If there were a Bad Trade Hall of Fame, Brian Hunter would have just secured himself a prominent spot.
Losing $5 billion in a week will do that.
Hunter lost that amount earlier this month, according to The Wall Street Journal, making big, risky bets on natural gas prices for coming winters.
Monday, September 25, 2006
Friday, September 22, 2006
The Trader's bell curve
Writes Price Headley, "MOST OF YOUR TRADES ARE GOING TO BE MEDIOCRE AT BEST. The huge homeruns are few and far between. But, you'll have enough of them over time to generate some big profits."
Thursday, September 21, 2006
hot stock tips
[9/25/06] The title of a paper by Laura Frieder and Jonathan Zittrain gets right to the point: “Spam Works: Evidence from Stock Touts and Corresponding Market Activity.”
Incredibly, while Internet users will readily delete emails touting Free Medz and good deals on V-i-a-g/ra, investors have plenty of time to read the email touts, find the ticker symbol, and buy the touted stock.
The authors reviewed a sample of Pink Sheet stocks touted in more than 75,000 emails. After all that number crunching, they concluded that the stocks went up on heavy volume the day they were touted. Stocks also showed unusual strength the day before the spamming as the spammers were no doubt buying into the names they were about to blast around the Internet. In the days following the big spam day, the stocks went down as the spammers continued selling and volume from new buyers dried up.
[9/21/06] According to a recent study of more than 1.8 million investment spam messages by Laura Frieder of Purdue University and Jonathon Zittrain of the University of Oxford, the purpose of investing spam is to provide enough liquidity for those touting the stock to sell their shares at a profit. For the hypesters, average returns from the day before the spam was sent to the day of heaviest touting was as much as 6%. What if you were one of the ones who received the spam and decided to "take a flyer" when you got the email? Your average loss would be as much as 8%.
[4/19/06] Have you ever wondered if you're missing out on a great investment opportunity by NOT investing in the "hot" stock tips you receive in your e-mailbox?
Joshua Cyr decided to find out. On May 5, 2005, he decided to track what would happen if he purchased 1000 shares of every stock for which he received a hot stock tip via spam.
Naturally, he didn't actually waste money on this experiment. Instead, he just pretended to buy the stocks and kept track of their value on a website he created (so he never actually bought the stocks). He simply tracked what would have happened if he had actually purchased these stocks based on the stock tips.
Joshua expected that he'd get temporary, short-term windfalls on all these stocks and then see big losses. What he found instead surprised him. Almost ALL of the stocks went up a few cents at most, and then dropped dramatically the next day. So, no short term windfalls.
Joshua tracks the stocks real time at his site, so you can see how he's doing at any moment.
Incredibly, while Internet users will readily delete emails touting Free Medz and good deals on V-i-a-g/ra, investors have plenty of time to read the email touts, find the ticker symbol, and buy the touted stock.
The authors reviewed a sample of Pink Sheet stocks touted in more than 75,000 emails. After all that number crunching, they concluded that the stocks went up on heavy volume the day they were touted. Stocks also showed unusual strength the day before the spamming as the spammers were no doubt buying into the names they were about to blast around the Internet. In the days following the big spam day, the stocks went down as the spammers continued selling and volume from new buyers dried up.
[9/21/06] According to a recent study of more than 1.8 million investment spam messages by Laura Frieder of Purdue University and Jonathon Zittrain of the University of Oxford, the purpose of investing spam is to provide enough liquidity for those touting the stock to sell their shares at a profit. For the hypesters, average returns from the day before the spam was sent to the day of heaviest touting was as much as 6%. What if you were one of the ones who received the spam and decided to "take a flyer" when you got the email? Your average loss would be as much as 8%.
[4/19/06] Have you ever wondered if you're missing out on a great investment opportunity by NOT investing in the "hot" stock tips you receive in your e-mailbox?
Joshua Cyr decided to find out. On May 5, 2005, he decided to track what would happen if he purchased 1000 shares of every stock for which he received a hot stock tip via spam.
Naturally, he didn't actually waste money on this experiment. Instead, he just pretended to buy the stocks and kept track of their value on a website he created (so he never actually bought the stocks). He simply tracked what would have happened if he had actually purchased these stocks based on the stock tips.
Joshua expected that he'd get temporary, short-term windfalls on all these stocks and then see big losses. What he found instead surprised him. Almost ALL of the stocks went up a few cents at most, and then dropped dramatically the next day. So, no short term windfalls.
Joshua tracks the stocks real time at his site, so you can see how he's doing at any moment.
Wednesday, September 20, 2006
The Presidential Election Cycle
[9/20/06 Keith Fitz-Gerald] In case you’re not familiar with it, the Presidential Effect suggests that the second year of any president’s term, regardless of party affiliation, is the least productive in terms of how the financial markets move. Years three and four, on the other hand, are the better performing ones and are typically made possible by all of the free money promises that get made during the election process by both parties. These promises then get translated into market gains.
According to the Stock Trader’s Almanac, the 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28%. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6%).
On average, since 1914, the Dow has jumped a whopping 50% from the bottom it hits in the second year to the top in the third year. This bounce ties in with other statistics that show the second and third years of the four-year cycle tend to be the best for stock markets as the party in power gears up for the following year’s election by trying to keep investors happy.
[7/5/06] Martin Zweig makes this observation in the Zweig Fund quarterly report.
"Based on statistics, there may be trouble ahead of the market. According to Standard and Poor's, the S&P 500 Index has lost 2% on average in second quarters of second years of presidential terms since 1945. Third quarters show average losses of 2.2%. Given the historically weaker mid-year trend, we will proceed cautiously."
[3/31/06] as the first quarter of 2006 ends stocks are smack in the midst of what is notoriously the most dangerous year of the U.S. political cycle -- Year Two of a presidential term. Of the 12 declining years endured by the Standard & Poor's 500 Index since 1960, a check of my Bloomberg indicates, six occurred in the second year of a presidential administration. Those included the punishing declines of 24 percent in 2002, 30 percent in 1974, and 13 percent in 1966.
On top of that, we're nearing the part of any year, from the end of April through October, that has gained a reputation as most difficult for stocks. Recall the boardroom adage, ``Sell in May and go away.''
[3/29/06] Liz Ann Sonders takes a look at the current presidential cycle.
[3/22/06] Looking ahead, there is one slight possible negative for the market relating to the presidential election cycle. Statistically, the postelection year and the mid-term year, which we are now in, have not been great years. Based on historical performance, the next pre-election year (2007) and election year (2008) would turn out to be better years according to this cycle.
While we are not strongly supportive of this particular thesis, data going back to 1949 indicates a significant market bottom occurs about every four years. Our last market bottom was in 2002 and it’s possible we may experience the next bottom in 2006. However, we are far from convinced that this will be the case.
-- Martin Zweig in the Zweig Fund annual report
[11/17/04] Several studies purportedly show that presidential elections do indeed affect the stock market and that the best times to own stocks are the two years before an election. Conversely, stocks apparently do not do as well during the first two years of a presidential term. One study, for example, shows that from 1941 to 1995, every bear market but one has occurred in the first or second year of a president's term; none have occurred during the last year, right before an election.
According to the Stock Trader’s Almanac, the 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28%. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6%).
On average, since 1914, the Dow has jumped a whopping 50% from the bottom it hits in the second year to the top in the third year. This bounce ties in with other statistics that show the second and third years of the four-year cycle tend to be the best for stock markets as the party in power gears up for the following year’s election by trying to keep investors happy.
[7/5/06] Martin Zweig makes this observation in the Zweig Fund quarterly report.
"Based on statistics, there may be trouble ahead of the market. According to Standard and Poor's, the S&P 500 Index has lost 2% on average in second quarters of second years of presidential terms since 1945. Third quarters show average losses of 2.2%. Given the historically weaker mid-year trend, we will proceed cautiously."
[3/31/06] as the first quarter of 2006 ends stocks are smack in the midst of what is notoriously the most dangerous year of the U.S. political cycle -- Year Two of a presidential term. Of the 12 declining years endured by the Standard & Poor's 500 Index since 1960, a check of my Bloomberg indicates, six occurred in the second year of a presidential administration. Those included the punishing declines of 24 percent in 2002, 30 percent in 1974, and 13 percent in 1966.
On top of that, we're nearing the part of any year, from the end of April through October, that has gained a reputation as most difficult for stocks. Recall the boardroom adage, ``Sell in May and go away.''
[3/29/06] Liz Ann Sonders takes a look at the current presidential cycle.
[3/22/06] Looking ahead, there is one slight possible negative for the market relating to the presidential election cycle. Statistically, the postelection year and the mid-term year, which we are now in, have not been great years. Based on historical performance, the next pre-election year (2007) and election year (2008) would turn out to be better years according to this cycle.
While we are not strongly supportive of this particular thesis, data going back to 1949 indicates a significant market bottom occurs about every four years. Our last market bottom was in 2002 and it’s possible we may experience the next bottom in 2006. However, we are far from convinced that this will be the case.
-- Martin Zweig in the Zweig Fund annual report
[11/17/04] Several studies purportedly show that presidential elections do indeed affect the stock market and that the best times to own stocks are the two years before an election. Conversely, stocks apparently do not do as well during the first two years of a presidential term. One study, for example, shows that from 1941 to 1995, every bear market but one has occurred in the first or second year of a president's term; none have occurred during the last year, right before an election.
Strategy Performance
Validea has been keeping model portfolios of their various strategies since 2003. Leading the way is their Validea Hot List, followed closely by Martin Zweig and David Dreman [link from screenvestor of MFI, 9/18/06]
AAII has backtested various stock screens going back to 1998. Zweig is second again. O'Shaughnessy's Tiny Titans leads the way. [link from Michael Gallagher of MFI, 9/14/06]
AAII has backtested various stock screens going back to 1998. Zweig is second again. O'Shaughnessy's Tiny Titans leads the way. [link from Michael Gallagher of MFI, 9/14/06]
Saturday, September 16, 2006
Bears
[9/15/96] (Mauldin writes] The market, my various mentors have all told me, is designed to cause the most pain to the largest number of people. And while I am not in pain, the recent move up in the various market indices is certainly not in keeping with my thoughts that the economy is going to slow down and thus should exert downward pressure on the equity markets. Has the world transitioned to a kinder, gentler Mr. Market?
... this statistic from Paul Robinson: What happens when you have 3-plus years without a 10% correction in either the S&P 500 or DJIA? On March 15th, 2006 the market sustained 3 full years without a substantial sell-off from a 6-month high. This long a bull run has occurred only 3 other times in the past 100-plus years of market history and led to an average decline of 18.5% between the 3 occurrences.
In summary, I think it is too early to throw in my bearish towel. A slowdown means that earnings are not going to grow as fast as currently projected. That means some disappointments may (will?) be coming our way in the next few quarters.
Disappointments are the stuff that makes for bear markets.
[7/27/06, via investwise] Dr. Marc Faber says "Most asset markets including stocks and commodities are extremely overbought, and there is far too much speculation in all investment markets. Therefore, severe downside volatility, also in precious metals, should not be surprising in the period directly ahead.
... we can say that, yes, the Dow has been in a bull market since October 2002 in dollar terms, but it has been in a bear market in gold terms. This is an important point to understand. In case we should experience continuous monetary inflation, which could lift, over time, all asset prices such as stocks, real estate, and commodities, some asset classes will increase more in value than others."
* * *
[6/15/06] There are market bears--and then there's Barry Ritholtz. Some might call him one of the grizzliest forecasters on the Street. Although the Dow Jones Industrial Average came close to its all-time high of 11,722.98 earlier this year, Ritholtz expects the Dow to finish the year at 6,800. He's also forecasting that the Standard & Poor's 500 Index and Nasdaq will lose more than 25%.
[via investwise]
* * *
But even Ritholtz may not be as bearish as Doug Casey who believes that another depression is practically inevitable. On the bright side, he hasn't totally given up hope. "Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it's done."
... this statistic from Paul Robinson: What happens when you have 3-plus years without a 10% correction in either the S&P 500 or DJIA? On March 15th, 2006 the market sustained 3 full years without a substantial sell-off from a 6-month high. This long a bull run has occurred only 3 other times in the past 100-plus years of market history and led to an average decline of 18.5% between the 3 occurrences.
In summary, I think it is too early to throw in my bearish towel. A slowdown means that earnings are not going to grow as fast as currently projected. That means some disappointments may (will?) be coming our way in the next few quarters.
Disappointments are the stuff that makes for bear markets.
[7/27/06, via investwise] Dr. Marc Faber says "Most asset markets including stocks and commodities are extremely overbought, and there is far too much speculation in all investment markets. Therefore, severe downside volatility, also in precious metals, should not be surprising in the period directly ahead.
... we can say that, yes, the Dow has been in a bull market since October 2002 in dollar terms, but it has been in a bear market in gold terms. This is an important point to understand. In case we should experience continuous monetary inflation, which could lift, over time, all asset prices such as stocks, real estate, and commodities, some asset classes will increase more in value than others."
* * *
[6/15/06] There are market bears--and then there's Barry Ritholtz. Some might call him one of the grizzliest forecasters on the Street. Although the Dow Jones Industrial Average came close to its all-time high of 11,722.98 earlier this year, Ritholtz expects the Dow to finish the year at 6,800. He's also forecasting that the Standard & Poor's 500 Index and Nasdaq will lose more than 25%.
[via investwise]
* * *
But even Ritholtz may not be as bearish as Doug Casey who believes that another depression is practically inevitable. On the bright side, he hasn't totally given up hope. "Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it's done."
Tuesday, September 12, 2006
Current Account Balances
This is an interesting list from the CIA world fact book:A Rank Order of Current Account Balances...
http://tinyurl.com/eseet
[from chucks_angels]
[9/14/06] [Bill Bonner writes] Fallen into our hands is a report from the CIA, ranking nations in order of their current account balance. The current account, we remind readers, is like the operating statement of a business or an individual. Income must exceed outflow or your upkeep is your downfall. The difference between what comes in and what goes out, if it is positive, accumulates as though it were a profit. If it is negative, it builds up - but not necessarily, in the form of debt.
Last in line are the nations of the Anglo-Saxon, English-speaking debt-based empire! New Zealand has a deficit of nearly $10 billion. Then, South Africa...and India...and Australia all have deficits too. Among the major former colonies of the British Empire, only Canada seems to have any sense. It runs a surplus. The others are all debtors. The UK itself is third from the bottom with a $57 billion negative current account balance.
For no reason we can think of, the penultimate on the list is Spain. And then comes the worst of all...the United States of America, with a current account balance of a minus $829 billion.
Add up all the deficits of the entire world and you get a figure barely half of the U.S. total.
