Thursday, December 20, 2007

Forget auld lang syne; let's sing capitalism's praises

Peter Saunders writes in today's Sydney Morning Herald:

Every year, as we mill around the shops buying presents, commentators warn that the "true meaning" of Christmas is being eroded. Queuing at the bottle shop, we hear how Christmas has become "too commercial"; gorging on seafood and turkey, we chide ourselves for our gluttony. We tell each other how Christmases in the past were simpler, that children nowadays are spoiled and that we have all become too materialistic.

This sense that we have lost sight of the more important things in life is not new. The Marxist critic, Raymond Williams, believed every generation expresses a nostalgic yearning for a more "authentic" past that it thinks has just been lost. He thought this feeling of emptiness was caused by capitalism. Excessive materialism leaves us feeling that something important is missing in our lives, and we project this missing humanity onto a romanticised ideal of the past...

...But is it true that capitalism creates empty and meaningless lives?

Read the full article here.

Tuesday, December 18, 2007

Investment Advisor to The Rolling Stones

From Dimensional's December Newsletter...
How did a hotshot Wall Street broker, Hollywood playboy and former investment advisor to The Rolling Stones give away stock picking to become an advisor that embraces asset class investing? This colourful piece from Conde Nast's upmarket Portfolio magazine profiles the exotic life and times of Blaine Lourd:

Blaine Lourd got rich picking stocks. But then he realized that everything he thought he knew about the markets was wrong. And he's not alone.

Read the full article here.

Tuesday, November 27, 2007

H-E-D-G-E

This from New York Times Business... Merle Hazard bills himself as America’s first and only country music star to sing about mortgage-backed securities, derivatives and leveraged buyouts, and he slightly knows the economist Arthur Laffer, best known for the supply-side Laffer Curve beloved by anti-tax conservatives... See also "In The Hamptons" at YouTube.

Thursday, November 08, 2007

Sub-Prime Stuff Explained

Thanks to Crikey for bring this to our attention...



Friday, October 26, 2007

How hot performance can deliver bad results

This from Smart Investing by Robin Bowerman 26/10/07
Performance tables make for interesting reading but some new research has found they can mislead as much as inform investors.

The underlying flaw in performance tables - be they over one month, one year or seven years - is that the return numbers will not reflect the return that most investors actually receive.

Investors understand that the time period published in a performance table is rarely going to line up exactly with their investment time period so the total return number is only an approximate guide.

But research by the leading research company Morningstar raises more fundamental questions about how useful - or misleading - total return numbers can be. Morningstar's managing director, Don Phillips, was in Australia recently for the Australian operation's inaugural investment conference. His presentation looked at why total returns may not equal investor returns.

The normal performance measures we are used to seeing published in specialist magazines, websites and newspapers are time-weighted calculations and assume that an investor buys and holds for the entire period typically with no additional investment.

Morningstar in the US have developed a methodology for calculating an "investor return" which is a money-weighted calculation that accounts for aggregate monthly purchases and sales by all of a fund's investors.

The impact can be dramatic: Morningstar used an example of a US fund that had a healthy 10-year total return of 15.05%. When the 10-year investor return was calculated it was -1.46%. How can the numbers be so wildly different? The answer lies in the nature of the fund's performance. It had three years of spectacular returns followed by three years of significant losses. So investors followed the performance with most of the money turning up around the end of the strong performance period - just in time for it all turn sour.

So the nature of a fund's performance is probably more important than most investor's realise in terms of capturing their fair share of the return. Morningstar looked at another fund with a similar 10-year total return of 15.03%. But its investor return was 14.75% - investors got much closer to capturing the fund's headline return number.

Phillips says the difference is in the nature of both the performance profile - it was a steady rather than spectacular performer - and because of that investors had invested steadily and the fund's size had grown steadily and in a more orderly manner. Most importantly investors stayed put even when there were a couple of years of negative returns.

