After a historic, hard-fought campaign, businessman and real estate investor Donald Trump is set to become the 45th president of the United States. Given pre-election expectations, a Trump victory may not have been fully reflected in market prices, which could lead to a degree of near-term volatility as investors digest the news. In the end, however, what matters most to investors are key economic drivers like growth, interest rates, investor sentiment, and productivity gains. These drivers often move to their own rhythms, independent of whichever officials or parties happen to be in power. That said, there may be several notable ways the Trump presidency could impact the economy and markets.
Taxes—During the campaign, Trump offered a number of proposals related to tax policy. These included moving from seven to three tax brackets, streamlining deductions, repealing the estate tax, and cutting the corporate tax from 35% to 15%. He also proposed a one-time repatriation tax of 10% on corporate profits held overseas—a move that could enable corporations to use those funds for capital expenditures, dividends, or share repurchases. It’s worth noting, however, that some of these reforms may have a hard time winning approval by Congress. Many believe the likeliest to pass may be some form of tax repatriation and a watered-down tax cut on individuals and corporations.
Health care—One of Trump’s central campaign promises has been the full repeal of the Affordable Care Act (ACA). He also proposed the sale of health insurance across state lines and more favorable tax treatment on premiums. Whether Trump will be successful with ACA repeal will depend on the makeup and disposition of Congress, though it’s likely he’ll at least be able to roll back key parts of the law via presidential powers and the budgetary process. This could potentially boost several sectors of the health care industry, including pharmaceuticals. On the other hand, hospitals and Medicaid providers could suffer, as if they’ll no longer stand to benefit from the higher reimbursements provided by expanded coverage.
Regulatory environment—Based on Trump’s campaign proposals, he’s likely to seek to relax or overturn an array of government regulations. These include Dodd-Frank, the sweeping reform of Wall Street that passed in the wake of the 2008 financial crisis, and the Clean Power Plan, an initiative of the Environmental Protection Agency. In terms of energy policy, Trump has mentioned loosening restrictions on fracking and offshore drilling. Taken together, these actions could serve to benefit companies in a range of sectors—from financials to traditional energy companies, especially those focused on domestic oil exploration and production.
U.S. dollar and foreign affairs—Since Trump does not have traditional experience in foreign policy, this remains an area of some uncertainty. However, he’s consistently spoken out against free trade, and has had particularly contentious words for both Mexico and China. It’s possible that this may have just been campaign rhetoric. If not, and if Trump pursues policies in keeping with what he’s said during the campaign, trade tensions could escalate, and demand for U.S. dollars could wane. Investors may find both issues concerning, especially since strong demand for U.S. dollars has helped minimize inflation and keep yields on U.S. Treasuries at historically low levels.
Ultimately, only time will tell what the market impact of the Trump presidency will be. As with any presidential transition, especially from one party to the other, there may be some bumps in the days and weeks to come. With history as our guide, it’s likely, however, that these will subside as markets adjust.
Wednesday, November 09, 2016
Monday, October 24, 2016
The Little Book That Beats The Market (Greenblatt's Magic Formula)
[5/3/17] The new Magic Formula?
[10/14/16] Quotes on finding a magic formula
[5/28/13] Does the Magic Formula really work?
[3/12/10] The Magic Formula has trounced every mutual fund from 1998 to 2009.
[8/12/07]“Keep the big picture in mind.” Joel Greenblatt
Thortnon O’glove wrote a terrific book, Quality of Earnings. The book helps the reader understand the nuances of financial statements. The theme is to spot blow ups and fraud by companies before an investor is affected by it. In an interview Thortnon O’glove stated, “I looked at the footnotes but they are not the big picture. Don’t lose the perspective of the big picture. Listen, I lost the big picture.” When an author and analyst is as adept as Thortnon O’glove is, at spotting these errors in the forest of information on companies, states that he lost sight of the big picture, we should all heed notice. Greenblatt has taken Mr. O’glove’s advice and has written the book The Magic Formula. In it Greenblatt focuses solely on enterprise value to earnings before interest and taxes and return on invested capital. These two numbers and the future of these two numbers are what Greenblatt wants to figure out before he invests.
[4/2/07] How to outperform the Magic Formula (part 1)
[2/4/07] John Reese on the Magic Formula
[1/25/07] The Magic Flawmula?
[11/26/06] Robert Haugen indicates that other metrics can be used effectively instead of ROC and earnings yield. [via geraldgianoli@MFI, 11/20/06]
[11/20/06] Joel Greenblatt's course descripton [via falcon880@MFI, 11/13/06]
[11/9/06 from BL@MFI] Victor Niederhoffer and Laurel Kenner investigate the Magic Formula (see 11/9 and 11/7)
[10/17/06] Says gannononinvesting, Greenblatt considers future growth prospects
[10/9/06] Motley Fool CAPS tracks Greenblatt's picks
[9/27/06] David Meier looks at Greenblatt's portfolio
[9/24/06 MFI] Greenblatt video presentation (1 hour) on the Little Book That Beats The Market
[9/20/06] mechanical-investing's take on the Magic Formula
[7/31/06] That Magic Little Book
[6/7/06] MoneySense Magazine interviews Joel Greenblatt [from falcon880 of magicformulainvesting]
[6/4/06] The Joel Greenblatt Way by Brian Zen [magicformulainvesting, 5/31/06]
[5/29/06] Q. In a nutshell, the formula says buy companies with a good return on capital and a good earnings yield. Is it really that simple, or is there another dimension people should add to it? [via brknews, 5/7/06]
A. What the book was trying to do was show that the principle makes sense. And so the whole back-testing thing to see what would've happened if you invested that way - bought a bucket of securities that had those attributes - showed that it would have done very well. That would tend to validate the principle that buying good companies at attractive prices makes sense, which intuitively it does in the first place.
[5/10/06] Randy Harmelink of magicformulainvesting passes along this analysis of Greenblatt's method
[5/4/06] Joel Greenblatt notices that pricing anomalies are not rare occurrences in the market. Look at the 52-week highs and lows of any stock price, he says, and more often than not you'll see a big spread. Look at the range that General Motors traded over the last year: low of $18; high of $38. IBM: low of $72; high of $95. Abercrombie and Fitch: low of $44; high of $74. Do these prices always reflect business values? No, he says, they reflect the mood swings of Mr. Market, his personification of the broad stock market.
[4/19/06] Roger Lowenstein writes about the book (no, not that book) in his column in the May SmartMoney
[4/19/06] r4austin partially answers the 19.9% question saying Forsythe looked at large cap stocks which had lower return than the 30+% which was based on smaller caps. defender23263 has a more cynical view.
[4/17/06] Greg Forsythe, developer of the Schwab Equity Ratings, has written an article for Schwab Investing Insights saying Greenblatt's formula is a good one. But not as good as Schwab Equity Ratings. This is unsurprising considering the source. Mainly because if Forsythe had found otherwise, the article would not likely have been published.
The question I would have is how hard Forsythe kept searching for a test criteria until he found one that beat the Magic Formula. The other question the people over at the magicformulainvesting group have is how Forsythe arrived at the 19.9% performance for the Magic Formula when the book states 30+%.
[4/13/06] Joel Greenblatt is now officially a guru. Evidently he doesn't follow his Magic Formula precisely for his own investments as his holdings reveal only seven stocks, dominated by Viacom and CBS.
[4/13/06] Professor Joseph Piotroski has come up with a Greenblatt scan based on data from Yahoo
[4/6/06] fatpitchfinancials and portfolio123 tackle the Magic Formula
[3/29/06] Bob Haugen answers Greenblatt's claim.
[3/29/06] Bill Alpert's Barrons article: The Little Book's Little Flaw
[3/24/06] Jack Hough's column in the March 2006 SmartMoney magazine is about Greenblatt's Magic Formula.
[3/23/06] Hedge-fund guru Joel Greenblatt applied Wall Street principles to turn around a struggling Queens elementary school. And it worked.
[1/31/06] Shai's notes from his meeting with Joel Greenblatt
[1/31/06] Some thoughts on the Magic Formula [via brknews]
[1/21/06] Andy Cross uses the magicformula to find small caps
[1/20/06] Morningstar's take on the Magic Formula
[1/13/06] Shai reports on Greenblatt's presentation to the NYSSA
[12/29/05 from dnalur at chucks_angels] High Yield Small Cap Stocks: The Magic Investment Formula
[12/27/05 from chucks_angels] I suppose Mauldin must have the ins with Greenblatt since he published this article in his column.
[12/22/05 email from zenway] David Gardner talks with Joel Greenblatt (audio)
[12/21/05] Bill Mann's look at the book
[12/11/05] Brian Zen and Garret Hamai notes of Greenblatt's lecture at NYSSA
[12/8/05] deanvesuvio at the new magicformulainvesting group takes a look at some companies spit out by the magic formula.
[12/8/05] Shai passes along Rajeev's well-written article on ROIC + Earnings Yield
[12/3/05] Interesting. I now see that James O'Shaughnessy (author of What Works on Wall Street) has reviewed the book at Amazon.
[11/26/05] Bill Barker says they (the fools) have been advocates of return on invested capital for a long time.
[11/12/05] brknews mentions that Shai discussed the book in his blog which mentions that Andrew Tobias (who wrote the foreword to the book) discussed the book in his column.
* * *
This book by Joel Greenblatt (more accurately the WSJ article about the book) was discussed over at chucks_angels. Here's the article in case the link breaks one day.
LONG & SHORT
By JESSE EISINGER
Magic Formula
Of Little Book
Just May Work
November 9, 2005; Page C1
As hard as it is to envision, hedge-fund titans and other masters of the universe soon will be tucking themselves into bed with a thin tome bearing a cutesy title: "The Little Book That Beats the Market."
Here's why: The author is Joel Greenblatt, a former hedge-fund manager. His first investment guide, published in 1997, also sported a hokey title, "You Can Be a Stock Market Genius (Even If You're Not Too Smart)," and sold about 38,000 hardcover and softcover copies.
Not bad as first books go, but it also became a cult hit in the insular world of hedge funds, passed like samizdat from manager to manager. A book of war stories and case studies written clearly and laced with jokes, it had two profound insights, say hedge-fund managers who have pressed the book on me.
One was that there are secret hiding places in the stock market, like spinoffs and restructurings, where bargains tend to lurk. The other was there wasn't any compelling reason to have a giant portfolio of dozens of stocks when a well-designed, concentrated portfolio could accomplish the same goal of achieving high returns without adding risk.
"His book on investing is by far the most valuable thing I have read," says David Einhorn, who manages a large, successful hedge fund, Greenlight Capital.
