the failure of mutual funds

We spend a lot of time harping on mutual funds. Frankly, they deserve it. Most underperform their benchmarks and charge fees multiple times higher than passive index funds. The result is a giant wealth transfer from investors to fund managers.

But after speaking with a fund manager recently, I realize this story is more complicated than I've made it out to be. Mutual fund investors may only have themselves to blame for awful returns.

Most dismal mutual-fund returns are the result of managers engaging in the classic "buy high, sell low" dance. But those buy and sell decisions don't necessarily reflect the will of the investment manager. Fund investors are constantly adding to and withdrawing from the fund's they invest in -- almost always at the worst time possible.

"You would be surprised how easy it is for a fund's investors to take control of the fund," the manager told me.

Imagine you're a smart fund manager who thinks stocks are overvalued. You don't have any good ideas to invest in. But you come into the office one morning and your secretary says, "Congratulations, your investors just sent you another $1 billion." What do you do? You can:

• Keep it in cash or bonds.

• Close down your fund and refuse new investments.

• Grit your teeth and buy overvalued stocks.

The first choice isn't even an option for some funds, as their charters mandate that they stay almost fully invested. Even if they can, bulking up cash dilutes the investments of existing investors. Fund managers rarely take this option -- equity mutual fund cash levels have fluctuated in a tight band of between 4%-6% over the last decade.

The second option is the noble choice, but rarely occurs because funds earn fees on assets under management. When a fund manager goes to his or her boss and says, "I'd like to turn down $10 million in annual fees," the results are entirely predictable. Greenwich real estate doesn't buy itself, you know.

Option three is usually what happens.

Now imagine it's 2009, and everything is going to hell in a handbasket. Stocks are the cheapest you've seen in your career, and the last thing you want to do is sell them. But you come into the office one morning and your secretary says, "Your investors want to withdraw $5 billion."

You only have one option to meet that demand: sell cheap stocks. Forget about all the buying opportunities -- your traders are working overtime to liquidate the portfolio whether you like it or not.

Sadly, that affects all of a fund's investors. Even if one fund investor has a long-term outlook and no intention of selling, the fund's buy and sell actions can be dictated by maniac deposits and panic withdrawals. Other investors' decisions can hurt you. That's why they call it a mutual fund.

Take Bill Miller of Legg Mason. Miller was one the best investors in the 1990s and early 2000s before suffering huge losses during the financial crisis that sullied his long-term track record.

What happened? In part, he made some bad calls. But Miller's early success and media fame led investors to give him a net $4.4 billion in new cash to invest just as stocks were getting expensive last decade. As his skill came into question, they then yanked nearly $10 billion out just as stocks were the cheapest they had been in years. Miller's wisdom didn't really matter last decade. His investors were calling the shots.

***

[6/5/13 - see also Investor Nirvana by James J. Cramer, Worth, May 1997]

the market is (still) overvalued

It's that time again.

A growing group of pessimists are asking whether the stock market is back to bubble territory. Some are even comparing it to 1999. They say stocks are being inflated by the Fed. That they're disconnected from the reality of a weak economy. That they're overvalued and bound to fall.

Could they be right? Of course.

They make a forceful case with charts and ratios and historical data.

But they have been making the same argument for four years now, and they have been wrong all the way. Clearly, the world is more complicated than the pessimists assume.

Consider that the S&P 500 has risen as much as 60% since these quotes went to press:

"The S&P 500 is about 40 percent overvalued" -- October, 2009
"US Stocks Surge Back Toward Bubble Territory" -- January, 2010
"On a valuation basis, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings." -- July, 2010
"Is The Stock Market Overvalued? Almost Every Important Measure Says Yes" -- November, 2010
"The market is as overvalued now as it was undervalued [in early 2009]," said David A. Rosenberg, chief economist and strategist for Gluskin Sheff, an investment firm." -- March, 2010
"Andrew Smithers, an excellent economist based in London, is telling us that we're way too optimistic, that fair value for the S&P 500 is actually in the 700-750 range. Smithers, therefore, thinks the stock market is about 50% overvalued." -- June, 2010

Sure, you might say these calls were just early. But let me put forth a truism in finance: When an average business cycle lasts five years, there is no such thing as four years ahead of the game. You are just wrong.

Some of the bubble arguments haven't changed in the face of a 50% rally. Take the cyclically adjusted price/earnings ratio, or CAPE. In 2010, the S&P 500, which traded near the 1,000 level, had a CAPE valuation of around 22, which many pointed out was about 40% above historic norms. Today, trading above 1,600, the S&P 500 has a CAPE of about ... 23. Even as the market exploded higher, the degree to which the market is supposedly overvalued hasn't changed that much, since companies have been busy investing in their operations and boosting earnings. That's why being four years early means being four years wrong.

Some people predicted the financial crisis in 2008. And good for them. But many of them also predicted a financial crisis in 2007, 2006, 2005, 1997, 1995, 1992, 1985, 1970, and so on. They are perma-bears who get ignored during booms and lionized during busts, even though their arguments rarely change. It's the classic broken-clock-is-right-twice-a-day syndrome.
Author Daniel Gardner wrote earlier this year:

In 2010, [Robert] Prechter said the Dow would crash to 1,000 this year or in the near future. The media loved it. Prechter's call was reported all over the world. Which was nice for Prechter. 

Even better, very few reporters bothered to mention that Prechter has been making pretty much the same prediction since 1987.

It was similar for investor Peter Schiff. There's a great YouTube video -- worthy of some 2.1 million views -- of Schiff predicting a market crash circa 2007. That was an excellent call. But here's another video of Schiff in 2002 predicting all kinds of gloom that never happened. Sadly, that video received only a handful of views. Gardner writes in his book Future Babble:

[Schiff predicted the 2008 crisis,] but it's somewhat less amazing if you bear in mind that Schiff has been making essentially the same prediction for the same reason for many years. And the amazement fades entirely when you learn that the man Schiff credits for his understanding of economics -- his father, Irwin -- has been doing the same at least since 1976.

***

What do I think?  Well, AAPL has a P/E of 10.6.  MSFT has a P/E of 17.7 (forward P/E of 10.8).  Berkshire Hathaway has P/B of 1.4 (higher than low of 1.1 in 2011).  CSCO has a P/E of 13.1.  I would say these stocks aren't overpriced.  The current P/E of VFINX is 14.28.  While not cheap, that still sounds quite reasonable.

The argument is that current earnings are inflated.  I can see that the growth rate will slow, but I still see overall eps increasing from here, if only moderately.

5 things to know about investing

I own one finance textbook, and I occasionally open it to remind myself how little I know about finance. It's packed with formulas on complex option pricing, the Gaussian copula function, and a chapter titled, "Assessment of Confidence Limits of Selected Values of Complex-Valued Models." I have literally no idea what that means.

Should it bother me that there's so much about finance I don't know? I don't think so. As John Reed writes in his book Succeeding:

When you first start to study a field, it seems like you have to memorize a zillion things. You don't. What you need is to identify the core principles -- generally three to twelve of them -- that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.

Evolution tells you a lot about biology. A handful of cognitive biases explain most of psychology. Likewise, there are a few core principles that explain most of what we need to know about investing.

Here are five that come to mind.

1.  It takes time.
2.  The largest single variable that affect returns is valuations [Peter Lynch might disagree].
3.  Simple is better than smart.
4.  The odds of high volatility is 100%.
5.  The industry is dominated by cranks, charlatans, and salesmen.

you have it good

Consider human history. For all but a fragment of it, about half of all children died before their fifth birthdays. Of the ones who survived, life was nasty, brutish, and short. According to data compiled by economist Angus Maddison, the total world population grew at an annualized rate indistinguishable from zero over the period from A.D. 1 to A.D. 1820.

