkers and innovators: Mother Teresa, Billy Graham, Aleksandr Solzhenitsyn, the physicist Freeman Dyson, the philosopher Charles Taylor and a pantheon of Christians, Jews, Muslims, Buddhists and Hindus.
* * *
Templeton's 16 Rules to Investment Success
His death, at Doctors Hospital in Nassau, was caused by pneumonia, said Don Lehr, a spokesman for the Templeton Foundation.
The foundation awards the Templeton Prize, one of the world's richest, and sponsors conferences and studies reflecting the founder's passionate interest in "progress in religion" and "research or discoveries" on the nebulous borders of science and religion.
In a career that spanned seven decades, Sir John dazzled Wall Street, organized some of the most successful mutual funds of his time, led investors into foreign markets, established charities that now give away $70 million a year, wrote books on finance and spirituality and promoted a search for answers to what he called the "Big Questions" — realms of science, faith, God and the purpose of humanity.
Along the way, he became one of the world's richest men, gave up American citizenship, moved to the Bahamas, was knighted by the Queen of England and bestowed much of his fortune on spiritual thinkers and innovators: Mother Teresa, Billy Graham, Aleksandr Solzhenitsyn, the physicist Freeman Dyson, the philosopher Charles Taylor and a pantheon of Christians, Jews, Muslims, Buddhists and Hindus.
* * *
Templeton's 16 Rules to Investment Success
Friday, July 04, 2008
Neglected stocks
Last week, Mark Hulbert reported on a new study in The New York Times that found that from 1962 to 2003, stocks that could go at least a day without trading any shares -- like Brazil Fast Food -- outperformed stocks that traded every day by more than 8 percentage points annually. And that was the case even though the "neglected stock portfolio," as researchers Athanasios Bolmatis and Evangelos Sekeris called it, contains "a disproportionate number of stocks that underperform the market by a dramatic margin."
Good To Great
Jim Collins, already established as one of the most influential management consultants, further established his credibility with the wildly popular Good to Great: Why Some Companies Make the Leap...and Others Don’t, originally published in 2001. The book went on to be one of the bestsellers in the genre, and it is now widely regarded as a modern classic of management theory.
Collins takes up a daunting challenge in the book: identifying and evaluating the factors and variables that allow a small fraction of companies to make the transition from merely good to truly great. ‘Great,’ an admittedly subjective term, is operationally defined according to a number of metrics, including, specifically, financial performance that exceeded the market average by several orders of magnitude over a sustained period of time. Using these criteria, Collins and his research team exhaustively catalogued the business literature, identifying a handful of companies that fulfilled their predetermined criteria for greatness. Then, the defining characteristics that differentiated these ‘great’ firms from their competitors were quantified and analyzed.
[via gfs1354@chucks_angels]
Collins takes up a daunting challenge in the book: identifying and evaluating the factors and variables that allow a small fraction of companies to make the transition from merely good to truly great. ‘Great,’ an admittedly subjective term, is operationally defined according to a number of metrics, including, specifically, financial performance that exceeded the market average by several orders of magnitude over a sustained period of time. Using these criteria, Collins and his research team exhaustively catalogued the business literature, identifying a handful of companies that fulfilled their predetermined criteria for greatness. Then, the defining characteristics that differentiated these ‘great’ firms from their competitors were quantified and analyzed.
[via gfs1354@chucks_angels]
Thursday, July 03, 2008
price anchoring
Price anchoring is a mental mistake that can be very costly to your long-term returns.
As soon as your intuition seizes on a number -- any number -- it becomes stuck, as if it had been coated in glue. That's why real estate agents will usually show you the most expensive house on the market first, so the others will seem cheap by comparison -- and why mutual fund companies nearly always launch new funds at $10.00 per share, enticing new investors with a "cheap" price at the beginning.
Share prices are complicated things -- they account for not only the underlying quality of the company, but also public opinion, assumed earnings growth, and investor enthusiasm.
Anchoring to a price means you'll ignore the more important trait -- value.
As soon as your intuition seizes on a number -- any number -- it becomes stuck, as if it had been coated in glue. That's why real estate agents will usually show you the most expensive house on the market first, so the others will seem cheap by comparison -- and why mutual fund companies nearly always launch new funds at $10.00 per share, enticing new investors with a "cheap" price at the beginning.
Share prices are complicated things -- they account for not only the underlying quality of the company, but also public opinion, assumed earnings growth, and investor enthusiasm.
Anchoring to a price means you'll ignore the more important trait -- value.
Tuesday, July 01, 2008
financial stocks are cheap
says Richard Pzena.
In brief, the subprime mortgage and liquidity crisis has sent investors into panic mode about financial stocks, driving their prices far below their underlying value. Major firms with strong franchises have fallen precipitously, despite their historical records.
A bubble not unlike that seen with internet stocks in the late 1990s seems to have formed, with energy, commodities, and industrial cyclicals being bid up with little regard to earnings. Indeed, the spread in valuations between commodity and financial stocks is wider than at any time in the past 55 years, and financials represent one of the most compelling investment opportunities we have ever seen.
In brief, the subprime mortgage and liquidity crisis has sent investors into panic mode about financial stocks, driving their prices far below their underlying value. Major firms with strong franchises have fallen precipitously, despite their historical records.
A bubble not unlike that seen with internet stocks in the late 1990s seems to have formed, with energy, commodities, and industrial cyclicals being bid up with little regard to earnings. Indeed, the spread in valuations between commodity and financial stocks is wider than at any time in the past 55 years, and financials represent one of the most compelling investment opportunities we have ever seen.
Sunday, June 22, 2008
bubblin' crude
June 13 (Bloomberg) -- The rally that drove oil to a record $139.12 a barrel last week surpassed the gains in Internet stocks that preceded the dot-com crash in 2000.
Crude rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001, and reached 28 record highs this year. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq Composite Index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group LLC.
The Nasdaq tumbled 78 percent from its March 2000 peak, erasing about $6 trillion of market value, as investors concluded that prices weren't supported by profits at companies such as Broadcom Corp. and Amazon.com Inc.
Billionaire investor George Soros and Stephen Schork, president of Schork Group Inc., say oil is ready to tumble because prices aren't justified by supply and demand.
"There's nothing different between this mania, the dot-com mania, the real estate mania, the Dow Jones mania of the 1920s, the South Sea bubble and the Dutch tulip-bulb mania," said Schork, whose Villanova, Pennsylvania-based firm advises the Organization of Petroleum Exporting Countries, Wall Street firms and oil companies on the outlook for energy prices. "History repeats itself over and over and over again."
Crude rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001, and reached 28 record highs this year. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq Composite Index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group LLC.
The Nasdaq tumbled 78 percent from its March 2000 peak, erasing about $6 trillion of market value, as investors concluded that prices weren't supported by profits at companies such as Broadcom Corp. and Amazon.com Inc.
Billionaire investor George Soros and Stephen Schork, president of Schork Group Inc., say oil is ready to tumble because prices aren't justified by supply and demand.
"There's nothing different between this mania, the dot-com mania, the real estate mania, the Dow Jones mania of the 1920s, the South Sea bubble and the Dutch tulip-bulb mania," said Schork, whose Villanova, Pennsylvania-based firm advises the Organization of Petroleum Exporting Countries, Wall Street firms and oil companies on the outlook for energy prices. "History repeats itself over and over and over again."
Thursday, June 19, 2008
A Warning from the Royal Bank of Scotland
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Such a slide on world bourses would amount to one of the worst bear markets over the last century.
[via chucks_angels]
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Such a slide on world bourses would amount to one of the worst bear markets over the last century.
[via chucks_angels]
Thursday, June 12, 2008
Why John Montgomery invests
[Austin Edwards] remembers when John Montgomery, founder, CEO, and fund manager of Bridgeway Funds, came to Fool HQ to give us some insight into why -- not how -- he runs his funds.
Granted, I would've loved to learn more about how he invests. His Bridgeway Aggressive Investors 1 Fund (BRAGX) has returned a jaw-dropping 19.1% annualized since he started it in 1994, and currently owns market superstars Intuitive Surgical (Nasdaq: ISRG), Mosaic (NYSE: MOS), and Potash (NYSE: POT).
Nonetheless, it was refreshing to see that Montgomery has never lost sight of why he's investing. See, Bridgeway donates a whopping 50% of its after-tax profits to charities -- most notably to foundations dedicated to stopping genocide in Africa.
Granted, I would've loved to learn more about how he invests. His Bridgeway Aggressive Investors 1 Fund (BRAGX) has returned a jaw-dropping 19.1% annualized since he started it in 1994, and currently owns market superstars Intuitive Surgical (Nasdaq: ISRG), Mosaic (NYSE: MOS), and Potash (NYSE: POT).
Nonetheless, it was refreshing to see that Montgomery has never lost sight of why he's investing. See, Bridgeway donates a whopping 50% of its after-tax profits to charities -- most notably to foundations dedicated to stopping genocide in Africa.
Bill Miller Deja Vu?
In 1991, financial markets opened the New Year with significant weakness, weighed down by a lingering recession in the U.S. housing market, soaring oil prices and fallout from war in the Middle East. Markets were also contending with a major crisis in the financial sector that arose from junk bond investments in the savings & loan industry.
Sound familiar? It should, as we face similar challenges today -- only this time, the turmoil in the financial industry stems from the subprime lending collapse.
Reflecting on his [poor] recent performance, Bill Miller noted that 2007 was "the first time since 1990 the Value Trust has lagged the S&P 500 in two consecutive calendar years. Perhaps, not surprisingly, that was also a time of panic due to a housing market recession, soaring oil prices, plus huges losses in the banking and financial sector. We took advantage of lower prices back in the 90s, which ushered in a pretty good period of excess returns.
-- from Legg Mason's empower Magazine, Spring 2008
Sound familiar? It should, as we face similar challenges today -- only this time, the turmoil in the financial industry stems from the subprime lending collapse.
Reflecting on his [poor] recent performance, Bill Miller noted that 2007 was "the first time since 1990 the Value Trust has lagged the S&P 500 in two consecutive calendar years. Perhaps, not surprisingly, that was also a time of panic due to a housing market recession, soaring oil prices, plus huges losses in the banking and financial sector. We took advantage of lower prices back in the 90s, which ushered in a pretty good period of excess returns.
-- from Legg Mason's empower Magazine, Spring 2008
Monday, June 09, 2008
Consuelo Mack
Consuelo Mack has a TV show called WealthTrack that only now I found out about from a link at gurufocus.
Listening to her show, she sounds like the spiritual successor to Rukeyser (without the bad puns). And in fact, she's actually a real successor to Rukeyser having hosted Rukeyser's Wall Street in its final months.
The latest show (6/6/08) features Bruce Berkowitz.
Listening to her show, she sounds like the spiritual successor to Rukeyser (without the bad puns). And in fact, she's actually a real successor to Rukeyser having hosted Rukeyser's Wall Street in its final months.
The latest show (6/6/08) features Bruce Berkowitz.
Some notable (to me) past shows include
Chris Davis (1/18/08)
Jean-Marie Eveillard (12/28/07)
Dan Fuss (12/14/07)
Whitney Tilson (12/7/07)
Robert Hagstom, Steve Leuthold (10/19/07)
Bill Gross, Jean-Marie Eveillard (10/14/07)
Ron Muhlenkamp (9/21/07)
Jason Zweig and Whitney Tilson (9/7/07)
Ben Stein and Jason Zweig (7/6/07)
David Winters and Rob Arnott (5/25/07)
Keith Trauner (3/16/07)
Ben Stein, David Winters (2/23/07)
Saturday, June 07, 2008
is this the bottom?
With stocks down sharply from their bull market peaks, Forbes compiled a group of four prominent analysts and asked them to share their viewpoints on whether the markets had truly reached bottom. Here's what those experts had to say:
"Stocks are down, expectations are down, valuations are down, fear is up and the money supply growth has already started to take off along with the Fed cuts. Those are all positives for the market. The significant volume of selling, or panic selling, over the last few months is commensurate with a bottom."