But hedge-fund managers "were not quite the underprivileged group I was shooting for when I wrote it," he says. So for his second book, Mr. Greenblatt says he wanted to write an even more basic and fundamental book on investing that would appeal beyond Wall Street. Think Benjamin Graham does Borscht Belt.
Mr. Greenblatt, 47 years old, says his goal was to provide advice that, while sophisticated, could be understood and followed by his five children, ages 6 to 15. They are in luck. His soon-to-be-released "Little Book" is one of the best, clearest guides to value investing out there. I have some minor quibbles, but in a world where individual-investor advice is dominated by jargon-filled short-termism on the one hand and oversimplified throw-up-your-hands indexing on the other, Mr. Greenblatt's approach is valuable.
It is so simple and cute that an investor with a little bit of knowledge might mistakenly dismiss it. Mr. Greenblatt titles his investment approach a "magic formula." His tongue is in his cheek, but not entirely. He writes as if he were J.M. Barrie spinning a Peter Pan-esque fairy tale, but with the fervor of a true believer:
"You have to take the time to understand the story, and most important, you have to actually believe that the story is true. In fact, the story concludes with a magic formula that can make you rich over time. I kid you not."
What is the magic formula? Invest in good companies when they are cheap. As Mr. Greenblatt might say: See? We told you it sounded obvious. Yeah, so what's "good"? And what's "cheap"?
Good companies earn high returns on their investments, he explains, while cheap companies sport share prices that are low (based on past earnings). His proxies for these criteria are return on capital (operating profit as a percentage of net working capital and net fixed assets) and earnings yield (pretax operating earnings compared with enterprise value, which is the market value plus the net debt). To his credit, however, Mr. Greenblatt explains all that parenthetical jargon in terms that shouldn't insult his peers but that will ring a bell for the unschooled masses.
To make things simpler still, his free Web site, www.magicformulainvesting.com, screens companies using his criteria. He advises individual investors to buy a basket of top stocks and turn them over on a strict schedule, depending on how they perform. (For maximum tax advantage, sell losers just before a year's up, and winners just after a year.)
It sounds too easy. But in fact, his approach is difficult not because it is hard to understand, but because it requires patience and faith that you are right when the market is saying you're wrong.
This is based on Warren Buffett's investment principles. But they bear repeating. Even a die-hard value investor like Mr. Greenblatt says he didn't realize that trying to find cheap, good companies, rather than just cheap ones, was so important until the 1990s. While Mr. Graham, Mr. Buffett's mentor, was looking for starkly cheap companies, Mr. Buffett wants only the great ones.
"I didn't get Buffettized until the early 1990s," says Mr. Greenblatt. "I wish it happened earlier."
Looked at retroactively, the returns of the "magic formula" beat the market handily. From 1988 through 2004, according to Mr. Greenblatt's book, the high-return/low-price stocks of the largest 1,000 companies had returns of 22.9% annually, compared with 12.4% for the S&P 500.
The most convincing part of Mr. Greenblatt's argument is that when 2,500 companies are ranked for price and returns (based on the formula), the top 10% outperformed the second 10%, which outperformed the third 10% and so on. "The darn thing works in order," he says.
There are some limitations to the approach. It seems prone to tossing up stocks whose high returns and growth may be in the past. Magic-formula stocks with more than $1 billion in stock-market value include lots of fast-growing specialty retailers and niche pharmaceutical companies. Some of these will flame out.
That's why Mr. Greenblatt argues that novice investors buy at least 20 or 30 of them. For himself, he buys a smaller number that he can know deeply. But that requires something not easily taught in a book: good instincts and judgment to distinguish true cheap gems from one-hit wonders.
Though he always was a value investor, his hedge-fund firm, Gotham Capital, wasn't always run on his magic formula, especially in the early years, when he tended toward complex arbitrage. He started Gotham in 1985 and ran it for outside investors for 10 years, achieving compounded annual returns, before fees but after expenses, of 50%. He started with $7 million, mostly raised through junk-bond king Michael Milken. After five years, he returned half the outside capital. He finished with more than $350 million and returned all the remaining outside capital.
These days, he spends his time teaching at Columbia Business School and helping run a Web site for pros, the Value Investors Club. His wealth is mostly tied up in Gotham Capital, which manages $1.6 billion, including some outside money in a fund of hedge funds he started a few years back.
His home cooking isn't just good enough for Mr. Greenblatt. He's got his kids eating it, too. His eldest son is doing well following the book's advice. A daughter, at it for two months, is having a rougher time. "I'm not sure if she didn't have me as her daddy she'd be hanging in there," he says.
URL for this article:
http://online.wsj.com/article/SB113149105486391586.html
[10/14/16] Quotes on finding a magic formula
[5/28/13] Does the Magic Formula really work?
[3/12/10] The Magic Formula has trounced every mutual fund from 1998 to 2009.
[8/12/07]“Keep the big picture in mind.” Joel Greenblatt
Thortnon O’glove wrote a terrific book, Quality of Earnings. The book helps the reader understand the nuances of financial statements. The theme is to spot blow ups and fraud by companies before an investor is affected by it. In an interview Thortnon O’glove stated, “I looked at the footnotes but they are not the big picture. Don’t lose the perspective of the big picture. Listen, I lost the big picture.” When an author and analyst is as adept as Thortnon O’glove is, at spotting these errors in the forest of information on companies, states that he lost sight of the big picture, we should all heed notice. Greenblatt has taken Mr. O’glove’s advice and has written the book The Magic Formula. In it Greenblatt focuses solely on enterprise value to earnings before interest and taxes and return on invested capital. These two numbers and the future of these two numbers are what Greenblatt wants to figure out before he invests.
[4/2/07] How to outperform the Magic Formula (part 1)
[2/4/07] John Reese on the Magic Formula
[1/25/07] The Magic Flawmula?
[11/26/06] Robert Haugen indicates that other metrics can be used effectively instead of ROC and earnings yield. [via geraldgianoli@MFI, 11/20/06]
[11/20/06] Joel Greenblatt's course descripton [via falcon880@MFI, 11/13/06]
[11/9/06 from BL@MFI] Victor Niederhoffer and Laurel Kenner investigate the Magic Formula (see 11/9 and 11/7)
[10/17/06] Says gannononinvesting, Greenblatt considers future growth prospects
[10/9/06] Motley Fool CAPS tracks Greenblatt's picks
[9/27/06] David Meier looks at Greenblatt's portfolio
[9/24/06 MFI] Greenblatt video presentation (1 hour) on the Little Book That Beats The Market
[9/20/06] mechanical-investing's take on the Magic Formula
[7/31/06] That Magic Little Book
[6/7/06] MoneySense Magazine interviews Joel Greenblatt [from falcon880 of magicformulainvesting]
[6/4/06] The Joel Greenblatt Way by Brian Zen [magicformulainvesting, 5/31/06]
[5/29/06] Q. In a nutshell, the formula says buy companies with a good return on capital and a good earnings yield. Is it really that simple, or is there another dimension people should add to it? [via brknews, 5/7/06]
A. What the book was trying to do was show that the principle makes sense. And so the whole back-testing thing to see what would've happened if you invested that way - bought a bucket of securities that had those attributes - showed that it would have done very well. That would tend to validate the principle that buying good companies at attractive prices makes sense, which intuitively it does in the first place.
[5/10/06] Randy Harmelink of magicformulainvesting passes along this analysis of Greenblatt's method
[5/4/06] Joel Greenblatt notices that pricing anomalies are not rare occurrences in the market. Look at the 52-week highs and lows of any stock price, he says, and more often than not you'll see a big spread. Look at the range that General Motors traded over the last year: low of $18; high of $38. IBM: low of $72; high of $95. Abercrombie and Fitch: low of $44; high of $74. Do these prices always reflect business values? No, he says, they reflect the mood swings of Mr. Market, his personification of the broad stock market.
[4/19/06] Roger Lowenstein writes about the book (no, not that book) in his column in the May SmartMoney
[4/19/06] r4austin partially answers the 19.9% question saying Forsythe looked at large cap stocks which had lower return than the 30+% which was based on smaller caps. defender23263 has a more cynical view.
[4/17/06] Greg Forsythe, developer of the Schwab Equity Ratings, has written an article for Schwab Investing Insights saying Greenblatt's formula is a good one. But not as good as Schwab Equity Ratings. This is unsurprising considering the source. Mainly because if Forsythe had found otherwise, the article would not likely have been published.
The question I would have is how hard Forsythe kept searching for a test criteria until he found one that beat the Magic Formula. The other question the people over at the magicformulainvesting group have is how Forsythe arrived at the 19.9% performance for the Magic Formula when the book states 30+%.
[4/13/06] Joel Greenblatt is now officially a guru. Evidently he doesn't follow his Magic Formula precisely for his own investments as his holdings reveal only seven stocks, dominated by Viacom and CBS.
[4/13/06] Professor Joseph Piotroski has come up with a Greenblatt scan based on data from Yahoo
[4/6/06] fatpitchfinancials and portfolio123 tackle the Magic Formula
[3/29/06] Bob Haugen answers Greenblatt's claim.
[3/29/06] Bill Alpert's Barrons article: The Little Book's Little Flaw
[3/24/06] Jack Hough's column in the March 2006 SmartMoney magazine is about Greenblatt's Magic Formula.
[3/23/06] Hedge-fund guru Joel Greenblatt applied Wall Street principles to turn around a struggling Queens elementary school. And it worked.
[1/31/06] Shai's notes from his meeting with Joel Greenblatt
[1/31/06] Some thoughts on the Magic Formula [via brknews]
[1/21/06] Andy Cross uses the magicformula to find small caps
[1/20/06] Morningstar's take on the Magic Formula
[1/13/06] Shai reports on Greenblatt's presentation to the NYSSA
[12/29/05 from dnalur at chucks_angels] High Yield Small Cap Stocks: The Magic Investment Formula
[12/27/05 from chucks_angels] I suppose Mauldin must have the ins with Greenblatt since he published this article in his column.
[12/22/05 email from zenway] David Gardner talks with Joel Greenblatt (audio)
[12/21/05] Bill Mann's look at the book
[12/11/05] Brian Zen and Garret Hamai notes of Greenblatt's lecture at NYSSA
[12/8/05] deanvesuvio at the new magicformulainvesting group takes a look at some companies spit out by the magic formula.
[12/8/05] Shai passes along Rajeev's well-written article on ROIC + Earnings Yield
[12/3/05] Interesting. I now see that James O'Shaughnessy (author of What Works on Wall Street) has reviewed the book at Amazon.
[11/26/05] Bill Barker says they (the fools) have been advocates of return on invested capital for a long time.
[11/12/05] brknews mentions that Shai discussed the book in his blog which mentions that Andrew Tobias (who wrote the foreword to the book) discussed the book in his column.
