Thursday, July 31, 2008

The Prescient Are Few

By MARK HLBERT, New York Times, July 13, 2008

HOW many mutual fund managers can consistently pick stocks that outperform the broad stock market averages — as opposed to just being lucky now and then?

... A new study builds on this research by applying a sensitive statistical test borrowed from outside the investment world. It comes to a rather sad conclusion: There was once a small number of fund managers with genuine market-beating abilities, as judged by having past performance so good that their records could not be attributed to luck alone. But virtually none remain today. Index funds are the only rational alternative for almost all mutual fund investors, according to the study’s findings...

... Professor Wermers says his advice has evolved significantly as a result of this study. Until now, he says, he wouldn’t have tried to discourage a sophisticated investor from trying to pick a mutual fund that would outperform the market. Now, he says, “it seems almost hopeless.”



Saturday, July 12, 2008

Take the Bait, Ruin Your Investing Life

This is an old Ben Stein article (Feb 14, 2008) but worth another read today...
Nothing good happens when investors lose focus in a topsy-turvy market and give in to self-serving doom and gloom...


Don't Panic - Buy Index Funds and Real Estate

by Ben Stein at Yahoo Finance

Now for some reassuring words. Of all of the columnists writing in this space, I suspect I am the oldest. This means I have seen the most economic fluctuations. This also means I am less terrified about them than younger heads.

Let me put this differently. I read recently in The Wall Street Journal that the stock market was at the time of that writing almost in "Bear Market Territory," which is to say, down roughly 20% or more from its high. This, said the author of the piece, shows that we are about to have very bad economic times. The author helpfully noted that the market has been down into "Bear Market Territory " some nine times since the mid-1960's. Without doubt, this author was trying to do his best, and to serve his readers.

But here's a relevant addendum: yes, the market may have fallen 20% or more nine times since then. But there have only been five recessions since then.
That is to say, the stock market predicts 10 out of five recessions. Not such a great record...

However, let's assume we do have a recession. I hope we don't, but we might. What do we do about it? What can we do about it? Just keep plugging along. Just keep buying broad indexes. Just keep a good chunk of liquid assets. None of us can control the economy. Thus, we just have to keep swimming in the roiled waters.

As we cling to our life jackets, please remember this: no recession lasts forever. I can well recall so many times in the past when every single headline in The Wall Street Journal was about some record growth of sales or profits. Then time passes and every single headline is about horrible news. Then time passes and there is mixed news, and then it's all good news again.

Economies go through cycles. But the long-term trend is up...

The plain fact is that you don't know when real estate will be at bottom until it's too late. If you see a home you love, buy it now if you plan to be in it a long time. And know that the headline writers want to whip you up and make you crazy about the economy. They sell fear. Stay calm and stay well to do.


Thursday, July 10, 2008

The Stock Picks From Hell

Jim Parker, Regional Director, DFA Australia Limited

Whenever equity markets turn rocky, we're told that stock pickers start sharpening their pencils and proving their worth. So with the year half over, it's interesting to note how the "hot stock picks" for 2008 are panning out.

Late last year, Sydney's Daily Telegraph decided to ask some of Australia's "leading analysts" for the "inside word on the hottest stocks for 2008".1

Six analysts from six separate broking and financial services firms were selected to provide a handful of individual stock selections—the cream of the cream, the best of the bourse, the flower of the flock.

But looking at the dire performances of their individual selections, one is left wondering whether the tipsters mistook their bottom drawer for their top.

Even taking into account the fairly ordinary performance of the overall Australian market this year (down 21 per cent as of early July), the Daily Tele's "hottest stocks for 2008" appear to be very cold fish indeed.

Of the 27 stock tips, all but three had underperformed the market by early July, many of them significantly.

Retailer Harvey Norman, we were told, would continue to benefit from falling prices for electronic goods imports and the strong Australian dollar. Maybe it is, but that's not reflected in its share price (down 54 per cent year to date).

Major debt collection group Credit Corp was said to be due for a rebound, having been hammered in 2007. Well, as it has turned out, the hits have just kept on coming, as Credit Corp shares are down 80 per cent in 2008.

Another analyst told readers that Babcock & Brown Power was likely to be a strong performer this year, given its focus on gas-fired generation—or maybe not, because this particular stock was down 73 per cent as of July.

Elsewhere, Regional Express, we were advised, was "the forgotten airline in a climate of unprecedented growth". But it seems the market is still suffering a memory lapse, because Region's shares were down 47 per cent as of July.

On the speculative front, one of the analysts tipped Destra Corporation. He had interviewed the company's CEO, he told us, and had come away with the impression that here was a "very tech-savvy guy". He may well be. But that hasn't helped his company's share price, down 83 per cent year-to-date.

Also among the stock picks from hell were Record Realty (down 89 per cent), Perilya (down 74 per cent), Strathfield (down 50 per cent) and Image Resources (down 55 per cent).

Maybe the analysts' pencils weren't sharp enough. Or maybe they just need to go back to investment school and learn the benefits of diversification.

The fact is successful investing means not only capturing risks that generate expected return but reducing risks that do not. Avoidable risks include holding too few securities, betting on countries or industries and following market predictions—even ones written by "top analysts".

That's not to say you shouldn't read these articles. But you might be better off treating them more as entertainment, than as information.

1'The Hot Stocks of 2008', The Daily Telegraph, Dec 14, 2007


Jeremy Siegel on the Bear Market and Sky-high Oil Prices

Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. This interview was produced by Knowledge@Wharton and published on YouTube.