-- Stuart T. Freeman, A.G. Edwards
"We're in a transitional area, but the trend looks like we're at or near the bottom. We're probably going to move up from here, but the question is how quickly."
-- Holly Gustafson, Legg Mason
"We should see a sustainable upturn from here."
-- Joseph Kalinowski, Thomson Financial/IBES
"In March a bottom occurred."
-- Daniel Peris, Argus Research
Will the experts' predictions prove correct? I wouldn't bet on it.
You see, those quotes were taken from early May. May 2001, that is.
After an extended bull rally, the S&P 500 dropped sharply in late 2000, characterized by sudden price swings and sharp volatility. In the spring of 2001, the market temporarily rebounded, and Forbes' experts all agreed: This was the bottom.
They were wrong.
Over the next four months, the S&P 500 fell 24%. It rebounded briefly, then dropped another 30%.
They weren't just wrong -- they were spectacularly wrong.
"Stocks are down, expectations are down, valuations are down, fear is up and the money supply growth has already started to take off along with the Fed cuts. Those are all positives for the market. The significant volume of selling, or panic selling, over the last few months is commensurate with a bottom."
-- Stuart T. Freeman, A.G. Edwards
"We're in a transitional area, but the trend looks like we're at or near the bottom. We're probably going to move up from here, but the question is how quickly."
-- Holly Gustafson, Legg Mason
"We should see a sustainable upturn from here."
-- Joseph Kalinowski, Thomson Financial/IBES
"In March a bottom occurred."
-- Daniel Peris, Argus Research
Will the experts' predictions prove correct? I wouldn't bet on it.
You see, those quotes were taken from early May. May 2001, that is.
After an extended bull rally, the S&P 500 dropped sharply in late 2000, characterized by sudden price swings and sharp volatility. In the spring of 2001, the market temporarily rebounded, and Forbes' experts all agreed: This was the bottom.
They were wrong.
Over the next four months, the S&P 500 fell 24%. It rebounded briefly, then dropped another 30%.
They weren't just wrong -- they were spectacularly wrong.
Tuesday, May 27, 2008
Soros on oil
Soaring oil prices are increasingly the result of speculation, financier George Soros said in an interview published Monday.
The billionaire investor said the money pouring into the oil market increasingly had the look of a bubble, but that it would not burst until both the United States and Britain were knocked into a recession.
"Speculation ... is increasingly affecting the price," Soros was quoted as saying by The Daily Telegraph. "The price has this parabolic shape that is characteristic of bubbles."
But the cost of oil — which briefly reached new record highs of more than US$135 a barrel in trading Thursday — was unlikely to fall dramatically until the U.S. and Britain economies began contracting, the paper quoted Soros as saying.
The billionaire investor said the money pouring into the oil market increasingly had the look of a bubble, but that it would not burst until both the United States and Britain were knocked into a recession.
"Speculation ... is increasingly affecting the price," Soros was quoted as saying by The Daily Telegraph. "The price has this parabolic shape that is characteristic of bubbles."
But the cost of oil — which briefly reached new record highs of more than US$135 a barrel in trading Thursday — was unlikely to fall dramatically until the U.S. and Britain economies began contracting, the paper quoted Soros as saying.
Ken Fisher is bullish
I'm getting a lot of hate e-mail these days. This onslaught is not entirely a bad thing. It reassures me that my bet against the crowd is a wise one. I'm bullish and have been steadily since the July 8, 2002 issue. In my Jan. 28 column I reiterated the upbeat outlook and reminded you that the fourth year of a presidency only rarely delivers losses to stockholders. Now, with stocks globally (as measured by the Morgan Stanley All-Country World Index) down 8.6% so far this year, people are telling me I'm an idiot. Someone posted to FORBES Web site, "Hi Ken. It's been an absolute pleasure watching you vie for the 2008 Henry Blodget Award. Keep up the good work!"
Gloat for now, but please note that 2008 isn't over. I still think the year will end in the plus column. And I'm never happier than when I'm alone.
My critics call me a perma-bull. They forget I called the last three full-fledged bear markets right here in FORBES--reasonably well and better than most--and mostly alone (June 15, 1987; Nov. 27, 1989; Feb. 19, 2001). I know I may be wrong now. But I see what's happened since Jan. 1 as just a major correction, very comparable to 1998, with a few things flip-flopped, as described in my Feb. 25 column.
On Mar. 13 Goldman Sachs demoted market strategist Abby Cohen for having been bullish too long. That day marked the bottom of the back half of what I think is a double-bottom whose first bottom was in January. I see Goldman's move as bullish. That once famous market timer Joe Granville materialized out of nowhere saying that we are beginning a bad bear market. I'd bet against Joe any time. Gloomy people are saying that we are in the midst of the worst financial crisis since the 1930s. They said the same thing in 1998. Bullish!
You can't find a time in the 20th century when, less than five months into a real global bear market, people were talking bear market and recession in any visible numbers. But they always talk disaster during corrections. Check out "Russian Financial Crisis" on Wikipedia. The second sentence says 1998 was a "global recession … which started with the Asian financial crisis in July 1997." Wrong. There wasn't a global recession then. There isn't one now.
An old saw says, "You should be fearful when others are greedy and greedy when others are fearful." Clearly folks are fearful now. So you should be greedy. Another saw: "Buy when there is blood on the streets." There's plenty of blood, or at least depression, on Wall Street. So keep buying.
[via investwise 5/13/08]
Gloat for now, but please note that 2008 isn't over. I still think the year will end in the plus column. And I'm never happier than when I'm alone.
My critics call me a perma-bull. They forget I called the last three full-fledged bear markets right here in FORBES--reasonably well and better than most--and mostly alone (June 15, 1987; Nov. 27, 1989; Feb. 19, 2001). I know I may be wrong now. But I see what's happened since Jan. 1 as just a major correction, very comparable to 1998, with a few things flip-flopped, as described in my Feb. 25 column.
On Mar. 13 Goldman Sachs demoted market strategist Abby Cohen for having been bullish too long. That day marked the bottom of the back half of what I think is a double-bottom whose first bottom was in January. I see Goldman's move as bullish. That once famous market timer Joe Granville materialized out of nowhere saying that we are beginning a bad bear market. I'd bet against Joe any time. Gloomy people are saying that we are in the midst of the worst financial crisis since the 1930s. They said the same thing in 1998. Bullish!
You can't find a time in the 20th century when, less than five months into a real global bear market, people were talking bear market and recession in any visible numbers. But they always talk disaster during corrections. Check out "Russian Financial Crisis" on Wikipedia. The second sentence says 1998 was a "global recession … which started with the Asian financial crisis in July 1997." Wrong. There wasn't a global recession then. There isn't one now.
An old saw says, "You should be fearful when others are greedy and greedy when others are fearful." Clearly folks are fearful now. So you should be greedy. Another saw: "Buy when there is blood on the streets." There's plenty of blood, or at least depression, on Wall Street. So keep buying.
[via investwise 5/13/08]
Saturday, May 24, 2008
Memorial Day
According to Martin Zweig's Winning on Wall Street, the day before Memorial Day (and holidays in general) is supposed to be bullish, "the odds of the market rising on the day before a holiday was about seven out of eight." However if the market is down on that day, then one should short the market for the day after the holiday.
So this means we should expect the market to go down further on Tuesday.
Of course, the mere fact that we know this affects the pattern. The book uses data thru 1985 and was published in 1986. Since then, the tendencies may not as strong.
[6/3/08] The market finished positive on May 27. In other words, wrong again.
So this means we should expect the market to go down further on Tuesday.
Of course, the mere fact that we know this affects the pattern. The book uses data thru 1985 and was published in 1986. Since then, the tendencies may not as strong.
[6/3/08] The market finished positive on May 27. In other words, wrong again.
Friday, May 23, 2008
How has van den Berg done it?
Although he is not quoted as frequently as master value investor Warren Buffett, value investor Arnold van den Berg's long-term investment returns at Century Management are nearly as impressive.
Since its 1974 inception, the firm has delivered more than 16% annual returns to investors before fees, and nearly 15% annual returns after fees. As Century points out, that means the firm would have doubled your money every 4.8 years.
How has van den Berg done it? Mostly by concentrating on buying stocks that are out of favor with other investors. At a presentation he gave in 2006 (which was transcribed in an excellent issue of Outstanding Investor Digest), he described four psychological states investors experience that he takes advantage of in order to earn those outsized returns.
Since its 1974 inception, the firm has delivered more than 16% annual returns to investors before fees, and nearly 15% annual returns after fees. As Century points out, that means the firm would have doubled your money every 4.8 years.
How has van den Berg done it? Mostly by concentrating on buying stocks that are out of favor with other investors. At a presentation he gave in 2006 (which was transcribed in an excellent issue of Outstanding Investor Digest), he described four psychological states investors experience that he takes advantage of in order to earn those outsized returns.
- Apathy: The stock price has gone nowhere for a number of years, and people are just tired of it.
- Disgust: The stock has done nothing; earnings and sales might be down. People might have lost money holding on to it and can't bear to own it any more.
- Fear and panic: The bad news hits, the company runs into trouble, and the price drops off a cliff. Sell! Sell!
- Anger: Nothing's gone right while holding it, lost a lot of money, it will never turn around! Just dump this piece of garbage!
Tuesday, May 20, 2008
a penny costs more than a penny
WASHINGTON (AP) -- Further evidence that times are tough: It now costs more than a penny to make a penny. And the cost of a nickel is more than 7½ cents.
Surging prices for copper, zinc and nickel have some in Congress trying to bring back the steel-made pennies of World War II and maybe using steel for nickels, as well.
Surging prices for copper, zinc and nickel have some in Congress trying to bring back the steel-made pennies of World War II and maybe using steel for nickels, as well.
Market Cycle Math
During bull markets, a vibrant, peaceful combination of P/E expansion (a staple of bull markets, a great source of return) and earnings growth brings outsize returns to jubilant investors. Prolonged bull markets start with below- and end with above-average P/Es.
P/Es are some of the most mean-reverting creatures, and range-bound markets act as clean-up guys: they rid us of the mess (i.e., deflate high P/Es) caused by bull markets, taking them down towards and actually below the mean. P/E compression wipes out most if not all earnings growth, resulting in zero (or nearly) price appreciation plus dividends.
Bear markets are range-bound markets' cousins; they share half of their DNA: high starting valuations. However, where in cowardly lion markets economic growth helps to soften the blow caused by P/E compression, during secular bear markets the economy is not there to help. Economic blues (runaway inflation, severe deflation, subpar or negative economic or earnings growth) add oil to the fire (started by high valuations) and bring devastating returns to investors.
A true secular bear market has not really taken place in the US, but one has occurred across the pond in Japan. The market decline caused by the Great Depression, though referred to as the greatest decline in US stocks in the 20th century, only lasted three years and thus doesn't really fit the traditional "secular" requirement of lasting more than five years. Japan's Nikkei 225 suffered through a true secular bear market: stock prices declined over 80 percent from their 1989-1991 highs until they bottomed in 2003 (the market seems to be coming back now). For more than a decade the country struggled with deflation caused by its banking system coming to a near halt on the heels of a collapsing real estate market and the bad loans that came with it. Of course, all this took place on the heels of a huge bull market, and thus very high valuations.
P/Es are some of the most mean-reverting creatures, and range-bound markets act as clean-up guys: they rid us of the mess (i.e., deflate high P/Es) caused by bull markets, taking them down towards and actually below the mean. P/E compression wipes out most if not all earnings growth, resulting in zero (or nearly) price appreciation plus dividends.
Bear markets are range-bound markets' cousins; they share half of their DNA: high starting valuations. However, where in cowardly lion markets economic growth helps to soften the blow caused by P/E compression, during secular bear markets the economy is not there to help. Economic blues (runaway inflation, severe deflation, subpar or negative economic or earnings growth) add oil to the fire (started by high valuations) and bring devastating returns to investors.
