Archive for the ‘Security Selection & Market Timing’ Category
Credit: behaviorgap.com
In my previous article, “The perils of chasing hot fund managers,” I showed that the average investor in a mutual fund run by “star” manager Bill Miller would be better off buying and holding an S&P 500 index fund.
There is only one problem. Most index fund investors are not immune to the buy high and sell low tendency, as illustrated by the table below. Between 1991 and 2005, the Vanguard S&P 500 Index Fund (VFINX) returned an annualized 11.51%, but the average VFINX investor only earned a return of 7.96% during the same period.
| 1991 to 2005 annualized | |
| VFINX fund return | 11.51% |
|
VFINX investor return |
7.96% |
Staying in Your Seat
Posted on: November 18, 2011
[Guest post by Tom Warburton] Who could forget the recent World’s Series? Man, was that sixth game otherworldly or what!
The day after the sixth game a buddy wandered in – remorseful that he, while watching the Cards vs Rangers, had gotten up out of his seat to go out in his backyard with his dogs (to do who knows what) only to return to his seat and discover that he had missed the walk-off Home Run by Freese – arguably the climactic play of the season!
Not satisfied with its downgrading of U.S. Treasury Debt and Fannie Mae, today S&P downgraded Google’s stock from “Buy” to “Sell,” sending GOOG tumbling by 3.3%.
In case you don’t remember, yesterday Google announced that it would purchase Motorola Mobility for a whopping $12.5 billion in cash – a decision that prompted S&P’s downgrade of Google. According to S&P’s equity analyst, Scott Kessler:
Market Correction
As of yesterday, the market had dropped more than 10% from its recent peak on 5/2. Many investors are very concerned. I am too.
Whenever I find my emotions are unsettled, I study historical data. That has always given me a perspective unavailable from the tick-by-tick reporting of the real-time financial media.
The following table summarizes the frequencies of market declines of various magnitudes.
| Magnitude of market decline | Frequency of occurrence |
| >5% | Every year |
| >10% | Every two years |
| >20% | Every three and a half years |
| >30% | Every ten years |
| >40% | Every twenty-five years |
| >50% | Every fifty years |
I asked my PhD analyst John Want to pull the Harvard Endowment 13F filing for the first quarter of 2011 and find out what has changed sinceour last examination three months ago. From the table of the top 15 holdings that is attached, we can see three changes:
1. The iShare S&P 500 Index ETF is no longer among the top 15 holdings. Though there are still a number of individual U.S. stocks among the top 15, their relative weights have decreased. Does that signify Harvard is a tad less bullish on U.S. equities over all?
Recently, I came across a 20 Year Periodic Return Table prepared by Black Rock. I want to share this with you since this table illustrates the investment principles I have been emphasizing: 1) asset class diversification; 2) disciplined rebalancing; and 3) small value tilt. Today’s focus is on 1); the other two points will be discussed in future articles.
20 Year Asset Class Returns
March of Efficient Market
I turned $300k into $2mm in six month. Here is what happened.
After the Enron debacle in 2002, Congress passed the Sarbanes-Oxley Act. One obscure clause in the act required company insiders to report their insider trades electronically within a day. The reports would go into a Securities and Exchange Commission (SEC) database accessible to the public (if they knew how to query the database.)
Tom making his new year resolution
[Guest Post by Tom Warburton] How’s this for a New Year’s Resolution – repeat after me – I Resolve That I Will Abandon Personal Stock Picking And I Will Not Permit That Foolishness To Be Foisted Upon Me By Stock Brokers, Money Managers Or Financial Advisors.
New evidence shows up every day suggesting that it makes more sense to invest in index funds than to personally pick stocks, invest in hedge funds, invest in actively managed mutual funds or let a money manager pick stocks for you.
Boo-Yahhh
Never underestimate what a bull market could do to Jim Cramer. After shying from making any top picks for 2009, presumably because he didn’t see any stocks worthy of buying at the beginning of 2009, he is back to his own game with a vengeance this year. We’ll see if his 2010 picks below will turnout as dismal as his 2008 ones.
How not to ruin a 60/40 portfolio
Posted on: January 6, 2010
This past Christmas, I had the distinct pleasure of calling several of my clients in retirement and telling them their portfolios are back to their pre-crisis level and their financial freedom is safe and sound.
Their portfolios are variations of the so-called 60/40 portfolio – about 60% in equity-like investments and 40% in bond-like ones.
Many other 60/40 portfolios have been decimated by this crisis. Even with recent gains, they are still far from recovering all their losses. How did I manage to pull even for my clients? There are a few key lessons I’d like to share.
