Archive for the ‘Security Selection & Market Timing’ Category
Last week, the Fed announced another round of quantitative easing (QE3).
This time around, they plan to buy $40 billion worth of mortgage-backed securities with created money until the employment picture improves. Compared to QE1 and QE2, QE3 is open-ended.
How does this affect your personal finances?
Share this:
Meeting Allan Roth
Posted on: September 10, 2012
financial blogging
I was in Denver attending the Financial Blogger Conference (FinCon12), and I was thrilled to meet Allan Roth there.
If you don’t know Allan Roth, for the sake of your financial wellbeing, you should.
Allan is an hourly fee-only financial advisor practicing in Colorado Spring. He also writes an investment column for CBS MoneyWatch. Recently, Jason Zweig invited him to write a column in the Wall Street Journal as well. Read the rest of this entry »
Share this:
Posted on: August 5, 2012
I met a CPA yesterday and we have a lively discussion about option writing strategies. He is torn between the benefit and the time needed to execute the strategy. I wrote an article 4 years ago that could reconcile the two.
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?
View original post 469 more words
Share this:
This is an article I wrote in middle of May that was published on Morningstar.
Half way into May, major market indexes have all fallen more than 5% from their peaks reached in late March. The Nasdaq has fallen close to 10%. It looks like the ancient stock market folklore “Sell in May and go away” is quietly unfolding right before our eyes.
To get a better understanding of this phenomenon, I did two things recently: 1) I studied the historical returns between May 1 and Sept. 30 and 2) I pondered a plausible explanation of stock market seasonality and its implication on investment. Today, I will report to you the results of my intellectual exercises.<
Historical returns
Using data retrieved from Yahoo.com, I calculated the average S&P 500 index return between May 1 and Sept. 30 to be -0.3% over the past 20 years. As a comparison, the average index return between Oct 1 and April 30 is 7.2%. Clearly the five months starting in May are unproductive for stock investment, historically.
Share this:
Today is the last trading day of 2011. The S&P 500 closed at 1257, exactly the same close as in 2010! So, if your goal is wealth preservation, the market just did it for you.
Or did it?
From January to April, the market staged a four-month rally of 8.5% to peak at 1364 on April 29. For the next six months, it collapsed nearly 20% to bottom at 1098 on Oct. 3. Then, it staged a late rally to close the year at 1257.
Share this:
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% |
Share this:
The Perils of Market Timing
Posted on: November 18, 2011
[Guest post by Tom Warburton] Market timing is alluring, but, you have to be right twice – when to get out and when to get back in – over and over. We have NEVER found evidence of anyone successfully practicing this tactic over a statistically significant period of time.
Market timers get out hoping they have ‘called a market top’ – OR – get in hoping they have ‘called a market bottom’. But then the agonizing work begins because market timers not only have to be right on When To Get Out Of Their Seat but also When To Get Back In Their Seat. It is this second decision that is so terribly difficult. When markets move up, or down, they do so VERY quickly.
Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
History Demonstrates That If Investors Miss The Best Market Days
Their Long-Term Returns Are Dramatically Reduced.
Share this:
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:
Share this:
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 five years |
| >30% | Every ten years |
| >40% | Every twenty-five years |
| >50% | Every fifty years |
Share this:
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?
Share this:
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
Share this:
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.)
Share this:
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.
Share this:
Finding Winning Fund Manager
Posted on: August 8, 2010
Can you find a needle here?
When it comes to mutual fund investing, the focus of most investors is to find outperforming fund managers. Many financial advisors justify their hefty fees by claiming they can do just that.
Finding a skilled manager is actually a daunting challenge, because it is hard to separate skill from luck. Take Bill Miller, the legendary manager of Legg Mason Value Trust, for example. He outperformed the S&P 500 index for 15 consecutive years. Iron-clad proof he has the skills, right?
Share this:
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.
- Apple (AAPL)
- Google (GOOG)
- Crown Castle (CCI)
- American Tower (AMT)
- SBC Communications (SBC)
- Skyworks Solution (SWKS)
- Altera (ALTR)
- Cypress Semi (CY)
- Xilinx (XLNX)
- Amazon (AMZN)
- Cisco (CSCO)
- Electronic Arts (ERTS)
- Qualcomm (QCOM)
Get informed about wealth building, sign up for The Investment Scientist newsletter
Share this:
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 |
Get informed about wealth building, sign up for The Investment Scientist newsletter
The Investment Scientist 