The U.S. economy makes up a quarter of the world total...that it should have more than half of the world's current account deficits is a spectacular success - only made possible by its great wealth and status.
[I guess that's one way of looking at it.]
http://tinyurl.com/eseet
[from chucks_angels]
[9/14/06] [Bill Bonner writes] Fallen into our hands is a report from the CIA, ranking nations in order of their current account balance. The current account, we remind readers, is like the operating statement of a business or an individual. Income must exceed outflow or your upkeep is your downfall. The difference between what comes in and what goes out, if it is positive, accumulates as though it were a profit. If it is negative, it builds up - but not necessarily, in the form of debt.
Last in line are the nations of the Anglo-Saxon, English-speaking debt-based empire! New Zealand has a deficit of nearly $10 billion. Then, South Africa...and India...and Australia all have deficits too. Among the major former colonies of the British Empire, only Canada seems to have any sense. It runs a surplus. The others are all debtors. The UK itself is third from the bottom with a $57 billion negative current account balance.
For no reason we can think of, the penultimate on the list is Spain. And then comes the worst of all...the United States of America, with a current account balance of a minus $829 billion.
Add up all the deficits of the entire world and you get a figure barely half of the U.S. total.
The U.S. economy makes up a quarter of the world total...that it should have more than half of the world's current account deficits is a spectacular success - only made possible by its great wealth and status.
[I guess that's one way of looking at it.]
Thursday, September 07, 2006
How To Lose Money
It sounds contrary, but understanding how you lose money is what will make you a successful investor. Because you will lose money.
There are three ways of thinking when it comes to losers. Two of them will help you retire to a life of leisure; the other will help you retire to a life of dog food.
There are three ways of thinking when it comes to losers. Two of them will help you retire to a life of leisure; the other will help you retire to a life of dog food.
Wednesday, September 06, 2006
Two Fools
The Motley Fool hosted its first teleseminar, an event in which Fool co-founders David and Tom Gardner, along with GreenLight masters Shannon Zimmerman and Dayana Yochim, spoke to 1,000 Fools nationwide and shared their Foolish wisdom on the art and science of buying and selling.
Getting Started: What To Look For
How to determine when the price is right
Going against the grain
Emotions and investing
Getting Started: What To Look For
How to determine when the price is right
Going against the grain
Emotions and investing
What Is Value Investing?
[From DEEPWEALTH:]<!- via investwise -->
In a great book and a must-read for investors, “What is Value Investing?”, the author, Lawrence A. Cunningham, writes about the many traditions of value investing.
“Value investing is partly a state of mind. It is characterized by habitually relating the price of a stock to the value of the underlying business. Basic principles of fundamental analysis are the tools. They arise from three traditions.
Benjamin Graham's margin of safety principle is the first one. It requires assurance that a stock's price is substantially below its estimated value. The test requires conducting a full business analysis. To begin, value investors use simple filters that narrow the range of candidates to those that an investor understands and can evaluate (commonly known as a circle of competence).
John Burr Williams refined value investing's second core tradition. This quantitative tradition requires estimating a company's intrinsic value measured by the present value of its probable future cash flows, conservatively estimated using current data. This principle captures the intuition that a dollar in hand today is worth more than a dollar paid in the future.
Philip A. Fisher added value investing's third tradition. This qualitative tradition requires the diligent investor to find a company exhibiting strong long-term prospects. These are indicated by characteristics creating a business franchise, such as consumer loyalty, unmatched brand-name recognition, and formidable market power. Also relevant are high-quality managers who can be counted on to channel the franchise's rewards to the company's shareholders.
Warren E. Buffett is the consummate and best-known integrator of these three traditions. Buffett practices a comprehensive method of value investing. He refers to the exercise simply as investing, viewing the modifier "value" as redundant. Other disciples weight the components differently, producing a range of value investing styles. All are united by appreciating the difference between price and value.
In a great book and a must-read for investors, “What is Value Investing?”, the author, Lawrence A. Cunningham, writes about the many traditions of value investing.
“Value investing is partly a state of mind. It is characterized by habitually relating the price of a stock to the value of the underlying business. Basic principles of fundamental analysis are the tools. They arise from three traditions.
Benjamin Graham's margin of safety principle is the first one. It requires assurance that a stock's price is substantially below its estimated value. The test requires conducting a full business analysis. To begin, value investors use simple filters that narrow the range of candidates to those that an investor understands and can evaluate (commonly known as a circle of competence).
John Burr Williams refined value investing's second core tradition. This quantitative tradition requires estimating a company's intrinsic value measured by the present value of its probable future cash flows, conservatively estimated using current data. This principle captures the intuition that a dollar in hand today is worth more than a dollar paid in the future.
Philip A. Fisher added value investing's third tradition. This qualitative tradition requires the diligent investor to find a company exhibiting strong long-term prospects. These are indicated by characteristics creating a business franchise, such as consumer loyalty, unmatched brand-name recognition, and formidable market power. Also relevant are high-quality managers who can be counted on to channel the franchise's rewards to the company's shareholders.
Warren E. Buffett is the consummate and best-known integrator of these three traditions. Buffett practices a comprehensive method of value investing. He refers to the exercise simply as investing, viewing the modifier "value" as redundant. Other disciples weight the components differently, producing a range of value investing styles. All are united by appreciating the difference between price and value.
Tuesday, September 05, 2006
Centenarian looks overseas
Aug. 30 (Bloomberg) -- Albert H. Gordon took over Kidder, Peabody & Co. in 1931, turned it into an underwriting leader on Wall Street, and saw opportunities overseas before many rivals.
He's still looking abroad at the age of 105.
After eight decades as an executive and investor that spanned from the roaring 1920s to the age of terrorism, Gordon says he's ``bearish'' on U.S. stocks partly because of the $8.41 trillion national debt. He prefers shares of companies such as Canada's EnCana Corp., Wal-Mart de Mexico SA de CV and Petroleo Brasileiro SA.
``At least three-quarters of whatever I own is foreign stocks,'' he says from his Manhattan apartment overlooking the East River.
He's still looking abroad at the age of 105.
After eight decades as an executive and investor that spanned from the roaring 1920s to the age of terrorism, Gordon says he's ``bearish'' on U.S. stocks partly because of the $8.41 trillion national debt. He prefers shares of companies such as Canada's EnCana Corp., Wal-Mart de Mexico SA de CV and Petroleo Brasileiro SA.
``At least three-quarters of whatever I own is foreign stocks,'' he says from his Manhattan apartment overlooking the East River.
we've struck oil
NEW YORK (CNNMoney.com) -- Chevron and its partners have successfully extracted oil from a test well in the deep waters of the Gulf of Mexico, an achievement that could be the biggest breakthrough in domestic oil supplies since the opening of the Alaskan pipeline.
The news sent oil prices lower, with U.S. light crude for October delivery sinking 69 cents to $68.50 on the New York Mercantile Exchange.
The announcement helped dampen fears that oil supplies would be swamped by growing global demand, a concern that helped lift oil to record highs this summer, unadjusted for inflation.
But experts cautioned that relief at the pump from the breakthrough is many years away.
The news sent oil prices lower, with U.S. light crude for October delivery sinking 69 cents to $68.50 on the New York Mercantile Exchange.
The announcement helped dampen fears that oil supplies would be swamped by growing global demand, a concern that helped lift oil to record highs this summer, unadjusted for inflation.
But experts cautioned that relief at the pump from the breakthrough is many years away.
Saturday, September 02, 2006
Reading between those for-sale signs
The latest housing numbers seem like they could be a turning point. A real estate crash might not be the most likely outcome, but it certainly seems legitimate to think about what one would look like.
Wednesday, August 30, 2006
buy low or buy high?
[1/28/07] A stock trading near its 52-week high may not seem like much of a bargain. But research suggests it may still add plenty of value to your portfolio.
That's because stocks near their highs tend to climb still higher over the next six to 12 months. (The reverse is also true: Stocks near their 52-week lows tend to slide lower.)
The main reason for this phenomenon: The market usually underreacts to good news when a stock is near its 52-week high. That's because investors who are taught to "buy low and sell high" get skittish as stocks near their recent peaks and - in the short run - they hesitate to bid up prices furthers. But the reluctance doesn't last forever.
"Eventually the impact of the news wins out and the stock's price trends up," says Thomas George, a finance professor at the University of Houston's Bauer College of Business. Dr. George and colleague Chuan-Yang Hwang pioneered research about the 52-week high as a predictor of future performance.
Greg Forsythe, senior vice president of equity ratings at Charles Schwab, says his clients are just as reluctant as many professional traders to buy stocks near their recent peaks. His response, in some cases: The stock price may be higher than it was a few months ago, "but it's low relative to where it should be."
Mr. Forsythe urged clients to consider selected stocks near their highs in a November 2005 newsletter. He picked eight stocks that had Schwab's highest rating for potential outperformance - based on factors including earnings quality and valuation - and that were close to their recent peaks. Over the following twelve months, the group of stocks gained 22%, compared with the Dow Jones Industrial Average's 13% advance for the same period.
The accompanying table lists five stocks that last week held Schwab's top rating and were near their 52-week highs.
There are some "momentum" investors - on the lookout for companies with recent outsidezed stock returns - who do use 52-week highs to spot possible targets. And, to be sure, some stocks near their 52-week highs may be unattractive and overpriced relative to the companies' earnings and prospects. For instance, stocks near their 52-week highs that have Schwab's lowest ratings include Las-Vegas-based station Casinos (STN) and auto-parts company Amerigon (ARGN).
Proximity to the high is perhaps best used as a tiebreaker that helps investors choose among a handful of stocks with good potential. If you have three equally attractive stocks, the one closest to its high is likely to be a "better performer and to perform more quickly" than the others, says Schwab's Mr. Forsythe.
[8/30/06] What goes down tends to go down some more.
This has been shown in several studies that are sliced, diced, and summarized by noted NYU finance professor Aswath Damodaran in Chapter 8 of his book Investment Fables.
In these studies, when you measure time in terms of months, stocks that have gone up tend to keep going up. In other words, winners keep winning. And vice-versa. So when people advise you not to try to "catch a falling knife," they're not being silly -- they're playing the smart odds.
However, when time is measured in terms of years, the contrarian strategy begins to pay off. Oft-referenced work by Fama and French found that the contrarian strategy is far more successful for five-year returns than for one-year returns. Moreover, it works better for smaller companies than large ones.
* * *
[8/25/06] Barry Ritholtz at The Big Picture had a recent comment about never buying a 52 week low. As you might expect, such absolutes simply don’t exist in trading.
Here’s fellow RealMoney.com columnist James “quant-jock” Altucher’s take:
I took all Nasdaq 100 stocks since 1996, including stocks that have been deleted from the index (to avoid survivorship bias). What happens if you buy stocks hitting 52-week lows that are trading for greater than $5 (avoiding penny stocks) and sell them one quarter later?
The results actually demonstrate that, over this period, the odds were on your side to outperform the market if you bought stocks at 52-week lows. The average return per trade was 7.34% (over 662 trades), including wins and losses. This far outperforms the average return per quarter of the Nasdaq during this period of 2.6%.
Some 60% of the trades turned out favorably and 40% were failures.
This would seem to run counter to O'Shaughnessy's What Works On Wall Street which found that buying stocks with the worst 1-year price performance turned out to be the worst strategy in the whole book.
The difference could be the universe of stocks looked at. Altucher looked at the Nasdaq 100 while O'Shaughnessy used the CompuState database which had about 3500 stocks on average. It could well be that the smaller companies chosen had a higher percentage of companies headed for bankruptcy. The "Large Stocks" did decidedly better that the All Stocks universe, but still underperformed the Large Stock universe.
* * *
What Works on Wall Street (Chapter 15) looked at stocks with the best and worst 1-year price changes.
The stocks with the best 1-year price appreciation outperformed the All Stock universe by 2-to-1.
The stocks with the worst 1-year price appreciation widely underperformed the All Stock universe beating it only 11 of the 43 years reviewed and only once on 39 5-year periods.
Conclusion: buy the stocks with the best 1-year relative strength.
* * *
However another study found that the momentum strategy is a relatively short effect, the biggest gains were over the next year. Momentum doesn't seem to affect the stock after a year.
* * *
Tweedy Browne's study What Has Worked In Investing (page 43) cites a study which the 35 worse and 35 best performing stocks over the last five years. The worst performing stocks over the preceding five-year period produced average cumulative returns of 18% in excess of the market index 17 months after portfolio formation, a compound annual return in excess of the market index of 12.2%. The best performing stocks over the preceding five years produced average cumulative returns of about 6% less than the market index after 17 months, a compounded annual negative return of 4.3% versus the market index.
* * *
In summary, the above studies indicate that buy high works in the short term (about a 1 year period), while buy low works in the longer term.
-- written up after the Tweedy Browne study was uploaded at magicformulainvesting
* * *
[5/28/06] In the June 2006 SmartMoney, Jaack Hough cites a study by George and Hwang which looked at stocks within 5 percent of their 52-week highs and lows (rather than the top six month gainers and losers that the Jagadeesh and Titman study looked at). This would for example exclude stocks that was up 60% for six months though it has backed off 15% from the high. Again, these stock beat the overall market but "strong returns kept rolling in for at least five years".
I'd say this strategy would have worked quite well in 1998 and 1999, but pretty poorly in 2000. So value would have to figure in somewhere.
Hough looked at stocks with PEG <= 1 and trading within 5% of their 52-week highs. The screen came out with the following stocks. ABK (79.70), ACO (28.28), PLCE (56.22), DFG (51.00), EBF (19.38), GS (158.12), KAI (22.37), LEH (144.82), NE (81.44).
That's because stocks near their highs tend to climb still higher over the next six to 12 months. (The reverse is also true: Stocks near their 52-week lows tend to slide lower.)
The main reason for this phenomenon: The market usually underreacts to good news when a stock is near its 52-week high. That's because investors who are taught to "buy low and sell high" get skittish as stocks near their recent peaks and - in the short run - they hesitate to bid up prices furthers. But the reluctance doesn't last forever.
"Eventually the impact of the news wins out and the stock's price trends up," says Thomas George, a finance professor at the University of Houston's Bauer College of Business. Dr. George and colleague Chuan-Yang Hwang pioneered research about the 52-week high as a predictor of future performance.
Greg Forsythe, senior vice president of equity ratings at Charles Schwab, says his clients are just as reluctant as many professional traders to buy stocks near their recent peaks. His response, in some cases: The stock price may be higher than it was a few months ago, "but it's low relative to where it should be."
Mr. Forsythe urged clients to consider selected stocks near their highs in a November 2005 newsletter. He picked eight stocks that had Schwab's highest rating for potential outperformance - based on factors including earnings quality and valuation - and that were close to their recent peaks. Over the following twelve months, the group of stocks gained 22%, compared with the Dow Jones Industrial Average's 13% advance for the same period.