Harvard University Endowment significantly increased its holding of Market Vector Russia, iShare Mexico and iPath India in third quarter of 2009.
Table: Top 10 holdings in Harvard University Endowment’s public portfolio
| Rank | Names | 9/30/09 (x1000sh) | 6/30/09 (x1000sh) | Change |
| 1 | iShares E. Mkt | 10298 | 9712 | +586 |
| 2 | iShares Brazil | 3355 | 3294 | +61 |
| 3 | iShares China | 4962 | 4178 | 784 |
| 4 | iShares S. Korea | 4127 | 4349 | -222 |
| 5 | iPath India | 1882 | 1388 | +494 |
| 6 | iShares S. Africa | 1624 | 1595 | +29 |
| 7 | iShares Taiwan | 7297 | 6836 | +461 |
| 8 | Mkt vector Russia | 2596 | 882 | +1714 |
| 9 | iShares Mexico | 1639 | 570 | +1069 |
| 10 | Vanguard E. Mkt | 1568 | 1758 | -190 |
Sign up for The Investment Fiduciary monthly newsletter and get 10% off investment planning services.
Warren Buffet
Being a financial advisor, I get asked to forecast the market all the time. I notice most other financial advisors would regurgitate the morning financial news and look really smart and up-to-date. I felt like I am the only one in my profession who doesn’t know what the market is going to do in the near future. So what a relief Warren Buffet threw me a life line like this one:
We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, (Berkshire Hathaway vice chairman) Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.
I am gonna print this quote on note cards and hand it to anyone who ask me to forecast the market again.
Sign up for The Investment Fiduciary monthly newsletter and get 10% off investment planning services.
This is a story shared with me by Larry Swedroe …
In 1959 Harry Roberts, of the University of Chicago, had a computer generate a series of random numbers that would have a distribution matching the average weekly price change of the average stock (about 2 percent). Since the numbers were randomly generated, there was no pattern and therefore no knowledge that could be obtained by studying a chart of this nature. In order to create the illusion that his charts were those of particular stocks, Roberts placed a starting price of $40 on each chart. He then took a group of these charts to the leading technical analysts of his day. He asked for their advice on whether to buy or sell these unnamed hypothetical stocks. He told them that he did not want them to know the name of the stock since this knowledge might bias them. Each technical analyst had very strong advice on what Roberts should do but since the numbers were randomly generated the patterns were only in the minds of the observers. I am sure that you will never hear about this story from a technical analyst.
Sign up for The Investment Fiduciary monthly newsletter and get 10% off investment planning services.
In the mind of an investor
Posted on: August 31, 2009
Found this chart on digg.com … don’t know who to give credit to. Whoever drew this is brilliant.
Harvard University Endowment significantly increased its holding of iShare S. Korea, iShare Taiwan and iPath India in second quarter of 2009.
Table: Top 10 holdings in Harvard University Endowment’s public portfolio
| Rank | Names | 3/31/09 (x1000sh) | 6/30/09 (x1000sh) | Change |
| 1 | iShares E. Mkt | 8276 | 9712 | +1436 |
| 2 | iShares Brazil | 3170 | 3294 | +124 |
| 3 | iShares China | 3162 | 4178 | +1016 |
| 4 | iShares S. Korea | 1737 | 4349 | +2612 |
| 5 | iShares S. Africa | 1222 | 1595 | 373 |
| 6 | iShares Taiwan | 0 | 6836 | New |
| 7 | iPath India | 446 | 1388 | +942 |
| 8 | iShares Mexico | 1380 | 570 | -810 |
| 9 | Vanguard E. Mkt | 2289 | 1758 | -531 |
| 10 | Market Vectors Russia | 1762 | 882 | -880 |
| Drop | China Mobile | 376 | 459 | +83 |
| Drop | Stoneleigh Partners | 2626 | 0 | Sold Out |
Need help with investment? Call 301-452-4220.
Sign up for The Investment Fiduciary monthly newsletter and get 10% off investment planning services.
Investors don’t need outside help to hurt themselves. I’ve been writing about how ignoring conflict of interest, hidden fees, and not taking the necessary time to do due diligence costs investors a great deal of money. Today, I’m going to show you another way they self-inflict pain, and what to do about it.
Let’s imagine you’re in your car. Your vehicle is traveling at 60 mph. How can you, as passenger, only be going 30 mph? You can’t. It’s an impossibility. Nevertheless, it happens in the financial world all the time.