A true secular bear market has not really taken place in the US, but one has occurred across the pond in Japan. The market decline caused by the Great Depression, though referred to as the greatest decline in US stocks in the 20th century, only lasted three years and thus doesn't really fit the traditional "secular" requirement of lasting more than five years. Japan's Nikkei 225 suffered through a true secular bear market: stock prices declined over 80 percent from their 1989-1991 highs until they bottomed in 2003 (the market seems to be coming back now). For more than a decade the country struggled with deflation caused by its banking system coming to a near halt on the heels of a collapsing real estate market and the bad loans that came with it. Of course, all this took place on the heels of a huge bull market, and thus very high valuations.
Sell in May?
Numerous studies show that since World War II, as much as 99% of stock market returns have been generated between November 1 and May 1. Good friend and fishing buddy David Kotok of Cumberland Advisors sums it up nicely:
"According to the Ned Davis (NDR) database, starting in 1950, $10,000 invested in the S&P 500 Index every May 1st and then liquidated every October 31st would only be worth $10,026 today. That's right: had you stayed out of the stock market from November through April and only been in the market from May through October, you would have had no change during the last 57 years. 21 of those years would have been negative; 36 were positive. Thi s happened during the same period that stock prices were rising about 75% of the time and markets made extended upward moves.
"Consider the results of the reverse strategy. Buy the S&P 500 Index on November 1st and sell all your stocks on May 1st. The outcome is dramatically different. Your original $10,000 would now be worth $372,890 as of April 30th closing prices in 2008. Out of the 58 periods you would have had positive results in 45 of them and negative results in only 13 years."
*** 4/30/12
I'm perfectly willing to believe that there is a seasonal component to stocks' price appreciation that is inconsistent with efficient markets, but these data aren't enough to judge the efficacy of a seasonal switching strategy. In that regard, NDR's methodology suffers from several shortcomings: For one, it assumes that when the money isn't invested in stocks, it earns no return whatsoever instead of being invested in Treasury bills. Furthermore, their data do not account for dividends, a critical component of stock returns. Finally, there is no benchmark data corresponding to a straightforward "buy and hold" strategy.
In order to address these issues, I performed my own calculations, using data series from Ibbotson Associates (a unit of Morningstar) that begin in 1926.
There are two key observations here:
The "sell in May" strategy soundly beat the converse strategy, with a margin of outperformance that exceeds 3 percentage points on an annualized basis.
However, "Sell in May" underperformed buy-and-hold; in fact, the outperformance of buy-and-hold is understated because the returns in the table assume no transaction costs and no tax impact.
"According to the Ned Davis (NDR) database, starting in 1950, $10,000 invested in the S&P 500 Index every May 1st and then liquidated every October 31st would only be worth $10,026 today. That's right: had you stayed out of the stock market from November through April and only been in the market from May through October, you would have had no change during the last 57 years. 21 of those years would have been negative; 36 were positive. Thi s happened during the same period that stock prices were rising about 75% of the time and markets made extended upward moves.
"Consider the results of the reverse strategy. Buy the S&P 500 Index on November 1st and sell all your stocks on May 1st. The outcome is dramatically different. Your original $10,000 would now be worth $372,890 as of April 30th closing prices in 2008. Out of the 58 periods you would have had positive results in 45 of them and negative results in only 13 years."
*** 4/30/12
I'm perfectly willing to believe that there is a seasonal component to stocks' price appreciation that is inconsistent with efficient markets, but these data aren't enough to judge the efficacy of a seasonal switching strategy. In that regard, NDR's methodology suffers from several shortcomings: For one, it assumes that when the money isn't invested in stocks, it earns no return whatsoever instead of being invested in Treasury bills. Furthermore, their data do not account for dividends, a critical component of stock returns. Finally, there is no benchmark data corresponding to a straightforward "buy and hold" strategy.
In order to address these issues, I performed my own calculations, using data series from Ibbotson Associates (a unit of Morningstar) that begin in 1926.
There are two key observations here:
The "sell in May" strategy soundly beat the converse strategy, with a margin of outperformance that exceeds 3 percentage points on an annualized basis.
However, "Sell in May" underperformed buy-and-hold; in fact, the outperformance of buy-and-hold is understated because the returns in the table assume no transaction costs and no tax impact.
Thursday, May 15, 2008
The Value Imperative
Dr. John Price (creator of ValueSoft and the Conscious Investor) has written a series of articles for gurufocus called the Value Imperative.
Here are the links to the articles:
Part 1: Setting The Scene
Part 2: Replacement Theory and Tobin's q theory
Part 3: Charting and Technical Analysis
Part 4: The Investment Methods of Benjamin Graham
Part 5: Intrinsic Value and Discount Cash Flow Methods
Part 6: Intrinsic Value and Dividend Discount Methods
What the Sydney Harbour Bridge Taught Me
He also has a number of informative articles at Sherlock Investing.
Here are the links to the articles:
Part 1: Setting The Scene
Part 2: Replacement Theory and Tobin's q theory
Part 3: Charting and Technical Analysis
Part 4: The Investment Methods of Benjamin Graham
Part 5: Intrinsic Value and Discount Cash Flow Methods
Part 6: Intrinsic Value and Dividend Discount Methods
What the Sydney Harbour Bridge Taught Me
He also has a number of informative articles at Sherlock Investing.
Buffett and Gates on FBN
Liz Klaman of Fox Business News interviews Warren Buffett and Bill Gates:
Buffett discusses the future of Berkshire Hathaway
Bill Gates discusses the failed Microsoft-Yahoo deal
Buffett and Gates discuss the energy industry and alternative energy
Buffett and Gates discuss the American economy
Buffett and Gates discuss their contrasting deal making methods
Buffett discusses the future of Berkshire Hathaway
Bill Gates discusses the failed Microsoft-Yahoo deal
Buffett and Gates discuss the energy industry and alternative energy
Buffett and Gates discuss the American economy
Buffett and Gates discuss their contrasting deal making methods
Wednesday, May 14, 2008
Emerging Markets are still going strong
Although industrialized economies in the U.S., Europe, and Japan are all likely to see slow growth in the next couple of years, emerging markets are still going strong.
Country GDP Growth -- 2008 GDP 2009 GDPBy one simple measure -- the P/E ratio -- emerging-market countries have quite reasonable stock market valuations. And in some cases, they look downright cheap.
Past 12 Months Growth Est. Growth Est.
United States 2.5% 1.1% 1.7%
Germany 1.8% 1.7% 1.6%
Japan 2.0% 1.3% 1.5%
China 10.6% 9.6% 9.0%
India 8.4% 7.8% 7.2%
Brazil 6.2% 4.6% 4.0%
Russia 8.0% 7.1% 6.2%
Country Trailing P/E Estimated
Forward P/E
United States 19.2 14.8
Germany 12.4 11.9
Japan 16.6 15.6
China 19.5 16.2
India 22.0 20.9
Brazil 16.2 13.2
Russia 10.4 11.6
Wednesday, May 07, 2008
2008 Berkshire Hathaway annual meeting
There's a bunch of links regarding the Berkshire Hathaway annual meeting this year, thanks to brknews and chuck_angels and others. There's so many that, instead of cramming them in at WBIARD, I decided to list them here instead.
Warren Buffett to draw biggest crowd ever
The Buffett Madness has begun (Liz Klaman)
CNBC Live Blog Archive
Liveblogging the Berkshire Hathaway annual meeting (Justin Fox)
Joe Ruff's updates
Justin Fuller's blog
Peter Boodell's notes
iluvbabyb's notes
Liz Klaman blog
Buffett says Berkshire won't get indecent results
Buffett advice: Buy smart...and low
CNBC Video Gallery
LIVE BLOG ARCHIVE: Warren Buffett News Conference
Buffett explains his purchase of Berkshire
Adam Smith's Money World transcript 5/15/98 [via pohick2]
Warren Buffett to draw biggest crowd ever
The Buffett Madness has begun (Liz Klaman)
CNBC Live Blog Archive
Liveblogging the Berkshire Hathaway annual meeting (Justin Fox)
Joe Ruff's updates
Justin Fuller's blog
Peter Boodell's notes
iluvbabyb's notes
Liz Klaman blog
Buffett says Berkshire won't get indecent results
Buffett advice: Buy smart...and low
CNBC Video Gallery
LIVE BLOG ARCHIVE: Warren Buffett News Conference
Buffett explains his purchase of Berkshire
Adam Smith's Money World transcript 5/15/98 [via pohick2]
Thursday, May 01, 2008
Earnings Estimates
A recent eye-opening study by Patrick Cusatis and J. Randall Woolridge of Pennsylvania State University looked at 20 years' worth of published earnings estimates made by Wall Street industry analysts. What they found was startling.
Cusatis and Woolridge found that Wall Street analysts -- supposedly among the smartest, most well-informed prognosticators -- consistently overestimated the future earnings growth rates of the companies they cover. By a lot. I mean by a whole lot.
* * *
also
Cusatis and Woolridge found that Wall Street analysts -- supposedly among the smartest, most well-informed prognosticators -- consistently overestimated the future earnings growth rates of the companies they cover. By a lot. I mean by a whole lot.
* * *
also
Wednesday, April 30, 2008
Sequoia Fund reopens
The Sequoia Fund, after experiencing selling by investors, is reopening its doors May 1 to new investors for the first time since 1982.
The $3.5 billion value fund is celebrated for outperforming the broader market during much of its 38-year history. For years, it was run by legendary stock picker William Ruane, who followed the same approach as Benjamin Graham and Warren Buffett.
In recent years, however, Sequoia has a mixed performance record, lagging the Standard & Poor's 500-stock index in three of the past five calendar years.
Selling by investors caused assets to fall to a level lower than it was a decade ago, the funds' managers wrote in a report for the quarter ending March 31. If that were to continue at that rate, it could "cause us to have to sell stocks that we didn't want to," said co-manager Robert Goldfarb, 63 years old, in a telephone interview Wednesday.
Since its inception in 1970, Sequoia has returned more than three times that of the S&P 500. An investor who put $1,000 into the fund at inception would today have a little more than $200,000, compared to about $63,000 in an S&P 500 fund, according to Morningstar Inc.
The $3.5 billion value fund is celebrated for outperforming the broader market during much of its 38-year history. For years, it was run by legendary stock picker William Ruane, who followed the same approach as Benjamin Graham and Warren Buffett.
In recent years, however, Sequoia has a mixed performance record, lagging the Standard & Poor's 500-stock index in three of the past five calendar years.
Selling by investors caused assets to fall to a level lower than it was a decade ago, the funds' managers wrote in a report for the quarter ending March 31. If that were to continue at that rate, it could "cause us to have to sell stocks that we didn't want to," said co-manager Robert Goldfarb, 63 years old, in a telephone interview Wednesday.
Since its inception in 1970, Sequoia has returned more than three times that of the S&P 500. An investor who put $1,000 into the fund at inception would today have a little more than $200,000, compared to about $63,000 in an S&P 500 fund, according to Morningstar Inc.
Peter Bernstein doesn't like what he sees
Peter Bernstein has witnessed just about every financial crisis of the past century.
As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.
One of Peter Bernstein's worries: 'If China goes into a recession, God knows.' Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.
[via iluvbabyb]
As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.
One of Peter Bernstein's worries: 'If China goes into a recession, God knows.' Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.
[via iluvbabyb]
Thursday, April 24, 2008
Writing Put Options
At Morningstar, we are currently developing a methodology that can be used to combine fundamental research with options investing. One strategy that we think can be used relatively safely is writing put options on wide-moat companies with low or medium fair value uncertainty ratings. In other words, we wish to write put options on companies that, in our opinion, have durable competitive advantages whose fair values lie within a tightly bounded range. Using this strategy, we can generate annualized double-digit returns if the options expire worthless. Or in case the stock gets put to us, we'd end up owning stakes in wonderful businesses at attractive prices--we think it's a win-win situation.