The accompanying table lists five stocks that last week held Schwab's top rating and were near their 52-week highs.
Cigna (CI) $130The case for buying stocks near their highs may seem counterintuitive, especially since investors are usually counseled not to chase performance when it comes to individual mutual funds and fund categories - high-yield bonds, for example, or technology stocks. But the research shows individual stocks that are near their highs can sustain that momentum through the next 12 months.
Hasbro (HAS) $28
Hewlett-Packard (HPQ) $42
International Business Machines IBM) $97
Prudential Financial (PRU) $88
There are some "momentum" investors - on the lookout for companies with recent outsidezed stock returns - who do use 52-week highs to spot possible targets. And, to be sure, some stocks near their 52-week highs may be unattractive and overpriced relative to the companies' earnings and prospects. For instance, stocks near their 52-week highs that have Schwab's lowest ratings include Las-Vegas-based station Casinos (STN) and auto-parts company Amerigon (ARGN).
Proximity to the high is perhaps best used as a tiebreaker that helps investors choose among a handful of stocks with good potential. If you have three equally attractive stocks, the one closest to its high is likely to be a "better performer and to perform more quickly" than the others, says Schwab's Mr. Forsythe.
[8/30/06] What goes down tends to go down some more.
This has been shown in several studies that are sliced, diced, and summarized by noted NYU finance professor Aswath Damodaran in Chapter 8 of his book Investment Fables.
In these studies, when you measure time in terms of months, stocks that have gone up tend to keep going up. In other words, winners keep winning. And vice-versa. So when people advise you not to try to "catch a falling knife," they're not being silly -- they're playing the smart odds.
However, when time is measured in terms of years, the contrarian strategy begins to pay off. Oft-referenced work by Fama and French found that the contrarian strategy is far more successful for five-year returns than for one-year returns. Moreover, it works better for smaller companies than large ones.
* * *
[8/25/06] Barry Ritholtz at The Big Picture had a recent comment about never buying a 52 week low. As you might expect, such absolutes simply don’t exist in trading.
Here’s fellow RealMoney.com columnist James “quant-jock” Altucher’s take:
I took all Nasdaq 100 stocks since 1996, including stocks that have been deleted from the index (to avoid survivorship bias). What happens if you buy stocks hitting 52-week lows that are trading for greater than $5 (avoiding penny stocks) and sell them one quarter later?
The results actually demonstrate that, over this period, the odds were on your side to outperform the market if you bought stocks at 52-week lows. The average return per trade was 7.34% (over 662 trades), including wins and losses. This far outperforms the average return per quarter of the Nasdaq during this period of 2.6%.
Some 60% of the trades turned out favorably and 40% were failures.
This would seem to run counter to O'Shaughnessy's What Works On Wall Street which found that buying stocks with the worst 1-year price performance turned out to be the worst strategy in the whole book.
The difference could be the universe of stocks looked at. Altucher looked at the Nasdaq 100 while O'Shaughnessy used the CompuState database which had about 3500 stocks on average. It could well be that the smaller companies chosen had a higher percentage of companies headed for bankruptcy. The "Large Stocks" did decidedly better that the All Stocks universe, but still underperformed the Large Stock universe.
* * *
What Works on Wall Street (Chapter 15) looked at stocks with the best and worst 1-year price changes.
The stocks with the best 1-year price appreciation outperformed the All Stock universe by 2-to-1.
The stocks with the worst 1-year price appreciation widely underperformed the All Stock universe beating it only 11 of the 43 years reviewed and only once on 39 5-year periods.
Conclusion: buy the stocks with the best 1-year relative strength.
* * *
However another study found that the momentum strategy is a relatively short effect, the biggest gains were over the next year. Momentum doesn't seem to affect the stock after a year.
* * *
Tweedy Browne's study What Has Worked In Investing (page 43) cites a study which the 35 worse and 35 best performing stocks over the last five years. The worst performing stocks over the preceding five-year period produced average cumulative returns of 18% in excess of the market index 17 months after portfolio formation, a compound annual return in excess of the market index of 12.2%. The best performing stocks over the preceding five years produced average cumulative returns of about 6% less than the market index after 17 months, a compounded annual negative return of 4.3% versus the market index.
* * *
In summary, the above studies indicate that buy high works in the short term (about a 1 year period), while buy low works in the longer term.
-- written up after the Tweedy Browne study was uploaded at magicformulainvesting
* * *
[5/28/06] In the June 2006 SmartMoney, Jaack Hough cites a study by George and Hwang which looked at stocks within 5 percent of their 52-week highs and lows (rather than the top six month gainers and losers that the Jagadeesh and Titman study looked at). This would for example exclude stocks that was up 60% for six months though it has backed off 15% from the high. Again, these stock beat the overall market but "strong returns kept rolling in for at least five years".
I'd say this strategy would have worked quite well in 1998 and 1999, but pretty poorly in 2000. So value would have to figure in somewhere.
Hough looked at stocks with PEG <= 1 and trading within 5% of their 52-week highs. The screen came out with the following stocks. ABK (79.70), ACO (28.28), PLCE (56.22), DFG (51.00), EBF (19.38), GS (158.12), KAI (22.37), LEH (144.82), NE (81.44).
The Future for Investors
A book review of Jeremy J. Siegel's book The Future for Investors: Why the Tried and the True Triumph over the Bold and the New.
The Inside Value Approach (an advertisement)
[3/23/07] Conviction is perhaps the most important factor in investing
[11/15/06] Virtually all of the greatest investors -- Warren Buffett, Benjamin Graham, Charles Munger, John Neff, Walter Schloss -- earned their fortunes by following value principles. They've done so well not because value stocks have grown faster than so-called growth stocks. Instead, they've triumphed because stocks are priced largely based on their expected growth rates. More often than not, those expectations are wrong.
[10/30/06] David Meier looks for falling prices and rising returns
[9/5/06] methods of valuing companies
[8/30/06] The only two things that matter in investing
[7/20/06] Growth or value: which is the best way?
[7/14/06] Richard Gibbons tells value investors to buy growth stocks
[5/14/06] David Meier says that turnarounds are better path to multibagers
[5/2/06] It may take time to beat the market with value investing
[4/17/06] Richard Gibbons follows three important rules
[4/11/06] Nathan Parmalee on the P/E ratio
[4/10/06] David Meier's triple double
[4/5/06] Seth Jayson hunts for value
[3/14/06] David Meier points out examples of bad growth, good growth, and great growth.
[2/24/06] Richard Gibbons warns value investors that temporary bad news is sometimes not so temporary
[2/9/06] Richard Gibbons presents Three Simple Rules
[2/3/06] Buy ugly, but not too ugly
[1/24/06] Two paths to profits: Rule Breakers vs. Inside Value
[1/13/06] The Inside Value team looks for relentless growers.
[1/6/06] Durrell says turnarounds are right under your nose.
[12/23/05] There's a good reason why many wealthy folks could credibly be described as "cheap".
[12/21/05] How to beat Inside Value
[12/18/05] Seth Jayson says wiggles give you opportunities for profits.
[12/9/05] Jim Gillies gives his definition of "value" investing.
[12/3/05] Jim Gillies discusses Stern Stewart's trademarked concept of Economic Value Added. Or EVA = [ROIC – WACC] * IC.
[11/3/05] Richard Gibbons says to buy strong companies when blood is in the streets
[10/29/05] Richard Gibbons talks about buying companies in crisis.
[10/28/05] Seth Jayson talks about Buffett's Stealth Values which are strong companies that are neither dirt-cheap or expensive.
[11/24/05] Tim Beyers learns four lessons from the bubble
[9/15/05] Chuck Saletta again
[8/29/05] The evolution of Richard Gibbons
[8/29/05] Invest like you shop (Chuck Saletta's turn to write the ad)
[8/18/05] In this article/advertisement, Richard Gibbons explains the Inside Value newsletter approach to selecting stocks. Here's my summary: find a great company, then buy it cheap.
[5/6/05] A Patient Investor's Guide to Profit
[11/15/06] Virtually all of the greatest investors -- Warren Buffett, Benjamin Graham, Charles Munger, John Neff, Walter Schloss -- earned their fortunes by following value principles. They've done so well not because value stocks have grown faster than so-called growth stocks. Instead, they've triumphed because stocks are priced largely based on their expected growth rates. More often than not, those expectations are wrong.
[10/30/06] David Meier looks for falling prices and rising returns
[9/5/06] methods of valuing companies
[8/30/06] The only two things that matter in investing
[7/20/06] Growth or value: which is the best way?
[7/14/06] Richard Gibbons tells value investors to buy growth stocks
[5/14/06] David Meier says that turnarounds are better path to multibagers
[5/2/06] It may take time to beat the market with value investing
[4/17/06] Richard Gibbons follows three important rules
[4/11/06] Nathan Parmalee on the P/E ratio
[4/10/06] David Meier's triple double
[4/5/06] Seth Jayson hunts for value
[3/14/06] David Meier points out examples of bad growth, good growth, and great growth.
[2/24/06] Richard Gibbons warns value investors that temporary bad news is sometimes not so temporary
[2/9/06] Richard Gibbons presents Three Simple Rules
[2/3/06] Buy ugly, but not too ugly
[1/24/06] Two paths to profits: Rule Breakers vs. Inside Value
[1/13/06] The Inside Value team looks for relentless growers.
[1/6/06] Durrell says turnarounds are right under your nose.
[12/23/05] There's a good reason why many wealthy folks could credibly be described as "cheap".
[12/21/05] How to beat Inside Value
[12/18/05] Seth Jayson says wiggles give you opportunities for profits.
[12/9/05] Jim Gillies gives his definition of "value" investing.
[12/3/05] Jim Gillies discusses Stern Stewart's trademarked concept of Economic Value Added. Or EVA = [ROIC – WACC] * IC.
[11/3/05] Richard Gibbons says to buy strong companies when blood is in the streets
[10/29/05] Richard Gibbons talks about buying companies in crisis.
[10/28/05] Seth Jayson talks about Buffett's Stealth Values which are strong companies that are neither dirt-cheap or expensive.
[11/24/05] Tim Beyers learns four lessons from the bubble
[9/15/05] Chuck Saletta again
[8/29/05] The evolution of Richard Gibbons
[8/29/05] Invest like you shop (Chuck Saletta's turn to write the ad)
[8/18/05] In this article/advertisement, Richard Gibbons explains the Inside Value newsletter approach to selecting stocks. Here's my summary: find a great company, then buy it cheap.
[5/6/05] A Patient Investor's Guide to Profit
Monday, August 28, 2006
Remember the bubble
[8/25/06] A review of Roger Lowenstein's book 'Origins of the Crash'
[12/19/05] Jeremy Grantham studied 28 financial bubbles, ALL of which eventually
reverted to the mean. (from chucks_angels)
[12/17/05] Tulips should serve as a reminder to us investors of the dangers of speculation.
[3/14/05] Looking back at the bursting of the bubble
[12/19/05] Jeremy Grantham studied 28 financial bubbles, ALL of which eventually
reverted to the mean. (from chucks_angels)
[12/17/05] Tulips should serve as a reminder to us investors of the dangers of speculation.
[3/14/05] Looking back at the bursting of the bubble
Finding your 'latte factor'
You may have heard of the "latte factor," which states that by skipping the daily stop for a $3 coffee, you can save hundreds, even thousands of dollars, a year. But if don’t drink that much coffee anyway and are still short on savings, what do you do?
Since many Americans are higher in credit card debt than they are in bank account balances, figuring out one’s own latte factor is crucial to keeping spending under control. That means paring down the shopping list and accepting the fact that your "wants" are far more numerous than your "needs."
Since many Americans are higher in credit card debt than they are in bank account balances, figuring out one’s own latte factor is crucial to keeping spending under control. That means paring down the shopping list and accepting the fact that your "wants" are far more numerous than your "needs."
Tuesday, August 22, 2006
The Hot Product
We analyze all kinds of companies to find opportunities for the long-term investor. One category that can be a challenge sometimes is the firm with a hot product on its hands. The product is usually something new that is generating a lot of hype and excitement. Soon enough all the "cool" people have the item and the sky's the limit on the new opportunity.
With excitement comes risk, however, as stock prices shoot up and attract investors at the peak of expectations. Then the realities of the marketplace hit. Some investors get caught at the top, unaware of the white-knuckle ride back down that will soon commence.
With excitement comes risk, however, as stock prices shoot up and attract investors at the peak of expectations. Then the realities of the marketplace hit. Some investors get caught at the top, unaware of the white-knuckle ride back down that will soon commence.
Sunday, August 20, 2006
How Bad Can It Get?
investors who bought the Dow at the peak of the market in 1929 had lost roughly 89% of their investment only three years later. They broke even, in real terms, in 1954 -- 25 years later. If you include dividends in the mix, it's a bit better. In that case, the breakeven year was 1945.
Let's look at a more recent example -- the market's fall from its highs in 2000. From peak to trough, the Nasdaq fell 79%. Investors who bought at the peak broke even in ... well, actually, they're not at breakeven yet. The S&P 500 fared better, with investors losing "only" 50%.
Let's look at a more recent example -- the market's fall from its highs in 2000. From peak to trough, the Nasdaq fell 79%. Investors who bought at the peak broke even in ... well, actually, they're not at breakeven yet. The S&P 500 fared better, with investors losing "only" 50%.
Friday, August 11, 2006
The Congressional Fund
Weekdays in August are a good time to own stocks. The end of October isn't bad either. Christmas can be fine for equities as well.
What these dates have in common is that they are times when Congress isn't in session. Back in 1991, a Wall Streeter named Eric Singer noticed that equities that year tended to do better when lawmakers weren't in Washington. He published an op-ed in Barron's proposing that the correlation was no coincidence.
Later, he looked at a wider timeframe and went around the squash courts of New York telling people he might write a book about his thesis. Now Singer is going one step further. He has created a hedge fund, Singer Congressional Fund. Its goals include making money from the Congressional calendar.
What these dates have in common is that they are times when Congress isn't in session. Back in 1991, a Wall Streeter named Eric Singer noticed that equities that year tended to do better when lawmakers weren't in Washington. He published an op-ed in Barron's proposing that the correlation was no coincidence.
Later, he looked at a wider timeframe and went around the squash courts of New York telling people he might write a book about his thesis. Now Singer is going one step further. He has created a hedge fund, Singer Congressional Fund. Its goals include making money from the Congressional calendar.
How the Fed Affects You
By now, you have probably heard that the Federal Reserve chose on Tuesday to leave the federal funds interest rate unchanged after having made 17 consecutive increases over the past two years.