Over the millennia, there were pockets of progress, some lasting for centuries. The ones we know of included the Roman Empire in Europe, the Tang and Song dynasties in China, and the Inca, Aztec, and Maya civilizations in the Americas. However, these civilizations, for the most part, did not set growth on a permanently higher trajectory. They usually ended in the sacking of great cities and the burning of books. Humanity didn't convincingly break out of this cycle until a couple of centuries ago.

Even narrowing our scope to the 20th century, our current prosperity looks surprisingly fragile and uneven, the outcome of a series of contingent events that plausibly could have led to far worse outcomes. The future of democratic capitalism was up for grabs during the Great Depression. World War I and World War II devastated Europe twice over and Asia once. The Cold War risked nuclear apocalypse. If we could reroll the 20th century many times, creating slightly different starting conditions each time, some outcomes surely would have led to regress (the probability of such outcomes is unknowable, of course). If you were born to a random family in the first half of the 20th century, chances are you would have experienced privation or total war. Even today, the majority of humanity lives in poverty by the rich world's standards. Bad things happen more often than not.

I don't write to frighten you but to let you know how good you've had it these past few decades. They were the most peaceful, stable, prosperous period humanity has ever experienced.

[I'll stop here, but the author makes the case that things will regress from here.]

stocks are headed higher

says David Tepper

Let's get a few things straight:

• The Federal Reserve is buying $85 billion a month of Treasuries.

• The budget deficit is shrinking very fast thanks to a combination of a stronger economy, budget cuts, and Fannie Mae and Freddie Mac repaying tens of billions of dollars in bailout funds. 

• Over the next six months, the budget deficit will likely be less than $100 billion, while the Fed will buy more than $500 billion of Treasuries.

Hedge fund billionaire David Tepper connects these dots and comes to a firm conclusion: Stocks are going higher. The Dow Jones (DJINDICES: ^DJI) surged on his comments.

Here he is on CNBC this morning:

In My Cousin Vinny there's this moment at the end of the movie where he's making a case and he's summing it up, and he sums it up with so many different things that the prosecution says, "case dismissed." Because the evidence is so overwhelming. 

It's kind of like that right now. It's so overwhelming. I mean, the economy is getting better, autos are better, housing is better -- they can't find enough people to work in housing, that's the only thing holding it back right now. 

The Fed ... we actually looked at how the numbers run. The numbers are quite amazing -- just truly amazing. The Fed, as you know, is going to purchase $85 billion of Treasuries and mortgages per month ... so over $500 billion in six months. 

But what's happened, and what's really amazing, is that over the next six months, because of tax increases, because of budget cuts, because of growth in the economy, and also because of Fannie Mae and Freddie Mac paying back money to the government, the deficit over the next six months is shrinking massively. ... It looks like the next six month's deficit is going to be well under $100 [billion], probably closer to $85 [billion]. 

Which means -- and this is an important thing -- ... we have over $500 billion we're going to buy over the next six months, and now we only have a deficit that's less than $100 billion over the next six months. ... That means we've got $400 billion -- $400 billion -- that has to be made up.

A lot of that $400 billion will make its way into stocks, Tepper concludes.

how rich would you be

if you had bought Apple stock instead of its gadgets?

Ever wonder how much money you would have now had you invested in AAPL stock instead of the first iPod when it came out? (That's $399 in 2001).

You'd have tens of thousands of dollars (see image).

We put 10 of the most popular Apple products of the last two decades together with what their current value would be if they had been stock investments. Our numbers come from Kyle Conroy, a software engineer who compiled all the data on his website.

If you paid for a new MacBook or iPhone in the past 10 years, seeing these figures may cause you to feel some regret. But it's an interesting reflection of just how successful AAPL stock has been.

the beginning of the end of QE (what happens?)

The Fed met again April 30-May 1 and as expected, kept interest rate policy unchanged. But the recent debate at the Fed has focused less on interest rates and more on when to begin reducing its bond purchases from the current pace of $85 billion per month. A few Fed members have indicated that they would like to taper down purchases later this year. What does that mean for the bond market?

A steeper yield curve is likely. When the Fed signals a slowdown in bond purchases it could trigger higher long-term interest rates and a steepening yield curve, in our view. Since the Fed has concentrated its bond buying in long-term debt, less buying would mean that private sector buyers would need to step in to fill the gap. It's likely they would demand higher interest rates than the Fed. Also, presumably the Fed will begin tapering its purchases when they are confident that the economy is a on a sustainable path to stronger growth and lower unemployment. Those factors are likely to push long-term interest rates higher as well. However, based on the latest projections by the Fed, most members see short-term interest rates to remain near zero until 2016. Consequently, we anticipate that the yield curve will steepen with short-term rates remaining anchored at low levels while long-term interest rates move higher.

Bottom line. The Fed could begin to signal that they are going to reduce the pace of monthly bond purchases later this year. We would expect that long-term interest rates are likely to move higher and the yield curve to steepen, in response to that signal. Although we don't expect a sharp rise in interest rates, we suggest preparing for a steeper yield curve by limiting your exposure to long-term bonds.

Jon Stewart on gold

When gold prices plummet and folks like G. Gordon Liddy and Glenn Beck start advising investors to hoard like Yosemite Sam, there's a voice that cuts through the commodity fever to the heart of the matter: Jon Stewart's.

Back on April 15, gold prices dropped to $1,321 per ounce and hit their lowest point since cresting $1,920 per ounce in September 2011.

As convicted Watergate conspirator Liddy shilled for gold in commercial breaks and Beck blamed the slide on a shadowy cabal of government, media and otherworldly forces bent on stripping Americans of their precious gold and damning them to a life of slavery, Stewart used the pulpit on Viacom (VIA -0.74%)-owned Comedy Central's "The Daily Show" earlier this week to suggest it might just be a market correction.

The market wasted little time proving him right, as prices climbed roughly 7% by Wednesday to $1,453.10 per ounce. Still, that didn't prevent Stewart from flogging Beck for his assertion that investors should listen to God by quoting decidedly anti-gold passages from the Bible's books of Exodus and Job.

***

[forwarded from Buddy]

The crash of the price of paper gold on Monday has unleashed an unprecedented global frenzy to buy physical gold and silver.  All over the planet, people are recognizing that this is a unique opportunity to be able to acquire large amounts of gold and silver at a bargain price.  So precious metals dealers now find themselves being overwhelmed with orders in the United States, in Canada, in Europe and over in Asia.

Will this massive run on physical gold and silver soon lead to widespread shortages of those metals?  Instead of frightening people away from gold and silver,the takedown of paper gold seems to have had just the opposite effect.  People just can’t seem to get enough physical gold and silver right now.  Those that wish that they had gotten into gold when it was less than $1400 an ounce are able to do so now, and it is absolutely insane that silver is sitting at about $23 an ounce.

If the big banks continue to play games with the price of gold, we are going to see existing supplies of physical gold and silver dry up very quickly.  And once reports of physical shortages of gold and silver become widespread, it is going to absolutely rock the financial world.  But this is what happens when you manipulate free markets – it often has unintended consequences far beyond anything that you ever imagined.

[so doesn't this mean that that gold has bottomed?]

CAPE

There are three popular P/E ratios:

• Forward P/E (on subsequent 12-month earnings forecasts)
• Trailing 12-month (TTM) P/E (on most recent 12-month past earnings)
• Robert Shiller's Cyclically Adjusted P/E (CAPE)

The CAPE uses earnings from the prior 10 years and has become a widely followed valuation measure. Yale professor Robert Shiller defines the numerator of the CAPE as the real (inflation-adjusted) price level of the S&P 500® Index and the denominator as the moving average of the preceding 10 years of S&P 500 real reported earnings, where the US Consumer Price Index (CPI) is used to adjust for inflation. The purpose of averaging 10 years of real reported earnings is to control for business-cycle effects. The CAPE is also sometimes referred to as the P/E10.

There are several problems with the construction of the CAPE, detailed in a terrific report by Steve Wilcox for The American Association of Individual Investors posted on the Seeking Alpha site in 2011, from which I'll pull some data.