What Goes Up
Just because a stock has risen for 10 years in a row, that doesn't at all mean that it will keep doing so. It may very well fall a little (or a lot) in the coming years.
Wednesday, April 23, 2008
The 10 Greatest CEOs Of All Time
For good reason, we've become cynical about CEOs. There seem to be no heroes left standing, no one to emulate or believe in. There's an increasingly gloomy sense that we should simply throw up our hands and give up on corporate leadership.
I disagree. Having spent years studying what separates great companies from mediocre ones, I can say unequivocally: There are role models to learn from--albeit not the ones you might expect. It's what inspired me to go back to my research and assemble my list of the ten greatest CEOs of all time.
[via brknews]
I disagree. Having spent years studying what separates great companies from mediocre ones, I can say unequivocally: There are role models to learn from--albeit not the ones you might expect. It's what inspired me to go back to my research and assemble my list of the ten greatest CEOs of all time.
[via brknews]
Sunday, April 13, 2008
The Death of the American Billionaire
For the past decade, Forbes' billionaires list has been as American as apple pie. Gates and Buffett have vied for the top spot, typically followed by the likes of Paul Allen, Dell (Nasdaq: DELL) founder Michael Dell, Oracle (Nasdaq: ORCL) founder Larry Ellison, and Las Vegas Sands (NYSE: LVS) chairman Sheldon Adelson.
But in recent years, the upper echelons have been invaded by international businessmen who are growing their fortunes at an astonishing clip. In the past five years, Slim has increased his net worth eight-fold, thanks to the stellar performance of Latin American telecoms like America Movil (NYSE: AMX). With a fortune currently worth $60 billion, Slim has surpassed Gates and is nipping at Buffett's heels.
Meanwhile, a trio of Indian businessmen lurks behind Gates, poised to leapfrog into the top three slots. Over the past two years, shares of Luxembourg-based steelmaker ArcelorMittal (NYSE: MT) have doubled, helping CEO and 11% shareholder Lakshmi Mittal add $21 billion to his net worth.
As impressive as that feat may be, Mittal is hardly the greatest gainer of the past 24 months. That distinction belongs to Anil Ambani, who has increased his fortune from $5.7 billion to $42 billion in just two years through his ownership stake in India's Reliance Communications and Reliance Power. Anil clocks in as the sixth-richest person in the world, just behind his estranged brother, Mukesh Ambani.
The tremendous performance of international stocks has led to a seismic shift in the composition of Forbes' list. As recently as two years ago, 12 of the 25 richest people in the world were Americans. Now only four are.
But in recent years, the upper echelons have been invaded by international businessmen who are growing their fortunes at an astonishing clip. In the past five years, Slim has increased his net worth eight-fold, thanks to the stellar performance of Latin American telecoms like America Movil (NYSE: AMX). With a fortune currently worth $60 billion, Slim has surpassed Gates and is nipping at Buffett's heels.
Meanwhile, a trio of Indian businessmen lurks behind Gates, poised to leapfrog into the top three slots. Over the past two years, shares of Luxembourg-based steelmaker ArcelorMittal (NYSE: MT) have doubled, helping CEO and 11% shareholder Lakshmi Mittal add $21 billion to his net worth.
As impressive as that feat may be, Mittal is hardly the greatest gainer of the past 24 months. That distinction belongs to Anil Ambani, who has increased his fortune from $5.7 billion to $42 billion in just two years through his ownership stake in India's Reliance Communications and Reliance Power. Anil clocks in as the sixth-richest person in the world, just behind his estranged brother, Mukesh Ambani.
The tremendous performance of international stocks has led to a seismic shift in the composition of Forbes' list. As recently as two years ago, 12 of the 25 richest people in the world were Americans. Now only four are.
Friday, April 11, 2008
What actually happens in your brain when you invest?
Researchers from the fields of neuroscience, economics, and psychology — neuroeconomists — have been discovering the role that biology plays in financial decision-making and identifying why our brains can sometimes unwittingly stop us from making sound investment decisions.
Primal Emotions
Exploration into how the brain works and the emotional impact of investment decisions shows that if you’ve ever felt nervous when watching the price of an investment fall, you may have been receiving a message released by your amygdala, the part of your brain that initiates feelings of fear. The amygdala gives off adrenaline, which triggers our most primitive and protective response, preparing us for “fight or flight.” So while we typically no longer rely on our amygdala’s warning signals for our physical survival, it is still responsible for causing a sense of anxiety to arise when there is an expectation of a financial loss as well as when the market actually shifts.
Also, when faced with the prospect of achieving a positive outcome, certain neurons in the brain release dopamine, a neurotransmitter that regulates feelings of pleasure. The mere anticipation of making money on an investment could cause your brain to release this chemical — even more than when you truly realize the return on your assets.
Staying Centered
Neuroeconomists have found that the prefrontal cortex can help counter the amygdala’s impact and guide our thoughts and behavior as investors. The prefrontal cortex is the area of the brain responsible for evaluating the consequences of your actions: it is where people rationally weigh pros and cons. In effect, the prefrontal cortex can help you control impulsive messages sent from your amygdala by enabling you to concentrate, analyze concepts, and draw logical conclusions.
Smart Investing
To increase your chances of success as an investor, it may help to be aware of how primal emotions might influence the decisions we make and the actions we take regarding money. Understanding these instincts can enable your prefrontal cortex to form thoughtful judgments based on established investment strategies such as pursuing long-term goals and maintaining an appropriate asset allocation. As a result, we may be able to make more informed decisions—instead of allowing our primal emotions to guide our actions in a constantly changing market.
Source: Jason Zweig, Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich, 2007.
[from T. Rowe Price Investor, March 2008]
Primal Emotions
Exploration into how the brain works and the emotional impact of investment decisions shows that if you’ve ever felt nervous when watching the price of an investment fall, you may have been receiving a message released by your amygdala, the part of your brain that initiates feelings of fear. The amygdala gives off adrenaline, which triggers our most primitive and protective response, preparing us for “fight or flight.” So while we typically no longer rely on our amygdala’s warning signals for our physical survival, it is still responsible for causing a sense of anxiety to arise when there is an expectation of a financial loss as well as when the market actually shifts.
Also, when faced with the prospect of achieving a positive outcome, certain neurons in the brain release dopamine, a neurotransmitter that regulates feelings of pleasure. The mere anticipation of making money on an investment could cause your brain to release this chemical — even more than when you truly realize the return on your assets.
Staying Centered
Neuroeconomists have found that the prefrontal cortex can help counter the amygdala’s impact and guide our thoughts and behavior as investors. The prefrontal cortex is the area of the brain responsible for evaluating the consequences of your actions: it is where people rationally weigh pros and cons. In effect, the prefrontal cortex can help you control impulsive messages sent from your amygdala by enabling you to concentrate, analyze concepts, and draw logical conclusions.
Smart Investing
To increase your chances of success as an investor, it may help to be aware of how primal emotions might influence the decisions we make and the actions we take regarding money. Understanding these instincts can enable your prefrontal cortex to form thoughtful judgments based on established investment strategies such as pursuing long-term goals and maintaining an appropriate asset allocation. As a result, we may be able to make more informed decisions—instead of allowing our primal emotions to guide our actions in a constantly changing market.
Source: Jason Zweig, Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich, 2007.
[from T. Rowe Price Investor, March 2008]
Sunday, April 06, 2008
Morningstar's New Fair Value Uncertainty Rating
At Morningstar, we try to look at the future in a probabilistic way. Practically, that means we spend a lot of time thinking about the range of possible outcomes for the companies that we cover, even though the fair values we publish are, of necessity, point estimates. For example, we use scenario analysis and other tools to estimate a variety of fair values given different combinations of plausible future events.
To better reflect this aspect of our research process, we're replacing our business risk rating with a fair value uncertainty rating. Going forward, we'll rate every stock we cover as having low, medium, high, very high, or extreme uncertainty. In assigning the rating, we'll be asking ourselves, "How tightly can we bound the fair value of this company? With what level of confidence can we estimate its future cash flows?" If you have a background in statistics, you'll recognize that what we'll be doing is estimating the size of a confidence interval for the values of the companies we analyze.
To better reflect this aspect of our research process, we're replacing our business risk rating with a fair value uncertainty rating. Going forward, we'll rate every stock we cover as having low, medium, high, very high, or extreme uncertainty. In assigning the rating, we'll be asking ourselves, "How tightly can we bound the fair value of this company? With what level of confidence can we estimate its future cash flows?" If you have a background in statistics, you'll recognize that what we'll be doing is estimating the size of a confidence interval for the values of the companies we analyze.
Friday, March 28, 2008
Commodities: boom or bubble?
With commodity prices already at record highs, many people are predicting the resources boom is a bubble ready to burst spectacularly. The commodity sector is notoriously cyclical, and the time to buy is at the bottom of the cycle. We are surely closer to the top of the cycle than the bottom, traditionally seen as the time to sell.
But there are plenty of counterarguments, most of which focus on the insatiable Chinese growth story.
But there are plenty of counterarguments, most of which focus on the insatiable Chinese growth story.
Investing like a girl
So how exactly do women invest? Check out these characteristics of female investors that distinguish them from their male counterparts.
Women spend more time researching their investment choices than men do. This prevents them from chasing "hot" tips and trading on whims -- behavior that tends to weaken men's portfolios.
Men trade 45% more often than women do, and although men are more confident investors, they tend to be overconfident. By trading more often -- and without enough research -- men reduce their net returns. But by trading less often, women get better returns and also save on transaction costs and capital gains taxes.
A study by the University of California at Davis found that women's portfolios gained 1.4% more than men's portfolios did. What's more, single women did even better than single men, with 2.3% greater gains.
Women tend to look at more than just numbers when deciding whether to invest in a company. They invest in companies they feel good about ethically and personally. And companies with good products, good services, and ethics tend to have better long-term prospects -- and face fewer lawsuits.
Women spend more time researching their investment choices than men do. This prevents them from chasing "hot" tips and trading on whims -- behavior that tends to weaken men's portfolios.
Men trade 45% more often than women do, and although men are more confident investors, they tend to be overconfident. By trading more often -- and without enough research -- men reduce their net returns. But by trading less often, women get better returns and also save on transaction costs and capital gains taxes.
A study by the University of California at Davis found that women's portfolios gained 1.4% more than men's portfolios did. What's more, single women did even better than single men, with 2.3% greater gains.
Women tend to look at more than just numbers when deciding whether to invest in a company. They invest in companies they feel good about ethically and personally. And companies with good products, good services, and ethics tend to have better long-term prospects -- and face fewer lawsuits.
Bear Markets
The average bear market since 1940 lasted 386 calendar days (about 13 months) with an average peak-to-trough decline of roughly 30%. According to Bespoke Investment Group, historically, an average 74% of the bear market was complete (in terms of the number of days the bear market lasted) by the time the market hit official bear territory of –20%. In fact, three of the 11 bear markets (1948–1949, 1956–1957 and 2002) ended within 13 days of crossing the –20% threshold while just one hit –20% when the bear market was less than half over (1946–1947).
Getting back to breakeven was a longer path, but the range was wide around the average 1,177 days (3.2 years) it took the market to get back to its old highs. It took the least amount of time after the 1966 bear market and the longest after the most recent 2000–2002 bear market. And remember, the percentage increase on the way back up beats the percentage drop on the way down. After a 30% drop, a return to breakeven represents a 43% move higher. Panicking out at the bottom of bear markets means a lot of missed opportunity on the way back up.
[3/27/08] Beginning on March 6, the Dow lost 515 points over three days, followed by a 417 point surge the next day, then dropped 200 points a few days later, before soaring 420 points two days after that, only to lose nearly 300 points the next day, before jumping over 230 points the day after that!