Perhaps the most confusing thing about Fed announcements is why they really matter. The Federal Reserve isn't a bank that has individual customers, so the rates the Federal Reserve charges or pays don't have a direct impact on any one person. However, because many financial institutions deal directly with the Federal Reserve on an ongoing basis, changes at the Fed do rapidly work their way across the spectrum of banks, lending institutions, and investment companies, and then they eventually reach your bills and account statements.
Perhaps the most confusing thing about Fed announcements is why they really matter. The Federal Reserve isn't a bank that has individual customers, so the rates the Federal Reserve charges or pays don't have a direct impact on any one person. However, because many financial institutions deal directly with the Federal Reserve on an ongoing basis, changes at the Fed do rapidly work their way across the spectrum of banks, lending institutions, and investment companies, and then they eventually reach your bills and account statements.
The Secrets of Nine-Figure Fortunes
Todd Wenning writes, "In a previous job, I helped manage a few nine-figure fortunes -- which was intimidating at first. I mean, an errant mouse click while making a multimillion-dollar trade and you're fired. But eventually the sweats subsided, and I learned the secrets behind this enormous wealth."
How did they do it?
In two easy steps ...
How did they do it?
In two easy steps ...
Wednesday, August 09, 2006
Benefiting from a pause
NEW YORK (Money Magazine) -- The Federal Reserve decided Tuesday not to raise interest rates for the first time in more than two years, noting that economic growth had "moderated."
So which sectors are likely to do well now? A recent study from Citigroup looked at the past five runs of Fed rate hikes and examined how stocks performed in the 12 months following each final rate increase.
What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.
That's because consumers continue buying medicine, drinking soda and paying their electric bill, regardless of the state of the economy.
One-year gain after Fed stops raising rates
Financials: + 24.7%
Health Care: + 23.4%
Consumer Staples: + 17.6%
S&P 500: + 9.9%
* * *
[8/22/06] The above seems to contradict this fact ""Since the Fed's inception in 1913, the average historical DJIA return after the Fed's terminal interest-rate hike is negative (i.e., the DJIA goes down, not up), 4, 6, 8, 10 and 12 months thereafter."
So which sectors are likely to do well now? A recent study from Citigroup looked at the past five runs of Fed rate hikes and examined how stocks performed in the 12 months following each final rate increase.
What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.
That's because consumers continue buying medicine, drinking soda and paying their electric bill, regardless of the state of the economy.
One-year gain after Fed stops raising rates
Financials: + 24.7%
Health Care: + 23.4%
Consumer Staples: + 17.6%
S&P 500: + 9.9%
* * *
[8/22/06] The above seems to contradict this fact ""Since the Fed's inception in 1913, the average historical DJIA return after the Fed's terminal interest-rate hike is negative (i.e., the DJIA goes down, not up), 4, 6, 8, 10 and 12 months thereafter."
Friday, August 04, 2006
Growth Investors
[8/16/06] 2 Things I Learned From Philip Fisher (by Tim Beyers)
[8/4/06] Just as there is Benjamin Graham for value investors, there is Philip Fisher for growth disciples.
[8/4/06] Just as there is Benjamin Graham for value investors, there is Philip Fisher for growth disciples.
Sunday, July 30, 2006
companies buying back shares
[9/19/07] Fools duel dividends vs. buybacks
[5/2/07] Studies found that the stocks of the companies that buy back 5-10% of their total shares on average gain 6.8% more than the companies that do not buy back shares. Dilutions from the increases in the number of shares outstanding result in poorer stock performance over long term.
[12/18/06] At well-run companies, buybacks benefit shareholders by increasing dividend growth potential. But a dollar spent on buying back shares is not the same as a dollar paid out in dividends. For those seeking income, buybacks are far less attractive than dividends.
[12/14/06] On a purely theoretical level, it shouldn't make a big difference whether or not a company pays dividends. If earnings are distributed to investors in the form of dividends, the recipients must choose how to reinvest those payments. Many investors participate in dividend reinvestment programs, which automatically use any dividends they receive to purchase additional shares of stock. On the other hand, if a company retains its earnings instead of paying a dividend, the value of the company should be higher by the amount of cash the company kept. The company can reinvest the money in its business operations or perform capital-structure transactions, such as paying down debt or repurchasing stock.
In reality, however, many investors prefer dividend-paying stocks, and many companies have responded to that preference by continuing to pay substantial dividends. Part of that preference may be simply because dividends represent real money, rather than an abstract paper value.
[12/5/06] Stock buybacks are huge.
Through the first nine months of this year, big U.S. corporations spent a record $325 billion snapping up some of their outstanding shares, according to Standard & Poor's. That's up 33% from the same time last year, and more than double the $130 billion spent on buybacks during the first nine months of 2004.
To put those figures in perspective, consider that total operating earnings for S&P 500 companies through the end of the third quarter was $590 billion. In other words, the biggest companies spent more than half their earnings power retiring their shares.
[12/3/06] Dueling Fools: dividends vs. buybacks
[9/29/06] Share repurchases can be great value creators for investors -- if done for the right reasons. But be careful, because some repurchases are undertaken just to offset option dilution.
[8/25/06] Standard & Poor's Corp. of New York is warning investors about distortions in corporate earnings due to high levels of treasury stock and cash held on balance sheets.
Yesterday, S&P announced that share buybacks in the second quarter had reached a record $116 billion for S&P 500 companies.
For 20% of these firms, the reduced number of shares outstanding caused a "significant boost to earnings-per-share" in the quarter, said Howard Silverblatt, S&P senior index analyst, in a statement.
Although helpful for per-share earnings, share buybacks combined with large amounts of interest-earning cash could cause problems in predicting results for many companies, the research firm said.
[8/20/06] Many Americans need to look for ways to curb their spending. Big U.S. companies have the opposite problem.
The piles of cash and stockpile of repurchased shares at these companies have hit record levels and continue to grow along with corporate earnings, creating challenges for the executives who must decide how to allocate all that capital.
While some investors carp about managers hoarding cash rather than building their businesses, data show companies have in fact been reinvesting in themselves. Some are also acquiring other companies, although these deals are often smaller in scope than the takeovers executed in the go-go late 1990s, as executives don't want to undertake expensive deals that could hamper investor returns for years to come.
The cash figures are also becoming so large that they are skewing some of the yardsticks used to gauge corporate performance. For example, with more companies seeing bigger portions of their bottom line accounted for by interest income, it becomes harder for Main Street investors to gauge how well some corporate managers are running core operations.
* * *
[7/30/06] The companies in the Standard & Poor's 500 index have reported 16 straight quarters of double-digit earnings growth. If upcoming reports show that this spectacular growth continued in the second quarter, earnings per share may be pushed into double digits not because of stellar performance, but thanks to share buybacks and higher interest rates.
Share buybacks have become a big-money endeavor. The cash-laden companies in the S&P 500 spent 45 percent of their capital expenditures on stock buybacks last year, which was especially significant because capital expenditures were on the upswing. Thanks to buybacks, the S&P 500 companies now hold 10 percent of their market value in company-owned stock, according to Howard Silverblatt, senior index analyst at S&P. Companies have never bought back this much stock before, Silverblatt said.
[5/2/07] Studies found that the stocks of the companies that buy back 5-10% of their total shares on average gain 6.8% more than the companies that do not buy back shares. Dilutions from the increases in the number of shares outstanding result in poorer stock performance over long term.
[12/18/06] At well-run companies, buybacks benefit shareholders by increasing dividend growth potential. But a dollar spent on buying back shares is not the same as a dollar paid out in dividends. For those seeking income, buybacks are far less attractive than dividends.
[12/14/06] On a purely theoretical level, it shouldn't make a big difference whether or not a company pays dividends. If earnings are distributed to investors in the form of dividends, the recipients must choose how to reinvest those payments. Many investors participate in dividend reinvestment programs, which automatically use any dividends they receive to purchase additional shares of stock. On the other hand, if a company retains its earnings instead of paying a dividend, the value of the company should be higher by the amount of cash the company kept. The company can reinvest the money in its business operations or perform capital-structure transactions, such as paying down debt or repurchasing stock.
In reality, however, many investors prefer dividend-paying stocks, and many companies have responded to that preference by continuing to pay substantial dividends. Part of that preference may be simply because dividends represent real money, rather than an abstract paper value.
[12/5/06] Stock buybacks are huge.
Through the first nine months of this year, big U.S. corporations spent a record $325 billion snapping up some of their outstanding shares, according to Standard & Poor's. That's up 33% from the same time last year, and more than double the $130 billion spent on buybacks during the first nine months of 2004.
To put those figures in perspective, consider that total operating earnings for S&P 500 companies through the end of the third quarter was $590 billion. In other words, the biggest companies spent more than half their earnings power retiring their shares.
[12/3/06] Dueling Fools: dividends vs. buybacks
[9/29/06] Share repurchases can be great value creators for investors -- if done for the right reasons. But be careful, because some repurchases are undertaken just to offset option dilution.
[8/25/06] Standard & Poor's Corp. of New York is warning investors about distortions in corporate earnings due to high levels of treasury stock and cash held on balance sheets.
Yesterday, S&P announced that share buybacks in the second quarter had reached a record $116 billion for S&P 500 companies.
For 20% of these firms, the reduced number of shares outstanding caused a "significant boost to earnings-per-share" in the quarter, said Howard Silverblatt, S&P senior index analyst, in a statement.
Although helpful for per-share earnings, share buybacks combined with large amounts of interest-earning cash could cause problems in predicting results for many companies, the research firm said.
[8/20/06] Many Americans need to look for ways to curb their spending. Big U.S. companies have the opposite problem.
The piles of cash and stockpile of repurchased shares at these companies have hit record levels and continue to grow along with corporate earnings, creating challenges for the executives who must decide how to allocate all that capital.
While some investors carp about managers hoarding cash rather than building their businesses, data show companies have in fact been reinvesting in themselves. Some are also acquiring other companies, although these deals are often smaller in scope than the takeovers executed in the go-go late 1990s, as executives don't want to undertake expensive deals that could hamper investor returns for years to come.
The cash figures are also becoming so large that they are skewing some of the yardsticks used to gauge corporate performance. For example, with more companies seeing bigger portions of their bottom line accounted for by interest income, it becomes harder for Main Street investors to gauge how well some corporate managers are running core operations.
* * *
[7/30/06] The companies in the Standard & Poor's 500 index have reported 16 straight quarters of double-digit earnings growth. If upcoming reports show that this spectacular growth continued in the second quarter, earnings per share may be pushed into double digits not because of stellar performance, but thanks to share buybacks and higher interest rates.
Share buybacks have become a big-money endeavor. The cash-laden companies in the S&P 500 spent 45 percent of their capital expenditures on stock buybacks last year, which was especially significant because capital expenditures were on the upswing. Thanks to buybacks, the S&P 500 companies now hold 10 percent of their market value in company-owned stock, according to Howard Silverblatt, senior index analyst at S&P. Companies have never bought back this much stock before, Silverblatt said.
Thursday, July 27, 2006
Peak Oil
[8/9/06: Mauldin writes about Peter Tertzakian's book A Thousand Barrels a Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World] Once peak oil occurs, then the historic patterns of world oil demand and price cycles will cease. In recent years, the realization of price stability has depended on the effectiveness of nations belonging to the Organization of the Petroleum Exporting Countries (OPEC) to adjust for the production increases and lags of the non-OPEC nations.
This is leading to what Tertzakian calls a "break point."
"Although the stakes have never been greater, the history of energy shows that a time of crisis is always followed by a defining break point, after which government policies, and social and technological forces, begin to rebalance the structure of the world's vast energy complex. Break points are crucial junctures marked by dramatic changes in the way energy is used.
"During the break point and the rebalancing phase that follows (which can last for 10 to 20 years), nations struggle for answers, consumers suffer and complain, the economy adapts, and science surges with innovation and discovery. In the era that emerges, lifestyles change, businesses are born and fortunes are made."
[8/3/06] The reason for high oil prices: speculation?
[7/27/06] LONDON (Reuters) -- Oil prices will soar to well over $100 a barrel and stay high as part of a sustained commodities bull run that has another 15 years of life, billionaire U.S. investor Jim Rogers told Reuters in an interview.
"We're going to have high oil prices for a very long time. The surprise is going to be how high it goes," Rogers said.
Reiterating earlier comments that oil prices would hit at least $100 a barrel, he said: "It will be much more than $100 before the bull market is over."
[via Maverick of investwise 7/14/06]
[6/2/06] Is the oil boom over?
[12/18/05] The Energy Department is projecting $57 oil in 25 years (up from their $31 projection last year).
[8/22/05] The term "peak oil" (also known as "Hubbert Peak Theory") was first used by M. King Hubbert, a geophysicist with Royal Dutch Shell (NYSE: RD). In 1956, Hubbert predicted that U.S. oil production would reach a peak between the late 1960s and early 1970s, from which point production rates would forever decline.
Hubbert's prediction proved accurate in 1970, when U.S. production peaked at 11.3 million barrels per day -- a point from which production has been declining ever since. According to the Department of Energy, the United States produced 7.8 million barrels per day in 2003, representing a 31% drop in production from the peak. With oil now at $66 per barrel, there are plenty of "experts" applying the Hubbert theory to say that world oil production is peaking.
[5/2/05] What We Now Know about peak oil
This is leading to what Tertzakian calls a "break point."
"Although the stakes have never been greater, the history of energy shows that a time of crisis is always followed by a defining break point, after which government policies, and social and technological forces, begin to rebalance the structure of the world's vast energy complex. Break points are crucial junctures marked by dramatic changes in the way energy is used.
"During the break point and the rebalancing phase that follows (which can last for 10 to 20 years), nations struggle for answers, consumers suffer and complain, the economy adapts, and science surges with innovation and discovery. In the era that emerges, lifestyles change, businesses are born and fortunes are made."
[8/3/06] The reason for high oil prices: speculation?
[7/27/06] LONDON (Reuters) -- Oil prices will soar to well over $100 a barrel and stay high as part of a sustained commodities bull run that has another 15 years of life, billionaire U.S. investor Jim Rogers told Reuters in an interview.
"We're going to have high oil prices for a very long time. The surprise is going to be how high it goes," Rogers said.
Reiterating earlier comments that oil prices would hit at least $100 a barrel, he said: "It will be much more than $100 before the bull market is over."
[via Maverick of investwise 7/14/06]
[6/2/06] Is the oil boom over?
[12/18/05] The Energy Department is projecting $57 oil in 25 years (up from their $31 projection last year).