The problem with using a 10-year period for earnings is that the average business cycle only lasts about six years. More recently, recessions have become shorter and expansions longer (notwithstanding the long "Great Recession" which ended in 2009), as you can see in the table below. As a result, CAPE tends to overestimate "true" average earnings during a contraction and underestimate "true" average earnings during an expansion.

In the present bull market, the first month the CAPE crossed into overvalued territory (i.e. went above its median) was May 2009, just two months after the market's bottom, since which time the market has more than doubled. Even more dramatic was the cross into overvalued territory by the CAPE in February 1991, a mere nine years shy of the top of the great 1990s' bull market.

Timeless Investment Classics

I just picked up Where Are the Customer's Yachts? from BookOff today.

Looking at the reviews of the book, I noticed one by Joseph L. Shaefer at Seeking Alpha ran a series reviewing 10 books that he considered "timeless investment classic"s

1.  Extraordinary Popular Delusions and the Madness of Crowds (1841)

2.  The Crowd: A Study of the Popular Mind (1896)

3.  The Battle for Investment Survival (1935)

4.  Where Are the Customers Yachts? (1940)

5.  Reminiscences of a Stock Operator (1923)

6.  Security Analysis (1934)

7.  The Intelligent Investor (1949)

8.  The Art of Contrary Thinking (1954)

9.  Common Stocks and Uncommon Profits (1958)

10.  The Money Game (1967)

*** [8/25/13]

Tanner Pilatzke's 27 must-read books for investors

*** [8/29/14]  26 more books reviewed

don't fear the high

Until the Dow's record on March 5 this year, it had gone 1,973 days without hitting an all-time high. According to Bespoke Investment Group (BIG), that's the sixth-longest stretch the Dow has ever gone without closing at a new all-time high. It's also the second time in the past decade that the Dow has gone more than two years without closing at a new all-time high.

These periods of "drought" are very rare.

As you can see in the table below, going back to 1900, there have only been 10 periods when the Dow went two or more years without closing at a new all-time high. For each period, also shown is how the index performed over the following one, three, six and 12 months.

Looking at the average returns, there isn't much credence to the argument that you shouldn't be buying stocks when the Dow is trading at an all-time high. Over the following one, six and 12 months, the Dow saw better-than-average returns. Furthermore, while the average maximum drawdown (loss) was a decline of 8.5% over the following 12 months, the magnitude of the average maximum gain was more than twice that at over 20%.

the President's economic report

Morgan Housel highlights four charts

[1] The budget forecasts that promise trillion-dollar deficits for decades to come overwhelmingly rely on the assumption that health-care costs will spiral higher, just as they did over the past few decades. But lately, per-beneficiary cost growth for Medicare has actually been below the rate of overall economic growth. I've written more extensively about this here, but the bottom line is that we're really bad at forecasting, so the discrepancy between forecasts and reality shouldn't be surprising. And if the trend of recent years holds up, it's a true game-changer: A majority of projected budget deficits will disappear without lifting a finger.

 [2] Evan Soltas of Bloomberg writes:

For much of the middle class, the real net cost of college has not changed significantly [over the past two decades]. ... Data from the College Board show effectively no change in real net tuition and fees for dependent students at four-year public or private universities whose families are in the lower-two income quartiles.

[3] Not only are we currently building too few homes to keep up with demographics, but the skew is almost as large today as it was during last decade's housing bubble -- just in the other direction.

The importance of that can't be overstated enough, which is why I've written about it a lot. People look back at the housing bubble with a sense of amazement. The market was out of control! It was so crazy! Everything was out of balance! But it's virtually the same today. Except this time, rather than a bust, the end game is likely to be a surge in construction.

[4] Yes, real federal government spending has risen sharply since 2008. But real state and local spending declined sharply during that period. Not only is that unheard of in modern recoveries, but it offset part of the rise in government spending. With the recent federal spending sequestration, total state, local, and federal government spending as a share of GDP will probably be the same in 2013 as it was in 2007, before the recession (36%).

[bottom line: it might not be as bad as people think]

bull and bear markets

A historical look at bull and bear markets.

the effects of sequestration

The Federal government has agreed to reduce spending by $1.2 trillion over the next nine years, which amounts to $130 billion a year. This is set to start immediately and then ramp up over time. This fiscal year, $85 billion in cuts are required, and then $85 billion the year after. Subsequently, the spending cuts ratchet up in the years following.

Keep in mind, U.S. GDP is $16 trillion, and the budget deficit is 5.3%, or $840 billion. Therefore, spending cuts of $85 billion takes the U.S. deficit to roughly $760 billion. As U.S. government spending decreases, it reduces GDP, reduces corporate earnings, and could have a negative effect on the market over the short-term.

***

While the sequestration will be a negative for economic growth in the short term, we believe the spending cuts will result in a rise in private growth over the long term.

The U.S. Federal deficit needs to be reduced in order to raise the long-term growth rate potential of the economy. As the U.S. government continues to run a deficit, there is an increasing amount of debt that is issued in the form of treasury bonds.

This debt crowds out investing in the private sector. In the private sector, new ideas, products and companies may not get funded at a lower rate because investors tend to purchase government debt as opposed to lending to corporations. As the debt is reduced, or at least stops growing at such a rapid rate, the economy will benefit over the long term because it will lead to positive growth for the private sector. We believe this is why the market has not reacted negatively to the sequestration. At the end of the day, cutting spending helps long-term GDP growth.

***

The biggest problem with sequestration is that it does not address entitlement programs. Medicare and Social Security are not being touched. Politically, both sides of the aisle do not want to touch entitlement programs that support the elderly because of the historic consequences on national elections.

***

The stock market is soaring to new highs, largely, because of the Fed’s quantitative easing programs. The biggest risk to the market is the reversal of those programs as we believe that would trigger a massive sell-off in the equity market.

Cutting spending actually reduces the risk that quantitative easing will stop. This is because the budget cuts soften the economy, which allows the Fed to continue to essentially print money. Effectively, budget cuts increase unemployment and therefore reduce the chance that the Fed is going to scale back their quantitative easing programs anytime soon.

Cutting spending has become a sideshow. The Fed is the key. The fact that the stock market is approaching new highs is proof that the market and economy are fine with these cuts.

What’s Next

Down the road, we need to see the politicians agree to more spending cuts, and agree to do it rationally. This would help the stock market and the economy. So far, they are not doing it in a coherent, economically efficient, fashion.

-- Mitch Zacks, ZIM Weekly Update

***

The sequester has been advertised as “cutting” discretionary spending over a ten year period by $995 billion. After inflation adjustments and exempting more than a trillion dollars of defense and non defense discretionary spending from the sequester, the CBO projects  (in its Table 1.1) discretionary spending to increase by $110 billion over the decade. There is no actual $995 billion cut after the CBO applies its magic adjustments. Rather there is a $110 billion increase.

[In other words, instead of increasing by $1105 billion, it will increase by $110 billion.  So about a 90% reduction of increased spending.]

jobless rate at four year low

Job growth surged last month as auto makers, builders and retailers pushed the unemployment rate to a four-year low, defying concerns that budget battles in Washington would harm the economic expansion.

Employment rose 236,000 last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped to 7.7 percent, the lowest since December 2008, from 7.9 percent.

Stocks, the dollar and Treasury yields all rose on signs the world’s largest economy is gaining strength in the face of federal budget cuts and higher payroll taxes. The report may fuel debate among Federal Reserve policy makers considering how long to maintain record stimulus to boost growth and employment.

[which could be bad for the stock market.  when the unemployment rate drops and gdp grows, the Fed will stop buying bonds, raise the interest rate, making stocks less attractive]

the next Berkshire Hathaway

I'm looking at this blurb (via junk mail) touting the next Berkshire Hathaway.  [It's trying to push a subscription to Charles Mizrahi's Inevitable Weath Portolio.]

I'm not about to send for the free report, but I'm sort of curious who it might be.