If your head is spinning and you are wondering what to do now, you are not alone. Those two big 400+ point up days are often seen near market bottoms. In fact, 4 of the best 10 days from 1988-2007 came in the second half of 2002 as the 2000-2002 bear market was reaching its bottom. [via etrade]
Getting back to breakeven was a longer path, but the range was wide around the average 1,177 days (3.2 years) it took the market to get back to its old highs. It took the least amount of time after the 1966 bear market and the longest after the most recent 2000–2002 bear market. And remember, the percentage increase on the way back up beats the percentage drop on the way down. After a 30% drop, a return to breakeven represents a 43% move higher. Panicking out at the bottom of bear markets means a lot of missed opportunity on the way back up.
[3/27/08] Beginning on March 6, the Dow lost 515 points over three days, followed by a 417 point surge the next day, then dropped 200 points a few days later, before soaring 420 points two days after that, only to lose nearly 300 points the next day, before jumping over 230 points the day after that!
If your head is spinning and you are wondering what to do now, you are not alone. Those two big 400+ point up days are often seen near market bottoms. In fact, 4 of the best 10 days from 1988-2007 came in the second half of 2002 as the 2000-2002 bear market was reaching its bottom. [via etrade]
Wednesday, March 19, 2008
Bears Stearns bought for $2
Dow member JPMorgan (JPM $40 1) has acquired the fifth largest US investment bank Bear Stearns (BSC $4) for a dramatically low price of $2.00 per share, or about $236 million. According to the Wall Street Journal, Bear Stearns had a stock market value of $3.5 billion on Friday and was worth $20 billion in January 2007. The fire-sale price of the deal is related to the massive decrease in BSC's client confidence, which prompted a liquidity scare, forcing the brokerage firm to make a decision to sell the firm at any price or face bankruptcy. The Federal Reserve will also assume management of $30 billion of BSC's debt to help JPM finance the deal. A spokesman for China's CITIC Securities said it was unclear regarding the current situation between BSC and JPM and, as well as the prospects of its original proposed $1 billion investment in the struggling brokerage house.
[3/24/08] JPMorgan Chase (JPM $46 1) is reportedly in talks to raise its offer to buy Bear Stearns (BSC $6) from $2 per share to $10 per share in an effort to win over angry Bear Stearns shareholders, according to the New York Times. People familiar with the matter said the Federal Reserve, which must approve any new deal, has thus far balked at the latest price, in part because a sweetened offer may give critics ammunition to argue Bear's shareholders are being rescued. As a result, the Times said efforts to secure a renegotiated agreement could be delayed or collapse. BSC is up sharply. Neither of the parties involved commented.
[3/24/08] JPMorgan Chase (JPM $46 1) is reportedly in talks to raise its offer to buy Bear Stearns (BSC $6) from $2 per share to $10 per share in an effort to win over angry Bear Stearns shareholders, according to the New York Times. People familiar with the matter said the Federal Reserve, which must approve any new deal, has thus far balked at the latest price, in part because a sweetened offer may give critics ammunition to argue Bear's shareholders are being rescued. As a result, the Times said efforts to secure a renegotiated agreement could be delayed or collapse. BSC is up sharply. Neither of the parties involved commented.
Monday, March 10, 2008
Buffett overtakes Gates
Warren Buffett is the richest man on the planet.
Riding the surging price of Berkshire Hathaway (nyse: BRK - news - people ) stock, America's most beloved investor has seen his fortune swell to an estimated $62 billion, up $10 billion from a year ago. That massive pile of scratch puts him ahead of Microsoft co-founder Bill Gates, who was the richest man in the world for 13 straight years.
Gates is now worth $58 billion and is ranked third in the world. He is up $2 billion from a year ago, but would have been perhaps as rich--or richer--than Buffett had Microsoft not made an unsolicited bid for Yahoo! at the beginning of February.
Microsoft shares fell 15% between Jan. 31, the day before the company announced its bid for the search engine giant, and Feb. 11, the day we locked in stock prices for the 2008 World's Billionaires list. More than half of Gates' fortune is held outside of Microsoft shares.
Mexican telecom tycoon Carlos Slim Helú is the world's second-richest man, with an estimated net worth of $60 billion. His fortune has risen $11 billion since last March.
Despite Buffett's meteoric rise, his days as the World's Richest Man are almost certainly numbered. He had long promised to give away his fortune posthumously. But in the summer of 2006 he irrevocably earmarked the majority of his Berkshire shares to charity, most going to the Bill & Melinda Gates Foundation.
Riding the surging price of Berkshire Hathaway (nyse: BRK - news - people ) stock, America's most beloved investor has seen his fortune swell to an estimated $62 billion, up $10 billion from a year ago. That massive pile of scratch puts him ahead of Microsoft co-founder Bill Gates, who was the richest man in the world for 13 straight years.
Gates is now worth $58 billion and is ranked third in the world. He is up $2 billion from a year ago, but would have been perhaps as rich--or richer--than Buffett had Microsoft not made an unsolicited bid for Yahoo! at the beginning of February.
Microsoft shares fell 15% between Jan. 31, the day before the company announced its bid for the search engine giant, and Feb. 11, the day we locked in stock prices for the 2008 World's Billionaires list. More than half of Gates' fortune is held outside of Microsoft shares.
Mexican telecom tycoon Carlos Slim Helú is the world's second-richest man, with an estimated net worth of $60 billion. His fortune has risen $11 billion since last March.
Despite Buffett's meteoric rise, his days as the World's Richest Man are almost certainly numbered. He had long promised to give away his fortune posthumously. But in the summer of 2006 he irrevocably earmarked the majority of his Berkshire shares to charity, most going to the Bill & Melinda Gates Foundation.
Friday, March 07, 2008
January barometer
Does the weak start to the year portend a down year for the market in 2008? The so-called “January Barometer,” which posits that as January goes, so goes the year, would suggest that it does.
First recognized by Yale Hirsch in 1972, the January Barometer appears to be an especially good predictor when the market is up in January. In the 58 years since 1950, the S&P 500 has been up in January 37 times. Of those years, the S&P has been up for the year 34 times, or more than 90% of the time.
On the downside, the correlation is not as strong, but the market direction in January is still predictive of the direction of full-year results more often than not. In the 21 years since 1950 that the S&P 500 has been down in January, it has finished the full year down 12 times, or a little more than half the time.
When the market is very weak in January, as it was this year, the odds rise that the year itself will also be down. Following the 10 worst Januarys since 1950, the S&P 500 was down for the year seven times. Those are higher odds of a down year than we like to see.
On the other hand, in those same 10 worst Januarys, the S&P 500 was down an average of 5.5% for the month, but only down an average of 5.8% for the full year. So, most of the damage for the year was done in the first month, and from there, the market was about flat for the rest of the year.
First recognized by Yale Hirsch in 1972, the January Barometer appears to be an especially good predictor when the market is up in January. In the 58 years since 1950, the S&P 500 has been up in January 37 times. Of those years, the S&P has been up for the year 34 times, or more than 90% of the time.
On the downside, the correlation is not as strong, but the market direction in January is still predictive of the direction of full-year results more often than not. In the 21 years since 1950 that the S&P 500 has been down in January, it has finished the full year down 12 times, or a little more than half the time.
When the market is very weak in January, as it was this year, the odds rise that the year itself will also be down. Following the 10 worst Januarys since 1950, the S&P 500 was down for the year seven times. Those are higher odds of a down year than we like to see.
On the other hand, in those same 10 worst Januarys, the S&P 500 was down an average of 5.5% for the month, but only down an average of 5.8% for the full year. So, most of the damage for the year was done in the first month, and from there, the market was about flat for the rest of the year.
Saturday, March 01, 2008
Avoid these investment mistakes
Whether it's the Dutch tulip craze of the 17th century, the dot-com mania of the late 1990s, or the most recent rush into real estate, there's no shortage of examples of investors behaving irrationally.
In the world of traditional economists and finance professors, though, that's not supposed to happen. If investors are rational decision-makers, then emotion-driven bubbles shouldn't be possible. Yet human weaknesses can limit our ability to think clearly. Many studies of investor behavior have shown that investors are too willing to extrapolate recent trends far into the future, too confident in their abilities, and too quick (or not quick enough) to react to new information. These tendencies often lead investors to make decisions that run counter to their own best interests.
... According to several studies, overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade. And all that trading can be hazardous to your wealth, as University of California, Berkeley professors Brad Barber and Terrance Odean put it in their 2000 study of investor trading behavior. The study looked at approximately 66,000 households using a discount broker between 1991 and 1996 and found that individuals who trade frequently (with monthly turnover above 8.8%) earned a net annualized return of 11.4% over that time, while inactive accounts netted 18.5%. Investors who traded most often paid the most in brokerage commissions, taking a huge bite out of returns.
In the world of traditional economists and finance professors, though, that's not supposed to happen. If investors are rational decision-makers, then emotion-driven bubbles shouldn't be possible. Yet human weaknesses can limit our ability to think clearly. Many studies of investor behavior have shown that investors are too willing to extrapolate recent trends far into the future, too confident in their abilities, and too quick (or not quick enough) to react to new information. These tendencies often lead investors to make decisions that run counter to their own best interests.
... According to several studies, overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade. And all that trading can be hazardous to your wealth, as University of California, Berkeley professors Brad Barber and Terrance Odean put it in their 2000 study of investor trading behavior. The study looked at approximately 66,000 households using a discount broker between 1991 and 1996 and found that individuals who trade frequently (with monthly turnover above 8.8%) earned a net annualized return of 11.4% over that time, while inactive accounts netted 18.5%. Investors who traded most often paid the most in brokerage commissions, taking a huge bite out of returns.
Morningstar performance
[Pat Dorsey writes] As an investor, I have always valued candor very highly when assessing both CEOs and portfolio managers. So, I will be as candid as possible in reviewing the overall performance of our stock picks in 2007: We had a bad year. Our 5-star calls underperformed just about any relevant benchmark, and they also posted poor absolute returns.
Thursday, February 28, 2008
Bottom Fishing
Most finance academics believe in the “efficient market hypothesis,” which teaches that past stock price changes provide absolutely no information for forecasting future price changes. But just how true is this theory in practice? Is bottom-fishing really a viable strategy?
Fortunately, stock price data is readily available for analysis. Schwab’s equity research team has extensively studied the relationship of historical stock price changes to future stock price changes in markets around the world.
For the purposes of this article, we took the 3,000 largest U.S. stocks by market capitalization each month from 1990 to 2007 and divided them into five uniform portfolios, according to their price changes over the prior 12 months. We then measured portfolio returns over subsequent six-, 12- and 24-month holding periods relative to the 3,000-stock-universe average.
Are stocks that have performed poorly over the past year potential bargains? The graph “Give the Deep Divers Time to Resurface” reveals that the answer depends on your time horizon. Let’s focus on Portfolio 5: the 20% of stocks with the weakest past performance, underperforming the average stock by 30% or more over the prior year. Note: On average, Portfolio 5 stocks continued to underperform for the first six months after portfolio formation, but then eventually reversed and outperformed over a longer 24-month holding period.
This pattern suggests that investors tend to initially underreact to whatever caused the poor performance over the previous year, but then eventually overreact—leading to potential market-beating opportunities for bottom-fishing investors with a longer-term focus.
As a quick aside, these results certainly throw some cold water on the efficient market hypothesis. Past price performance trends tend to persist for holding periods up to six months, which suggests that price momentum can be a useful indicator for active traders.
Fortunately, stock price data is readily available for analysis. Schwab’s equity research team has extensively studied the relationship of historical stock price changes to future stock price changes in markets around the world.
For the purposes of this article, we took the 3,000 largest U.S. stocks by market capitalization each month from 1990 to 2007 and divided them into five uniform portfolios, according to their price changes over the prior 12 months. We then measured portfolio returns over subsequent six-, 12- and 24-month holding periods relative to the 3,000-stock-universe average.