[8/22/05] The term "peak oil" (also known as "Hubbert Peak Theory") was first used by M. King Hubbert, a geophysicist with Royal Dutch Shell (NYSE: RD). In 1956, Hubbert predicted that U.S. oil production would reach a peak between the late 1960s and early 1970s, from which point production rates would forever decline.
Hubbert's prediction proved accurate in 1970, when U.S. production peaked at 11.3 million barrels per day -- a point from which production has been declining ever since. According to the Department of Energy, the United States produced 7.8 million barrels per day in 2003, representing a 31% drop in production from the peak. With oil now at $66 per barrel, there are plenty of "experts" applying the Hubbert theory to say that world oil production is peaking.
[5/2/05] What We Now Know about peak oil
Monday, July 24, 2006
Check back in 10 years
Morningstar's Pat Dorsey takes his shot at Ten Stocks for the Next Ten Years. Hopefully he'll do better than the New York Times did in 2000. The stocks are AMGN, CSG, DELL, EBAY, FAST, JNJ, JPM, MA, MDT, SYY.
Thursday, July 13, 2006
The Ultimate Buy-and-Hold Strategy
In theory, a “perfect” investment strategy would be cheap, easy to implement and risk-free. It would make you fabulously rich in about a week. Tax-free, of course. We haven’t found that combination, and we don’t expect to. But the Ultimate Buy-and-Hold Strategy is the best real-world substitute that we’ve found.
The Ultimate Buy-and-Hold Strategy produces higher returns than the investments most people hold. It does so at lower risk, with minimal transaction costs. It’s mechanical, so it does not depend on finding the right guru to make the right predictions about an individual company, the market or the economy. You will never again have to rely on financial publications for articles with headlines like “The 10 Funds You Should Own Now.”
Even though this strategy is based on the finest academic research available, it’s simple and easy to understand. If I had to sum it up in one sentence, I’d do it this way:
The Ultimate Buy-and-Hold Strategy uses no-load index funds to create a sophisticated asset allocation model with worldwide diversification and the addition of value stocks and small-cap stocks to a traditional large-cap growth stock portfolio.
If you think you already know what that means and you’re tempted to skip the rest of this article, I hope you won’t. The evidence I’m about to show you is compelling, and I hope you’ll let me present it.
-- Paul Merriman, Merriman Capital Management, FundAvice.com
[8/17/14 - 2014 update]
The Ultimate Buy-and-Hold Strategy produces higher returns than the investments most people hold. It does so at lower risk, with minimal transaction costs. It’s mechanical, so it does not depend on finding the right guru to make the right predictions about an individual company, the market or the economy. You will never again have to rely on financial publications for articles with headlines like “The 10 Funds You Should Own Now.”
Even though this strategy is based on the finest academic research available, it’s simple and easy to understand. If I had to sum it up in one sentence, I’d do it this way:
The Ultimate Buy-and-Hold Strategy uses no-load index funds to create a sophisticated asset allocation model with worldwide diversification and the addition of value stocks and small-cap stocks to a traditional large-cap growth stock portfolio.
If you think you already know what that means and you’re tempted to skip the rest of this article, I hope you won’t. The evidence I’m about to show you is compelling, and I hope you’ll let me present it.
-- Paul Merriman, Merriman Capital Management, FundAvice.com
[8/17/14 - 2014 update]
Wednesday, July 12, 2006
The average S&P 500 stock
[7/12/06] The S&P 500 index is now trading at 14.5 estimated 2006 earnings with a forecast of 12% earnings growth in 2006. [That sounds pretty reasonable to me.]
-- Markets Are Never Wrong?, James Holloway, Vice President S&P Editorial
[4/20/05] Right now the average S&P 500 company sports a return on equity of 20%. It's priced at 19 times free cash flow and 20 times trailing 12 months' earnings. It's expected to grow those earnings at just under 13%. (And for those of you punching away at your calculators, yes, the average company is therefore selling at a PEG of more than 1.5, and so is by traditional metrics overpriced.) Finally, the average company pays a historically tiny 2% dividend.
Actually that average company sounds pretty good to me.
[updated 7/18/05] 18 times free cash flow, 19 times trailing earnings.
-- Markets Are Never Wrong?, James Holloway, Vice President S&P Editorial
[4/20/05] Right now the average S&P 500 company sports a return on equity of 20%. It's priced at 19 times free cash flow and 20 times trailing 12 months' earnings. It's expected to grow those earnings at just under 13%. (And for those of you punching away at your calculators, yes, the average company is therefore selling at a PEG of more than 1.5, and so is by traditional metrics overpriced.) Finally, the average company pays a historically tiny 2% dividend.
Actually that average company sounds pretty good to me.
[updated 7/18/05] 18 times free cash flow, 19 times trailing earnings.
The Gospel of Wealth
"The Gospel of Wealth" was an essay written by Andrew Carnegie in 1889 that described the responsibility of philanthropy by the new upper class of self-made rich. The central thesis of Carnegie's essay was the peril of allowing large sums of money to be passed into the hands of persons or organizations ill-equipped mentally or emotionally to cope with them. As a result, the wealthy entrepreneur must assume the responsibility of distributing his fortune in a way that it will be put to good use, and not wasted on frivolous expenditure. The very existence of poverty in a capitalistic society could be negated by wealthy philanthropic businessmen.
Carnegie based his philosophy on the observation that the heirs of large fortunes frequently squandered them in riotous living rather than nurturing and growing them. Even bequeathing one's fortune to charity was no guarantee that it would be used wisely, since there was no guarantee that a charitable organization not under one's direction would use the money in accordance with one's wishes. Carnegie disapproved of charitable giving that merely maintained the poor in their impoverished state, and urged a movement toward the creation of a new mode of giving which would create opportunities for the beneficiaries of the gift to better themselves. As a result, the gift would not be merely consumed, but would be productive of even greater wealth throughout the society.
-- link from brknews, 7/2/06
Carnegie based his philosophy on the observation that the heirs of large fortunes frequently squandered them in riotous living rather than nurturing and growing them. Even bequeathing one's fortune to charity was no guarantee that it would be used wisely, since there was no guarantee that a charitable organization not under one's direction would use the money in accordance with one's wishes. Carnegie disapproved of charitable giving that merely maintained the poor in their impoverished state, and urged a movement toward the creation of a new mode of giving which would create opportunities for the beneficiaries of the gift to better themselves. As a result, the gift would not be merely consumed, but would be productive of even greater wealth throughout the society.
-- link from brknews, 7/2/06
Monday, July 10, 2006
cash is king for balance sheet strength
Investors are often told to look for companies that have a "strong balance sheet," and one of the measures they often use is the ratio of long-term debt to stockholders' equity. Unfortunately, Schwab research has found that such debt ratios of little use as stock selection tools.
Historically, stocks with little or no long-term debt have not outperformed market averages. Not surprisingly, the stock market is generally too efficient to reward metrics in such widespread use.
But that's not to say that balance-sheet strength is irrelevent for stock selection. An alternative indicator that many investors tend to overlook is a company's cash liquidity level as an indicator of future returns.
The ratio of cash and marketable securities to market capitalization as a measure of balance-sheet strength is simple and intuitive, but apparently not fully appreciated by the market. Among the 3200 largest U.S. companies (excluding financial firms, whose cash balances are largely offset by short-term liabilities), a simulated portfolio containing the 5% of stocks with the most cash have historically delivered an annual buy-and-hold return of about 24% versus 14% for the average stock ranked over the period 1986-2005. While past returns don't guarantee future results, the potential power of this simple indicator is intriguing.
One note of caution in researching the investment merits of firms with lots of cash on the balance sheet: it's critical to understand where the cash came from. The Statement of Cash Flows (found in a firm's annual 10-K report) is a great tool for this purpose because it reveals the sources of recent changes in a firm's cash balance.
For example, a firm generating positive cash flows from operations is preferable as this is a sign of a healthy business. On the other hand, a firm whose high cash balance stems from recent financoing efforts such as share offerings or debt issues, or from investing activities such as the sale of a business unit, is much less interesting as these sources of cash flow tend to be one-time shots.
-- Greg Forsythe, On Investing Magazine, Fall 2005
The article goes on name several stocks worthy of further research, all of which have positive and growing cash flow from operations: ASF, AET, AGYS, IMN, SFA (Scientific Atlanta has since been acquired by Cisco), UNTD.
Historically, stocks with little or no long-term debt have not outperformed market averages. Not surprisingly, the stock market is generally too efficient to reward metrics in such widespread use.
But that's not to say that balance-sheet strength is irrelevent for stock selection. An alternative indicator that many investors tend to overlook is a company's cash liquidity level as an indicator of future returns.
The ratio of cash and marketable securities to market capitalization as a measure of balance-sheet strength is simple and intuitive, but apparently not fully appreciated by the market. Among the 3200 largest U.S. companies (excluding financial firms, whose cash balances are largely offset by short-term liabilities), a simulated portfolio containing the 5% of stocks with the most cash have historically delivered an annual buy-and-hold return of about 24% versus 14% for the average stock ranked over the period 1986-2005. While past returns don't guarantee future results, the potential power of this simple indicator is intriguing.
One note of caution in researching the investment merits of firms with lots of cash on the balance sheet: it's critical to understand where the cash came from. The Statement of Cash Flows (found in a firm's annual 10-K report) is a great tool for this purpose because it reveals the sources of recent changes in a firm's cash balance.
For example, a firm generating positive cash flows from operations is preferable as this is a sign of a healthy business. On the other hand, a firm whose high cash balance stems from recent financoing efforts such as share offerings or debt issues, or from investing activities such as the sale of a business unit, is much less interesting as these sources of cash flow tend to be one-time shots.
-- Greg Forsythe, On Investing Magazine, Fall 2005
The article goes on name several stocks worthy of further research, all of which have positive and growing cash flow from operations: ASF, AET, AGYS, IMN, SFA (Scientific Atlanta has since been acquired by Cisco), UNTD.
Sunday, July 09, 2006
The Changing Face of Growth Investing
While an appealing case can be made in general for growth investing, managers agree that investors have to be more careful than usual in identifying companies that offer superior growth potential.
There are increased concerns that some traditional growth sectors such as pharmaceuticals and technology, as well as some companies that have been considered leading growth companies in the past, may face slower growth prospects in the future.
Robert Sharps, manager of the Institutional Large-Cap Growth Fund, believes that various growth companies, such as those operating in areas like food and beverage, household products, and pharmaceuticals, “just don’t have the sort of growth prospects now that they once did. Technology is another sector that will not grow the way it has. It already accounts for 50% of total capital expenditures, compared with 10% in the past. It’s basically finished taking share of such expenditures. Companies like IBM, Cisco Systems, and Intel face more significant growth challenges.
“So, you have to be more selective and look for companies that haven’t already consolidated their industry and don’t already have massive share of their market and very high (profit) margins already. That might include sectors like biotechnology, HMOs, or Internet-oriented companies —- stocks like eBay, Yahoo!, Gilead Sciences, and UnitedHealth Group.
-- T. Rowe Price Report, Spring 2005
There are increased concerns that some traditional growth sectors such as pharmaceuticals and technology, as well as some companies that have been considered leading growth companies in the past, may face slower growth prospects in the future.
Robert Sharps, manager of the Institutional Large-Cap Growth Fund, believes that various growth companies, such as those operating in areas like food and beverage, household products, and pharmaceuticals, “just don’t have the sort of growth prospects now that they once did. Technology is another sector that will not grow the way it has. It already accounts for 50% of total capital expenditures, compared with 10% in the past. It’s basically finished taking share of such expenditures. Companies like IBM, Cisco Systems, and Intel face more significant growth challenges.
“So, you have to be more selective and look for companies that haven’t already consolidated their industry and don’t already have massive share of their market and very high (profit) margins already. That might include sectors like biotechnology, HMOs, or Internet-oriented companies —- stocks like eBay, Yahoo!, Gilead Sciences, and UnitedHealth Group.
-- T. Rowe Price Report, Spring 2005
Friday, July 07, 2006
dividends and growth?
An old adage holds that investors in dividend stocks are being "paid to wait for the stock to appreciate." Academic research suggests they may not have to wait very long. Dividends, it turns out, can actually forecast earnings growth. And earnings growth, of course, drives stock gains.
The idea that dividends can foreshadow earnings sounds illogical, like using a sore backside to predict a kick in the pants. Dividends, after all, are paid with the money a company earns. One would expect earnings growth to predict dividends, not the other way around. But it works.
Robert Arnott and Clifford Asnes studied the relationship between the percentage of earnings paid out as dividends - what's known as the payout ratio - and subsequent earnings growth. They studied 130 years of dividend data, but focused primarily on S&P 500 numbers since 1946, which they called the "modern period."
Their findings in their paper "Surprise! Higher Dividends = Higher Earnings Growth" defy conventional wisdom that dividend payers are slow growers. Higher payout ratios predicted faster earnings growth over the next 10 years.
-- Jack Hough, SmartMoney, October 2005
The idea that dividends can foreshadow earnings sounds illogical, like using a sore backside to predict a kick in the pants. Dividends, after all, are paid with the money a company earns. One would expect earnings growth to predict dividends, not the other way around. But it works.
Robert Arnott and Clifford Asnes studied the relationship between the percentage of earnings paid out as dividends - what's known as the payout ratio - and subsequent earnings growth. They studied 130 years of dividend data, but focused primarily on S&P 500 numbers since 1946, which they called the "modern period."
Their findings in their paper "Surprise! Higher Dividends = Higher Earnings Growth" defy conventional wisdom that dividend payers are slow growers. Higher payout ratios predicted faster earnings growth over the next 10 years.
-- Jack Hough, SmartMoney, October 2005
The Index Effect
Given its name, you'd think the S&P 500 index of large company stocks would include the 500 largest publicly traded corporatoins. But that would be too easy -- and the truth is more interesting anyway.
Standard & Poor's, which constructs the index, has a committee of eight staffers who meet in private every month to decide what goes in and what gets tossed. They follow guidelines pertaining to issues including liquidity, shares available to the public, sector balance and financial viability. But in the end, the index is composed of whatever the committee decides are the "leading companies in leading industries."
It's a big responsibility, seeing that Americans have $1.2 trillion invested in index funds that trac the S&P 500. In fact, the power of the index is such that the companies gaining entry often enjoy a significant, persistant gain in share price.
Hypothetically, you can make money trading on this so-called index effect, though it'll probably take a lot of effort. One strategy: buy on the date the addition is announced, and sell several days later, when the change goes into effect -- typically, you'll see a 6 percent gain, says, Vijay Singal, a Pamplin College of Business finance professor. You can do even better trading on S&P 500 deletions. When a company is knocked out of the index, the price typically falls at least 10 percent between the announcement and the effective data, then rebounds to its starting point.