The big hit for investors in the first fund was that they invested after the best performance had been achieved and then sold out once the pain of three years of losses got too much to stand. So most investors had a dramatically different experience to what the healthy 10-year total return numbers would suggest. Morningstar's research has concentrated on the US market but an initial look at the Australian market, Phillips says, suggests a similar pattern of behaviour and return result.

Another interesting point out of the research was that the style of fund made a difference to investor's real world result. The gap between total return and investor returns was widest among specific sector funds - US equity funds for example had a 10-year total return average of 10.42% compared with an investor return of 7.64%.
In contrast balanced funds on Morningstar's database delivered a slightly lower total return of 9.12% over 10 years in total return numbers but investors enjoy a much higher success rate of capturing the return - investor returns were 8.93%.

Phillips says that diversification leads to better results for investors. Why? Perhaps because the diversified funds do not have the meteoric years that attracts a flood of hot new money or crushing down years when investors capitulate and sell out crystallising big losses.

Supporting that argument is the Morningstar work that shows that volatility hurts investor's chances of capturing a fund's full return. Low volatility funds had a success ratio of 98% in terms of investor's receiving the total return compared to only 62% for the high volatility funds in the research study.

Hopefully Morningstar will extend this work to the Australian fund universe because clearly there are valuable lessons investors and advisers may be able to learn from it.
We have all seen the warnings about past performance not being a guide to future returns but what Morningstar's work offers is an insight beyond the headline return numbers that gives a better indication of whether a fund did a good job for its investors.

But perhaps the most powerful message out of Morningstar's research is for investors not to chase the latest hot performer but rather take a disciplined, long-term approach to their asset allocation and avoid the dangers of trying to time market moves.

Monday, September 24, 2007

"Stupid" investors, rejoice!

Ben Stein (from his Blog of 19 August 2007)

Economist, writer, lawyer, and actor

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

To make money, at least in the postwar world, all you have to do is buy the broad indexes domestically--both in the emerging world and in the developed world--and, to throw in a little certainty about your old age, maybe buy some annuities.

To lose money, pretend you're really, really clever, and that by reading financial journalism and watching CNBC, you can outguess the market day by day. Along with that, you must have absolutely no sense of proportion about money and the world at large.

For example, right now we are stewing over what everyone calls "the subprime mess" and going crazy, mourning all day and into the night--falling over ourselves to get all of the misery right, to paraphrase Evita. I'm writing this on Aug. 13, 2007, and in the past four or five weeks, the markets of the U.S. have lost some 7% of their value, or about $1 trillion.

But read on: The subprime mortgage world is about 15% of all mortgages, or $1.5 trillion worth, very roughly. About 10%--approximately $150 billion--is in arrears. Of that, something like half is in default and will likely be seized in foreclosure and sold. That comes to about $75 billion. Roughly half to two-thirds of that will be realized on liquidation, leaving a loss of maybe $37 billion. Not chump change by any means--but one-thirtieth, more or less, of what has been knocked off the stock market.

The "smart" investor nevertheless reads the papers, bails out, heads for the hills, and stocks up on canned foods. He gets a really big charge out of reading in the press that there are also problems in the mergers and acquisitions market and that some deals will not go through because there are problems raising the funds for the deal. He does not see that the total value of the U.S. major stock markets (the Wilshire 5000) is roughly $18 trillion. The value of the deals that have failed in the private equity world is in the tens of billions or less. The loss to investors--what the merger price was compared with the normalized premerger price--is in the billions. It's real money, and I could buy my wife some nice jewelry with it, but it's pennies in the national or global systems.

The "smart" investor also reads that the Fed has injected, say, $100 billion into the banking system in the last week or ten days, and says, "Aha! The whole country is vaporizing. Look how desperate the system is for money!" What he does not see is that the Fed is always either adding or subtracting liquidity and that recent moves are tiny in the context of a nation with a money supply in the range of $12 trillion. No, the "smart" investor is far too busy looking for reasons to run for cover and thinks he can outsmart long-term trends.