Googling the next Berkshire Hathaway reveals some candidates:

Sears
Loews, Leucadia National, PICO Holdings, Biglari Holdings
Markel
JSHLY, SNFCA

Ah, here's the answer.  It's Leucadia.

I remember I bought OTTR because there was an article comparing it to Berkshire Hathaway.  Let me see if I can dig it up.

It was a 2008 CNBC video interviewing James Altucher.  He mentions OTTR, MKL, and LUK.

Dow sets all-time high

The Dow climbed more than 125 points to close at a record high of 14,253.77, topping the prior record set in October 2007. Earlier, the blue chip index climbed to an intraday record of 14,286.37.

The S&P 500 added 15 points and finished at its highest level since October 2007 and is now only about 2% away from its record closing high.

"We're back to the highest levels in history, but we've got more things going for the economy and the market than we did last time," said Art Hogan, managing director at Lazard Capital.

Back in 2007, the economy was on the verge of winding down and heading into a tailspin, he said, whereas now it's continuing to improve, albeit slowly.

Stocks are also cheaper now. They were trading at 17 times earnings estimates in 2007. Currently, stocks are valued at about 14 times earnings estimates for 2013.

Plus, both consumers and businesses have more cash and less debt, said Hogan.

Still, not all stocks are at record highs. The Nasdaq, which rose more than 42 points Tuesday, is nearly 40% below its all-time highs that were set in March 2000, prior to the collapse of the dotcom bubble. The Nasdaq is trading at its highest level since November 2000 though.

the wild circus

Value investing ultimately wins, but in the process it passes through a wild circus of lunacy.
-- Ron Suskind

January 2013 has gone down in the books as having the highest levels of inflows into U.S. equity mutual funds since March 2000, the dying days of the dot-com bubble. The week ended Jan. 11 alone saw net inflows into funds of $8.9 billion -- the fourth-largest amount ever recorded, according to B of A Merrill Lynch Global Investment Strategy, EPFR Global, and Lipper FMI. This, of course, came right on the heels of the legislative agreement to avoid the fiscal cliff that solved the most recent in a too-long series of macroeconomic crises that threatened the global economy.

Well, consider us saved -- at least for a few months.

Take a look at that opening paragraph again and consider the implications. The last time so much money came pouring into stocks (using stock mutual funds as a reasonable proxy), valuations were really, really high. About that time, Warren Buffett said stocks were so richly priced that he expected the overall market returns for the decade to be in the low single digits. For this, and for his unwillingness to buy into the "New Economy" companies, Buffett was derided as having lost his touch. The scoreboard suggests otherwise.

It's my observation that intelligence and analytical firepower are less important for long-term investing success than simply having the confidence to invest when others are fearful. Those who bought in March 2000 have, on average, suffered more than a decade's worth of negative returns.

Martin Zweig

Martin E. Zweig, who predicted the 1987 stock market crash and whose newsletters influenced U.S.investors for a quarter century, has died. He was 70.

He died yesterday, according to Zweig-DiMenna Associates LLC, his New York-based firm. No cause of death was given.

Zweig wrote “Martin Zweig’s Winning on Wall Street,” his book first published in 1986, and stock-picking newsletters such as the Zweig Forecast for 26 years, helping start his career in hedge funds and philanthropy. He co-founded Zweig-DiMenna Partners in 1984 and, according to the New York Times, bought a 16-room apartment at Manhattan’s Pierre hotel in 1999 for $21.5 million. He also had a residence in Fisher Island, Florida.

“I was on the road show with Marty for the Zweig Fund in 1986 and he was like a rock star,” Gene Glaser, a business partner with Zweig from 1989 to 1999, said today in an interview. “People would wait around to get his autograph and ask him questions about the market.”

Zweig began his career in the 1970s writing investment newsletters, which became the Zweig Forecast, published from 1971 to 1997, the company said in a statement through Business Wire. In 1984, Zweig and Joe DiMenna founded Zweig-DiMenna Partners, their first long-short hedge fund, followed by the Zweig Fund in 1986 and the Zweig Total Return Fund in 1988.

A regular guest on the PBS television show “Wall Street Week With Louis Rukeyser,” Zweig is credited with developing the technical analysis tool known as the put-call ratio, according to his firm. The indicator plots bearish versus bullish options as a way of determining investor sentiment.

Zweig’s best-known call came during Rukeyser’s program on Oct. 16, 1987, when he predicted stocks were poised for a “vicious” decline reminiscent of the crash of 1929. The Dow Jones Industrial Average plunged 508 points, or a record 23 percent, in the next session, now known as Black Monday.

“I haven’t been looking for a bear market per se, really, in my own mind I’m looking for a crash,” Zweig said in the PBS interview. “I only look for a brief decline, but a vicious one.” The Dow declined 23 percent in October 1987 and climbed 2.3 percent that year, according to data compiled by Bloomberg.

“He was a pioneer in technical analysis,” said Richard Russell, editor of the Dow Theory Letters newsletter, in a telephone interview. Zweig was a “terrible worrier,” said Russell, who took over Zweig’s investment advisory service.

***

Liz Ann Sonders remembers:

On February 18, while on vacation, I received a shocking phone call. My first mentor and boss, Wall Street icon Marty Zweig, had passed away. I've been extremely blessed throughout my 27-year career to work with some of the most transformative and legendary folks in the business. Marty was one.

I worked for him (and his partner at Avatar Associates, Ned Babbitt) for 13 years, starting in 1986 after I graduated from college. Another would be Louis Rukeyser, with whom Marty and I shared the "stage" on Wall $treet Week for many years as regular panelists. And of course, I've had the great thrill of working for Chuck Schwab since 2000. It doesn't get any better than learning from these legends over the past 27 years.

After degrees from Wharton, University of Miami and Michigan State, Marty started his career in academia but ultimately became one of the most respected stock market "gurus" in the modern era. I have years' worth of memories of Marty, and hope readers will indulge me as I reminisce and share some of the most important market lessons I learned from one of the greats.

But first, the personal stuff. Marty was brilliant, there's no doubt; but he was also quirky, goofy and affable. He was the consummate worrier... but he was also the ultimate warrior. He lived, ate and breathed the markets and perpetually (and tirelessly) strived to "figure it out."

One of my greatest memories is getting to see first-hand his now-famous memorabilia collection—to which there are no comparables. Among them, there was the dress Marilyn Monroe wore while singing Happy Birthday to John F. Kennedy in 1962; the suits worn by the Beatles on the Ed Sullivan Show in 1964; the 1992 Olympics' US "Dream Team" basketball jerseys; the booking sheet from one of Al Capone's arrests; a letter from Madonna to Michigan State declining acceptance so she could pursue a music career; guitars of many rock stars, including Bruce Springsteen and Jimi Hendrix; the fedora worn by Humphrey Bogart in Casablanca; the original Terminator costume worn by Arnold Schwarzenegger; and multiple boxing championship belts, Super Bowl rings and Heisman Trophies.

Probably the coolest one, which I got to sit on at his home in Connecticut, was the Harley Davidson Hydra-Glide motorcycle ridden by Peter Fonda in Easy Rider. It was bolted to the floor in his game room. How cool is that?! Apparently, last year he also had a banana yellow 1934 Packard convertible installed in his Florida living room. Marty was loads of fun.

In Marty's book Winning on Wall Street, he called Jesse Livermore one of his heroes and "one of the most fabulous traders of all time;" recommending that people read the 1923 book about Livermore, Reminiscences of a Stock Operator by Edwin Lefevre. It was the first book about the market I read; it remains one of my favorites, and one I always recommend when people ask about the best market books.

Here's a quote from Livermore: "People don't seem to grasp easily the fundamentals of stock trading. I have often said that to buy into a rising market is the most comfortable way of buying stocks… Remember that stocks are never too high for you to begin buying or too low to begin selling." These words were quoted often by Marty, because he believed in "buying strength, selling weakness and staying in gear with the tape."