Sounds like a sure thing, but Singal warns the price movements are simply historical averages -- it's impossible to predict what will happen with any particular stock. "You need a large sample of trades over a period of two years for it to work," he says.
-- Anne Kadet, Ask SmartMoney, October 2005
Standard & Poor's, which constructs the index, has a committee of eight staffers who meet in private every month to decide what goes in and what gets tossed. They follow guidelines pertaining to issues including liquidity, shares available to the public, sector balance and financial viability. But in the end, the index is composed of whatever the committee decides are the "leading companies in leading industries."
It's a big responsibility, seeing that Americans have $1.2 trillion invested in index funds that trac the S&P 500. In fact, the power of the index is such that the companies gaining entry often enjoy a significant, persistant gain in share price.
Hypothetically, you can make money trading on this so-called index effect, though it'll probably take a lot of effort. One strategy: buy on the date the addition is announced, and sell several days later, when the change goes into effect -- typically, you'll see a 6 percent gain, says, Vijay Singal, a Pamplin College of Business finance professor. You can do even better trading on S&P 500 deletions. When a company is knocked out of the index, the price typically falls at least 10 percent between the announcement and the effective data, then rebounds to its starting point.
Sounds like a sure thing, but Singal warns the price movements are simply historical averages -- it's impossible to predict what will happen with any particular stock. "You need a large sample of trades over a period of two years for it to work," he says.
-- Anne Kadet, Ask SmartMoney, October 2005
Thursday, July 06, 2006
risk and return
Schwab has devloped a "risk gauge" that quantifies the overall risk of each of the approximately 3000 stocks they follow.
Surprisingly, historically less risk has been associated with more return! Indeed, the 30% of stocks ranked as most risky by the gauge not only have been more volatile than the market, they historically have underperformed the average stock over 60% of the time on an annual buy-and-hold basis from 1986-2005.
The lesson is that investors seeking higher returns should avoid stocks with high market sensitivity, small size and high EPS growth forecasts.
Ten stocks worthy of further research that are currently in the lowest 10% of the risk gauge rankings and also A-rated by Schwab Equity Ratings are ABC, ADM, BDX, XOM, LMT, MET, NWL, RTN, SLE, CTL [none of which I own].
-- Greg Forsythe, Charles Schwab OnInvesting Magazine, Summer 2006
Surprisingly, historically less risk has been associated with more return! Indeed, the 30% of stocks ranked as most risky by the gauge not only have been more volatile than the market, they historically have underperformed the average stock over 60% of the time on an annual buy-and-hold basis from 1986-2005.
The lesson is that investors seeking higher returns should avoid stocks with high market sensitivity, small size and high EPS growth forecasts.
Ten stocks worthy of further research that are currently in the lowest 10% of the risk gauge rankings and also A-rated by Schwab Equity Ratings are ABC, ADM, BDX, XOM, LMT, MET, NWL, RTN, SLE, CTL [none of which I own].
-- Greg Forsythe, Charles Schwab OnInvesting Magazine, Summer 2006
Tuesday, July 04, 2006
Learning from our mistakes
This week (writes John Mauldin) we look at mistakes and why we don't learn from them, at least not initially. Good friend James Montier explores the limits to learning we all have and offers some help on how to overcome them. Investors are constantly facing these challenges against their own biases when making sound decisions.
Tuesday, June 27, 2006
mutual funds are lousy (says Robert Kiyosaki)
[9/26/06] A negative view of Kiyosaki
[8/20/06] TMF Selena takes a look at Robert Kiyosaki
[6/27/06] A vast number of people think that investing for the long term in a diversified portfolio of mutual funds is the smart thing to do. In [Robert Kiyosaki's] opinion, this ranks among the worst possible investments.
The problem with funds is fees. The longer you invest in a mutual fund, the more you pay in fees. I've pointed out before that when I buy a piece of real estate or a stock, I pay the sales commission once, but when I purchase a mutual fund, I pay a sales commission for as long as I own the fund (see "So Long Pensions, Hello Fees" ).
That's why the return on investment is much lower on mutual funds -- and why gains get lower the longer you own them. The reason most financial planners recommend you invest for the long term is simply because the longer you hold on to the fund, the more money they make.
[8/20/06] TMF Selena takes a look at Robert Kiyosaki
[6/27/06] A vast number of people think that investing for the long term in a diversified portfolio of mutual funds is the smart thing to do. In [Robert Kiyosaki's] opinion, this ranks among the worst possible investments.
The problem with funds is fees. The longer you invest in a mutual fund, the more you pay in fees. I've pointed out before that when I buy a piece of real estate or a stock, I pay the sales commission once, but when I purchase a mutual fund, I pay a sales commission for as long as I own the fund (see "So Long Pensions, Hello Fees" ).
That's why the return on investment is much lower on mutual funds -- and why gains get lower the longer you own them. The reason most financial planners recommend you invest for the long term is simply because the longer you hold on to the fund, the more money they make.
Monday, June 19, 2006
Fundamentally Weighted Indexes
[10/9/06] Jeremy Siegel writes about fundamentally weighted indexes, "we are on the verge of a revolution: New research demonstrates that it is possible to construct broad-based indexes offering investors better returns and lower volatility than capitalization-weighted indexes. These indexes are weighted by fundamental measures of firm value, such as sales or dividends, instead of allowing the market price alone to dictate how much of each firm should be included in the index."
* * *
[from John Mauldin's Thoughts From The Frontline]
* * *
if every asset is trading above or below its true fair value, then any index that is capitalization-weighted (price-weighted or valuation-weighted) is automatically going to have us overexposed to every single asset that's trading above its true fair value and underexposed to every single asset that's trading below its true fair value.
[Read that again. This is one of the reasons why value investing beats indexing over the long term.]
* * *
In addition to PowerShares mentioned in the article. Jeremy Siegel was talking about these new fundamentally weighted ETFs on CNBC which served practically as a free commercial for Wisdom Tree a firm with which he has signed on as an advisor.
Disclaimer: I (currently) own no investments in either PowerShares or Wisdom Tree.
* * *
[from John Mauldin's Thoughts From The Frontline]
* * *
if every asset is trading above or below its true fair value, then any index that is capitalization-weighted (price-weighted or valuation-weighted) is automatically going to have us overexposed to every single asset that's trading above its true fair value and underexposed to every single asset that's trading below its true fair value.
[Read that again. This is one of the reasons why value investing beats indexing over the long term.]
* * *
In addition to PowerShares mentioned in the article. Jeremy Siegel was talking about these new fundamentally weighted ETFs on CNBC which served practically as a free commercial for Wisdom Tree a firm with which he has signed on as an advisor.
Disclaimer: I (currently) own no investments in either PowerShares or Wisdom Tree.
Friday, June 16, 2006
Wednesday, June 14, 2006
The Current Pullback
[6/14/06] Like a youngster unable to sleep because he thinks there are horrible monsters hiding in his closet, financial markets have been spooked by irrational fears of surging inflation. The result: an imagined need for endless interest rate increases to bring prices under control.
Every time a Federal Reserve official says that U.S. inflation in recent months is outside the "comfort zone," investors sell assets on the grounds rates are headed higher, perhaps much higher.
The investors ignore the fact that the officials also say pointedly that they expect economic growth to slow and inflation to subside later this year. None of the officials, from Fed Chairman Ben S. Bernanke on down, have indicated they believe a new inflationary spiral has begun. The 0.3 percent increase in the consumer price index that was reported today by the Labor Department won't change that view.
To the contrary, many of them have explicitly said the opposite.
[6/13/06] "I think the average person out there in the market is winging it," said Daniel Kiley, chief executive officer of The Retirement Corporation of America, an investment advisory firm in Cincinnati, Ohio. "It's not that they don't want to succeed, they don't have a systematic approach to the way they're investing or diversifying. Individual investors often buy high, at the tail end of a market bubble, and sell low, just before a bull market is about to start again. From an emotional perspective, for individual investors it is a lot easier to buy high and sell low, but the exact opposite is required."
[6/13/06] What are the odds that what has so far been an almost classical correction could turn into something worse -- a prolonged downturn that puts an end to the long-term rally that now stretches back to March 2003?
[6/13/06] In another move reflecting Schwab’s continued cautious outlook on the equity markets, the Investment Strategy Council now recommends an underweight to U.S. and international equities while continuing to avoid emerging markets. We also added to our defensive posture by bumping both cash and bonds up a notch—the former to maximum overweight and the latter to neutral. Within bonds, we also made two recommendation changes—moving investment grade corporates to an underweight and mortgage-backed securities to an overweight. For details behind these specific moves within the bond allocation, please see our regular weekly write-up. We remain neutral to style and cap within the U.S. equity recommendation. We do think the market will stage a sentiment/technical-driven rebound before too long, but we’d be biased toward selling into any strength versus buying on weakness.
[6/12/06] [from Goldman Sachs] It has been exactly one month since the current market correction began on May 9th.
The S&P 500 dropped 2.8% last week and has returned -5.3% during the last month. However, the S&P 500 has experienced seven pull-backs of between 5% and 7% since the current expansion began in 2003 (see Exhibit 1). Most market participants seem to have overlooked this fact. Is this time different? The heightened scrutiny on the recent equity market decline may simply reflect an increased sensitivity regarding all things financial at a time when the Fed is closer to the end of its tightening cycle.
Our current sector recommendations have a strong growth tilt with overweight positions in Information Technology, Industrials, Energy and Materials and corresponding underweights in Financials, Health Care and Consumer Discretionary.
Every time a Federal Reserve official says that U.S. inflation in recent months is outside the "comfort zone," investors sell assets on the grounds rates are headed higher, perhaps much higher.
The investors ignore the fact that the officials also say pointedly that they expect economic growth to slow and inflation to subside later this year. None of the officials, from Fed Chairman Ben S. Bernanke on down, have indicated they believe a new inflationary spiral has begun. The 0.3 percent increase in the consumer price index that was reported today by the Labor Department won't change that view.
To the contrary, many of them have explicitly said the opposite.
[6/13/06] "I think the average person out there in the market is winging it," said Daniel Kiley, chief executive officer of The Retirement Corporation of America, an investment advisory firm in Cincinnati, Ohio. "It's not that they don't want to succeed, they don't have a systematic approach to the way they're investing or diversifying. Individual investors often buy high, at the tail end of a market bubble, and sell low, just before a bull market is about to start again. From an emotional perspective, for individual investors it is a lot easier to buy high and sell low, but the exact opposite is required."
[6/13/06] What are the odds that what has so far been an almost classical correction could turn into something worse -- a prolonged downturn that puts an end to the long-term rally that now stretches back to March 2003?
[6/13/06] In another move reflecting Schwab’s continued cautious outlook on the equity markets, the Investment Strategy Council now recommends an underweight to U.S. and international equities while continuing to avoid emerging markets. We also added to our defensive posture by bumping both cash and bonds up a notch—the former to maximum overweight and the latter to neutral. Within bonds, we also made two recommendation changes—moving investment grade corporates to an underweight and mortgage-backed securities to an overweight. For details behind these specific moves within the bond allocation, please see our regular weekly write-up. We remain neutral to style and cap within the U.S. equity recommendation. We do think the market will stage a sentiment/technical-driven rebound before too long, but we’d be biased toward selling into any strength versus buying on weakness.
[6/12/06] [from Goldman Sachs] It has been exactly one month since the current market correction began on May 9th.
The S&P 500 dropped 2.8% last week and has returned -5.3% during the last month. However, the S&P 500 has experienced seven pull-backs of between 5% and 7% since the current expansion began in 2003 (see Exhibit 1). Most market participants seem to have overlooked this fact. Is this time different? The heightened scrutiny on the recent equity market decline may simply reflect an increased sensitivity regarding all things financial at a time when the Fed is closer to the end of its tightening cycle.
Our current sector recommendations have a strong growth tilt with overweight positions in Information Technology, Industrials, Energy and Materials and corresponding underweights in Financials, Health Care and Consumer Discretionary.
Monday, June 12, 2006
The world is down
John Mauldin took a look at 64 markets around the world. All of them were down, with two-thirds down 10% or more from their high.
In comparison to some markets, the U.S. market has actually held up relatively well.
In comparison to some markets, the U.S. market has actually held up relatively well.
And just wait til the price goes up!
When you look at Forbes billionaire list and compare it to Morningstar's stock ratings, something will immediately jump out at you. A high proportion of the top 20 richest people in the world owe their wealth to companies that are rated as undervalued by Morningstar.
Sunday, June 11, 2006
more companies being investigated for backdated options
[8/11/06] Morningstar's take of options backdating and what to do if a company you own is caught up in the scandal.
[6/11/06] WASHINGTON - Alarmed by the possible manipulation of stock options to enrich top executives at a growing number of companies, federal regulators are looking at refining their plan to expand public disclosure of compensation.
The list of public companies under investigation by the Securities and Exchange Commission or federal prosecutors regarding the suspicious timing of options grants has grown to at least 30, and executives at several companies have been fired in recent weeks.
[InvestorGuide Daily]
[6/11/06] WASHINGTON - Alarmed by the possible manipulation of stock options to enrich top executives at a growing number of companies, federal regulators are looking at refining their plan to expand public disclosure of compensation.
The list of public companies under investigation by the Securities and Exchange Commission or federal prosecutors regarding the suspicious timing of options grants has grown to at least 30, and executives at several companies have been fired in recent weeks.
[InvestorGuide Daily]
Wednesday, June 07, 2006
The Six Rules for Lazy Investors
Paul Farrell writes (8/17/14 - this link works).
Investors need a way to sift through the useless chatter about the 8,000 or more funds out there. So years ago I started tracking the best unexciting, dull, boring, simple, lazy portfolios I could find that were being used by Nobel winners, money managers, advisers, behavioral finance experts, millionaires and average investors.
Most of their portfolios are very simple, with 10 or less funds. I wrote a book about them, "The Lazy Person's Guide to Investing." Here's what they told me: The six basic strategies used by America's laziest investors, guaranteed to help you diversify, lower risk, level out bull/bear cycles, and generate returns close to or better than market benchmarks.
-- from investwise
Investors need a way to sift through the useless chatter about the 8,000 or more funds out there. So years ago I started tracking the best unexciting, dull, boring, simple, lazy portfolios I could find that were being used by Nobel winners, money managers, advisers, behavioral finance experts, millionaires and average investors.
Most of their portfolios are very simple, with 10 or less funds. I wrote a book about them, "The Lazy Person's Guide to Investing." Here's what they told me: The six basic strategies used by America's laziest investors, guaranteed to help you diversify, lower risk, level out bull/bear cycles, and generate returns close to or better than market benchmarks.
-- from investwise
When Bernanke speaks
When Ben Bernanke was tapped to become the new chairman of the U.S. Federal Reserve, Wall Street hailed his fine communication skills, saying the plainspoken economics professor would improve the transparency of the Fed.