The stupid investor knows only a few basic facts: The economy has not had one real depression since 1941, a span of an amazing 66 years. In the roughly 60 rolling-ten-year periods since the end of World War II, the S&P 500's total return has exceeded the return on "risk-free" Treasury long-term bonds in all but four ten-year periods--the ones ending in 1974, 1977, 1978, and 2002. The first three of these were times of seriously flawed monetary policy that allowed stagflation, and the last one was on the heels of the tech crash and the worst peacetime terrorist attack in the history of the Western world.

The inert, lazy, couch potato investor (to use a phrase from my guru, Phil DeMuth, investment manager and friend par excellence) knows that despite wars, inflation, recession, gasoline shortages, housing crashes in various parts of the nation, riots in the streets, and wage-price controls, the S&P 500, with dividends reinvested, has yielded an average ten-year return of 243%, vs. 86% for the highest-grade bonds. That sounds pretty good to him.

The "smart" investor, in a bunker in the Montana wilderness, keeps his money in gold bullion. After all, he's heard that home prices are falling slightly nationwide and a lot in some areas (he ignores areas of rising prices like San Francisco and New York City). He says that this will discourage the consumer and lead to a severe, bottomless recession. He even has bald people on TV telling him he's right to worry.

The stupid investor, the guy who just lies on his couch, knows that the consumer is always about to stop buying and never quite does. Maybe someone in his bowling club has told him there has only been one year since 1959 when consumer spending fell--and that was barely, in 1980. Somehow, if the consumer could keep spending after the bursting of the tech bubble wiped out $7 trillion or so of wealth, maybe the consumer can keep spending even if the subprime "mess" wipes out roughly half of 1% of that tech-bubble loss and the stock market has a fit. And maybe he knows that, even if there is a recession, recessions rarely last more than two quarters, and the economy and the stock market revive mightily after that--and that buying stocks in a recession is a good idea, not a bad idea.

Now, the alert reader may at this point be saying, "Hey, that `stupid' guy who's really smart is a long-term investor. That's why he's doing so well." Correctamundo, alert reader. There used to be a saying: "Bulls make money and bears make money, but hogs get slaughtered." I am not sure that was ever true, but it sure ain't now. The real story is that long-term investors who have some sense of proportion make money. Short-term investors who live and die by the sweep-second hand of the $300,000 watch get rich fast and poor fast and sometimes are slaughtered faster. I have no advice for them except that the next train may be bringing in someone a little younger who's a little faster on the draw and a lot hungrier, so they'd better enjoy their Gulfstream while they have it.

For the rest of us, the stock market is cheap on a price-earnings basis, profits are fabulous, Mrs. Clinton and Mr. Giuliani are far from being socialists and in the long run, both here and abroad, stocks are a lovely place to be. I have no idea what the S&P will be ten days from now, but I am confident it will be a lot higher ten years from now, and for most Americans, that's what we need to think about. The subprime and private equity and hedge fund dogs may bark, but the stock market caravan moves on.

Thursday, September 20, 2007

The Conscience of a Liberal

Paul Krugman has launched his new New York Times blog. With the closure of TimesSelect all his columns and archives are now available free.

Wednesday, August 29, 2007

A Model for Advice

This material may refer to mutual funds offered by Dimensional Fund Advisors. These mutual funds are only available in the United States of America. Nothing in this material is an offer or solicitation to invest in these mutual funds or any other financial products or securities. All figures in this material are in US dollars unless otherwise stated.

author
August 2007
Advisor Commentary: August 2007

Dan Wheeler puts the current market volatility in perspective and discusses the need for advisors to strategically position themselves as either professional practices or businesses.

Monday, August 27, 2007

Putting Market Movements into Perspective...