Marty is also given credit for popularizing the phrase "The trend is your friend." He was a trend follower, not a trend fighter; smart enough to realize that "a slap is easier to recover from than a beating…" He considered himself both conservative and aggressive. By nature he was conservative and risk-averse, wanting to protect himself and the people to whom he gave advice. But he also believed there were times to be aggressive. "The problem with most people who play the market is that they are not flexible."

"Summing it up, to succeed in the market you must have discipline, flexibility—and patience. You have to wait for the tape to give its message before you buy or sell." These words from Marty still ring true, and it's why I cringe when I'm asked about market tops and bottoms as if anyone can call them precisely. "…you must forget about trying to catch the exact tops or bottoms, which no one can consistently do anyhow. But success in the market doesn't require catching those tops and bottoms. Success means making profits and avoiding losses. By using [his theories] and waiting for a trend to develop, you can make money, stay in tune with the tape and interest rates, and, best of all, sleep better at night."

gravestone doji candlestick (uh oh)

Buddy has called for a bearish reversal of the market as a gravestone doji candlestick pattern occurred (on 2/28/13).

What's that?

A type of candlestick pattern that is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day. The long upper shadow suggests that the day's buying buying pressure was countered by the sellers and that the forces of supply and demand are nearing a balance. This pattern is commonly used to suggest that the direction of the trend maybe be nearing a major turning point.

***

After being down earlier, the market finished up, forming a hammer.  Gravestone followed by a hammer.  That means ... (who knows?)

deficit falling?

Although Wall Street hasn't reacted to Washington lately, we have to consider that the deficit problem isn't as big as it was just a few years ago. In 2009, the country ran a $1.41 trillion deficit. This year, the Congressional Budget Office predicts the deficit will be down to $845 billion, or 5.3% of GDP, and if Congress does nothing (which looks likely) by 2015, the deficit will be $459 billion, or 2.4% of the economy.

These numbers look large, but in the grand scheme of the world's biggest economy they're not anywhere near uncharted territory. Since 1980 the federal government has run a deficit larger than 3% in 18 years -- more than half of the time. A 3% deficit is widely considered to be sustainable, because if the deficit grows as much as or less than the economy does, then the debt-to-GDP ratio will fall. And 3% should be an attainable long-term level of economic growth -- at least, that's the theory at least.

the repatriation tax

If an American company earns profit in another country, it has to pay that country's income taxes. But if it then chooses to bring that cash back to America, it owes U.S. taxes, minus a credit for foreign taxes already paid.

So imagine Cisco earns $1 billion profit in Switzerland. It will owe Switzerland's 8.5% corporate tax. But if Cisco then brings the remaining $915 million back to the U.S. to pay dividends or expand its workforce, it will owe another 26.5% to the IRS -- the difference between Switzerland's 8.5% tax rate and America's 35% rate. It's called the repatriation tax.

Cisco's other option is to keep the money in Switzerland (or whatever country it earns overseas profit in). Not surprisingly, that's what most global corporations choose to do. As of last March, U.S. companies held about $1.2 trillion in total cash. But almost 60% of that was sitting in foreign bank accounts, according to Moody's.

Some companies hold the vast majority of their loot abroad. About 80% of Oracle's (NASDAQ: ORCL) cash is held overseas. Apple (NASDAQ: AAPL) holds close to 70% of its cash outside the U.S.

There are two crazy things about the repatriation tax. The first is that it doesn't raise much money for the U.S. Treasury. Using the most bearish assumptions, The Joint Tax Committee estimates that ending the repatriation tax altogether would raise deficits by about $8 billion per year -- a rounding error measured against $2.9 trillion in total revenue. A separate estimate from the Congressional Budget Office shows that ending repatriation taxes would actually raise federal tax revenue, since companies would likely bring more cash home to pay dividends, which are then taxed. Either way, repatriation taxes have a trivial impact on the federal budget.

Second, the repatriation tax is virtually unique to America. Of the G-7 group of nations, only America exercises a repatriation tax. Among the 34 OECD nations, 26 impose a "territorial" tax system, where profits are only taxed where they are earned, with no repatriation owed when earnings are brought back to a company's home country. Two of the last holdouts, Japan and the United Kingdom, switched to a territorial tax system in 2009.

With the competition based in countries that use territorial tax systems, American companies are at a disadvantage.  The easiest way for them to compete is to keep foreign profits in foreign bank accounts. The loser is the U.S. economy.

best investment sector for the next decade

I understand there's plenty of animosity toward the sector because of high branded-drug prices and a long, drawn-out, drug development process, but there are five reasons why health care represents your best investment choice over the coming decade rather than traditionally strong sectors like technology or financials.

(1)  There is one primary reason why research costs are contributing to better drugs coming down our pipeline: Big technological advancements over the past decade.

Drug research all begins in the lab. According to the U.S. National Institutes of Health, there are more than 140,000 clinical studies currently under way. This figure has ballooned since 2000 as higher quality genome-sequencing equipment and better in-lab instrumentation has allowed researchers to conduct significantly more studies for the same previous cost.

The chart above means a big boost in human genome sequencing demand for Life Technologies (NASDAQ: LIFE) . Life Tech introduced its Benchtop Ion Proton Sequencer in January last year for a price of just $149,000 and touted its ability to sequence the human genome in a single day for just $1,000. Previous versions had cost anywhere from $500,000-$750,000 and took weeks or months to sequence the human genome at a cost of $5,000 to $10,000 a pop.

As you can see, human genome sequencing costs have dropped through the floor, falling from north of $95 million in 2001 to less than $7,700 as recently as January 2012. The introduction of Life Technologies' Benchtop Ion Proton Sequencer should send these costs heading even lower.

DNA sequencing is becoming increasingly important in cancer research, as sequencing tumors can lead to personalized therapy. Scientists at the Washington University School of Medicine in St. Louis, Mo., for instance, had fully sequenced 700 cancer patients' genomes, including healthy and cancerous cells, as of April last year, according to Science Daily. The lower cost of genome mapping and faster turnaround time will speed up the process of identifying mutations and could offer personalized cancer therapies in the not-so-distant future as opposed to a "one-size-fits-all" therapy.

Considering that health-care research budgets are only expanding, genome sequencing costs are falling, and that the sheer number of clinical studies being undertaken is rising, I can only assume that the next decade will see FDA approvals at a well-above-average rate than in the previous decade.

(2) The Congressional Budget Office released a long-term budget forecast in June 2009 that projected that the cost of Medicare -- which is social health-care coverage offered to those age 65 and older, as well as younger people with disabilities -- would practically double from 3.5% of GDP in 2009 to 6.9% of GDP by 2035, about six years after the last group of boomers retires. Even more pressing, better treatments and healthier eating habits are greatly extending the lives of retirees beyond just the age of 65.

All facets of the health care sector appear likely to benefit from this trend of longer life -- from hospital and insurers, to pharmaceutical companies and medical device makers geared toward an aging population.

One company that really stands out is Medtronic (NYSE: MDT) . If we simply extrapolate out the fact that cardiovascular diseases are the leading cause of death in this country based on PhRMA's research, then a dramatic jump in those aged 65 and older should lead to a large boost in pacemakers, stents, and valve replacements -- all markets that Medtronic operates in. Another area of solid growth that should be spurred by boomers is spinal implants, an area where Medtronic is the head honcho.

(3) Regardless of whether you support the Affordable Care Act, one thing is for certain: It will bring millions of uninsured Americans under the fold of government-sponsored Medicaid. As I noted, the baby boomers were one of the hardest-hit groups during the recession, so they may be one of the primary beneficiaries of the beginning of Obamacare in 2014.

Obamacare definitely has its share of critics, but it's expected to bring approximately 16 million newly insured Americans under the scope of government-sponsored health care. These are people who previously either avoided going to the doctor unless absolutely necessary or put holes in the pockets of hospitals because of their inability to pay their health care service costs. In addition, Obamacare mandates individuals to carry -- and businesses to provide -- health insurance or face potential tax penalties on a per-person basis.