Are stocks that have performed poorly over the past year potential bargains? The graph “Give the Deep Divers Time to Resurface” reveals that the answer depends on your time horizon. Let’s focus on Portfolio 5: the 20% of stocks with the weakest past performance, underperforming the average stock by 30% or more over the prior year. Note: On average, Portfolio 5 stocks continued to underperform for the first six months after portfolio formation, but then eventually reversed and outperformed over a longer 24-month holding period.
This pattern suggests that investors tend to initially underreact to whatever caused the poor performance over the previous year, but then eventually overreact—leading to potential market-beating opportunities for bottom-fishing investors with a longer-term focus.
As a quick aside, these results certainly throw some cold water on the efficient market hypothesis. Past price performance trends tend to persist for holding periods up to six months, which suggests that price momentum can be a useful indicator for active traders.
Saturday, February 16, 2008
Dow 18,500?
We [Morningstar] think the Dow Jones Industrial Average will rise more than 6,000 points to roughly 18,500 over the next three years.
How We Arrived at That Estimate
The Dow was trading at a very hefty 17% discount to our estimate of its fair value, which stood at around 14,000 as of Feb. 7, 2008. We base that fair value estimate on the fair value estimates that our equity analysts have placed on the Dow's 30 component stocks. The Dow hasn't looked this cheap to us since September 2002 when the index stood at 7,592 (three years later it had risen to 10,569).
When we take the Dow's market price and fair value estimate together with its 9.7% weighted average cost of equity (our analysts assign a percentage cost of equity to every stock they cover, including all of the Dow's components), it translates to a 17% annualized expected return. In other words, this is the return an investor would reap if the prices of the Dow's components converged to our fair value estimates over a three-year holding period (not ad infinitum).
To isolate the Dow's expected price return--which is what directly influences the index's value--we deducted the benchmark's 2.2% dividend yield from the 17% annualized return we derived. When we compound the Dow's closing value on Feb. 7 by this 14.8% annualized price return, we arrive at an 18,510 index value.
How We Arrived at That Estimate
The Dow was trading at a very hefty 17% discount to our estimate of its fair value, which stood at around 14,000 as of Feb. 7, 2008. We base that fair value estimate on the fair value estimates that our equity analysts have placed on the Dow's 30 component stocks. The Dow hasn't looked this cheap to us since September 2002 when the index stood at 7,592 (three years later it had risen to 10,569).
When we take the Dow's market price and fair value estimate together with its 9.7% weighted average cost of equity (our analysts assign a percentage cost of equity to every stock they cover, including all of the Dow's components), it translates to a 17% annualized expected return. In other words, this is the return an investor would reap if the prices of the Dow's components converged to our fair value estimates over a three-year holding period (not ad infinitum).
To isolate the Dow's expected price return--which is what directly influences the index's value--we deducted the benchmark's 2.2% dividend yield from the 17% annualized return we derived. When we compound the Dow's closing value on Feb. 7 by this 14.8% annualized price return, we arrive at an 18,510 index value.
Tuesday, February 12, 2008
Changes in the Dow
Dow Jones announced yesterday that it will be replacing two
stocks in its Dow Jones Industrial Average effective Feb 19.
Altria Group (MO) and Honeywell International (HON) will be
replaced with Bank of America (BAC) and Chevron (CVX).
This is the first change in the average since April 2004. The
move reflects the desire of Dow Jones to increase the
concentration of financial service and energy in its
benchmark. In addition, Altria is spinning off its
international operations next month. [via Zacks.com]
stocks in its Dow Jones Industrial Average effective Feb 19.
Altria Group (MO) and Honeywell International (HON) will be
replaced with Bank of America (BAC) and Chevron (CVX).
This is the first change in the average since April 2004. The
move reflects the desire of Dow Jones to increase the
concentration of financial service and energy in its
benchmark. In addition, Altria is spinning off its
international operations next month. [via Zacks.com]
Sunday, February 10, 2008
Estate Planning terminology
Lots of you have wills. Many of you also have trusts and powers of attorney. But, in general, when the subject of estate planning comes up, most people's eyes just glaze over. The terminology is confusing and the subject is, well, depressing.
I can't make the subject matter any more palatable, but I can help with the terminology.
-- By Sue Stevens, CFA, CFP, CPA
I can't make the subject matter any more palatable, but I can help with the terminology.
-- By Sue Stevens, CFA, CFP, CPA
Wednesday, February 06, 2008
Taming Financial Clutter
My name is Dayana, and I have a paperwork problem.
Now that that's out of the way, we can all deal with our piles of shame -- the money-related detritus (those gobs of receipts, bank records, investing statements, warranties, and whatnots) we've been stashing in closets, drawers, and basements for (I admit) years.
Based on the number of decluttering books in the "Get Organized" aisle at the bookstore, there's no shortage of advice on controlling the torrent of items that stack up every day. So let's heed the organizational pros and apply their advice to our financial clutter. For this exercise, I'm using the five steps that author Julie Morgenstern outlines in her popular organization book, Organizing From the Inside Out.
Now that that's out of the way, we can all deal with our piles of shame -- the money-related detritus (those gobs of receipts, bank records, investing statements, warranties, and whatnots) we've been stashing in closets, drawers, and basements for (I admit) years.
Based on the number of decluttering books in the "Get Organized" aisle at the bookstore, there's no shortage of advice on controlling the torrent of items that stack up every day. So let's heed the organizational pros and apply their advice to our financial clutter. For this exercise, I'm using the five steps that author Julie Morgenstern outlines in her popular organization book, Organizing From the Inside Out.
Monday, February 04, 2008
Five Sure Things
Each quarter, the Forbes Investors Advisory Institute under President Wallace Forbes hosts a financial round-table discussion to sample the economic and investment outlooks of some of the best and brightest minds on Wall Street.
The most recent discussion was held on Jan. 8 at Forbes headquarters in New York City. Below are the transcribed and edited remarks of Henry Mercer, president of Mercer Capital Advisors.
...
I'm getting older now, so I only invest in sure things. I don't invest in things that only "might" work out. So let me give you five sure things.
Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year.
The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies. And of course, if the dollar is weak, that's an inflationary phenomenon because the United States, having dismantled its manufacturing establishment, is dependent on foreign goods for our survival. This is something people aren't sufficiently worried about.
Cotton is going to be the commodity of choice because the world's standard of living is increasing, and the places where it's increasing fastest are warm, and they don't wear wool; they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing, and that's all you have to know.
Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the 7% that they did last year.
As far as stocks are concerned, I think that my investment ideas follow some of my thesis. Our portfolio is very heavily overseas, but we're in the agricultural area with Potash Corporation of Saskatchewan (nyse: POT - news - people ) and a lot of energy stocks--large caps such as Schlumberger (nyse: SLB - news - people ), smaller caps such as National Oilwell Varco (nyse: NOV - news - people ) and Ultra Petroleum (amex: UPL - news - people ). In technology, Qualcomm (nasdaq: QCOM - news - people ). Finally, in adult education we think that a lot of people will be laid off and they'll be trying to improve their skills so we would buy the Apollo Group (nasdaq: APOL - news - people ).
The most recent discussion was held on Jan. 8 at Forbes headquarters in New York City. Below are the transcribed and edited remarks of Henry Mercer, president of Mercer Capital Advisors.
...
I'm getting older now, so I only invest in sure things. I don't invest in things that only "might" work out. So let me give you five sure things.
Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year.
The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies. And of course, if the dollar is weak, that's an inflationary phenomenon because the United States, having dismantled its manufacturing establishment, is dependent on foreign goods for our survival. This is something people aren't sufficiently worried about.
Cotton is going to be the commodity of choice because the world's standard of living is increasing, and the places where it's increasing fastest are warm, and they don't wear wool; they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing, and that's all you have to know.
Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the 7% that they did last year.
As far as stocks are concerned, I think that my investment ideas follow some of my thesis. Our portfolio is very heavily overseas, but we're in the agricultural area with Potash Corporation of Saskatchewan (nyse: POT - news - people ) and a lot of energy stocks--large caps such as Schlumberger (nyse: SLB - news - people ), smaller caps such as National Oilwell Varco (nyse: NOV - news - people ) and Ultra Petroleum (amex: UPL - news - people ). In technology, Qualcomm (nasdaq: QCOM - news - people ). Finally, in adult education we think that a lot of people will be laid off and they'll be trying to improve their skills so we would buy the Apollo Group (nasdaq: APOL - news - people ).
Friday, February 01, 2008
the greatest secret to investment riches
David Gardner reveals the greatest secret to easy riches in the stock market.
Finding good companies and holding those positions tenaciously over time can yield multiples upon multiples of your original investment. That's what great investors do.
Finding good companies and holding those positions tenaciously over time can yield multiples upon multiples of your original investment. That's what great investors do.
The best time to invest
Consider John Templeton, founder of Templeton Growth Fund and widely regarded as one of the best investors of his generation. His advice about getting into the market is simple: "The best time to invest is when you have money. This is because history suggests it is not timing which matters, it is time."
Monday, January 28, 2008
Bill Gates and capitalism
Gates highlighted some fundamental problems with capitalism, including how innovation and technological advancement create an ever-growing economic disparity between the bottom third and the rest of the world's population. When businesses earn more profits in regions that are already economically stable, innovation tends to bypass the world's poor.
In what he calls "creative capitalism," Gates hopes to banish some of this disconnect by encouraging a new system of business. This new system would promote economic incentives for global powers to have a bigger presence in areas of the world stricken by disease and poverty, particularly Africa. When doing business there would not present profitable opportunities, using a company's reputation to pull in money is one way to use the marketplace to help the poor.
In what he calls "creative capitalism," Gates hopes to banish some of this disconnect by encouraging a new system of business. This new system would promote economic incentives for global powers to have a bigger presence in areas of the world stricken by disease and poverty, particularly Africa. When doing business there would not present profitable opportunities, using a company's reputation to pull in money is one way to use the marketplace to help the poor.
Tuesday, January 22, 2008
Get the Most Out of an Annual Report
Some annual reports are pretty, color-filled documents that, although helpful, function more as a marketing and communications tool than anything else. What you really want to dig into is the annual 10-K, the boring (and, at times, long) black-and-white document containing the information that public companies must file with the SEC.
Friday, January 11, 2008
eating your own cooking
According to a study recently published in The Journal of Financial Economics, there is a direct correlation between the amount of money a mutual fund manager has invested in his fund and its performance. No huge surprise there, particularly if you've spent any time reading about the importance of "eating your own cooking."
But wait, it gets better. The study cites that the amount a manager invests in his fund is the most accurate indicator of how well the fund will perform over time.
But wait, it gets better. The study cites that the amount a manager invests in his fund is the most accurate indicator of how well the fund will perform over time.
Tuesday, December 25, 2007
Real Men
Too much testosterone can cloud our financial judgment.
Back in June, The Economist discussed a study that proves it. In the experiment, subjects played a simple game in which pairs of players divided and received money from a central pot. One player would propose how to split the pot -- and the other player would decide whether to accept -- for instance, $35 for the splitter and, $5 for the decider. If the decider accepted, both took their cuts. If the decider refused, neither got any money.
An economically rational decider would always accept the offer, no matter how low, because any payoff is more than zero. In practice, something gets in the way, and deciders will sometimes rather take nothing at all than accept an offer considered too low.
Here's where it gets interesting. In this version of the experiment, the players' testosterone levels were checked, and those with higher levels of testosterone were more likely to reject the low-ball offers of money. According to The Economist, "The responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer, but only one of the 19 others made the same decision."
In short, too much testosterone got in the way of their making the most obvious, and profitable, financial decision.
Back in June, The Economist discussed a study that proves it. In the experiment, subjects played a simple game in which pairs of players divided and received money from a central pot. One player would propose how to split the pot -- and the other player would decide whether to accept -- for instance, $35 for the splitter and, $5 for the decider. If the decider accepted, both took their cuts. If the decider refused, neither got any money.