August 12, 2007
Everybody's Business

Chicken Little’s Brethren, on the Trading Floor

THE job of an economist, among many other duties, is to put things into perspective. So, because I am an economist, among other duties, here is a little perspective on the recent turmoil in the stock and bond markets.

First, when the story of this turbulence is reported, the usual explanation mainly has to do with some new loss in the subprime mortgage world — the universe of mortgages and mortgage-backed instruments related to buyers with poor credit histories or none at all.

Here is the first instance in which proportion tells us that something is out of whack:

The total mortgage market in the United States is roughly $10.4 trillion. Of that, a little over 13 percent, or about $1.35 trillion, is subprime — certainly a large sum. Of this, nearly 14 percent is delinquent, meaning late in payment or in foreclosure. Of this amount, about 5 percent is actually in foreclosure, or about $67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about $33 billion to $34 billion.

The rate of loss in subprime mortgages keeps climbing. In time, perhaps it will double, maybe back to $67 billion. This is a large sum by absolute standards, and I would sure like to have it in my bank account.

But by the metrics of a large economy, it is nothing. The total wealth of the United States is about $70 trillion. The value of the stocks listed in the United States is very roughly $15 trillion to $20 trillion. The bond market is even larger.

Much more to the point, the fears and terrors about subprime mortgages have helped knock off 6.7 percent of the stock market’s value in recent weeks. This amounts to about $1.1 trillion, or more than 30 times the losses so far in the subprime market. In other words, these subprime losses are wildly out of all proportion to the likely damage to the economy from the subprime problems.

The disconnect goes even further. The Dow Jones industrial average has been heavily moved by fears about the subprime market. But how are most of the Dow 30 affected by subprime mortgages in any meaningful way? No Dow company is short of liquidity, and consumer spending is still strong.

Foreign stocks, especially in developing countries, have been hard hit, and this is supposedly connected with a “repricing of risk,” which in turn is connected with subprime mortgages. But how are the risks in Thailand or Brazil or Indonesia intrinsically related to problems in a housing tract in Las Vegas? The developing countries are fantastically strong and liquid. Why should problems at a mortgage company in Long Island have anything to do with them?

European stocks have also been hard hit, and this has to do with relatively small amounts of subprime in some European banks. On a global scale, the numbers in Germany and France are minuscule for subprime exposure. For European markets to fall on subprime issues makes no sense.

News last Thursday that a small amount of unpriceable subprime mortgages was in a BNP Paribas fund in France sent the markets in Europe and the United States sharply lower. Why? The losses in France are at most in the single billions, while the losses in United States markets alone were in the hundreds of billions on the BNP news.

Then there is the supposed “drying up” of credit for private equity deals because of fears of risk. But this is also puzzling. I can’t think of a single recent major private equity deal in which the bonds have defaulted.

More to the point, suppose that all private equity deals were stalled for a year. Why should this affect the Dow? None of companies in the Dow 30 is having trouble raising cash. And suppose that all private equity deals went away for good. Taken together, they are not all that big a piece of the United States economy. Why should they put the markets of the richest nation in the world, as well as all of the world’s other markets, into turmoil?

Then let’s take a peek at Bear Stearns. This venerable and clever financial house has taken some major hits on subprime mortgages lately. That is sad for the stockholders (I am a very small stockholder), and the price of Bear Stearns stock has tumbled.

A little over a week ago, news about Bear Stearns’ liquidity issues lowered the its market value by about more than $1 billion in one day. That is a big hit to a single company, to be sure, but then came the shocker: that news also helped wipe out hundreds of billions off the total value of United States stocks.

MY point is this: I don’t know where the bottom is on subprime. I don’t know how bad the problems are at Bear. Yet I do know that the market reactions are wildly out of proportion to the real problems that have been revealed. Maybe there is some giant thing hiding in the closet that might rationalize the market’s fears. But if it’s hidden, how can the market be reacting to it in the first place?