* * *
This book by Joel Greenblatt (more accurately the WSJ article about the book) was discussed over at chucks_angels. Here's the article in case the link breaks one day.
LONG & SHORT
By JESSE EISINGER
Magic Formula
Of Little Book
Just May Work
November 9, 2005; Page C1
As hard as it is to envision, hedge-fund titans and other masters of the universe soon will be tucking themselves into bed with a thin tome bearing a cutesy title: "The Little Book That Beats the Market."
Here's why: The author is Joel Greenblatt, a former hedge-fund manager. His first investment guide, published in 1997, also sported a hokey title, "You Can Be a Stock Market Genius (Even If You're Not Too Smart)," and sold about 38,000 hardcover and softcover copies.
Not bad as first books go, but it also became a cult hit in the insular world of hedge funds, passed like samizdat from manager to manager. A book of war stories and case studies written clearly and laced with jokes, it had two profound insights, say hedge-fund managers who have pressed the book on me.
One was that there are secret hiding places in the stock market, like spinoffs and restructurings, where bargains tend to lurk. The other was there wasn't any compelling reason to have a giant portfolio of dozens of stocks when a well-designed, concentrated portfolio could accomplish the same goal of achieving high returns without adding risk.
"His book on investing is by far the most valuable thing I have read," says David Einhorn, who manages a large, successful hedge fund, Greenlight Capital.
But hedge-fund managers "were not quite the underprivileged group I was shooting for when I wrote it," he says. So for his second book, Mr. Greenblatt says he wanted to write an even more basic and fundamental book on investing that would appeal beyond Wall Street. Think Benjamin Graham does Borscht Belt.
Mr. Greenblatt, 47 years old, says his goal was to provide advice that, while sophisticated, could be understood and followed by his five children, ages 6 to 15. They are in luck. His soon-to-be-released "Little Book" is one of the best, clearest guides to value investing out there. I have some minor quibbles, but in a world where individual-investor advice is dominated by jargon-filled short-termism on the one hand and oversimplified throw-up-your-hands indexing on the other, Mr. Greenblatt's approach is valuable.
It is so simple and cute that an investor with a little bit of knowledge might mistakenly dismiss it. Mr. Greenblatt titles his investment approach a "magic formula." His tongue is in his cheek, but not entirely. He writes as if he were J.M. Barrie spinning a Peter Pan-esque fairy tale, but with the fervor of a true believer:
"You have to take the time to understand the story, and most important, you have to actually believe that the story is true. In fact, the story concludes with a magic formula that can make you rich over time. I kid you not."
What is the magic formula? Invest in good companies when they are cheap. As Mr. Greenblatt might say: See? We told you it sounded obvious. Yeah, so what's "good"? And what's "cheap"?
Good companies earn high returns on their investments, he explains, while cheap companies sport share prices that are low (based on past earnings). His proxies for these criteria are return on capital (operating profit as a percentage of net working capital and net fixed assets) and earnings yield (pretax operating earnings compared with enterprise value, which is the market value plus the net debt). To his credit, however, Mr. Greenblatt explains all that parenthetical jargon in terms that shouldn't insult his peers but that will ring a bell for the unschooled masses.
To make things simpler still, his free Web site, www.magicformulainvesting.com, screens companies using his criteria. He advises individual investors to buy a basket of top stocks and turn them over on a strict schedule, depending on how they perform. (For maximum tax advantage, sell losers just before a year's up, and winners just after a year.)
It sounds too easy. But in fact, his approach is difficult not because it is hard to understand, but because it requires patience and faith that you are right when the market is saying you're wrong.
This is based on Warren Buffett's investment principles. But they bear repeating. Even a die-hard value investor like Mr. Greenblatt says he didn't realize that trying to find cheap, good companies, rather than just cheap ones, was so important until the 1990s. While Mr. Graham, Mr. Buffett's mentor, was looking for starkly cheap companies, Mr. Buffett wants only the great ones.
"I didn't get Buffettized until the early 1990s," says Mr. Greenblatt. "I wish it happened earlier."
Looked at retroactively, the returns of the "magic formula" beat the market handily. From 1988 through 2004, according to Mr. Greenblatt's book, the high-return/low-price stocks of the largest 1,000 companies had returns of 22.9% annually, compared with 12.4% for the S&P 500.
The most convincing part of Mr. Greenblatt's argument is that when 2,500 companies are ranked for price and returns (based on the formula), the top 10% outperformed the second 10%, which outperformed the third 10% and so on. "The darn thing works in order," he says.
There are some limitations to the approach. It seems prone to tossing up stocks whose high returns and growth may be in the past. Magic-formula stocks with more than $1 billion in stock-market value include lots of fast-growing specialty retailers and niche pharmaceutical companies. Some of these will flame out.
That's why Mr. Greenblatt argues that novice investors buy at least 20 or 30 of them. For himself, he buys a smaller number that he can know deeply. But that requires something not easily taught in a book: good instincts and judgment to distinguish true cheap gems from one-hit wonders.
Though he always was a value investor, his hedge-fund firm, Gotham Capital, wasn't always run on his magic formula, especially in the early years, when he tended toward complex arbitrage. He started Gotham in 1985 and ran it for outside investors for 10 years, achieving compounded annual returns, before fees but after expenses, of 50%. He started with $7 million, mostly raised through junk-bond king Michael Milken. After five years, he returned half the outside capital. He finished with more than $350 million and returned all the remaining outside capital.
These days, he spends his time teaching at Columbia Business School and helping run a Web site for pros, the Value Investors Club. His wealth is mostly tied up in Gotham Capital, which manages $1.6 billion, including some outside money in a fund of hedge funds he started a few years back.
His home cooking isn't just good enough for Mr. Greenblatt. He's got his kids eating it, too. His eldest son is doing well following the book's advice. A daughter, at it for two months, is having a rougher time. "I'm not sure if she didn't have me as her daddy she'd be hanging in there," he says.
URL for this article:
http://online.wsj.com/article/SB113149105486391586.html
Wednesday, October 12, 2016
controlling your emotions
I had the honor and privilege of introducing this year’s luncheon
keynote speaker, Rob O’Neill. He was a SEAL Team Six leader and is one
of the most highly decorated combat veterans of our time--a true
American hero. O’Neill’s mantra is “never quit.”
For an hour and 15 minutes, O’Neill held our attention (not a fork dropped, not an email checked) with his stories from SEAL training and special operations.
The key lessons O’Neill shared during his talk were the importance of preparation, of controlling your emotions, and of never giving up. According to O’Neill, the best plan ceases to be the best plan as soon as it leaves the planning room. Faced with uncertainty, chaos, and extreme emotional stress, it is critical to keep one’s emotions in check.
O’Neill said that our first instincts are typically our worst. Only countless hours of training and emotional discipline can help us overcome these instincts. Per O’Neill, panic breeds panic and calm breeds calm. The former is unproductive, and the latter will keep you on track. Above all else, O’Neill urged his audience to never quit.
My Take-Away:
O’Neill learned these lessons in the highest-stakes scenarios imaginable. However, they’re every bit as relevant in the much lower-stakes setting of investing to reach your financial goals. Particularly relevant is the importance of controlling your emotions and remembering that your first instinct is typically your worst.
For an hour and 15 minutes, O’Neill held our attention (not a fork dropped, not an email checked) with his stories from SEAL training and special operations.
The key lessons O’Neill shared during his talk were the importance of preparation, of controlling your emotions, and of never giving up. According to O’Neill, the best plan ceases to be the best plan as soon as it leaves the planning room. Faced with uncertainty, chaos, and extreme emotional stress, it is critical to keep one’s emotions in check.
O’Neill said that our first instincts are typically our worst. Only countless hours of training and emotional discipline can help us overcome these instincts. Per O’Neill, panic breeds panic and calm breeds calm. The former is unproductive, and the latter will keep you on track. Above all else, O’Neill urged his audience to never quit.
My Take-Away:
O’Neill learned these lessons in the highest-stakes scenarios imaginable. However, they’re every bit as relevant in the much lower-stakes setting of investing to reach your financial goals. Particularly relevant is the importance of controlling your emotions and remembering that your first instinct is typically your worst.
Friday, September 30, 2016
Buffett-like funds
while every manager desires Buffett’s results, most do not mimic his
investment approach. Concentrated, low-turnover portfolios are not for
everybody. There are, however, two dozen U.S. stock mutual funds that
could reasonably be called Berkshire Hathaway hopefuls. They have
large-value or large-blend investment styles, fewer than 25 stock
positions, and annual turnover of less than 50%.
Their collective results stink.
*** [10/1/16]
Well, how about YAFFX (Yackman Focused Fund), which is a fund I own? I'm looking at the semi-annual report (and data from Morningstar).
The fund has 20 stock holdings with turnover of 6%.
The fund has returned 15.38%, 11.74%, 10.02%, 12.29% for 1, 5, 10, 15 years.
The S&P 500 has returned 15.43%, 16.37%, 7.24%, 7.15%.
Berkshire Hathaway has returned 10.75%, 15.15%, 8.48%, 7.81%.
Morningstar rates the fund three stars silver.
Their collective results stink.
*** [10/1/16]
Well, how about YAFFX (Yackman Focused Fund), which is a fund I own? I'm looking at the semi-annual report (and data from Morningstar).
The fund has 20 stock holdings with turnover of 6%.
The fund has returned 15.38%, 11.74%, 10.02%, 12.29% for 1, 5, 10, 15 years.
The S&P 500 has returned 15.43%, 16.37%, 7.24%, 7.15%.
Berkshire Hathaway has returned 10.75%, 15.15%, 8.48%, 7.81%.
Morningstar rates the fund three stars silver.
Thursday, September 29, 2016
John Szramiak
Who is John Szramiak? I never heard of him before. He writes the Vintage Value Investing blog and Gurufocus saw fit to ask him 15 Questions.
So when the financial crisis hit in 2008, I remember looking up Google stock on Google Finance. And it was trading somewhere around $150 per share (adjusted for stock splits) compared to a high of $357. I knew next to nothing about investing, but I knew enough to think to myself "there must be something wrong here" So I did a little research and it didn't take long to figure out that (a) Google as a company was doing fine, but (b) we were in a recession - the worst recession since the Great Depression! So I opened a brokerage account and bought as many shares as I could using all the money I had saved from birthdays and summer jobs.
1. How and why did you get started investing? What is your background?
I got started investing in a sort of
roundabout way... actually, I owe it all to Google. In middle school and
high school I was probably on Google for several hours every day -
searching different topics and learning about whatever I was curious
about that day (it was basically my equivalent to hanging out in a
library and trying to read every book). I loved Google the search engine
and how you could think of any question and then find the answer to it
within a few seconds. And I also loved Google the company - its vision,
its culture, its philosophy, its other products, and its success.