An economically rational decider would always accept the offer, no matter how low, because any payoff is more than zero. In practice, something gets in the way, and deciders will sometimes rather take nothing at all than accept an offer considered too low.
Here's where it gets interesting. In this version of the experiment, the players' testosterone levels were checked, and those with higher levels of testosterone were more likely to reject the low-ball offers of money. According to The Economist, "The responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer, but only one of the 19 others made the same decision."
In short, too much testosterone got in the way of their making the most obvious, and profitable, financial decision.
Thursday, December 20, 2007
Jeff Mortimer: Lessons From the Trenches
My first big lesson was during the crash of 1987. I remember sitting next to a Quotron, watching tick by tick as clients’ money just melted away. The calls were pouring in. Many clients wanted to bail. But the reality was, it was too late to sell. “Stay put,” we told them. “Don’t panic. This market will rebound. If you panic and sell now, you’ll miss out.” In fact, two years later, the market was back. If you had sat tight, you’d have weathered the storm.
When everyone else is losing their heads, you’ve got to keep yours. And it’s as true in up markets as in down. Remember 2000, when tech-heavy investors insisted there would be no end to the bull run? They refused to rebalance their portfolios. They pushed their bets, and when the bubble popped, those portfolios suffered.
The key is discipline. You’ve got to think like a fiduciary of your own assets. Make your investment plan and stick to it. Be unemotional.
When everyone else is losing their heads, you’ve got to keep yours. And it’s as true in up markets as in down. Remember 2000, when tech-heavy investors insisted there would be no end to the bull run? They refused to rebalance their portfolios. They pushed their bets, and when the bubble popped, those portfolios suffered.
The key is discipline. You’ve got to think like a fiduciary of your own assets. Make your investment plan and stick to it. Be unemotional.
Wednesday, November 28, 2007
bear and bull cycles
Since 1950, there have been eight declines greater than 20% in the S&P 500. At their worst, the S&P 500 declines since 1950 have twice shrunk the market value of the index by nearly half. The grueling 21-month bear market that began in 1973 cut the index by more than 48% before the beginning of next bull market.
Fortunately, bear markets are only half of the cycle, and a much smaller half at that. The bull phases average over four times the length of the bear phases. And the average gain of 165.7% is a hefty reward for enduring the 33.2% average decline during the bear campaigns.
Fortunately, bear markets are only half of the cycle, and a much smaller half at that. The bull phases average over four times the length of the bear phases. And the average gain of 165.7% is a hefty reward for enduring the 33.2% average decline during the bear campaigns.
The Greatest Investment Quotes of All Time
Some of the most profound, insightful thoughts in business aren't that complicated. Heck, a lot of them are clear as day. You might be surprised at how much you can take away from something as simple as a one-line quote.
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
-- Warren Buffett
"Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise."
-- Marty Whitman
"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."
-- Warren Buffett
"The four most expensive words in the English language are, 'This time it's different.'"
-- Sir John Templeton
"The stock market is filled with individuals who know the price of everything, but the value of nothing."
-- Philip Fisher
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
-- Warren Buffett
"Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise."
-- Marty Whitman
"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."
-- Warren Buffett
"The four most expensive words in the English language are, 'This time it's different.'"
-- Sir John Templeton
"The stock market is filled with individuals who know the price of everything, but the value of nothing."
-- Philip Fisher
Morningstar's Perspective
Some of the strategies in managing Morningstar StockInvestor's Tortoise and Hare portfolios are definitely not in sync with academia or conventional wisdom.
Saturday, November 24, 2007
Blaine Lourd
Blaine Lourd got rich picking stocks. but then he realized that everything he thought he knew about the markets was wrong.
[via brknews]
[via brknews]
Thursday, November 15, 2007
Three Questions
Before making an investment, I think all investors needs to ask themselves the following three questions.
Morningstar projects a 14% return
Let's cut right to the chase: Our research suggests that SPDRs Trust (SPY), an ETF that tracks the S&P 500 Index, will return 14% annualized over the next three years.
Lest you wonder which hat we pulled that number out of, rest assured that there were no wands or seers involved. And because top-down macro forecasting isn't our bag (what…you were expecting the second coming of Bill Gross?), we kept the focus squarely on the stocks in front of us.
As it turns out, that's a lot of stocks--we cover 2,000 companies, including more than 450 of the S&P 500's constituent holdings. Therefore, we can harness the work that our analysts do in evaluating company fundamentals, such as the presence and durability of competitive advantages each business might boast. That work culminates in a fair value estimate that our analysts place on each stock they cover. We can roll up the fair value estimates that our analysts have placed on the S&P 500's holdings and, voilà !, come up with a fair value estimate for the index as a whole (1,626.80 as of Nov. 7).
But how does that get us to an expected return? We ordinarily expect a stock's price to converge to fair value over a three-year time horizon. Assuming that we compound our fair value estimate at the cost of equity--which is the minimum compensation that we demand for owning a stock--the expected return represents the return that will cause the stock's price to converge to fair value at some point in the future, not to exceed three years.
Lest you wonder which hat we pulled that number out of, rest assured that there were no wands or seers involved. And because top-down macro forecasting isn't our bag (what…you were expecting the second coming of Bill Gross?), we kept the focus squarely on the stocks in front of us.
As it turns out, that's a lot of stocks--we cover 2,000 companies, including more than 450 of the S&P 500's constituent holdings. Therefore, we can harness the work that our analysts do in evaluating company fundamentals, such as the presence and durability of competitive advantages each business might boast. That work culminates in a fair value estimate that our analysts place on each stock they cover. We can roll up the fair value estimates that our analysts have placed on the S&P 500's holdings and, voilà !, come up with a fair value estimate for the index as a whole (1,626.80 as of Nov. 7).
But how does that get us to an expected return? We ordinarily expect a stock's price to converge to fair value over a three-year time horizon. Assuming that we compound our fair value estimate at the cost of equity--which is the minimum compensation that we demand for owning a stock--the expected return represents the return that will cause the stock's price to converge to fair value at some point in the future, not to exceed three years.
Wednesday, November 07, 2007
Seven Traits of Great Investors
Marks Sellers writes there are at least seven traits great investors share that are true sources of advantage. Unfortunately he also believes that they can't be learned once a person reaches adulthood. And "In fact, some of them can't be learned at all; you're either born with them or you aren't."
Saturday, October 27, 2007
Value vs. Glamour revisited
As described in our "Value vs. Glamour" studies, value stocks have outperformed growth stocks over the long term. But what about commonly used benchmarks? Over the long term, aren't returns for growth and value indices about the same?
This is a research report by the Brandes Institute.
This is a research report by the Brandes Institute.
Thursday, October 25, 2007
which investment style?
Morningstar looked at the performance of broad investment styles over time to see if a particular style had done a better job at helping investors meet this goal. A clear pattern emerged.
One style stood out from the pack. Ibbotson Associates has shown that value stocks have outperformed other styles by a wide margin since 1927. And they've done so consistently, beating all other styles in nearly every decade over the past 80 years. But because of active management and fees, stock performance doesn't always translate into fund performance. In this case it does. More than 70% of value funds topped the Dow Jones Wilshire 5000 in the trailing 10- and 15-year periods. That's a much better record than domestic-equity funds in general, and growth and blend funds in particular.
One style stood out from the pack. Ibbotson Associates has shown that value stocks have outperformed other styles by a wide margin since 1927. And they've done so consistently, beating all other styles in nearly every decade over the past 80 years. But because of active management and fees, stock performance doesn't always translate into fund performance. In this case it does. More than 70% of value funds topped the Dow Jones Wilshire 5000 in the trailing 10- and 15-year periods. That's a much better record than domestic-equity funds in general, and growth and blend funds in particular.
Wednesday, October 24, 2007
David Swensen
[5/26/09] Consuelo Mack interview with David Swensen
[11/26/07] Wisdom from the World's Second-Best Investor
[10/24/07] Yale University has long been renowned for its prowess in the classroom, but it's certainly no slouch in the investing realm, either. In fact, its giant $22.5 billion endowment notched an impressive 28% gain in its most recent fiscal year ending June 2007. And over the past decade, it returned nearly 18% annually, the best showing of any college endowment in the nation. By contrast, the S&P 500 was up only 7% over that period.
The brain behind it all is longtime Yale endowment chief David Swensen. Swensen's route to investment success at Yale has been unconventional (hence the aptly named title of his most-recent book, Unconventional Success). When Yale appointed him to his post in 1985, most college endowments, including Yale's, stuck to a plain-vanilla mix of stocks and bonds. But Swensen believed Yale's portfolio wasn't diversified enough and eventually built stakes in what are now known as alternative investments--private equity (investments in companies that aren't public), hedge funds, and real assets, such as timber, real estate, and oil--that don't move in step with the stock market or each other. Broadening the portfolio beyond stocks and bonds would moderate volatility, Swensen thought. And by mining less-followed areas, he and his analysts would have a better shot at unearthing undiscovered gems.
That plan of attack couldn't be more different than the one advocated by financial planners.
* * *
IN RECENT YEARS investors have eyed burgeoning Ivy League endowments like high school seniors applying to Harvard and Yale with weak grade point averages, low SAT scores and no extracurricular activities: zero chance of getting in. Can you blame them for being envious? In the year that ended June 2006, Yale notched a 22.9% return for a gain of $3.4 billion. Even more impressive is its consistency. Over the past 10 years, which included the market meltdown of 2000 to 2002, Yale has had annualized gains of 17.2%. Harvard, meanwhile, earned a 16.7% return in fiscal 2006 and boasts a 10-year average of over 15%. Of course, Harvard and Yale have long enjoyed formidable advantages, starting with immense wealth and prestige. Even other institutions, many with endowments in the billions of dollars, have been hard-pressed to keep up, let alone individual investors.
Surprisingly, that may be beginning to change. We've taken a close look at these endowments and at the new investment vehicles now available to the rest of us. Our conclusion: Even average investors can mimic Harvard or Yale in their portfolio, with access to some of the Ivy League's most exclusive and esoteric asset classes. We'll show you how and illustrate our method with a model portfolio.
[11/26/07] Wisdom from the World's Second-Best Investor
[10/24/07] Yale University has long been renowned for its prowess in the classroom, but it's certainly no slouch in the investing realm, either. In fact, its giant $22.5 billion endowment notched an impressive 28% gain in its most recent fiscal year ending June 2007. And over the past decade, it returned nearly 18% annually, the best showing of any college endowment in the nation. By contrast, the S&P 500 was up only 7% over that period.
The brain behind it all is longtime Yale endowment chief David Swensen. Swensen's route to investment success at Yale has been unconventional (hence the aptly named title of his most-recent book, Unconventional Success). When Yale appointed him to his post in 1985, most college endowments, including Yale's, stuck to a plain-vanilla mix of stocks and bonds. But Swensen believed Yale's portfolio wasn't diversified enough and eventually built stakes in what are now known as alternative investments--private equity (investments in companies that aren't public), hedge funds, and real assets, such as timber, real estate, and oil--that don't move in step with the stock market or each other. Broadening the portfolio beyond stocks and bonds would moderate volatility, Swensen thought. And by mining less-followed areas, he and his analysts would have a better shot at unearthing undiscovered gems.
That plan of attack couldn't be more different than the one advocated by financial planners.
* * *
IN RECENT YEARS investors have eyed burgeoning Ivy League endowments like high school seniors applying to Harvard and Yale with weak grade point averages, low SAT scores and no extracurricular activities: zero chance of getting in. Can you blame them for being envious? In the year that ended June 2006, Yale notched a 22.9% return for a gain of $3.4 billion. Even more impressive is its consistency. Over the past 10 years, which included the market meltdown of 2000 to 2002, Yale has had annualized gains of 17.2%. Harvard, meanwhile, earned a 16.7% return in fiscal 2006 and boasts a 10-year average of over 15%. Of course, Harvard and Yale have long enjoyed formidable advantages, starting with immense wealth and prestige. Even other institutions, many with endowments in the billions of dollars, have been hard-pressed to keep up, let alone individual investors.