More will be revealed, as the saying goes. But recently, investors have been selling out of all relation to what we know. Reassurances in word and deed from Ben Bernanke, chairman of the Federal Reserve, helped calm the markets on Friday. But recent events are a disturbing commentary on the power of fear.

This economy is extremely strong. Profits are superb. The world economy is exploding with growth. To be sure, terrible problems lurk in the future: a slow-motion dollar crisis, huge Medicare deficits and energy shortages. But for now, the sell-off seems extreme, not to say nutty.

Some smart, brave people will make a fortune buying in these days, and then we’ll all wonder what the scare was about.

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.

Friday, August 10, 2007

Investing in the best of times, the worst of times

This from Robin Bowerman's Smart Investing today:

Sharemarkets are at record highs; must be a bad time to invest.

Markets are falling around the globe; must be a bad time to invest.

In a few short weeks market sentiment has shifted in seismic fashion. The threat of a credit squeeze around the globe plus the impact of the latest interest rate rise by our Reserve Bank sends mixed signals to investors.

The concerns about the slack lending practices in the US sub-prime mortgage market - the so-called "Ninja" loans (no income, no job, no assets) - is real enough and it has already had an impact directly in Australia with a number of funds having to declare their exposure or in one hedge fund's case suspend redemptions.

At times like this if you get a group of investors in a seminar room you could be certain that one of the main questions would be "is this the right time to invest?" Essentially people are looking to time the market - buy on the hope it is just a dip. Trying to time market moves is the oldest game in town. It is also involves two decisions not just one - the easy move is to sell when a market hits a record high the harder call is when to buy back in.

And the problem for investors is that often the biggest moves in sharemarket value - both up and down - are clustered together. We saw that again in the last week. A big fall on Wall Street followed a couple of days later by big rise on Wall Street. The yo-yo effect was dramatic.

For those old enough to remember the sharemarket crash of October 1987 it is a salutary reminder of how hard it is to time big market moves. It is probably no surprise that research over 20 years of daily moves in the Australian sharemarket found that between 1977 and 1997 eight of the 12 worst days for our sharemarket were in October 1987.

What generally surprises people is that six of the eight best days for sharemarket gains were clustered around October 1987. Now by most people's definition if you had managed to be out of the sharemarket in October 1987 that would qualify you for hall of fame status as a market timer.

But you would have missed some significant market gains and over the long-term possibly had a lower return overall. Past performance is certainly not a reliable guide to future market performance but it can be useful to remind us of mistakes or emotional over-corrections.

One of the best attributes any investor can have is discipline. The discipline to stick to a financial plan and investing within the asset allocation limits that your risk tolerance dictates...

Friday, July 27, 2007

Dimensional Annual Returns to 30 June 2007

Australian Small Companies 46.2%
Australian Value Companies 33.2%
Australian Large Companies 21.0 %

Global Small Companies 7.2%
Global Value Companies 11.7%
Global Large Companies 7.7 %

Emerging Market Companies 31.0%

The figure above show the performance of the Dimensional Australian Resident Trusts as represented by the Total Return (after management fees and expenses). DFA Australia Limited.

Friday, July 06, 2007

Look Beyond the Index Headlines

This article from Robin Bowerman's weekly Smart Investing newsletter:

Our sharemarket index grabbed the performance headlines this week.

The S&P/ASX 200 index that you see quoted on the television news most nights claimed its best year since it was introduced in 2000. A return for the last financial year of 28.7% shaded the previous best of 26.4% in 2005 according to Jason Hill, director, index services at Standard&Poors.

Short-term performance numbers like those have a tendency to blind people to normal long-term levels of return. And this is where understanding and using indexes can help you keep a realistic perspective - particularly if you are projecting out your superannuation in 20 or 30 years time. For example in the past 10 years ended June 30 the Australian sharemarket index delivered 12.8% return a year - a strong result but more in keeping with long-run averages than the latest series of 20+ per cent returns.
As Vanguard is an index fund specialist this is an area of focus but there for individual investors indexes are great tools to measure your portfolio against.
Some people love data - retired engineers or actuaries for example - while other people find studying numbers about as exciting as watching grass grow.