But now that blunt talk from the new Fed chief has thrown the markets into a two-day tailspin, many observers seem wistful for Bernanke's predecessor, the famously abstruse Alan Greenspan.
But now that blunt talk from the new Fed chief has thrown the markets into a two-day tailspin, many observers seem wistful for Bernanke's predecessor, the famously abstruse Alan Greenspan.
Tuesday, June 06, 2006
is the market high or low?
In his journal, Richard Band relates an article by Ed Elfenbein which points out that the p/e ratio of the S&P 500 is currently at a 10-year low.
However, if you go back like 125 years, the p/e looks pretty much in the middle to me.
However, if you go back like 125 years, the p/e looks pretty much in the middle to me.
Where are the hot hedge funds?
Contrary to common wisdom, a new study says that many hedge funds can outperform their benchmarks consistently, according to published reports.
Studies that found that hedge funds performed strongly in a sprint but not for the long haul were flawed, says this study, because they failed to correct fully for statistical problems in databases of hedge fund returns.
According to "Do Hot Hands Persist Among Hedge Fund Managers? An Empirical Evaluation," the misconception comes from a "self-selection bias" whereby good performers close to new investors, stop reporting their performance and therefore vanish from the databases.
The study found funds closed to new investors as a result of good performance were more likely to be above-average performers in the period after they closed.
-- from investmentnews.com
Studies that found that hedge funds performed strongly in a sprint but not for the long haul were flawed, says this study, because they failed to correct fully for statistical problems in databases of hedge fund returns.
According to "Do Hot Hands Persist Among Hedge Fund Managers? An Empirical Evaluation," the misconception comes from a "self-selection bias" whereby good performers close to new investors, stop reporting their performance and therefore vanish from the databases.
The study found funds closed to new investors as a result of good performance were more likely to be above-average performers in the period after they closed.
-- from investmentnews.com
Saturday, June 03, 2006
The magazine cover indicator
[Mike Norman writes] Perhaps you've heard of one of my favorite media indicators. It's called the "Magazine Cover Indicator." I kid you not. The premise is simple: When a major investment theme or trend shows up as the cover story of a well-known publication, then that theme is near an end or at least ready to take a pause.
Tuesday, May 30, 2006
bear market?
Ned Davis Research firm found that drops of 5 percent or more in the Dow Jones Industrial Average have occurred 355 times since 1900, or an average of 3.3 times a year. Only 31 times did the decline worsen into a bear market, defined as a drop of 20 percent or more. A bear market occurs about once every three years.
So, more than 90 percent of all 5 percent declines don't turn into bear markets.
Ned Davis Research conducted a similar analysis on the Russell 2000, going back to 1979. The small-stock index has experienced 74 dips of 5 percent or more, and nine bear markets. The frequency of declines and bear markets is about the same as for the Dow.
If the decline resumes and worsens, dragging the Dow and the Russell down more than 10 percent from the May 10 peaks, then history suggests there is roughly a 50-50 chance of an outright bear market.
So, more than 90 percent of all 5 percent declines don't turn into bear markets.
Ned Davis Research conducted a similar analysis on the Russell 2000, going back to 1979. The small-stock index has experienced 74 dips of 5 percent or more, and nine bear markets. The frequency of declines and bear markets is about the same as for the Dow.
If the decline resumes and worsens, dragging the Dow and the Russell down more than 10 percent from the May 10 peaks, then history suggests there is roughly a 50-50 chance of an outright bear market.
Monday, May 29, 2006
avarice
The lust of avarice as so totally seized upon mankind that their
wealth seems rather to possess them than they possess their wealth.
- Pliny the Elder (23-79 A. D.) [from InvestorWords, (5/29/06)]
wealth seems rather to possess them than they possess their wealth.
- Pliny the Elder (23-79 A. D.) [from InvestorWords, (5/29/06)]
Sunday, May 28, 2006
David Dreman and the Long View
SmartMoney's Beverly Goodman interviews David Dreman.
You began your work in behavioral finance with the study of heuristics — essentially, rules of thumb. How does that influence the way people invest?
Heuristics are simple guidelines that we use without thinking. We need them to operate, and they work very well most of the time. For instance, if you're driving down a city street, you focus on what you should see — like other cars, traffic lights, etc.-and ignore everything else, like all the people on the sidewalk and things going on in nearby apartments. Heuristics allow people to concentrate on what's important at that moment. A shortcut, in a sense.
So where do they go wrong?
Heuristics don't work when people aren't good statistical processors. There's been a lot of research on cognitive heuristical errors, such as how people focus on the case rate rather than the base rate of whatever statistics they're evaluating.
Base rate and case rate?
The base rate is the long view. Sharks attack something like one in 5 million swimmers — that's the base rate — but that doesn't stop people from avoiding the water after a highly publicized shark attack or seeing Jaws — the case rate.
How does that apply to the stock market?
With stocks, the base rate is the 10% the stock market has returned on average over decades. The case rate is what the market's been doing for a few weeks or months or even a couple of years. So when we get a bubble, like what we had in the late 1990s, people immediately go over to the case rate — the short-term return — and project that into the future forever. So they end up paying too much for their stocks.
[see also Philip Durell's interview]
You began your work in behavioral finance with the study of heuristics — essentially, rules of thumb. How does that influence the way people invest?
Heuristics are simple guidelines that we use without thinking. We need them to operate, and they work very well most of the time. For instance, if you're driving down a city street, you focus on what you should see — like other cars, traffic lights, etc.-and ignore everything else, like all the people on the sidewalk and things going on in nearby apartments. Heuristics allow people to concentrate on what's important at that moment. A shortcut, in a sense.
So where do they go wrong?
Heuristics don't work when people aren't good statistical processors. There's been a lot of research on cognitive heuristical errors, such as how people focus on the case rate rather than the base rate of whatever statistics they're evaluating.
Base rate and case rate?
The base rate is the long view. Sharks attack something like one in 5 million swimmers — that's the base rate — but that doesn't stop people from avoiding the water after a highly publicized shark attack or seeing Jaws — the case rate.
How does that apply to the stock market?
With stocks, the base rate is the 10% the stock market has returned on average over decades. The case rate is what the market's been doing for a few weeks or months or even a couple of years. So when we get a bubble, like what we had in the late 1990s, people immediately go over to the case rate — the short-term return — and project that into the future forever. So they end up paying too much for their stocks.
[see also Philip Durell's interview]
Friday, May 26, 2006
buy and hold
In my opinion, the greatest misconception about the market is the idea that if you buy and hold stocks for long periods of time, you'll always make money. Let me give you some specific examples. Anyone who bought the stock market at any time between the 1896 low and the 1932 low would have lost money. In other words, there's a 36 year period in which a buy-and-hold strategy would have lost money. As a more modern example, anyone who bought the market at any time between the 1962 low and the 1974 low would have lost money.
- Victor Sperandeo (Trader Vic)
- Victor Sperandeo (Trader Vic)
emerging markets
[9/15/06 investwise] [Says Price Headley] The general consensus for many economists is that Brazil, Russian, Inda, and China will combine to be the prevailing economic powerhouses of this century. They all have GDP's that continue to soar and they've signed trade agreements that assure economic ties for years to come.
One of the main reasons that the BRIC's (Brazil, Russia, India, and China) have potential to be the economic powerhouse of the 21st century is their recent adoption of global capitalistic economies. Goldman sachs reported that BRIC economies currently are responsible for 20% of the world growth in GDP. That number will swell to 40% in 2025.
[7/25/06] Morningstar asked international fund managers whether they have been finding bargains in emerging markets after the decline. The answer? No.
[7/9/06] David Herro of Oakmark International writes "Commodities, metals, energy, real estate, global small caps, cyclical stocks, emerging markets… what do they all have in common? All of these asset classes have experienced strong price increases in the past three to five years. In the meantime some of the most secure, profitable, and best run businesses in the world have experienced poor price performance. To us, this spells value. We continue to be enthusiastic about the opportunities we are finding in the forgotten asset class of large, blue chip global companies. About the other asset classes, we must warn: what goes strongly up, also can fall down."
[5/26/06] Schwab has gone neutral on emerging markets, which for moderate portfolios is 0% exposure. "This is the third time in the past three years we've moved to neutral. After the prior two, we ultimately went back to an overweight within several months. It's too soon to say whether we're on that same path again, but for now the risks are ample enough to justify no exposure."
[5/11/06] It is at times like this that contrarian commentators start to get nervous. James Montier, the Dresdner Kleinwort Wasserstein strategist, is most concerned about emerging markets. He points out that emerging markets have risen 225 per cent since 2003, while developed markets are up 87 per cent. Emerging markets now trade on a valuation discount to developed markets of just 15 per cent, half the post-1995 average.
Furthermore, US mutual fund investors are putting three times as much money into emerging markets as they were in 1993, just before a series of crises in the sector. On average, when mutual fund investors are investing heavily in emerging markets, subsequent three-year returns have been 1.7 per cent; after they have sold, three-year returns have been 15 per cent. The omens do not look good.
One of the main reasons that the BRIC's (Brazil, Russia, India, and China) have potential to be the economic powerhouse of the 21st century is their recent adoption of global capitalistic economies. Goldman sachs reported that BRIC economies currently are responsible for 20% of the world growth in GDP. That number will swell to 40% in 2025.
[7/25/06] Morningstar asked international fund managers whether they have been finding bargains in emerging markets after the decline. The answer? No.
[7/9/06] David Herro of Oakmark International writes "Commodities, metals, energy, real estate, global small caps, cyclical stocks, emerging markets… what do they all have in common? All of these asset classes have experienced strong price increases in the past three to five years. In the meantime some of the most secure, profitable, and best run businesses in the world have experienced poor price performance. To us, this spells value. We continue to be enthusiastic about the opportunities we are finding in the forgotten asset class of large, blue chip global companies. About the other asset classes, we must warn: what goes strongly up, also can fall down."
[5/26/06] Schwab has gone neutral on emerging markets, which for moderate portfolios is 0% exposure. "This is the third time in the past three years we've moved to neutral. After the prior two, we ultimately went back to an overweight within several months. It's too soon to say whether we're on that same path again, but for now the risks are ample enough to justify no exposure."
[5/11/06] It is at times like this that contrarian commentators start to get nervous. James Montier, the Dresdner Kleinwort Wasserstein strategist, is most concerned about emerging markets. He points out that emerging markets have risen 225 per cent since 2003, while developed markets are up 87 per cent. Emerging markets now trade on a valuation discount to developed markets of just 15 per cent, half the post-1995 average.
Furthermore, US mutual fund investors are putting three times as much money into emerging markets as they were in 1993, just before a series of crises in the sector. On average, when mutual fund investors are investing heavily in emerging markets, subsequent three-year returns have been 1.7 per cent; after they have sold, three-year returns have been 15 per cent. The omens do not look good.
Wednesday, May 24, 2006
Bad Management
Bad management can make a good business look lousy, and corrupt management can make a terrible business look great, which is even worse.
The issue is particularly important for value investors. We try to pick up companies that are trading at low prices because they're out of favor with the Wall Street crowd. But often, companies are unpopular because they're known to have less-than-stellar management. So it's critical for value investors to be able to identify bad leadership to avoid companies that are cheap because they just aren't all that valuable.
Richard Gibbons presents six warning signs to help identify such companies.
The issue is particularly important for value investors. We try to pick up companies that are trading at low prices because they're out of favor with the Wall Street crowd. But often, companies are unpopular because they're known to have less-than-stellar management. So it's critical for value investors to be able to identify bad leadership to avoid companies that are cheap because they just aren't all that valuable.
Richard Gibbons presents six warning signs to help identify such companies.
Tuesday, May 16, 2006
market slowdown?
[Shannon Zimmerman writes] In stock market parlance, a "correction" is usually taken to mean a downward swing of 10% or more. As I type, the S&P is off roughly 2.4% from the high it touched earlier this month, which means we still have a way to go before hitting correction territory. Nonetheless, last week's swoon has me wondering if the folks at the Leuthold fund shop are onto something.
As reported in this earlier commentary, Leuthold's merry band of data mavens thinks there's a possibility that "a significant economic slowdown, or possibly a recession, could become increasingly obvious by the second half of 2006."
As the management team put it in a recent letter to investors, "We believe it is a time to be conservative ... not aggressive."
As reported in this earlier commentary, Leuthold's merry band of data mavens thinks there's a possibility that "a significant economic slowdown, or possibly a recession, could become increasingly obvious by the second half of 2006."
As the management team put it in a recent letter to investors, "We believe it is a time to be conservative ... not aggressive."
Sunday, May 14, 2006
international investing
[12/14/06] Getting some international exposure in your portfolio may be one of the best things you can do as an investor. Why? Because such exposure -- whether through individual stocks, mutual funds, or exchange-traded funds -- generally provides you the same or even higher potential returns but at lower risk.
Burton Malkiel, a Princeton professor, drove this point home for me many years ago in his book A Random Walk Down Wall Street. I never forgot this paragraph, concerning his 21-year research period from 1977 to 1997:
It turns out that the portfolio with the least risk had 24% foreign securities and 76% U.S. securities. Moreover, adding 24% [Europe, Australia, and Far East] stocks to a domestic portfolio also tended to increase the portfolio return. In this sense, international diversification provided the closest thing to a free lunch available in our world securities markets. When higher portfolio returns can be achieved with lower risk by adding international stocks, no individual or portfolio manager should fail to take notice.
[6/3/06] Building portfolios with the least amount of risk for a given level of return is the foundation of modern portfolio theory. Including international equities in your portfolio helps reduce risk by adding diversification. Professionally managed endowments and pension funds have long recognized the diversification benefits of an international allocation. According to Pension & Investments, the average allocation to international equity for the top 200 U.S.-based pension funds is about 18% of total fund or 25% of total equity holdings.
We confirmed that portfolios with some exposure to international equities had lower risk (as measured by standard deviation) than an all-domestic portfolio for approximately the same level of return.
[5/14/06] Not all Fools see eye to eye when it comes to investing abroad. Some feel that buying a multinational company like General Electric (NYSE: GE) or Coca-Cola (NYSE: KO) will give them the right amount of overseas exposure without buying an actual foreign company like Sony (NYSE: SNE) or Ericsson (Nasdaq: ERICY).
Burton Malkiel, a Princeton professor, drove this point home for me many years ago in his book A Random Walk Down Wall Street. I never forgot this paragraph, concerning his 21-year research period from 1977 to 1997:
It turns out that the portfolio with the least risk had 24% foreign securities and 76% U.S. securities. Moreover, adding 24% [Europe, Australia, and Far East] stocks to a domestic portfolio also tended to increase the portfolio return. In this sense, international diversification provided the closest thing to a free lunch available in our world securities markets. When higher portfolio returns can be achieved with lower risk by adding international stocks, no individual or portfolio manager should fail to take notice.