So when the financial crisis hit in 2008, I remember looking up Google stock on Google Finance. And it was trading somewhere around $150 per share (adjusted for stock splits) compared to a high of $357. I knew next to nothing about investing, but I knew enough to think to myself "there must be something wrong here" So I did a little research and it didn't take long to figure out that (a) Google as a company was doing fine, but (b) we were in a recession - the worst recession since the Great Depression! So I opened a brokerage account and bought as many shares as I could using all the money I had saved from birthdays and summer jobs.
The stock must've gone up a bit soon after
I bought it, because I then became very excited about investing and
started doing research (using Google of course) about how to become a
better investor. And if you want to teach yourself about investing (and
you want to do it for free), then you're pretty much required to start
with the writings of Warren Buffett - who just so happens to be the greatest teacher
of investing of all time, as well as the greatest investor of all time.
In college I studied finance and economics, but I continued to read and
teach myself all about value investing outside of class (most value
investing concepts are actually never even mentioned in business
schools), and I would research stocks and manage my portfolio in my
spare time.
As it turns out, I still own all the Google shares I bought and have no plans of selling.
2. Describe your investing strategy
I'm a long-term value investor. What does
that mean exactly? Well, first it means that I think that every
investment decision absolutely must be based on the comparison of price
vs. intrinsic value, and that intrinsic value must be calculated using
conservative, fundamental analysis. And second, it means that I like to
buy-and-hold for very long periods of time.
On a more tactical level, I really try to follow Warren Buffett's
strategy as much as possible: find stocks that are attractively priced,
with good free cash flow characteristics, with good long-term
prospects, and that I'd be happy to own if the stock market shut down
for 5 years starting tomorrow.
3. What drew you to that specific strategy?
I think for some people, when they first
learn about value investing, it either clicks right away and makes total
sense, or it doesn't and they never really get it. I think it might
come down to how some people's brains are hardwired. For me, it just
clicked. I'm always baffled when I see people trying to time the stock
market, or day trading, or speculating - even the people that end up
making tons of money using those strategies, because I have no idea how
they do it (in my opinion most of these people end up being lucky,
rather than good). So I think intrinsically I've always been a value
investor.
10. What kind of checklist do you use when investing?
I don't have a standardized checklist,
although I recognize the importance of having one and I plan on writing
one out for myself in the near future. But I do have a checklist in my
head when I invest. Some of the questions I ask myself are: Is the stock
attractively priced? Do I have a margin of safety? Does the company
generate strong FCF? Will the company be able to generate as much or
more annual free cash flow going forward as it has in the past? Would I
be happy to own this stock if the stock market shut down tomorrow and
didn't reopen for 5 or 10 years?
Finally, and this is my most important piece of advice, I would recommend that you read everything written by and written about Warren Buffett. Like I said before, he is the greatest investor of all time and the greatest teacher
of investing of all time - surpassing even his own mentor, Ben Graham,
in my opinion. Buffett has also written so extensively on so many topics
and has given so many interviews on current events that you could spend
almost a lifetime just reading his works.
So always keep price vs. value in mind, invest for the long-term, and read everything by and about Warren Buffett. Do that, and keep learning, and you'll be a successful investor in no time!
Where are the customer's yachts?
[a book review by Kyle Ferguson]
Earlier this year, I attended my first Berkshire Hathaway meeting that was held in Omaha. During the meeting, Warren Buffett described a book, which he claimed that he read back in 1940 when he was 10 years old, called “Where are the Customers' Yachts?" or "A Good Hard Look at Wall Street."
The book is a fairly fast read at 170 pages. The book was originally
published in 1940. It is interesting to note that certain human
behavioral tendencies remain the same some 76 years after the book was
originally published.
The
author, Fred Schwed Jr., challenges the reader early on in the book to
answer six questions to determine whether or not they could handle a
career on Wall Street.
-
Do you perceive quite clearly what is the objection to playing a roulette wheel that has two zeros on it? (If not, don’t bother to be a financier; be a roulette player.)
- If a man has tossed a coin “heads” four times in succession, which do you think he is more likely to toss the fifth time, heads or tails? (If you think he is more likely to toss either heads or tails, look into the interior-decorating game. You have that instinctive type of mentality which might do very well at that.)
-
When do you consider that it is a good purchase to draw one card to an inside straight? (Answer when you are playing for soybeans.)
-
If you have answered (3) correctly, do you find that when you are actually playing poker for money, you can always resist making that draw? (If not, stay home with your money and start practicing being a miser.)
-
If a stock which is not paying any dividend is split two for one, how much good does that do the stockholder? (If you think it does him any real good come down and join our sales department, but steer clear of our trading department.)
-
What is the primary purpose of a business enterprise? This question is specifically for young men considering entering the banking field, where they will have a constant parade of business propositions passing before them, and they will be required to plump for a few of them and say “no” to the others. The answer is elementary and obvious: the primary purpose of a business is to make money.
At the time the book was written, there
wasn’t the same modern day information that we have available today.
During the 1920’s-1930’s, many people irrationally believed that the
best stocks were the ones that were the most talked about and the most
expensive. These thoughts occurred before a lot of modern day ratios
were invented. A time before modern technology had evolved, and before
financial ratings such as the Piotroski F-Score, the Altman Z-Score, and the Beneish M-Score
were all invented. These scores and rating give modern day investors a
much bigger advantage, which allows them to use rational thought, as
well as statistical analysis on their investments that enable them to
make the “best” most calculated decisions. Instead of irrationally
believing that a company is the “best” because it is trading at a high
in price or because it is the most talked about security.
Schwed talks about a large number of people set to play a game of pure chance against each other.
“Let us have 400,000 men (and women)
engage in this contest at one time. (Something like the number in this
country who try being speculators.)
We line them up, facing each other
in pairs, across a refectory table miles long. Each player is going to
play the person facing him a series of games, the game chosen being a
matter of pure luck, say matching coins. Two hundred thousand on one
side of the table face 200,000 on the other side.
If the reader is at
all mathematically inclined he should cease reading and work out for
himself what is now bound to occur. Otherwise:
The referee gives a
signal for the first game and 400,000 coins flash in the sun as they are
tossed. The scorers make their tabulations, and discover that 200,000
people are winners and 200,000 are losers.
Then the second game is
played. Of the original 200,000 winners, about half of them win again.
We now have about 100,000 who have won two games and an equal number who
have been so unfortunate as to lose both games. The rest have so far
broken even.
The simplest thing from now on is to keep our eyes on the
winners. (No one is ever much interested in the losers, anyway)
The
third game is played, and of the 100,000 who have won both games half of
them are again successful. These 50,000, in the fourth game, are
reduced to 25,000, and in the fifth to 12,500. These 12,500 have won
five straight without a loss and are no doubt beginning to fancy
themselves as coin flippers. They feel they have an “Instinct” for it.
However, in the sixth game, 6250 play on and are successively reduced in
number until less than a thousand are left. This little band has won
some nine straight without a loss, and by this time most of them have at
least a local reputation for their ability.
People come from some
distance to consult them about their method of calling heads and tails,
and they modestly give explanations of how they have achieved their
success. Eventually there are about a dozen men who have won every
single time for about fifteen games. These are regarded as the experts,
the greatest coin flippers in history, the men who never lose, and they
have their biographies written.”
I have been studying Warren Buffett for more than 5 years now. After I read Where are the Customers' Yachts?" I remembered that had his own version of a coin flipping story that can be read here.
Conclusion
I thought
that "Where Are The Customers Yachts?" was a good book, and I believe
that it was a great help in Buffett’s ability to think rationally
starting at the age of 10. The book is filled with wisdom, has some
comedic value and I understand why it is one of Warren Buffett’s all time favorite books.
Friday, September 23, 2016
8 biggest mistakes investors make
In the stock market, as in life, nothing is certain. The vast opportunities for creating wealth by investing come with plenty of risks, such as the 2008-2009 stock market collapse and plenty of sharp contractions since.
Mistakes? Investor, behold thyself. Here are the most common investing screw-ups, along with advice on how to avoid them.
1. freaking out in market drops
2. getting swept up in market euphoria
3. trading too frequently
4. putting all your eggs in one basket
5. treating your home as an investment
6. failing to rebalance your portfolio regularly
7. borrowing against stocks
8. miscalculating a fund's tax basis
Mistakes? Investor, behold thyself. Here are the most common investing screw-ups, along with advice on how to avoid them.
1. freaking out in market drops
2. getting swept up in market euphoria
3. trading too frequently
4. putting all your eggs in one basket
5. treating your home as an investment
6. failing to rebalance your portfolio regularly
7. borrowing against stocks
8. miscalculating a fund's tax basis
Tuesday, September 20, 2016
How Wells Fargo’s High-Pressure Sales Culture Spiraled Out of Control
Hourly targets, fear of being fired and bonuses kept employees selling even when the bank began cracking down on abuses; ‘not a team player’
—Christina Rexrode, AnnaMaria Andriotis and Jim Oberman contributed to this article.
Saturday, September 17, 2016
Will Yellen raise rates in September?
Once upon a time the only spokesperson for the Federal Reserve System
was the Chairperson. Responding to a call for more transparency, former
Chairman, Dr. Ben Bernanke, allowed the Fed's communication policy to
change.
Now-a-days, Fed Governors and Presidents of Federal Reserve Banks can say whatever they want regarding matters related to the Fed. Unfortunately, the opinions expressed by these officials have caused more confusion than clarity on what the Fed is likely to do. [See my essays of May 20, 2016 and June 17, 2016.]
In an August 28th editorial, entitled "The Federal Reserve's Politicians," The Wall Street Journal (WSJ) said, "The Fed's decision making is so ad hoc and arbitrary now that no one has any idea of what the Fed will do in December - including Ms. Yellen."
As I see it, even the WSJ editors are confused. Ms. Yellen knows exactly what she's going to do. She's stirring the pot for a potential interest rate hike in December and will not raise interest rates in September. Ms. Yellen remembers what happened after she raised rates last December. In case you forgot, the dollar got stronger and stock markets plummeted.
Even under the best of circumstances, she wouldn't risk upsetting financial markets around the world prior to the November's Presidential election. Ms. Yellen Is Not Raising Rates In September.
-- VectorVest Views Essay: by Dr. Bart DiLiddo
Now-a-days, Fed Governors and Presidents of Federal Reserve Banks can say whatever they want regarding matters related to the Fed. Unfortunately, the opinions expressed by these officials have caused more confusion than clarity on what the Fed is likely to do. [See my essays of May 20, 2016 and June 17, 2016.]
