Archive for December 2008
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Boston Globe: “Harvard’s endowment plunges $8 billion”
WSJ: “Harvard hit by loss as crisis spreads to college”
Harvard Crimson: “Yale losses a quarter of its endowment”
Edward Eptein in The Huffington Post argues in “How much has Harvard really lost?” that Harvard endowment loss could be a lot higher than disclosed.
Check out how Harvard and Yale endowments performed prior to this fiscal year here. Note their fiscal year ends in June 30th.
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Has the market hit bottom?
Posted on: December 9, 2008
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“Successful investing,” in the words of British economist John Maynard Keynes, “is anticipating the anticipations of others.” In this vein, a market hits bottom when most people think that most other people think it has hit bottom. Only then, most people start to buy stocks, creating a self-fulfilling prophecy. If most people think the market should hit bottom, but they also think that most other people don’t think that, they won’t buy stocks and the market will continue to drop. So, predicting when a market will hit bottom is a mind game on a grand scale. If there are people who are good at that, I am certainly not one of them.
Prescience not needed, discipline required
Now let me ride a time machine to January 1929. Let’s say I committed to invest $100 every month in the S&P 500 index. I did not have the prescience to know that the market would crash in October and the Great Depression would follow. But if I had the discipline to carry out that investment plan over 30 years, the table below summarizes what would have happened to my investment through the worst stock market period in history.
| Year from Jan 1929 | Total invested | Portfolio value | Total dividend received | Total gain (loss) | Dividend contribution to the gain |
| 1st year | 1,300 | 1,115 | 23 | (161) | |
| 2nd year | 2,500 | 1,779 | 98 | (623) | |
| 3rd year | 3,700 | 1,737 | 230 | (1,734) | |
| 4th year | 4,900 | 2,771 | 415 | (1,714) | |
| 5th year | 6,100 | 5,547 | 629 | 76 | 100% |
| 10th year | 12,100 | 12,835 | 3,024 | 3,759 | 80.4% |
| 20th year | 24,100 | 30,786 | 13,683 | 20,369 | 67.2% |
| 30th year | 36,100 | 135,992 | 47,960 | 147,852 | 32.4% |
Data source: Professor Robert Shiller’s website
The total gain from my investment plan is the portfolio value plus total dividends received minus total money invested. As you can see, though I suffered losses in the first four years, I had a small gain in the fifth year (January 1934)! This result is not bad, considering that between1929 and 1934 were the worst years for the stock market (an 89% drop) in history.
For the first 10 years of my hypothetical investment, dividends accounted for 80.4% of the total investment gain. This means that if I had invested in high dividend stocks, I would have done even better. (Also see my newsletter article, “Dividends to the rescue in a Great Depression“.)
Here is the take-home lesson from my time travel experiment: to recover from the market crash and to survive a recession, however deep, you don’t need prophecy, just discipline and patience.
The author is president of MZ Capital, a RIA serving DC/MD/VA. Get his monthly newsletter in your mailbox or get to the directory of his past articles.
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I wrote this article in early December 2008. Amazingly, it is one of the least read in my blog. Had
someone read it and followed it, he would have earned 10% return so far in 2009.
– Michael Zhuang 3/10/2009
At the moment of writing this, SPY, the exchange traded fund (ETF) for the S&P 500 index, is trading at $85.95 and the near at-the-money call option (with strike 86 and only eight days until expiration) is trading at $3.45! (A call option is the right to buy the underlying stock at the strike price. At-the-money means the option strike price is equal to the price of the underlying stock.)
The at-the-money call premium is a full 4% of the underlying index price! Historically, that number has been in the 1% to 2% range.
What does 4% premium imply?
The Investment Scientist 