Not surprisingly, no group of companies stands to benefit more from the streamlining of the health-care process more than hospitals. HCA Holdings (NYSE: HCA) , the nation's largest hospital operator, can, as a result of Obamacare, expect its bad-debt provision to fall dramatically. This should ultimately free up funds that can be used in other aspects of its business -- including acquisitions, funding future hospital construction, purchasing new medical equipment, and perhaps even paying shareholders a dividend.

(4) One of the biggest threats of the technology sector is that everything is slowly being commoditized. From memory to assembly line parts, many technical components can now be duplicated with ease, placing long-term downside pressure of many technology companies' margins. The same can't be said about the majority of health-care companies.

The effects against commoditization are even more readily apparent in medical device makers. Intuitive Surgical (NASDAQ: ISRG) , manufacturer of the da Vinci surgical system, offers the only commercially profitable surgical robotic system. Period! With few competitors on the horizon and an incredibly complex technology, I'd say its market share is safe for quite a long time.

(5) Some of the most basic illnesses continue to go untreated in emerging-market countries around the globe and offer a jumping-off point for growth beyond just domestic markets.

One company that's taking the bull by the horns in expansion abroad is Merck (NYSE: MRK) . Merck's annual report, filed earlier this month, demonstrates that it now generates 57% of its total revenue abroad. Burgeoning growth markets like India and China are where Merck's investment dollars are currently headed, with opportunities seen in cholesterol and diabetes medications, which are highly contested and largely saturated (no pun intended) in the United States.

a sign of the top?

The second defining event of the past few days is the surge of publicity surrounding the 16-year-old Hollywood actress who claims to be making a killing as a daytrader.

So daytrading is back!  Remember how the media lionized Barbra Streisand as a daytrading genius in 1999?  It was a sign of a historic top forming for stocks.

Now our media savants have gone one better:  The new daytrading queen they've anointed is only a teenager.  (Gosh, why did it take me so long to figure out how easy it is to get rich?)

Think about this angle for a moment:  Would our media gatekeepers have dared to hype a story about a teenage daytrader during the Lehman crisis in 2008?  Hardly.  We find the tale entertaining today, and even sort of plausible, because stock prices have roared higher for the past four years.  The excesses of a bull market manifest themselves near the top, not the bottom.

-- Richard Band, 2/19/13

goodbye stocks, hello funds

Someone must have sounded an all-clear signal on New Year’s Day because in January, after five years of fasting and penitence in the bond market, investors poured money into U.S. stocks.

But much of that money probably went into stock funds and exchange-traded funds, not individual stocks. Though few statistics are available, there are many indications individuals have abandoned individual stocks as their preferred form of equity investing.

Remember how people worshipped Cisco Systems (CSCO), Qualcomm (QCOM) and JDS Uniphase (JDSU) back in the 1990s?  Now they’re buying target funds, index funds, and their close cousins, ETFs, instead of individual stocks. With one big, bright red exception, which we’ll get to later, individual stock investors may be a dying breed.

Nothing brought that out more starkly than an article last week in The Wall Street Journal, which dealt with the demise of investing clubs, that former pop-culture icon. (Remember the Beardstown Ladies?)

Investment clubs flourished in the era of do-it-yourself investing, when every man and woman was his or her own stock picker. Who needed professional managers when all the data was right at your fingertips? Especially when friends and neighbors could help each other find winning stock ideas.

Well, it didn’t quite work out that way. As The Journal reported, BetterInvesting (formerly the National Association of Investors) has seen membership at investor clubs plummet from 400,000 at its peak in 1998 to only 39,000. That’s a plunge of 90% and reflects the ravages of a decade that saw two major bear markets. The problem, The Journal wrote: “Stocks aren’t fun anymore; they are scary.”

[which means there may be less dumb money now]

startling facts

Morgan Housel presents 100 startling facts about the economy.  Here's a few of them.

1. As of January 2013, there are 16 people left in the world who were born in the 1800s, according to the Gerontology Research Group. With dividends reinvested, U.S. stocks have increased 28,000-fold during their lifetimes.

5. According to a study by Harvard professor David Wise and two colleagues, 46.1% of Americans die with less than $10,000 in assets.

6. There are 3.8 million fewer Americans aged 30 to 44 today than there were a decade ago.

7. Related: The population of Americans aged 30 to 44 is about to start increasing for the first time since 2000.

8. Since 1928, the Dow Jones has increased more than 10% in a single day eight times, declined more than 10% in a single day four times, and gone either up or down more than 5% in a single day 136 times.

14. Including dividends, the S&P 500 gained 135% from March 2009 through January 2013, during what people remember as the "Great Recession." It gained the exact same amount from 1996 to 2000, during what people remember as the "greatest bull market in history."

15. "97% of the world's population now lives in countries where the fertility rate is falling," writes author Jonathan Last.

17. In 1980, there were 15,099 Americans aged 100 years or more. By 1990, there were 36,486, and by 2012 there were 88,510, according to the Census Bureau.

21. Despite the overall population doubling, more babies were born in the U.S. in 1956 than were born in 2009, 2010, or 2011.

22. According to The Telegraph, "Four in 10 girls born today is expected to live to 100. ... If trends continue, the majority of girls born in 2060 -- some 60 per cent -- will live to see 2160."

24. Netflix surged more than 50% on Jan. 24 from the previous day's low. $1,000 invested in short-term call options would have been worth $2 million in less than 24 hours. (Please don't try this at home.)

27. According to Bloomberg, "The 50 stocks in the S&P 500 with the lowest analyst ratings at the end of 2011 posted an average return of 23 percent [in 2012], outperforming the index by 7 percentage points."

29. Thanks in large part to cellphone cameras, "Ten percent of all of the photographs made in the entire history of photography were made last year," according to Time.

32. Fortune magazine published an article titled "10 Stocks To Last the Decade" in August, 2000. By December 2012, the portfolio had lost 74.3% of its value, according to analyst Barry Ritholtz.

40. Two news headlines published on the same day last September summed up the U.S. economy perfectly: "U.S. Median Income Lowest Since 1995, " and "Ferrari sales surge to record highs."

41. According to ConvergEx Group, "Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away. ... A full 30% have less than $1,000."

43. Since 1928, the S&P 500 has closed at a new all-time high 1,024 times, or 4.8% of all trading days.

45. One in seven crimes committed in New York City now involves an Apple product being stolen, according to NYPD records cited by ABC News.

46. In the first quarter of 2012, the number of iPhones Apple sold per day surpassed the number of babies born per day worldwide (402,000 vs. 300,000), according to Mobile First.

48. According to economist Glen Weyl, "Of Harvard students graduating in early '90s and pursuing careers in finance, 1/3 were making over $1 million a year by 2005."

49. According to the Center for Economic and Policy Research, 44% of those working for minimum wage in 2010 had attended at least some college, up from 25% in 1979.

52. The number of workers aged 55 and up is about to surpass the number of workers aged 24 to 34 for the first time ever.

53. In 2011, Asia had more millionaires than North America for the first time ever, according to RBC Wealth Management.

55. The IRS estimates that illegal tax-evasion reduced government tax revenue by $450 billion in 2006 (the most recent year calculated). That's roughly equal to what the government spends annually on Medicare.

56. According to The Wall Street Journal, "The average monthly mortgage payment on a median-price home in October, assuming a 10% down payment, fell to $720 at prevailing rates, down from nearly $1,270 at the end of 2005."

59. In 2012, the Greek stock market (ATHEX Index) outperformed the Chinese stock market (Shanghai Composite) by 48 percentage points.

62. According to BetterInvesting, the number of investment clubs has declined by 90% since 1998 from 400,000 to 39,000.

68. Last year, Franklin Templeton asked 1,000 investors whether the S&P 500 went up or down in 2009 and 2010. Sixty-six percent thought it went down in 2009, while 48% said it declined in 2010. In reality, the index gained 26.5% in 2009 and 15.1% in 2010.