In an August 28th editorial, entitled "The Federal Reserve's Politicians," The Wall Street Journal (WSJ) said, "The Fed's decision making is so ad hoc and arbitrary now that no one has any idea of what the Fed will do in December - including Ms. Yellen."
As I see it, even the WSJ editors are confused. Ms. Yellen knows exactly what she's going to do. She's stirring the pot for a potential interest rate hike in December and will not raise interest rates in September. Ms. Yellen remembers what happened after she raised rates last December. In case you forgot, the dollar got stronger and stock markets plummeted.
Even under the best of circumstances, she wouldn't risk upsetting financial markets around the world prior to the November's Presidential election. Ms. Yellen Is Not Raising Rates In September.
-- VectorVest Views Essay: by Dr. Bart DiLiddo
a look at the ACA
We know readers fall on both sides of the aisle, with some despising the ACA and others loving it. We offer no opinion on the validity of either side, but simply look at the economic and investment developments.
Proponents of the ACA, including many in the health care industry, promised that consumers would have more choices for insurance, use emergency rooms less and have lower costs. And investors believed many of those assurances, as stocks in much of the health care sector rallied in the years following the 2010 passage of the ACA.
Unfortunately for investors, those promises haven’t come to fruition yet.
There is no doubt that more Americans now have insurance: The nation’s uninsured rate has dropped to 8.6%, the lowest level on record, according to the Department of Health and Human Services. The department credits the ACA with adding 20 million to the ranks of the insured. But many have not ended up with more insurance options.
The problem stems from the estimated 30 million that remain uninsured. Many who have failed to get insurance are healthier, younger consumers. Insurance companies were expecting that group to seek insurance and help subsidize the costs of consumers with immediate health care needs who were quick to seek insurance coverage on the exchanges.
With a lower-than-projected number of younger, healthier patients seeking coverage, several major insurers have taken financial losses and exited the so-called ACA health care exchanges. This has resulted in a projection of about 31% of rural customers having only one insurance provider option in 2017, up from 7.8% in 2015, according to Healthcare.gov.
It doesn’t appear the ACA has led to fewer emergency room visits or lower health care costs either. A 2015 survey of the American College of Emergency Physicians shows emergency room visits rose over the previous 18 months.1 And the average insurance premium increase requested for 2017 is roughly 23%.2 It’s not just insurance premiums that are rising. Out-of-pocket health care payments are increasing at an annual rate of 5.1%,3 more than twice the rate of inflation.
So now there are growing calls to “fix” the ACA, with one group calling for more government intervention and another calling for completely scrapping the system. And the recent EpiPen controversy has dragged politicians even further into the fray, with politicians from various corners calling for price caps and more regulation. This raises our level of concern as government involvement typically doesn’t bode well for corporate profitability.
But while things have looked dour recently, we aren’t quite ready to throw in the towel on an industry that means so much to the vast majority of consumers and are keeping our marketperform rating on the group … for now.
Drugmakers have quickly responded to the government threats by walking back some recent price increases and promising more restraint in the future, which could lessen the furor toward the group.
Additionally, we are seeing great potential in the biotech area, where stocks have fallen recently, but are starting to look more reasonably valued.
And there are few doubts that given the above demographic trends, demand for health care services will increase in the coming decades. In fact, the Bureau of Labor Statistics estimates that 50% of the fastest-growing occupations between 2012 and 2022 will come from health care industries. With that amount of industry growth forecasted, it is difficult for us to downgrade the group, despite recent disappointing performance.
But if the tide toward more government involvement grows, we would likely be forced to do just that.
Proponents of the ACA, including many in the health care industry, promised that consumers would have more choices for insurance, use emergency rooms less and have lower costs. And investors believed many of those assurances, as stocks in much of the health care sector rallied in the years following the 2010 passage of the ACA.
Unfortunately for investors, those promises haven’t come to fruition yet.
There is no doubt that more Americans now have insurance: The nation’s uninsured rate has dropped to 8.6%, the lowest level on record, according to the Department of Health and Human Services. The department credits the ACA with adding 20 million to the ranks of the insured. But many have not ended up with more insurance options.
The problem stems from the estimated 30 million that remain uninsured. Many who have failed to get insurance are healthier, younger consumers. Insurance companies were expecting that group to seek insurance and help subsidize the costs of consumers with immediate health care needs who were quick to seek insurance coverage on the exchanges.
With a lower-than-projected number of younger, healthier patients seeking coverage, several major insurers have taken financial losses and exited the so-called ACA health care exchanges. This has resulted in a projection of about 31% of rural customers having only one insurance provider option in 2017, up from 7.8% in 2015, according to Healthcare.gov.
It doesn’t appear the ACA has led to fewer emergency room visits or lower health care costs either. A 2015 survey of the American College of Emergency Physicians shows emergency room visits rose over the previous 18 months.1 And the average insurance premium increase requested for 2017 is roughly 23%.2 It’s not just insurance premiums that are rising. Out-of-pocket health care payments are increasing at an annual rate of 5.1%,3 more than twice the rate of inflation.
So now there are growing calls to “fix” the ACA, with one group calling for more government intervention and another calling for completely scrapping the system. And the recent EpiPen controversy has dragged politicians even further into the fray, with politicians from various corners calling for price caps and more regulation. This raises our level of concern as government involvement typically doesn’t bode well for corporate profitability.
But while things have looked dour recently, we aren’t quite ready to throw in the towel on an industry that means so much to the vast majority of consumers and are keeping our marketperform rating on the group … for now.
Drugmakers have quickly responded to the government threats by walking back some recent price increases and promising more restraint in the future, which could lessen the furor toward the group.
Additionally, we are seeing great potential in the biotech area, where stocks have fallen recently, but are starting to look more reasonably valued.
And there are few doubts that given the above demographic trends, demand for health care services will increase in the coming decades. In fact, the Bureau of Labor Statistics estimates that 50% of the fastest-growing occupations between 2012 and 2022 will come from health care industries. With that amount of industry growth forecasted, it is difficult for us to downgrade the group, despite recent disappointing performance.
But if the tide toward more government involvement grows, we would likely be forced to do just that.
buy the dips?
Tuesday's Wall Street Journal published a nifty little chart, courtesy of LPL Financial, that showed the U.S. stock market's improving powers of recovery. For 70 years, a one-day market decline of at least 2% elicited no visible reaction: On average, the market reacted to the drop by matching its long-term norms for the next one-week, two-week, and one-month periods. Buying after a steep one-day loss was neither a help nor a harm.
That has changed since the bull market started in 2009, in a big way. Since then, a one-day market dip has been followed by an average one-week gain of 1.3%. For one month, the profit is just more than 3%. Annualized, those figures amount to 45% for the one-month period, and double that (90%) for the one-week measure.
Thursday, September 15, 2016
The 5 Biggest Stock Market Fears
... Debunked
If there’s one thing I think the market and market participants lack most today, it’s confidence. As a Principal and Portfolio Manager at Zacks Investment Management, I spend a lot of time interfacing with the financial media, clients and prospects. A common theme I’ve seen pretty much all year is a reluctance to believe that the market has substantial upside left, for a variety of reasons. Over the past few weeks, I’ve been notating the most frequently mentioned fears and concerns, and I’ve compiled a list of five. Here they are:
1. Election Fears
No matter what your political preference, there is a lot of uncertainty floating around this election cycle. But let’s forget about hypothetical “what if’s” for a moment, and look at how the stock market has historically reacted in election years, and in the year following the election.
For an election year, history suggests the market should hold up just fine. In the last 22 election years, there have only been four years where the S&P 500 index finished negative:
1932 Roosevelt v. Hoover: -8.2% (part of the Great Depression)
1940 Roosevelt v. Willkie: -9.8%
2000 Bush v. Gore: -9.1% (part of the tech bubble bursting)
2008 Obama v. McCain: -37% (part of the most recent financial crisis)
As you can see, three of those election years occurred amidst fairly extraordinary economic times. So if you strip those away, history tells us that election years are almost always positive. I expect this to be the case in 2016 as well.
The next year [2017], however, may be a different story. History tells us that the year following an election year is the weakest for stock market performance, which makes sense from a theoretical standpoint—the year following an election is typically the one where the new president is most aggressive about policy setting, and the market gets agitated when there’s a higher probability of regulatory changes and/or a shift in taxes or property rights. With the outcome of this election cycle too far off to call, it’s also too early to start making portfolio adjustments. We’ll have to wait and see.
2. The Monetary Policy Trap
In the developed world, central banks have done something that’s never been done before in history—lowered interest rates to near zero across the board. In some cases (Europe and Japan), they’ve implemented negative interest rate policies, which essentially means that banks lose money if they keep it parked at the central bank. There are two problems with this approach. First, it doesn’t seem to be working very well as banks have seen margins get squeezed, loans go up only marginally, and economic growth and inflation are currently not showing signs of taking off. Second, what happens if another financial crisis hits soon? Central banks will have already used many of their essential tools, and they could trap themselves into a corner. I actually see this as a legitimate concern in the markets today and another reason to favor U.S. stocks since the Fed has long ended QE and should be ‘normalizing’ interest rate policy soon.
3. The Geopolitical Threat
It often feels like the world is under siege and the threat of terror is imminent. For any readers that have been directly affected by an attack, we cannot begin to empathize with your experience. For the rest of us, we would do well to take a lesson from the market when it comes to terrorism—don’t let it shake you. Apart from the September 11th attacks, there has not been a terrorist attack that has coincided with or caused a bear market. Stocks have almost always shaken off attacks within a matter of days, and even as I write here today the market continues to reach new highs, even in spite of a string of terror attacks over the last couple of years.
4. China’s Economic Hard Landing
China’s economic restructuring is underway, but the long-feared economic hard landing has yet to be felt. Non-manufacturing PMI (Purchasing Managers' Index) has been running well over 50 for over a year. Additionally, manufacturing PMI, which was expected to feel impact of the restructuring, has recently recovered to expansionary territory over the last few months. With consumer prices rising at a healthy 1.8% clip, and GDP still over 6%, the China fears are losing steam.
5. The Bull Market is Too Old
At 90 months, this is now the second longest bull market in history. The longest was the 1990–2000 stretch, where economic growth levels were much higher than they are now. This has many investors worried that “something’s gotta give soon.” But that’s a weak reason to be bearish on stocks. Bull markets don’t have to die of old age, there has to be a confluence of negative forces occurring that few people are talking about, and that most investors are ignoring. When you have positive investor sentiment overshadowing negative fundamentals, that’s when the bull is usually ready to break. We don’t have that now.