But whether you are playing sport or investing it is useful to know what the score is. So as we do the financial housekeeping associated with the end of another financial year there is one question every investor ought to be able to answer - how did your portfolio perform?

Professional investors like large super funds track and attribute their performance precisely. They have the resources and expertise to do that but as an individual how do you measure your portfolio - particularly if you have a self-managed super fund and by definition a very individual investment strategy?

It is straightforward for individual investors to set themselves a benchmark to measure their portfolio against. For Australian shares it might be either the S&P/ASX 200 or the broader 300 index while for property trusts it will almost certainly be the S&P/ASX300 Property accumulation index. If you are looking overseas then there is a wide range of indexes but (for example) Vanguard measures its international shares fund against the MSCI World ex-Australia Total Return Index. That excludes our local sharemarket so you can see how the world's major sharemarkets are performing.
The index is a straightforward measure of a market's return - and they can be broad or quite narrow and specific - but the value to an individual investor is an index tells you in an unemotional way whether your portfolio outperformed or underperformed a particular market.

Why is setting benchmarks for your portfolio important? Well consider the case of an investor that a financial planner described recently.

This investor actively trades a significant share portfolio. He works hard at researching and studying companies and at the end of the financial year thought he had done pretty well. So he was taken aback when his accountant/financial planner explained that while the portfolio had indeed done well it underperformed the sharemarket by 3%. And that was before the tax cost of a high turnover portfolio is factored in.

As individuals we are programmed to believe that hard work and extra effort is generally rewarded. So the financial planner who relayed the story above found it a real challenge to get through to their client that all the time and research effort they had put in to managing their portfolio actually detracted value from what the market had delivered and could have been achieved by simply buying the index and using all the time spent monitoring stock performance to do other things.

Other investors may have done better and beaten the market but unless you measure your portfolio against a real world benchmark you simply do not know the score - and whether the effort and cost in transaction fees and tax were repaid.

Investment professionals like researchers and asset consultants use indexes as a critical measure of a fund manager's performance. An individual investor who uses an index correctly will find it is that rarest of commodities - a companion that keeps you honest.


How key indexes have performed to June 30, 2007

Asset class (Index name)
% Performance for 1 year; % Performance for 5 years

Aust shares (S&P/ASX 300 accum)
29.2% ; 19.3%

International shares (MSCI world ex-Aust)
(unhedged)
7.7% ; 4.6%

International shares (MSCI world ex-Aust)
(hedged into $A)
23.7% ; 14.3%

Australian property securities (S&P/ASX 300 property accum)
26.3% ; 18.3%

Aust fixed interest (UBS Aust composite bonds)
3.9% ; 5.4%

Intenational fixed interest (Citigroup World Govt Bond)
5.2% ; 6.7%

Friday, May 18, 2007

No Secrets to Conceal

This article, used with permission, is from Jim Parker, Regional Director, DFA Australia Limited:

May 2007
Jim Parker

The cover of one recently published investment magazine promised readers an insight into "secret stock plays"—the hot stocks that fund managers favour but don't want the general public to know about.1

One would have to assume that those "undiscovered" cover story stocks are a little less of a secret now that the magazine has appeared on the racks of tens of thousands of news agencies around the country.

This is the irony of media stories that proclaim to provide inside knowledge on what the "experts" are investing in. The information quickly loses whatever value it was purported to contain once it is no longer exclusive.

Indeed, there is old adage that once newspapers and magazines start spruiking companies in cover stories, it is time to sell. Likewise, when they write companies or asset classes off, it is said to be a time to buy.

On that last point, some might be old enough to remember a famous cover on US Business Week in 1979 which proclaimed "The Death of Equities", an edition which was published just prior to the start of one of the greatest bull markets in history.