70. "Of the Americans who earn over $150,000, 82 percent had a bachelor's degree. Just 6.5 percent had no more than a high school diploma," writes Catherine Rampell of The New York Times.

75. According to economist Stephen Bronars, the new 39.6% federal tax bracket will only affect 0.7% of taxpayers but will hit 9.5% of aggregate personal income, as top earners earn a disproportionate share of the national income.

77. According to Gallup, 51.3% of Americans consider themselves "thriving," 45.1% say they are "struggling," and 3.6% say they're "suffering."

78. An average couple will pay $155,000 in in 401(k) fees over their careers, according to Demos, reducing an average account balance from $510,000 to $355,000.

79. Related: 84% of actively managed U.S. stock funds underperformed the S&P 500 in 2011.

80. According to The Wall Street Journal, 49.1% of Americans live in a household "where at least one member received some type of government benefit in the first quarter of 2011."

83. "By 2050, workers' median age in China and Japan will be about 50, a decade higher than in America," writes Robert Samuelson.

85. The U.S. birthrate declined 8% from 2007 to 2010, according to Pew. At 63.2 per 1,000 women of childbearing age, the 2011 U.S. birthrate was the lowest since records began in 1920.

86. According to Wired magazine, "In a 2006 survey, 30 percent of people without a high school degree said that playing the lottery was a wealth-building strategy. ... On average, households that make less than $12,400 a year spend 5 percent of their income on lotteries."

88. We are used to hearing how much faster the earnings of the top 1% grow compared with everyone else's, but we often forget that it used to be the other way around. From 1943 to 1980, the annual incomes of the bottom 90% of Americans doubled in real terms, while the average income of the top 1% grew just 23%, according to Robert Frank.

89. According to Vanguard founder John Bogle, the average equity mutual fund gained 173% from 1997 to 2011, but the average equity mutual fund investor earned only 110%, thanks to the tendency to buy high and sell low.

94. According to The Economist, "Over the past ten years, hedge-fund managers have underperformed not just the stock market, but inflation as well."

95. According to Bloomberg, "Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.

97. S&P 500 companies held $900 billion in cash at the end of June, according to Thomson Reuters. That was up 40% since 2008.

98. "More than 50 million Americans couldn't afford to buy food at some point in 2011," writes CNNMoney, citing U.S. Department of Agriculture data. In June 2012, 46.7 million Americans received food stamps.

99. Japan's working-age population is on track to decline from 62.6% of its population in 2012 to just 49.1% by 2050.

100. The unemployment rate for those with a bachelor's degree is just 3.7% -- less than half the nationwide average.

Super Bowl indicator says up

Superstitious investors watch the Super Bowl results closely to get a sense of where the market's going. It sounds rather silly, but the so-called Super Bowl Indicator is often correct.

But this year, the prediction is a little odd. According to the indicator, stocks will go up this year no matter which team wins the championship.

The indicator says the market will rise when a team from the original National Football League wins the Super Bowl. This goes back to the time when there was also an American Football League in operation from 1960 to 1969. The AFL teams became part of the NFL in 1970.

This year, both teams hail from the original National Football League. Well, the Baltimore Ravens technically didn't exist until 1996, but the team originated from the Cleveland Browns, which was part of the NFL. So it counts, right? One could argue that the San Francisco 49ers might have a little more NFL cred, so maybe investors should be rooting for a 49er victory.

At any rate, it seems like this year's game is a big green light for jumping back into the market. But wait, let's look at what happened the last time two original NFL teams played each other. That happened in 2001, when the Ravens absolutely trounced New York Giants.

That was not the best year for the markets, according to the Wall Street Sector Selector site. The Dow Jones Industrial Average ($INDU -0.36%) fell 7.1% and the Standard & Poor's 500 Index ($INX -0.26%) fell 13.04%.

In other words, don't rely on one football game for your investing strategy this year. But if you want another sign that stocks might behave nicely this year, check out the "January effect." MSN Money's Charley Blaine writes that this indicator shows that a higher market (measured by the S&P 500) in January leads to a higher market for the year, and it's correct about 75% of the time.

new home sales down (but up)

New home sales unexpectedly fell 7.3% month-over-month (m/m) in December to an annual rate of 369,000, below the 385,000 rate expected, but the disappointing report was offset by an upward revision of November's figure to a 398,000 annual rate from the previously reported 377,000 rate. The median home price rose 1.3% m/m and 13.9% y/y to $248,900. The inventory of new homes of 151,000 was slightly up from the 149,000 recorded last month, representing 4.9 months of supply at the current sales rate. New home sales are considered a timely indicator of conditions in the housing market as they are based on signings instead of closings. The decline in sales was led by a 29% fall in sales in the northeast in December, coming on the heels of a 48% jump in November.

Despite the somewhat disappointing report, for all of 2012, new home sales gained 19.9%, the biggest jump since 1983 according to Bloomberg, and the first increase since 2005.

[But according to AP], For the year, sales rose nearly 20 percent to 367,000. That's the most since 2009, although the increase is coming off the worst year for new-home sales since the government began keeping records in 1963. Sales are still below the 700,000 level that economists consider healthy.

Ackman vs. Icahn

Carl Icahn and Bill Ackman really hate each other.

The two billionaires duked it out in an amazing show of verbal hostility on live television Friday, letting loose with a torrent of insults and obscenities. It was an unprecedented spectacle, one that the financial world won't forget anytime soon.

And the stock at the center of it all, Herbalife (HLF +0.79%), went nuts during the conversation.

The two investors have been fighting for years, going back to 2003, when Ackman's former company was under investigation by the Securities and Exchange Commission. Icahn bought Ackman's shares in a real estate company called Hallwood Realty, but the issue turned into a nasty legal battle later.

There's so much animosity between the two, in fact, that New York restaurants know not to seat them near each other, according to The New York Times.

The two are feuding again over Herbalife, a stock that Ackman has made a well-publicized bet against. Ackman has called the company a pyramid scheme. News reports later said that Icahn had bought a position in Herbalife -- something Icahn has not publicly confirmed.

The tension between the two has been building for days. In an interview with Bloomberg television, Icahn said he didn't respect Ackman and challenged his "holier than thou" attitude. Ackman went on CNBC to defend himself, and Icahn joined in as well.

*** [7/16/14]

NEW YORK, July 16 (Reuters) - Carl Icahn and William Ackman are friends again.

The billionaire investors, who have been at odds over nutrition and diet company Herbalife, made up in public on Wednesday, ending a decade long feud that exploded on cable television 18 months ago.

Icahn, 78, who made his reputation in the 1980s, and Ackman, 48, seen by some as a young version of the older corporate raider, sparred over opposing bets on Herbalife on CNBC in January 2013. Icahn has taken a long position on the stock and Ackman is short.

On Wednesday at the CNBC Institutional Investor Delivering Alpha Conference, the men hugged and then praised each other over their investor activism.

When asked about who would win the Herbalife bet, Ackman said "it is not about winning. I would love to get Carl out of Herbalife."

He added that Icahn could walk away with a handsome profit.

The war of words that began when Icahn called Ackman a cry baby in a school yard and Ackman shot back that Icahn was not an honest man captivated Wall Street for roughly half an hour on CNBC and was played repeatedly by the network.

The network provided the stage for the reconciliation at its CNBC Institutional Investor Delivering Alpha conference after suggesting the move to Ackman three weeks ago.

The detente has been months in the making, with both sides saying relations improved in late April and hinting they might even team up. Each man took pains to say nice things about the other in recent weeks, often while appearing on CNBC.

On Wednesday, Ackman appeared as a "mystery guest" at the conference, causing the audience to applaud when he walked onto the stage and gave Icahn a hug.

The men agreed good corporate chiefs need to run companies and that boards should let executives do their jobs, as long as they do them well.