Bottom Line for Investors
With equity investing, there will always be fears and worries. The volatility in the market that accompanies these fears can often dupe investors into thinking the next bear market has arrived. But, I can tell you from my decades of experience as a portfolio manager that for every bear market, there are dozens upon dozens of “events” that analysts claim is the end of a bull, but they end up being wrong. The five concerns I’ve listed above, while relevant, I do not believe are powerful enough to drive the next bear market.
Having debunked these bearish fears, the question on many of your minds is: should you increase your presence in the stock market? And if so, which sectors now offer the most promise for gain? To help you consider these pressing questions, you can download Zacks' latest Stock Market Outlook report free of charge. You'll see at a glance which sectors and industries are best for starting your stock search, and which are red flagged and best avoided. Read more by clicking on the link below...
-- Mitch Zacks
If there’s one thing I think the market and market participants lack most today, it’s confidence. As a Principal and Portfolio Manager at Zacks Investment Management, I spend a lot of time interfacing with the financial media, clients and prospects. A common theme I’ve seen pretty much all year is a reluctance to believe that the market has substantial upside left, for a variety of reasons. Over the past few weeks, I’ve been notating the most frequently mentioned fears and concerns, and I’ve compiled a list of five. Here they are:
No matter what your political preference, there is a lot of uncertainty floating around this election cycle. But let’s forget about hypothetical “what if’s” for a moment, and look at how the stock market has historically reacted in election years, and in the year following the election.
For an election year, history suggests the market should hold up just fine. In the last 22 election years, there have only been four years where the S&P 500 index finished negative:
1932 Roosevelt v. Hoover: -8.2% (part of the Great Depression)
1940 Roosevelt v. Willkie: -9.8%
2000 Bush v. Gore: -9.1% (part of the tech bubble bursting)
2008 Obama v. McCain: -37% (part of the most recent financial crisis)
As you can see, three of those election years occurred amidst fairly extraordinary economic times. So if you strip those away, history tells us that election years are almost always positive. I expect this to be the case in 2016 as well.
The next year [2017], however, may be a different story. History tells us that the year following an election year is the weakest for stock market performance, which makes sense from a theoretical standpoint—the year following an election is typically the one where the new president is most aggressive about policy setting, and the market gets agitated when there’s a higher probability of regulatory changes and/or a shift in taxes or property rights. With the outcome of this election cycle too far off to call, it’s also too early to start making portfolio adjustments. We’ll have to wait and see.
2. The Monetary Policy Trap
In the developed world, central banks have done something that’s never been done before in history—lowered interest rates to near zero across the board. In some cases (Europe and Japan), they’ve implemented negative interest rate policies, which essentially means that banks lose money if they keep it parked at the central bank. There are two problems with this approach. First, it doesn’t seem to be working very well as banks have seen margins get squeezed, loans go up only marginally, and economic growth and inflation are currently not showing signs of taking off. Second, what happens if another financial crisis hits soon? Central banks will have already used many of their essential tools, and they could trap themselves into a corner. I actually see this as a legitimate concern in the markets today and another reason to favor U.S. stocks since the Fed has long ended QE and should be ‘normalizing’ interest rate policy soon.
3. The Geopolitical Threat
It often feels like the world is under siege and the threat of terror is imminent. For any readers that have been directly affected by an attack, we cannot begin to empathize with your experience. For the rest of us, we would do well to take a lesson from the market when it comes to terrorism—don’t let it shake you. Apart from the September 11th attacks, there has not been a terrorist attack that has coincided with or caused a bear market. Stocks have almost always shaken off attacks within a matter of days, and even as I write here today the market continues to reach new highs, even in spite of a string of terror attacks over the last couple of years.
4. China’s Economic Hard Landing
China’s economic restructuring is underway, but the long-feared economic hard landing has yet to be felt. Non-manufacturing PMI (Purchasing Managers' Index) has been running well over 50 for over a year. Additionally, manufacturing PMI, which was expected to feel impact of the restructuring, has recently recovered to expansionary territory over the last few months. With consumer prices rising at a healthy 1.8% clip, and GDP still over 6%, the China fears are losing steam.
5. The Bull Market is Too Old
At 90 months, this is now the second longest bull market in history. The longest was the 1990–2000 stretch, where economic growth levels were much higher than they are now. This has many investors worried that “something’s gotta give soon.” But that’s a weak reason to be bearish on stocks. Bull markets don’t have to die of old age, there has to be a confluence of negative forces occurring that few people are talking about, and that most investors are ignoring. When you have positive investor sentiment overshadowing negative fundamentals, that’s when the bull is usually ready to break. We don’t have that now.
Bottom Line for Investors
With equity investing, there will always be fears and worries. The volatility in the market that accompanies these fears can often dupe investors into thinking the next bear market has arrived. But, I can tell you from my decades of experience as a portfolio manager that for every bear market, there are dozens upon dozens of “events” that analysts claim is the end of a bull, but they end up being wrong. The five concerns I’ve listed above, while relevant, I do not believe are powerful enough to drive the next bear market.
Having debunked these bearish fears, the question on many of your minds is: should you increase your presence in the stock market? And if so, which sectors now offer the most promise for gain? To help you consider these pressing questions, you can download Zacks' latest Stock Market Outlook report free of charge. You'll see at a glance which sectors and industries are best for starting your stock search, and which are red flagged and best avoided. Read more by clicking on the link below...
-- Mitch Zacks
Thursday, September 08, 2016
Wiped Out
This is an obscure little book published in 1966. The title is direct,
simple, and descriptive. A more flowery title could have been, “Losing
Money in the Stock Market as an Art Form.” Why? Because he made every
mistake possible in an era that favored stock investment, and managed to
lose a nice-sized lump sum that could have been a real support to his
family. Instead, he tried to recoup it by anonymously publishing this
short book which goes from tragedy to tragedy with just enough successes
to keep him hooked.
In this book, the author knows little about investing, but wishing to make more money in the midst of a boom, he entrusts a sizable nest egg for a young middle-class family to a broker, and lo and behold, the broker makes money in a rising market with a series of short-term investments, with very few losses.
Rather than be grateful, the author got greedy. Spurred by success, he became somewhat compulsive, and began reading everything he could on investing. To brokers, he became “the impossible client,” (my words, not those of the book) because now he could never be satisfied. Instead of being happy with a long-run impossible goal of 15%/year (double your money every five years), he wanted to double his money every 2-3 years. (26-41%/year)
As such, he moved his money from the broker that later he admitted he should have been satisfied with, and sought out brokers that would try to hit home runs. The baseball analogy is useful here, because home run hitters tend to strike out a lot. The analogy breaks down here: a home run hitter can be useful to a team even if he has a .250 average and strikes out three times for every home run. Baseball is mostly a game of team compounding, where usually a number of batters have to do well in order to score. Investment is a game of individual compounding, where strikeouts matter a great deal, because losses of capital are very difficult to make up. Three 25% losses followed by a 100% gain is a 15% loss.
In the process of trying to win big, he ended up losing more and more. He concentrated his holdings. He bought speculative stocks, and not “blue chips.” He borrowed money to buy more stock (used margin). He bought “story stocks” that did not possess a margin of safety, which would maybe deliver high gains if the story unfolded as illustrated. He did not do homework, but listened to “hot tips” and invested off them.
As he lost more and more, he fell into the psychological trap of wanting to get back what he lost, and being willing to lose it all in order to do so. I.e., if he lost so much already, it was worth losing what was left if there was a chance to prove he wasn’t a fool from his “investing.” As such, he lost it all…
This book will not teach you what to do; it teaches what not to do. It is best as a type of macabre financial entertainment.
-- book review by David Merkel, gurufocus 9/6/16
So where can you get this book? Checking Amazon.com, the lowest price (used) is $33.50 plus $3.99 shipping. Checking eBay, I see two offers for $75 and $95. Checking paperbackswap, I don't see it listed. Googling, I see a listing at AbeBooks for $24.00 plus $4.00 shipping. And here's one for $800! and another one.
If you don't want to spend that much (and will settle for a tamer, somewhat scientific but amusing approach), you might be interested in John Rothchild's A Fool and His Money. Available used for .01 plus shipping at Amazon.com. Surprisingly, not currently available for order at paperbackswap (but you can put your order in).
In this book, the author knows little about investing, but wishing to make more money in the midst of a boom, he entrusts a sizable nest egg for a young middle-class family to a broker, and lo and behold, the broker makes money in a rising market with a series of short-term investments, with very few losses.
Rather than be grateful, the author got greedy. Spurred by success, he became somewhat compulsive, and began reading everything he could on investing. To brokers, he became “the impossible client,” (my words, not those of the book) because now he could never be satisfied. Instead of being happy with a long-run impossible goal of 15%/year (double your money every five years), he wanted to double his money every 2-3 years. (26-41%/year)
As such, he moved his money from the broker that later he admitted he should have been satisfied with, and sought out brokers that would try to hit home runs. The baseball analogy is useful here, because home run hitters tend to strike out a lot. The analogy breaks down here: a home run hitter can be useful to a team even if he has a .250 average and strikes out three times for every home run. Baseball is mostly a game of team compounding, where usually a number of batters have to do well in order to score. Investment is a game of individual compounding, where strikeouts matter a great deal, because losses of capital are very difficult to make up. Three 25% losses followed by a 100% gain is a 15% loss.
In the process of trying to win big, he ended up losing more and more. He concentrated his holdings. He bought speculative stocks, and not “blue chips.” He borrowed money to buy more stock (used margin). He bought “story stocks” that did not possess a margin of safety, which would maybe deliver high gains if the story unfolded as illustrated. He did not do homework, but listened to “hot tips” and invested off them.
As he lost more and more, he fell into the psychological trap of wanting to get back what he lost, and being willing to lose it all in order to do so. I.e., if he lost so much already, it was worth losing what was left if there was a chance to prove he wasn’t a fool from his “investing.” As such, he lost it all…
but there are three good things to say about the author:
- He had the humility to write the book, baring it all, and he writes well.
- He didn’t leave himself in debt at the end, but that was good providence for him, because if he had waited one more day, the margin clerk would have sold him out at a decided loss, and he would have owed the brokerage money.
- In the end, he knew why he had gone wrong, and he tells his readers that they need to: a) invest in quality companies, b) diversify, and c) limit speculation to no more than 20% of the portfolio.
This book will not teach you what to do; it teaches what not to do. It is best as a type of macabre financial entertainment.
-- book review by David Merkel, gurufocus 9/6/16
So where can you get this book? Checking Amazon.com, the lowest price (used) is $33.50 plus $3.99 shipping. Checking eBay, I see two offers for $75 and $95. Checking paperbackswap, I don't see it listed. Googling, I see a listing at AbeBooks for $24.00 plus $4.00 shipping. And here's one for $800! and another one.