Now, some flesh has been given to the folklore with a new scientific study looking at whether cover stories are indeed contrarian indicators.

The study2, written by three professors from the University of Virginia and published in the Financial Analysts Journal, collected headlines from Business Week, Fortune and Forbes magazines over a 20-year period.

The aim was to determine whether positive news stories were associated with superior future performance and negative stories were associated with inferior future performance for the featured company.

"Superior" or "inferior" were determined in comparison with an index or another company in the same industry and of the same size. The time period for the study was 500 business days on either side of the publication.

The authors found that the appearance of a company on the covers of one of those investment magazines tended to signal the end of its extreme performance—whether negative or positive.

"Statistical testing implied that positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor performance," the study concluded.

So does this mean you can profit by short selling those companies getting favourable magazine coverage and aggressively buying those who are getting dumped on? The study authors found it isn't that simple.

Indeed, they conclude that while the stocks featured in positive cover stories don't out-perform the market on average after the story appears, they don't under-perform it either.

Equally, negative cover headlines don't provide a good signal for momentum or contrarian strategies when performance is measured against an index or measured on a size/industry-adjusted basis.

To anyone who believes the market does a decent job overall in assessing the prospects of individual stocks, this is good news.

In other words, while magazines claim they are uncovering great investment "secrets", it is highly likely that whatever information is included in a cover story will already be priced into the stock.

What's more, there is little evidence that you can do better than the market by using media coverage as a contrarian indicator.

This is not really surprising given the easy availability of real-time business and financial news these days and the difficulty of monthly or fortnightly magazines revealing anything new about a company.

That's not to say these stories don't make for an entertaining read. But if you really want to know how a company's prospects are rated, the market is a pretty good place to start.

So rather than trading off magazine covers, the prudential investor will concentrate on capturing the returns that the market offers, diversifying to wash away volatility and keeping a focus on the long term.

1"Secret Stock Plays", Financial Review Smart Investor, May 2007

2Arnold, Tom; Earl, John H. and North, David S., "Are Cover Stories Effective Contrarian Indicators?", Financial Analysts Journal 63 (2007); 70-73

Monday, May 07, 2007

A New Model For Advice

This presentation, from Dimensional and targeted more to Advisors, provides further insight into my business model and the value provided to clients by this model.

This material is provided for information only. No account has been taken of the objectives, financial situation, or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, have regard to the investor's objectives, financial situation, and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

Friday, April 13, 2007

Nobel Prize Winners on Investing...

This presentation, produced by Dimensional Fund Advisors, features five recipients of the Nobel Prize in Economics: Harry Markowitz, William Sharpe, Paul Samuelson, Myron Scholes and Robert Merton. Together their work provides much of the foundation of modern investment theory...

This material may refer to mutual funds offered by Dimensional Fund Advisors. These mutual funds are only available in the United States of America. Nothing in this material is an offer or solicitation to invest in these mutual funds or any other financial products or securities. All figures in this material are in US dollars unless otherwise stated.

Wednesday, March 21, 2007

The smartest way you can invest...

Dan Solin is the author of a great new book The Smartest Investment Book You’ll Ever Read: The Simple, Stress-Free Way to Reach Your Financial Goals. See an interview with Dan on the CBS Early Show. At Sensible Super we are creating these investments out of Australia in absolutely the most cost effective way... Call me on (02) 9345 0011 to discuss. Andy.

Friday, March 09, 2007

Charles Schwab's Investment Advice:

In a recent interview in Money Magazine Charles Schwab offers the following advice:

"You've got to understand that markets go both ways, up and down. Over longer periods, stocks generally have always gone up. But any specific stock may never come back.

Buy an index fund, and you're going to have long-term growth almost to a certainty. Buy an individual stock, and you never know. You could go to zero.... "

Read the whole interview here.