Icahn said there was room for their kind of activism.

"At the risk of sounding immodest, there is no one better at finance than us," Icahn said to Ackman.

Dow 6000 (says Harry Dent)

on CNBC today with Ron Insana on the other side

I see this video (transcript) from 11/15/12 that he's predicting 5600 to 6000 on the Dow by 2015 and 3300 to 3800 on the Dow by 2020 to 2022 (0:55 into the video).

Here (3/31/11) he says Dow 3300.

Here (9/12/11) he says Dow 3000 (also 7/24/12)

So he's doubled his price target.

On the other hand, Seth Masters forecasts Dow 20,000.  (No, I never heard of him either.)

Wait, here's one from 2004, Dow 40,000 by 2009.

From Barron's, 9/17/11:

Prophets of doom and gloom are often criticized for being stopped clocks: bound to be right, but just twice a day. Financial-newsletter writer and best-selling author Harry S. Dent Jr., by contrast, can lay claim to being a prophet of boom or gloom, depending on the circumstances.

Dent is as comfortable calling for Dow 35,000, as he did 13 years ago, as he is forecasting Dow 3800 now. His 1998 book, The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History, was a New York Times best seller. Its bleaker companion, The Great Crash Ahead: Strategies for a World Turned Upside Down, co-written with Rodney Johnson, will be published this week.

Based on these and similar titles (see below), Dent swings for the fences. But not always with grand-slam results.

Why is CNBC helping this guy sell books?

From wikipedia:

In the late 1980s, Dent forecast that the Japanese economy, then the darling of the world, would soon enter a slowdown that would last more than a decade. In the early 1990s, he predicted that the DOW would reach 10k. Both of these predictions were met with much skepticism, and yet both eventually came to pass.

In 2000, based on his forecast that economic growth would continue throughout the 2000s, Dent predicted that the DOW would reach 40k, a prediction which was repeated in his 2004 book. In his book, he also predicted the NASDAQ would reach 13-20k. In late 2006 he revised his forecasts to much lower levels, estimating the Dow would reach 16-18k and the NASDAQ 3-4k. In January 2006, he predicted that the DOW would reach 14-15k by the end of the year. It ended 2006 at 12,463, 11% below the lower end of his prediction. It ended 2007 at 13,264, again significantly lower than Dent's revised prediction of 15,000 by early 2008. Since then, the Dow crossed 14,000 in late 2007 before retreating.

His 2011 book goes on to suggest consumer spending will begin to plummet in 2012 with the Dow bottoming out somewhere between 3,000 and 5,600 in 2014. After hitting bottom, stocks will experience a mini-rally in 2015-2017 before falling into a final bottom during the 2019-2023 period, when the 45-50 age group troughs because the U.S. birth rate reached its own low in 1973.

OK, he's been right before (and also wrong).

P.S. Not to be confused with Harvey Dent.

the sell decision

The decision to sell liquid investments such as stocks and bonds is much harder than the buy decision. The reason for this is simple: human emotion. When an investor is considering purchasing a new position they aren’t psychologically wedded to the idea. Therefore, they can be open regarding the relative strengths and weaknesses of the investment.

However, when an active investor expresses a position in a security, they undoubtedly have a reason. Upon purchase, the investor is now committed to the idea. If the investment increases in value, either the investor was correct in their thesis or the investor was just lucky. Either way, the investor feels good that the investment increased and is hopeful for additional gains.

Having a specific selling strategy is paramount for success. Some value investors have price targets based on analysis, some sell only when they find better ex-ante values in other securities. The below quotes are curated to represent the selling methodologies of exceptional investors.

David Gardner interview

Earlier this week, I invited Fool co-founder David Gardner into our brand-new Motley Fool studio space here in Alexandria, Va. We spent nearly an hour talking about the state of the retail investor here in 2013, his investing philosophy, and his current thinking on a half-dozen specific stocks in his Supernova universe.

What follows is the video in full (run time: 40:24)

***

co-author of Rule Breakers, Rule Makers

see also The Greatest Secret to Investment Riches

***

David Gardner likes "overvalued" stocks

*** [1/26/14]

Another interview with David Gardner (run time 51:42)

Morningstar performance

In this Morningstar study, five and four star stocks outperformed three and two stars stocks.  But, interestingly enough, one star stocks also outperformed three and two star stocks.

Looking further, wide moat stocks actually underperformed no moat stocks.

Five star wide moat stocks did the best, but only barely better five star stocks with no moat.  And doing almost as well were one star stocks with no moat!

richer than Romney

Al Gore is.

A lot has changed for former Vice President Al Gore, who left the White House with a reported $1.9 million net worth.

With an estimated $100 million gross profit from the sale of his Current TV to pan-Arab broadcaster Al-Jazeera, Gore is now worth more than $300 million, according to an estimate from Forbes.com.

That puts his net worth well ahead of that of former presidential candidate Mitt Romney, who has an estimated fortune of $230 million and was often mocked for being out of touch with ordinary Americans during the election.

Gore's wealth accumulation began soon after he left the White House in 2001. Apple (AAPL) tapped him in 2003 to serve on its board, and the former vice president held more than 100,000 shares and options in the tech company as of Dec. 17, according to a regulatory filing. That makes Gore's stake worth more than $56 million, based on Apple's recent trading price.

The truth is, serving in the White House often proves beneficial to a person's financial health.

Charlie Tian

Did you know that the founder of gurufocus does not have a degree in finance?

"As the founder of GuruFocus.com, many people naturally assume that I have a degree in finance, or some other closely related field. However, I actually possess a Ph.D. in physics.

I worked as a research scientist at a giant telecommunications company, publishing many scientific papers and hold 35 U.S. and international patents.

But I Had One Problem: I had absolutely no knowledge whatsoever when it came to investing. At the peak of the internet bubble, I was buying shares in fiber optic companies which I thought had the brightest future. My fiber optics stocks quickly doubled or tripled. Making money with stocks was easy, I thought. Then the bubble burst...

It was then that I learned about Warren Buffett, Ben Graham, and Peter Lynch."

***

I wonder how successful Charlie is as an investor now?  However I assume that gurufocus has turned into a successful business.  [Hopefully for him, enough of these $249 memberships will add up.  A bargain, still the same price since 2007.] So I suppose one must assume he's now a successful businessman.

He invests his own money in the Buffett-Munger model portfolio (don't know what percentage though) which apparently has been successful.

Don't notice many stocks that Buffett actually owns though.  The only one of note is WMT.  I also note that they have a 50% turnover rate, again quite un-Buffett-like.

10 Stocks to Last The Decade

Barry Ritholtz looks back at Fortune's 10 Stocks To Last The Decade from 2000:

1. Nokia
2. Nortel Networks
3. Enron
4. Oracle
5. Broadcom
6. Viacom
7. Univision
8. Charles Schwab
9. Morgan Stanley Dean Witter
10. Genentech

Ritholtz writes:

The portfolio managed to lose 74.31%, with 3 bankruptcies, one bailout, and not a single winner in the bunch. Even the Roche Holdings takeover of Genentech was for 37% below the suggested purchase price. The lesson is that valuation matters.

2012 Predictions

Rather than insult you with another list of predictions for the year ahead, I find it more valuable to look back at how some of last year's prediction lists fared. A year ago, analysts were making a variety of predictions, but there was one common theme: Most of them were wrong. Dead wrong.

***

From John Paulson’s call for a collapse in Europe to Morgan Stanley (MS)’s warning that U.S. stocks would decline, Wall Street got little right in its prognosis for the year just ended.

Paulson, who manages $19 billion in hedge funds, said the euro would fall apart and bet against the region’s debt. Morgan Stanley predicted the Standard & Poor’s 500 Index would lose 7 percent and Credit Suisse Group AG (CSGN) foresaw wider swings in equity prices. All of them proved wrong last year and investors would have done better listening to Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd C. Blankfein, who said the real risk was being too pessimistic.