If you don't want to spend that much (and will settle for a tamer, somewhat scientific but amusing approach), you might be interested in John Rothchild's A Fool and His Money. Available used for .01 plus shipping at Amazon.com. Surprisingly, not currently available for order at paperbackswap (but you can put your order in).
Sunday, September 04, 2016
Calvin Coolidge number 1?
The
facts are inescapable: The Obama years have been among the best of
times to be a stock investor, going all the way back to the dawn of the
20th century.
Consider
that had you been prescient enough to buy shares of a low-cost stock
index fund on Mr. Obama’s first inauguration day, on Jan. 20, 2009, you
would now have tripled your money. Stock market performance of this
level has rarely been surpassed.
Yet this performance has not been as widely celebrated or appreciated as
past bull markets have been, nor is it a major issue in this year’s
presidential campaigns. The main reason may simply be that the current
bull market is suspect because it came after one of the worst declines
in stock market history.
“Politicians
almost seem embarrassed to talk about the stock market,” said Paul
Hickey, co-founder of the Bespoke Investment Group. “It’s not a popular
thing right now. But when you look at it, the record of the market under
Obama is kind of incredible.”
Buying
stock wasn’t the obvious thing to do when Mr. Obama took office. The
United States was still in the grips of the most severe economic
downturn since the Great Depression, and the Dow Jones industrial average had already declined 34 percent over the previous 12 months — and it was still dropping.
People
were fleeing the stock market. Many of them never returned and so never
benefited from the last seven and a half years of rising asset prices. Federal Reserve data and Gallup poll data both indicate that direct and indirect stock ownership by American households is lower than it was at the beginning of President Obama’s first term in office.
I asked Mr. Hickey to run the historical numbers, and he found that
since 1900, the Obama presidency has so far been the third best for
stock investors. Using the Dow Jones industrial average, market
performance has been better only during the presidencies of Calvin
Coolidge, a Republican, in the Roaring ’20s; and Bill Clinton, a
Democrat, from 1993 to early 2001, years that encompassed the tech
bubble.
The market under President Obama has risen 11.8 percent, on an
annualized basis, without dividends. That compares with 25.5 percent for
President Coolidge and 15.9 percent for President Clinton. It exceeds
the Dow’s performance for everyone else, including three Republicans who
were known for being pro-business and for tenures that coincided with
strong stock markets: Ronald Reagan, with 11.3 percent; Dwight D.
Eisenhower, with 10.4 percent; and George H. W. Bush, with 9.7 percent.
It’s also noteworthy that since 1900, the market has performed better
under Democrats, with a 6.7 percent annualized gain for the Dow,
compared with a 3 percent gain under Republicans.
That said, there are two obvious reasons for the market’s stellar performance in the Obama years.
One
is simply that, from a stock market standpoint, Mr. Obama had
fortuitous timing. The market and the economy were already in such bad
shape by the time he arrived in office that any signs of recovery were
likely to result in a market rebound. Stocks did relatively well during
much of Franklin Delano Roosevelt’s tenure, for example, partly because
they had done so badly during Herbert Hoover’s presidency at the start
of the Great Depression.
The second crucial factor is that the Federal Reserve, which the
president does not control directly, embarked on an extraordinarily
accommodative monetary policy, starting even before Mr. Obama took
office. On Dec. 16, 2008, for example, one month after the presidential election, the Fed brought short-term rates sharply lower, close to zero.
Fed interest rate policy may be the single most important factor behind
the stock market boom. And even if Mr. Obama does not control the Fed,
he did reappoint Ben S. Bernanke
as Fed chairman in August 2009. In October 2013, the president
appointed Janet L. Yellen as Mr. Bernanke’s successor. Under both, the
Fed has held interest rates very low, which is helping to buoy the stock
market and may be affecting the presidential election, as Ned Davis
Research suggests in a recent note to clients.
10 reasons you should never own stocks again
1. You’re not that good at it.
Its really hard to buy stocks. Its not just picking stocks and watching it go up 10,000%. Its buying them and watching them go down 80% before they end up going 20% from your original price. Its waiting. Psychology is at least 80% of the game. I don’t need to go over the statistics. Most people sell at the bottom and buy at the high.
The average return of the market over the past 70 years: 10.7%. The average return of the individual investor? 1.9%. And that’s probably generous.
6. True wealth in the stock market comes if you can hold forever and not diversify.
Warren Buffett says, “Wide diversification is used only by investors who don’t know what they are doing.”
I’ll give you an example: imagine having 100% of your portfolio in one stock, never ever diversifying for 20 or 30 years, and watching it sometimes go down over 50%, maybe even in a day. Guess who makes mistakes like that. Bill Gates (MSFT stock) and Warren Buffett (BRK-A stock) [See, 8 Unusual Things I’ve Learned About Warren Buffett].
So the guys who make real stock market wealth never diversify and never sell. You know how many guys get rich like that? Less than 100. Then there’s the other 100 million people who own stocks.
9, Well, what about daytrading?
A lot of people claim to do that successfully. They are lying.
Please see my article “8 Reasons Not to Daytrade”. I got a lot of criticism after that. People wanted to show me their tax returns to show me how good they daytraded. Get lost, punks. Some people make millions playing the violin also.
Doesn’t mean the other six billion people on the planet should perform in Carnegie Hall. In any case, we’re talking about investing in stocks. Not scalping like a little kid with eight terminals in front of him. And guess what, even the best daytraders in the world with twenty year track records go broke sometimes.
-- James Altucher [linked from this article]
Its really hard to buy stocks. Its not just picking stocks and watching it go up 10,000%. Its buying them and watching them go down 80% before they end up going 20% from your original price. Its waiting. Psychology is at least 80% of the game. I don’t need to go over the statistics. Most people sell at the bottom and buy at the high.
The average return of the market over the past 70 years: 10.7%. The average return of the individual investor? 1.9%. And that’s probably generous.
6. True wealth in the stock market comes if you can hold forever and not diversify.
Warren Buffett says, “Wide diversification is used only by investors who don’t know what they are doing.”
I’ll give you an example: imagine having 100% of your portfolio in one stock, never ever diversifying for 20 or 30 years, and watching it sometimes go down over 50%, maybe even in a day. Guess who makes mistakes like that. Bill Gates (MSFT stock) and Warren Buffett (BRK-A stock) [See, 8 Unusual Things I’ve Learned About Warren Buffett].
So the guys who make real stock market wealth never diversify and never sell. You know how many guys get rich like that? Less than 100. Then there’s the other 100 million people who own stocks.
9, Well, what about daytrading?
A lot of people claim to do that successfully. They are lying.
Please see my article “8 Reasons Not to Daytrade”. I got a lot of criticism after that. People wanted to show me their tax returns to show me how good they daytraded. Get lost, punks. Some people make millions playing the violin also.
Doesn’t mean the other six billion people on the planet should perform in Carnegie Hall. In any case, we’re talking about investing in stocks. Not scalping like a little kid with eight terminals in front of him. And guess what, even the best daytraders in the world with twenty year track records go broke sometimes.
-- James Altucher [linked from this article]
Wednesday, August 17, 2016
it's hard to beat this portfolio
Investing can seem like a daunting task. But low-cost index funds make it easy for investors to do better than they would with most professionally managed offerings, after fees. A broad-market index reflects the collective portfolio of all market participants and their view on the value of its holdings. In order for one investor to beat the market, someone else must underperform. Competition for superior performance creates a reasonably efficient market that is tough to consistently beat without taking on greater risk. The average actively managed dollar must underperform the average passively managed dollar because it incurs higher fees and, in aggregate, active investors define the market portfolio.(1) But as Warren Buffett wrote in his 2013 annual letter to Berkshire Hathaway shareholders, "Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit."
In the same letter, Buffett explained the advice he gave to the trustee for a bequest to his wife in his will: "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors--whether pension funds, institutions, or individuals--who employ high-fee managers."
While it may not be appropriate for most investors to tilt so heavily toward U.S. equities, the benefits of index investing persist in a more diversified portfolio, according to a study by Richard Ferri, founder of Portfolio Solutions, and Alex Benke, VP of financial advice and planning at Betterment. Ferri and Benke constructed a portfolio that invested 40% of its capital in the Investor shares of Vanguard Total Stock Market Index Fund (VTSMX), 20% in Vanguard Total International Stock Index Fund (VGTSX), and the remaining 40% in Vanguard Total Bond Market Index Fund (VBMFX). They tracked the pretax performance of this portfolio from 1997 through 2012 and compared it with 5,000 portfolios of actively managed funds. These active funds were randomly drawn from a survivorship-bias-free universe of each of the following categories: U.S. equity, international equity, and U.S. bond funds. The funds in these categories received the same weightings as in the index portfolio. Ferri and Benke excluded sales loads and did not rebalance either the index or the active portfolios. If a fund merged or closed during the period, they replaced it on that date with another randomly selected fund from the category.
In the same letter, Buffett explained the advice he gave to the trustee for a bequest to his wife in his will: "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors--whether pension funds, institutions, or individuals--who employ high-fee managers."
While it may not be appropriate for most investors to tilt so heavily toward U.S. equities, the benefits of index investing persist in a more diversified portfolio, according to a study by Richard Ferri, founder of Portfolio Solutions, and Alex Benke, VP of financial advice and planning at Betterment. Ferri and Benke constructed a portfolio that invested 40% of its capital in the Investor shares of Vanguard Total Stock Market Index Fund (VTSMX), 20% in Vanguard Total International Stock Index Fund (VGTSX), and the remaining 40% in Vanguard Total Bond Market Index Fund (VBMFX). They tracked the pretax performance of this portfolio from 1997 through 2012 and compared it with 5,000 portfolios of actively managed funds. These active funds were randomly drawn from a survivorship-bias-free universe of each of the following categories: U.S. equity, international equity, and U.S. bond funds. The funds in these categories received the same weightings as in the index portfolio. Ferri and Benke excluded sales loads and did not rebalance either the index or the active portfolios. If a fund merged or closed during the period, they replaced it on that date with another randomly selected fund from the category.
In 82.9% of the simulations, the index portfolio outperformed the active portfolio. When the active portfolios outperformed, they offered a median excess return of 0.53%. But when they underperformed, their median shortfall was 1.25%. These results were also consistent after controlling for differences in risk. In other words, the odds of randomly picking a winning fund aren't good, and the cost of selecting a losing fund can more than offset the payoff from a winning fund.
Not surprisingly, Ferri and Benke also found that the portfolio of index funds had a greater chance of outperforming a portfolio composed entirely of actively managed funds the longer it was held. This is because the cost advantage that index funds enjoy compounds over time, creating a bigger hurdle for active funds to overcome. Time also distinguishes luck from skill, which is scarce.