[6/3/06] Building portfolios with the least amount of risk for a given level of return is the foundation of modern portfolio theory. Including international equities in your portfolio helps reduce risk by adding diversification. Professionally managed endowments and pension funds have long recognized the diversification benefits of an international allocation. According to Pension & Investments, the average allocation to international equity for the top 200 U.S.-based pension funds is about 18% of total fund or 25% of total equity holdings.
We confirmed that portfolios with some exposure to international equities had lower risk (as measured by standard deviation) than an all-domestic portfolio for approximately the same level of return.
[5/14/06] Not all Fools see eye to eye when it comes to investing abroad. Some feel that buying a multinational company like General Electric (NYSE: GE) or Coca-Cola (NYSE: KO) will give them the right amount of overseas exposure without buying an actual foreign company like Sony (NYSE: SNE) or Ericsson (Nasdaq: ERICY).
Ward Cleaver or Eddie Haskell?
In "Stocks and Bonds" (season five, episode 194), Beaver and Wally take an interest in investing, and Ward decides to let them give it a try and learn about the market firsthand by making an actual investment. What's interesting about this episode is that investors today face many of the same problems Wally and the Beav did more than 40 years ago.
In the episode, Ward steers Beaver and Wally toward a dividend-paying company, Mayfield Power and Light. If that doesn't sound like a nice, safe, and absolutely boring investment, I don't know what does. But the boys are simultaneously tempted by their friend Eddie Haskell to invest in Jet Electro, a company that builds rockets.
In the episode, Ward steers Beaver and Wally toward a dividend-paying company, Mayfield Power and Light. If that doesn't sound like a nice, safe, and absolutely boring investment, I don't know what does. But the boys are simultaneously tempted by their friend Eddie Haskell to invest in Jet Electro, a company that builds rockets.
Thursday, May 11, 2006
Robert Shiller
Mauldin has Shiller on his side...
Stock markets are still expensive and investors could be in for an unpleasant surprise once corporate profits begin to weaken, says the Yale University economist who predicted the crash of 2000-2002.
Robert Shiller, whose 2000 book Irrational Exuberance became a bestseller for its gloomy but accurate forecast, said the current equity market rally is reminiscent of the mid-1930s rebound that followed the Great Crash of ‘29. The Dow Jones industrial average tripled over four years between 1933 and 1936 — only to plunge once again in the run-up to the Second World War.
-- from Trevor at chucks_angels
Stock markets are still expensive and investors could be in for an unpleasant surprise once corporate profits begin to weaken, says the Yale University economist who predicted the crash of 2000-2002.
Robert Shiller, whose 2000 book Irrational Exuberance became a bestseller for its gloomy but accurate forecast, said the current equity market rally is reminiscent of the mid-1930s rebound that followed the Great Crash of ‘29. The Dow Jones industrial average tripled over four years between 1933 and 1936 — only to plunge once again in the run-up to the Second World War.
-- from Trevor at chucks_angels
Saturday, May 06, 2006
scale trading
Scale Trading is a disciplined, mechanical approach to buying low and selling high. It is based on the economic law of Supply and Demand, built on the premise that a physical commodity has an intrinsic value and, therefore, will not likely become valueless.
However, Braden Glett warns that while "scale trading can be a viable strategy when applied to commodity futures, mostly because commodities have inherent value meaning that they cannot decline to zero value. ... [but] individual stocks can and do become worthless on occasion, which is one of the main reasons why scale trading is such an unfit approach for stock investing."
[link from scalenet, 4/24/06]
* * *
Note: Scale trading is an averaging down strategy, which is what Bill Miller does relentlessly.
However, Braden Glett warns that while "scale trading can be a viable strategy when applied to commodity futures, mostly because commodities have inherent value meaning that they cannot decline to zero value. ... [but] individual stocks can and do become worthless on occasion, which is one of the main reasons why scale trading is such an unfit approach for stock investing."
[link from scalenet, 4/24/06]
* * *
Note: Scale trading is an averaging down strategy, which is what Bill Miller does relentlessly.
random observations
Heard the one about the monkey and the typewriter?
“If one puts an infinite number of monkeys in front of (strongly built) typewriters and lets them clap away, there is a certainty that one of them [will] come out with an exact version of the ‘Iliad,’” writes Nassim Nicholas Taleb in a recent book, Fooled by Randomness.
The monkey typist story is an old one, and the key word is “infinite.” But Taleb takes this hoary tale a step further. “Now that we have found that hero among monkeys, would any reader invest his life’s savings on a bet that the monkey would write the ‘Odyssey’ next?”
Taleb’s point is that the past frequently tells us nothing at all about the future, even though many of us believe it does and make investments accordingly. “Think about the monkey showing up at your door with his impressive past performance. Hey, he wrote the ‘Iliad.’”
The lesson here for investors is powerful and frightening. How much can you rely on the track records of investment advisers, mutual fund managers, newspaper columnists, or even the market as a whole in making decisions about your investment portfolio? Not nearly as much as you probably think.
“If one puts an infinite number of monkeys in front of (strongly built) typewriters and lets them clap away, there is a certainty that one of them [will] come out with an exact version of the ‘Iliad,’” writes Nassim Nicholas Taleb in a recent book, Fooled by Randomness.
The monkey typist story is an old one, and the key word is “infinite.” But Taleb takes this hoary tale a step further. “Now that we have found that hero among monkeys, would any reader invest his life’s savings on a bet that the monkey would write the ‘Odyssey’ next?”
Taleb’s point is that the past frequently tells us nothing at all about the future, even though many of us believe it does and make investments accordingly. “Think about the monkey showing up at your door with his impressive past performance. Hey, he wrote the ‘Iliad.’”
The lesson here for investors is powerful and frightening. How much can you rely on the track records of investment advisers, mutual fund managers, newspaper columnists, or even the market as a whole in making decisions about your investment portfolio? Not nearly as much as you probably think.
hot commodities
[7/31/06] Mauldin presents The Absolutle Return letter which expounds on the relations between commododies and recession and expansion. They found "The best environment for commodities is late expansions where the average return both in absolute and relative terms is very attractive."
However what stood out for me was that seeing that bonds blew away both stocks and commodities in times of recession.
[6/7/06] Morningstar's take on commodities
[6/3/06] WITH THE PRICES OF OIL AND INDUSTRIAL METALS like copper, zinc and nickel screaming higher in recent months, such observers as Warren Buffett and Morgan Stanley's Steve Roach have proclaimed that commodity markets are in a bubble destined to burst soon.
But Jim Rogers, fabled hedge-fund manager of the 'Seventies and now ardent commodity bull, finds such talk ridiculous. Indeed, he has been pounding the drum for investing in commodities in recent years in numerous speeches and media interviews, even writing Hot Commodities, a book propitiously published in late 2004 that predicted a coming price boom in everything from aluminum to zinc.
* * *
[5/6/06] The world's commodity markets are making financial history.
They have staged a powerful rally heralding the emergence of a great global economic boom. Take a gander at the price of copper, which has roughly tripled in the last two years.
Oil, the commodity making the biggest headlines, last week soared above $75 a barrel for the first time. Gold, at more than $650 a troy ounce, looks to be mounting a challenge to the record highs set 25 years ago. Silver rocketed 8 percent on Friday when a new trading vehicle, the Ishares Silver Trust exchange-traded fund, made its debut.
All this has produced whoops of vindication from the commodity faithful, who spent the 1980s and 1990s sitting on the sidelines while paper assets such as stocks and bonds prospered.
It has also brought cries of alarm. However long it lasts, many voices of experience say, the commodity rally is headed toward a collapse like the one that ended the last great upsurge, which occurred in the 1970s.
However what stood out for me was that seeing that bonds blew away both stocks and commodities in times of recession.
[6/7/06] Morningstar's take on commodities
[6/3/06] WITH THE PRICES OF OIL AND INDUSTRIAL METALS like copper, zinc and nickel screaming higher in recent months, such observers as Warren Buffett and Morgan Stanley's Steve Roach have proclaimed that commodity markets are in a bubble destined to burst soon.
But Jim Rogers, fabled hedge-fund manager of the 'Seventies and now ardent commodity bull, finds such talk ridiculous. Indeed, he has been pounding the drum for investing in commodities in recent years in numerous speeches and media interviews, even writing Hot Commodities, a book propitiously published in late 2004 that predicted a coming price boom in everything from aluminum to zinc.
* * *
[5/6/06] The world's commodity markets are making financial history.
They have staged a powerful rally heralding the emergence of a great global economic boom. Take a gander at the price of copper, which has roughly tripled in the last two years.
Oil, the commodity making the biggest headlines, last week soared above $75 a barrel for the first time. Gold, at more than $650 a troy ounce, looks to be mounting a challenge to the record highs set 25 years ago. Silver rocketed 8 percent on Friday when a new trading vehicle, the Ishares Silver Trust exchange-traded fund, made its debut.
All this has produced whoops of vindication from the commodity faithful, who spent the 1980s and 1990s sitting on the sidelines while paper assets such as stocks and bonds prospered.
It has also brought cries of alarm. However long it lasts, many voices of experience say, the commodity rally is headed toward a collapse like the one that ended the last great upsurge, which occurred in the 1970s.
popularity contest
A Santa Fe institute study on how people judge music sheds light on investor behavior in the stock market.
Elements of an investor
Mike Norman writes "the most important lesson I've learned -- and the most difficult to learn -- is to master myself and my behavior.
I could dazzle people with my knowledge, but I still couldn't make a dime consistently in the markets.
... I started thinking that maybe the problem was me. I had a "we have met the enemy and it is us" kind of moment. From that point on, I started to focus on what I was doing to sabotage myself and then try to correct it.
Initially, the progress was slow. All of the old habits were taking their time going away. Little by little, however, change was occurring, and with that change came positive results. Soon, the momentum was building in the right direction, and my trading account was growing, too.
Over time, I began to see that the behavioral part is really simple. It can basically be distilled down to four elements: patience, detachment, alignment, and discipline.
I could dazzle people with my knowledge, but I still couldn't make a dime consistently in the markets.
... I started thinking that maybe the problem was me. I had a "we have met the enemy and it is us" kind of moment. From that point on, I started to focus on what I was doing to sabotage myself and then try to correct it.
Initially, the progress was slow. All of the old habits were taking their time going away. Little by little, however, change was occurring, and with that change came positive results. Soon, the momentum was building in the right direction, and my trading account was growing, too.
Over time, I began to see that the behavioral part is really simple. It can basically be distilled down to four elements: patience, detachment, alignment, and discipline.
Friday, May 05, 2006
Is Mauldin still bearish?
[10/23/06] With the market setting new highs, Mauldin reiterates his bear case made in his book, Bull-Eye Investing.
[5/10/06] Over the next 10 years, Mauldin would choose U.S. Treasuries over U.S. stocks. He thinks their 5% yield would outperform the S&P over the next decade. But he also sees opportunities overseas.
* * *
[5/5/06] Is (the widely-read columnist) John Mauldin still bearish?
The answer is pretty much yes.
He makes a good case. Based on the current p/e (or the p/e that he chooses to use), the market is in the highest quintile which has historically led to 0% returns.
Of course, he's been bearish at least since 2002 when the S&P 500 bottomed at 800. It's now at 1300.
[5/10/06] Over the next 10 years, Mauldin would choose U.S. Treasuries over U.S. stocks. He thinks their 5% yield would outperform the S&P over the next decade. But he also sees opportunities overseas.
* * *
[5/5/06] Is (the widely-read columnist) John Mauldin still bearish?
The answer is pretty much yes.
He makes a good case. Based on the current p/e (or the p/e that he chooses to use), the market is in the highest quintile which has historically led to 0% returns.
Of course, he's been bearish at least since 2002 when the S&P 500 bottomed at 800. It's now at 1300.
Wednesday, May 03, 2006
Louis Rukeyser
BOSTON (Reuters) - Louis Rukeyser, a television host and author who helped millions of Americans understand the workings of Wall Street with pun-filled stock market commentary delivered weekly for 32 years, died on Tuesday. He was 73.
Rukeyser died of multiple myeloma at his home in Greenwich, Connecticut, his brother Bud Rukeyser said on Wednesday.
From 1970 until 2002, at 8:30 p.m. on Friday evenings on public television, the dapper journalist began his half hour-long show Wall $treet Week with Louis Rukeyser to the clacking sound of an old stock ticker machine.
Rukeyser reviewed the week's news with witticisms, wordplay and factoids and then moderated a panel discussion. The better the market outlook, the more he liked it, his brother said. The format never changed.
TV Guide called Wall $treet Week one of the best programs of on American television and wrote, "Louis Rukeyser's opening remarks on the week's business events are crafted gems of wry commentary; his airy and adroit handling of his big-shot guests is a pleasure to watch."
Rukeyser died of multiple myeloma at his home in Greenwich, Connecticut, his brother Bud Rukeyser said on Wednesday.
From 1970 until 2002, at 8:30 p.m. on Friday evenings on public television, the dapper journalist began his half hour-long show Wall $treet Week with Louis Rukeyser to the clacking sound of an old stock ticker machine.
Rukeyser reviewed the week's news with witticisms, wordplay and factoids and then moderated a panel discussion. The better the market outlook, the more he liked it, his brother said. The format never changed.
TV Guide called Wall $treet Week one of the best programs of on American television and wrote, "Louis Rukeyser's opening remarks on the week's business events are crafted gems of wry commentary; his airy and adroit handling of his big-shot guests is a pleasure to watch."
Sunday, April 30, 2006
The World's Hottest Stocks
Just last year, markets in Austria, Egypt, Turkey, and South Korea delivered better than 50% returns, and that's no one-year fluke. In 2004, Mexico, Indonesia, Iceland, and Egypt (again) produced similarly great results. Look back to 2003 and you'll find a near-doubling of the Brazilian market, as well as very strong performance in places as diverse as Mexico, Indonesia, and Singapore.
John Kenneth Galbraith
John Kenneth Galbraith, the iconoclastic economist, teacher and diplomat and an unapologetically liberal member of the political and academic establishment that he needled in prolific writings for more than half a century, died yesterday at a hospital in Cambridge, Mass. He was 97.
-- from brknews
-- from brknews
Monday, April 24, 2006
Siegel vs. Shiller
The market has recovered from the lows of 2002. The question remains, though: Are we still experiencing "irrational exuberance," or can we expect long-run historical returns in the market going forward? Two heavyweight economists have been battling over just this question for the past 12 years.