Surprisingly, that may be beginning to change. We've taken a close look at these endowments and at the new investment vehicles now available to the rest of us. Our conclusion: Even average investors can mimic Harvard or Yale in their portfolio, with access to some of the Ivy League's most exclusive and esoteric asset classes. We'll show you how and illustrate our method with a model portfolio.
Saturday, October 20, 2007
John D. Rockefeller
John D. Rockefeller is the wealthiest man the world has ever known. On inflation-adjusted terms, Rockefeller's early-20th-century fortune is estimated by Forbes to be more than $300 billion today -- roughly five times the wealth of today's richest man, Carlos Slim.
Rockefeller quickly learned that the fastest and easiest way to make money was to sell "real" products that every household needed. When he discovered that crude oil could be refined into kerosene, a high-quality illuminating oil for lamps (automobiles and their need for gasoline would come later), Rockefeller saw the opportunity to help every U.S. family light up its house and jumped into the oil business in 1863.
Rockefeller quickly learned that the fastest and easiest way to make money was to sell "real" products that every household needed. When he discovered that crude oil could be refined into kerosene, a high-quality illuminating oil for lamps (automobiles and their need for gasoline would come later), Rockefeller saw the opportunity to help every U.S. family light up its house and jumped into the oil business in 1863.
Monday, October 15, 2007
Sound Investing and Peaceful Sleep
by Ben Stein [via wakywakyisha@chucks_angels]
INVEST FOR THE LONG HAUL If you are a smart long-term investor, do not pay any attention to short-term developments. They are often reported by people whose motivation may be to scare you (screaming about the subprime “crisis”) or to make you giddily greedy (screaming about that one certain stock you should buy to retire rich).
Some articles may scare you into selling, or not buying, at the wrong time, because the worse things are, and the worse the mood of speculators, the better the time to buy. Or some may motivate you to buy in excess — sort of like drinking in excess — at exactly the wrong, “irrationally exuberant” time. The people who write some of these articles often know very little about markets, are way too young to have learned much, have no money to invest anyway or just like to act like big shots with your money.
In the very long run, stock prices plus dividends (in the postwar period) have rewarded patient, long-term, careful accumulation of broad indexes, mutual funds, exchange-traded funds and variable annuities (with a careful eye on fees). They have not rewarded short-term trading. Such trading based on tips seen on television shows — even shows whose hosts are true comic geniuses with bald heads — or read in magazines can be potentially disastrous. The short term is no place for the ordinary investor to trade.
INVEST FOR THE LONG HAUL If you are a smart long-term investor, do not pay any attention to short-term developments. They are often reported by people whose motivation may be to scare you (screaming about the subprime “crisis”) or to make you giddily greedy (screaming about that one certain stock you should buy to retire rich).
Some articles may scare you into selling, or not buying, at the wrong time, because the worse things are, and the worse the mood of speculators, the better the time to buy. Or some may motivate you to buy in excess — sort of like drinking in excess — at exactly the wrong, “irrationally exuberant” time. The people who write some of these articles often know very little about markets, are way too young to have learned much, have no money to invest anyway or just like to act like big shots with your money.
In the very long run, stock prices plus dividends (in the postwar period) have rewarded patient, long-term, careful accumulation of broad indexes, mutual funds, exchange-traded funds and variable annuities (with a careful eye on fees). They have not rewarded short-term trading. Such trading based on tips seen on television shows — even shows whose hosts are true comic geniuses with bald heads — or read in magazines can be potentially disastrous. The short term is no place for the ordinary investor to trade.
Saturday, October 13, 2007
What's the market worth?
According the Morningstar, the Dow is 6.4% undervalued and the S&P 500 is 4.2% undervalued.
Friday, October 12, 2007
P/E expansion and contraction
Vitaliy Katsenelson writes in "Active Value Investing"
...I wanted to see what would happen to the average P/E of each quintile if I bought each quintile in the beginning of the range-bound market (January 1966) and sold it at the end in December 1982...The highest-P/E quintile exhibited a P/E compression of 50.3 percent. The P/E of the average stock dropped from 29.3 in 1966 to 14.6 in 1982. That portfolio generated a total annual return of 8.6 percent. The lowest-P/E quintile to my surprise had a P/E expansion of 34.8 percent. Yes, you read it right. The P/E of the average stock in my lowest-P/E quintile actually went up from 11.8 to 15.8 throughout the range-bound market. That portfolio produced a nice bull market-like total annual return of 14.16 percent...
see also
Tweedy Browne's What Has Worked In Investing (page 23)
According to What Works on Wall Street, low PERs worked well with big stocks, but not with small stocks.
...I wanted to see what would happen to the average P/E of each quintile if I bought each quintile in the beginning of the range-bound market (January 1966) and sold it at the end in December 1982...The highest-P/E quintile exhibited a P/E compression of 50.3 percent. The P/E of the average stock dropped from 29.3 in 1966 to 14.6 in 1982. That portfolio generated a total annual return of 8.6 percent. The lowest-P/E quintile to my surprise had a P/E expansion of 34.8 percent. Yes, you read it right. The P/E of the average stock in my lowest-P/E quintile actually went up from 11.8 to 15.8 throughout the range-bound market. That portfolio produced a nice bull market-like total annual return of 14.16 percent...
see also
Tweedy Browne's What Has Worked In Investing (page 23)
According to What Works on Wall Street, low PERs worked well with big stocks, but not with small stocks.
Wednesday, October 10, 2007
Reminiscences of the 1987 Crash
Fast-forward 20 years later, and here we sit, facing the crash's 20th anniversary. It's no wonder the history books are out and comparisons are being made between today's environment and that of two decades ago. Yes, it's natural to reminisce on anniversaries, but the comparisons between then and now are somewhat eerie. However, a resultant prediction of a pending crash would still be difficult to make, notwithstanding the chart below showing the simple Dow chart patterns for the two periods.
You have probably seen this chart, as it's made its way into many an investment blog and newsletter. What many fail to add, however, is that although the price movement comparison is quite similar, the percentage change for the two periods is not at all similar.
You have probably seen this chart, as it's made its way into many an investment blog and newsletter. What many fail to add, however, is that although the price movement comparison is quite similar, the percentage change for the two periods is not at all similar.
Wednesday, October 03, 2007
Panic No. 12
David Dreman 10.15.07, 12:00 AM ET
The capital markets have suffered mightily in the mortgage meltdown. Mortgage-backed securities--whether backed by nasty subprime loans, slightly better Alt A ones or even highly rated borrowings, have sunk. Junk bonds, often linked to MBSs, are hard to float. Private equity deals, frenetic not so long ago, are iffy now that high-yield funding is harder and costlier to provide.
That has introduced intense fear to stock- and fixed-income investors worldwide. Despite the Federal Reserve's half-point reduction in mid-September, there's still a lurking suspicion that more bad news lies ahead. What will happen when all those adjustable-rate mortgages reset upward in months to come, plunging more strapped homeowners into default? Are we approaching a financial meltdown that will take everything, including the stock market, into a dizzying drop not seen since the bear market of 2000--02?
Yes, it's bad now and could take many months to unwind, hurting swarms of investors who were suckered into going for sky-high returns of MBSs without examining the ridiculously poor security behind them. Ditto some of the convoluted securities that bundle them called collateralized debt obligations. The mortgage problem also could put a dent into economic growth for a while. But as all good value investors know, dire times bring opportunities. The long-term trend of the stock market is up.
Since coming to Wall Street in the late 1960s, I have been through seven such crises. Somehow, the market survived them and thrived. Look back even further to the period following the end of World War II, and sure enough, you'll find that pattern holding in four more market spills. Beginning with the first postwar panic, resulting from the 1948--49 Berlin blockade, stocks have tumbled only to come roaring back to new highs. The worst market break came in 1973--74, during a nasty recession and the Arab oil embargo. The most recent was the dot-com slide, which began in March 2000 and ended in late 2002. The Nasdaq Composite, heavy with tech names, still has not regained the ground lost in that crash, but the broad indexes have.
During each crisis investors felt confused, uncertain and panicky. They believed nothing in their previous experience could help them cope with the ominous new world they faced. "Sell, sell, sell," their inner worrywarts advised. "Save your capital before it's too late."
This almost always turned out to be a bad move. Selling in a crisis is foolish. Yes, if you had sold the S&P 500, say, a year into the bear market, in March 2001, you would have avoided another 28% decline before it hit bottom. But would you have had the wisdom to get back into stocks a year and a half later? I don't know of anyone advising an exit in March 2001 who also switched to a bullish stance in fall 2002. And if you had sold in March 2001, and stayed out, you would have missed an opportunity. Since then the stock market has returned 46% (including dividends). On average, for each of the dozen crises, the market was up 36% one year after the low point, 44% after two years.
Today's stock market remains solid with good fundamentals and many cheap stocks at hand. The ongoing liquidity crisis must be handled gingerly, of course. Commit your capital slowly as several more shocks must be absorbed before a broad market rally begins.
The capital markets have suffered mightily in the mortgage meltdown. Mortgage-backed securities--whether backed by nasty subprime loans, slightly better Alt A ones or even highly rated borrowings, have sunk. Junk bonds, often linked to MBSs, are hard to float. Private equity deals, frenetic not so long ago, are iffy now that high-yield funding is harder and costlier to provide.
That has introduced intense fear to stock- and fixed-income investors worldwide. Despite the Federal Reserve's half-point reduction in mid-September, there's still a lurking suspicion that more bad news lies ahead. What will happen when all those adjustable-rate mortgages reset upward in months to come, plunging more strapped homeowners into default? Are we approaching a financial meltdown that will take everything, including the stock market, into a dizzying drop not seen since the bear market of 2000--02?
Yes, it's bad now and could take many months to unwind, hurting swarms of investors who were suckered into going for sky-high returns of MBSs without examining the ridiculously poor security behind them. Ditto some of the convoluted securities that bundle them called collateralized debt obligations. The mortgage problem also could put a dent into economic growth for a while. But as all good value investors know, dire times bring opportunities. The long-term trend of the stock market is up.
Since coming to Wall Street in the late 1960s, I have been through seven such crises. Somehow, the market survived them and thrived. Look back even further to the period following the end of World War II, and sure enough, you'll find that pattern holding in four more market spills. Beginning with the first postwar panic, resulting from the 1948--49 Berlin blockade, stocks have tumbled only to come roaring back to new highs. The worst market break came in 1973--74, during a nasty recession and the Arab oil embargo. The most recent was the dot-com slide, which began in March 2000 and ended in late 2002. The Nasdaq Composite, heavy with tech names, still has not regained the ground lost in that crash, but the broad indexes have.
During each crisis investors felt confused, uncertain and panicky. They believed nothing in their previous experience could help them cope with the ominous new world they faced. "Sell, sell, sell," their inner worrywarts advised. "Save your capital before it's too late."
This almost always turned out to be a bad move. Selling in a crisis is foolish. Yes, if you had sold the S&P 500, say, a year into the bear market, in March 2001, you would have avoided another 28% decline before it hit bottom. But would you have had the wisdom to get back into stocks a year and a half later? I don't know of anyone advising an exit in March 2001 who also switched to a bullish stance in fall 2002. And if you had sold in March 2001, and stayed out, you would have missed an opportunity. Since then the stock market has returned 46% (including dividends). On average, for each of the dozen crises, the market was up 36% one year after the low point, 44% after two years.
Today's stock market remains solid with good fundamentals and many cheap stocks at hand. The ongoing liquidity crisis must be handled gingerly, of course. Commit your capital slowly as several more shocks must be absorbed before a broad market rally begins.