Tuesday, July 05, 2016
investor sentiment
The dearth of investor confidence is one of the more positive
indicators for the market looking into the second half of the year. As
shown in the chart below, the American Association of Individual
Investors (AAII) survey recently showed the lowest level of bullish
sentiment in more than 10 years, and the highest level of neutral
sentiment in more than 13 years.
Following occurrences like this in the past, the stock market generally had exceptionally strong returns a year later, with a consistent track record. The combination of very few bulls and very high neutrals is even rarer. In the post-1987 history of the AAII data, there were only five similar occurrences historically—all of which were within the 18 months following the crash of 1987. Here, too, the market was up more than 20% within the following year.
Following occurrences like this in the past, the stock market generally had exceptionally strong returns a year later, with a consistent track record. The combination of very few bulls and very high neutrals is even rarer. In the post-1987 history of the AAII data, there were only five similar occurrences historically—all of which were within the 18 months following the crash of 1987. Here, too, the market was up more than 20% within the following year.
Saturday, May 21, 2016
Brian Rogers reflects
Last October, Brian Rogers completed
an extraordinary 30-year tenure
managing the Equity Income Fund,
though he continues serving on
the fund’s Investment Advisory
Committee and as T. Rowe Price’s
chairman and chief investment officer.
Over a three-decade period leading
to October 31, 2015, Mr. Rogers
managed the fund through many
challenging market cycles.
Reflecting on that long career, Mr. Rogers offers several investing insights. Some may be basic common sense but are often difficult to achieve in practice.
First, when confronted with market setbacks, investors should try to keep a long-term perspective and take advantage of short-term volatility, he urges.
“When you look at a lot of these market declines on a long-term price chart, you realize how unimportant they seem,” he says. “The 1987 crash, for example, seemed like a huge incident at the time, but now it looks like a little blip on the chart. Many fund investors tend not to do as well as the market because they buy high and sell low.
In fact, Mr. Rogers says investors should try to take advantage of market declines by investing more in higher-quality companies selling at attractive prices.
“You have to be a counter-puncher, a contrarian,” he adds. “The long-term trend of economic growth is positive, and the long-term trend of markets is upward, but in any short-term period you can be down sharply. In the past, it has almost always made sense to ride through it.”
As a value investor, he says investors should focus on the quality of a company and its stock price rather than macro concerns. “The price you pay often determines investment success,” he says. “Over time, price and value will converge.
“We have always tried to capitalize on controversy, buying stocks that are out of favor often with lower price/ earnings ratios and higher dividend yields than average,” he adds. “If the company’s earnings and dividends grow over time, the value of the enterprise should rise, notwithstanding short-term fluctuations.”
To judge corporate quality, focus on its balance sheet and whether the company has the financial strength to withstand adversity, he says: “My worst investments were companies where the degree of financial leverage and illiquidity on the balance sheet got me into trouble. If you buy a good company and it doesn’t work out, the worst outcome may be little or no return rather than significant losses.”
“Simplicity is a virtue when it comes to investing,” he says. “Complexity is a friend of Wall Street and the enemy of Main Street.”
*** [8/8/16 - T. Rowe Price Report, Winter 2011]
Looking back over the last 25 years, Mr. Rogers notes several key lessons he has gleaned—first and foremost that, despite many challenging periods, “the world is a very resilient place.”
He cites four such periods in particular that shook market foundations and really rattled investors’ nerves:
• The market crash of 1987. “It was over so quickly that it hardly mattered in the long run, but that was as scary a couple of days as I have ever seen.”
• The credit crisis of the early 1990s. “That was really, really difficult, exacerbated by Saddam Hussein invading Kuwait, causing oil prices to spike dramatically,” Mr. Rogers says.
• The 2000–2002 bear market. “To me,” he says, “that wasn’t quite as frightening because it wasn’t as systemically challenging. It was more the result of several overvalued market sectors coming back to reality.”
• The crash of 2008. “This was a terrifying time because of the household name institutions that collapsed due to imprudent use of leverage and poor management decisions.”
After each of these crises, however, equilibrium returned to global markets and the financial world moved forward. “So we’ve seen a lot of things over 25 years, but what you realize over time is how resilient the system is,” Mr. Rogers says. “I sometimes think we forget that in periods of market dislocations.”
The second lesson, harkening back to the technology stock bubble of the late 1990s, “is that trees don’t grow to the sky,” he says. “And so if it seems too good to be true, it may be. Very few companies grow at 20% to 25% on a sustainable basis, and you have to be sensitive to what you what pay for an investment. And at times, when valuations become extended, you have to be willing to walk away and sell something when it looks too richly valued.
“I think that’s something that’s very hard for investors to do, because in periods of high valuation everything looks good.”
Accordingly, Mr. Rogers says, “The third lesson—and this is really hard— is that you have to force yourself to be a bit of a contrarian and avoid investing in something simply because it has recently done well.
Reflecting on that long career, Mr. Rogers offers several investing insights. Some may be basic common sense but are often difficult to achieve in practice.
First, when confronted with market setbacks, investors should try to keep a long-term perspective and take advantage of short-term volatility, he urges.
“When you look at a lot of these market declines on a long-term price chart, you realize how unimportant they seem,” he says. “The 1987 crash, for example, seemed like a huge incident at the time, but now it looks like a little blip on the chart. Many fund investors tend not to do as well as the market because they buy high and sell low.
In fact, Mr. Rogers says investors should try to take advantage of market declines by investing more in higher-quality companies selling at attractive prices.
“You have to be a counter-puncher, a contrarian,” he adds. “The long-term trend of economic growth is positive, and the long-term trend of markets is upward, but in any short-term period you can be down sharply. In the past, it has almost always made sense to ride through it.”
As a value investor, he says investors should focus on the quality of a company and its stock price rather than macro concerns. “The price you pay often determines investment success,” he says. “Over time, price and value will converge.
“We have always tried to capitalize on controversy, buying stocks that are out of favor often with lower price/ earnings ratios and higher dividend yields than average,” he adds. “If the company’s earnings and dividends grow over time, the value of the enterprise should rise, notwithstanding short-term fluctuations.”
To judge corporate quality, focus on its balance sheet and whether the company has the financial strength to withstand adversity, he says: “My worst investments were companies where the degree of financial leverage and illiquidity on the balance sheet got me into trouble. If you buy a good company and it doesn’t work out, the worst outcome may be little or no return rather than significant losses.”
“Simplicity is a virtue when it comes to investing,” he says. “Complexity is a friend of Wall Street and the enemy of Main Street.”
*** [8/8/16 - T. Rowe Price Report, Winter 2011]
Looking back over the last 25 years, Mr. Rogers notes several key lessons he has gleaned—first and foremost that, despite many challenging periods, “the world is a very resilient place.”
He cites four such periods in particular that shook market foundations and really rattled investors’ nerves:
• The market crash of 1987. “It was over so quickly that it hardly mattered in the long run, but that was as scary a couple of days as I have ever seen.”
• The credit crisis of the early 1990s. “That was really, really difficult, exacerbated by Saddam Hussein invading Kuwait, causing oil prices to spike dramatically,” Mr. Rogers says.
• The 2000–2002 bear market. “To me,” he says, “that wasn’t quite as frightening because it wasn’t as systemically challenging. It was more the result of several overvalued market sectors coming back to reality.”
• The crash of 2008. “This was a terrifying time because of the household name institutions that collapsed due to imprudent use of leverage and poor management decisions.”
After each of these crises, however, equilibrium returned to global markets and the financial world moved forward. “So we’ve seen a lot of things over 25 years, but what you realize over time is how resilient the system is,” Mr. Rogers says. “I sometimes think we forget that in periods of market dislocations.”
The second lesson, harkening back to the technology stock bubble of the late 1990s, “is that trees don’t grow to the sky,” he says. “And so if it seems too good to be true, it may be. Very few companies grow at 20% to 25% on a sustainable basis, and you have to be sensitive to what you what pay for an investment. And at times, when valuations become extended, you have to be willing to walk away and sell something when it looks too richly valued.
“I think that’s something that’s very hard for investors to do, because in periods of high valuation everything looks good.”
Accordingly, Mr. Rogers says, “The third lesson—and this is really hard— is that you have to force yourself to be a bit of a contrarian and avoid investing in something simply because it has recently done well.
Monday, April 25, 2016
the shrinking stock market
Amazingly, there are some 30% fewer public companies now than even in
July 1973. Obviously, some industries such as software and banks have
welcomed many new public participants, while a few such as miscellaneous
financials and building materials have been shrinking all along.
Monday, March 07, 2016
ValueWalk reports
ValueWalk is offering a free report on Warren Buffett. It's actually a 10-part report. You can get it by giving them your email address and they'll send you a link to this page.
The page links to reports on other great investors as well.
Warren Buffett (the early years)
Charlie Munger
Walter Schloss
Seth Klarman
Ray Dalio
The Great Little eBook on Value Investing
The page links to reports on other great investors as well.
Warren Buffett (the early years)
Charlie Munger
Walter Schloss
Seth Klarman
Ray Dalio
The Great Little eBook on Value Investing
Sunday, February 21, 2016
Charles Allmon
Slow and Steady Wins the Race
This famous investor showed that slow and steady really does win. It is with heavy hearts that we report the recent passing of our mentor, Charles Allmon, age 94. We are grateful for his long, full and abundant life, his endless enthusiasm, keen mind and tutelage.
[via Hendershot Investments]
This famous investor showed that slow and steady really does win. It is with heavy hearts that we report the recent passing of our mentor, Charles Allmon, age 94. We are grateful for his long, full and abundant life, his endless enthusiasm, keen mind and tutelage.
[via Hendershot Investments]
Wednesday, February 17, 2016
All there is to investing
True geniuses tend to make things simpler, not more confusing. Buffett is no exception.
Buffett simplifies investing down to the following:
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
That doesn’t sound overly complicated – because it isn’t. Click here to see 17 of Warren Buffett’s best quotes analyzed.
Buffett says there are 3 things that make a successful investment:
1. Good stocks (strong competitive advantage)
2. Good times (low prices)
3. Stay with them as long as they remain good investments (let them compound your wealth)
You don’t have to be a genius to follow this plan…
Buffett simplifies investing down to the following:
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
That doesn’t sound overly complicated – because it isn’t. Click here to see 17 of Warren Buffett’s best quotes analyzed.
Buffett says there are 3 things that make a successful investment:
1. Good stocks (strong competitive advantage)
2. Good times (low prices)
3. Stay with them as long as they remain good investments (let them compound your wealth)
You don’t have to be a genius to follow this plan…