My advice remains the same:

  • Markets Work: it is better to be properly invested in the market than to try an out-perform the market by stock-picking and market-timing;
  • Returns are related to risk: investment portfolios should be created to reflect the appropriate level of risk for the individual investor;
  • Diversification is essential: both across asset classes and within asset classes;
  • Long-term investment performance is explained by portfolio structure...

I believe that I now have some of the best investment portfolios available in Australia and can offer them to investors, for investments inside or outside superannuation, with flat-fees that are competitive with Industry Superannuation Funds and way below the best retail pricing.

Call me on (02) 9345 0011 or 0402 466640 to discuss...

Wednesday, February 14, 2007

Don't Trust the Forecasts

Peter Martin, Economics Editor of The Canberra Times. Posted this blog some time ago:

It’s the time of year to make forecasts - to gather together a group of experts to predict the course of politics, interest rates and the stock market throughout 2007. Most of the papers do it.

I’m here to issue a consumer warning: You would get a better handle on 2007 if you wrote out scenarios on scraps of paper, pinned them to dartboards, blindfolded yourself and aimed the darts.

Think I’m being too harsh?...It is one of the best-kept secrets of punditry that the better known a pundit is, the less likely are his or her forecasts to be correct. That’s right – the LESS likely...

...The problem facing experts is that they have the tools (and often the incentive) to convince themselves that their pet theories are right even when a rough glance at the evidence suggests that they are wrong. They know enough detail to convince themselves of things that you or I could not.

...year after year, in aggregate Australian fund managers have performed worse for their clients than they would have had they just left the money in the top 100 stocks and done nothing...

Daniel Kahneman, the first psychologist to win the Nobel Prize for economics, has coined the phrase “delusional optimism” to describe the way in which most of us convince ourselves that we are better at what we do than we really are.

READ THE WHOLE ARTICLE HERE

Tuesday, February 06, 2007

Is Now the Right Time to be Buying Shares?

This from the Bloomsbury in the UK, but it follows a theme that is very relevant in Australia as the ASX moved into record territory again this morning:

Is now a good time to commit funds to my long term investment portfolio, given that stock markets have had such a good run recently and some commentators suggest bad times are on the way?

The simple answer is that we don’t know if it is – and we suggest that nobody else does either...

As William Bernstein put it:
"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."
... our approach is that provided you invest in accordance with your risk capacity and that you hold a diversified portfolio which is aligned with your objectives, there is no reason to expect that trying to predict market turning points will be an effective tactic.

Our view is reinforced by some research carried out by committed active management house Fidelity in 2005, so perhaps we should leave the last word to them...
Fidelity looked at the effects of investing in five major equity markets over a 35-year period to 31st December 2005 on the best, worst and a randomly selected day in each year. The impact for such a long term investor of getting it right (or wrong) was minimal – as Fidelity says, “… investors…do not need to be timing experts to benefit from stockmarket investment.”

Wednesday, January 31, 2007

The Advice Seemed to be Sensible...

This article By Henry Blodget at Slate:

The most dangerous investment advice is often that which seems most sensible, which is why the worst investing counsel you will likely ever receive is that you should try to pick "good" stocks and sell "bad" ones. You will get this advice in one form or another from innumerable sources, including (some) investment advisers, friends, colleagues, Wall Street, and the investment media. You should ignore it....

...Most stock pickers believe that they are among the tiny minority of investors who can beat the market after costs, and, for inspiration and encouragement, they point to legends such as Warren Buffett and Benjamin Graham. What such investors often don't know is that even Buffett has said that the best strategy for most investors is to buy low-cost index funds and that the great Benjamin Graham eventually changed his mind about the wisdom of traditional stock-picking...

...The stock-picking mystique is so deeply entrenched in our financial culture that it feels like heresy to suggest that it is, on balance, dumb. The facts are clear, however. For the vast majority of investors—including professionals—stock-picking efforts waste both money and time...

Tuesday, January 23, 2007

Going International...

Sensible Super is coming to the UK and USA in 2007... details to follow!