Tag Archives: cfa-charter-holders

Stocks Higher 10 Years From Now

Before the onset of the market weakness in the early part of last week and the end of the prior week, S&P Dow Jones Indices released a report highlighting rolling 10-year annualized returns for the S&P 500 index. The report seems prompted by a response Warren Buffett made to a question on timing the market. Buffett noted he was not a market timer, and simply responded, “Stocks are going to be higher, and perhaps a lot higher, 10 years from now. I am not smart enough to pick times to get in and get out.” In the report, S&P notes: “Since 1947, the S&P 500’s price return was up in 72% of calendar years. Add in dividends reinvested and that batting average jumped to 80%.” “And if one is worried that the S&P 500 has gone too far since the conclusion of the 2007-09 mega-meltdown bear market, consider that the rolling 10-year CAGR through Q2 2015 was +7.9%, nearly 400 basis points below the long-term average.” “… there have been times when things didn’t work out too well for investors, but these times were few and isolated. Of the 278 quarters of rolling 10-year CAGRs from Q1 1946 through Q2 2015, only eight were negative, and they all occurred between Q4 2008 and Q3 2010.” (Source: S&P Dow Jones Indices ) The S&P report contains additional detail on sector returns going back to 1990 and investors should find the entire report a worthwhile read. One sector highlight noted in the report is the fact that, “… each sector recorded very high monthly 10-year CAGR batting averages, or frequencies of positive observations, from 100% for consumer staples, energy, materials and utilities, to 79% for telecom services and 67% for financials. The S&P 500’s average was 87%.” In short, timing the market can be a difficult endeavor for many investors. Last week’s heightened market volatility is an example of this, especially for those who sold out of stocks on Tuesday. Share this article with a colleague

When To Deploy Capital

One of my clients asked me what I think is a hard question: When should I deploy capital? I’ll try to answer that here. There are three main things to consider in using cash to buy or sell assets: What is your time horizon? When will you likely need the money for spending purposes? How promising is the asset in question? What do you think it might return versus alternatives, including holding cash? How safe is the asset in question? Will it survive to the end of your time horizon under almost all circumstances, and at least preserve value while you wait? Other questions like “Should I dollar cost average, or invest the lump?” are lesser questions, because what will make the most difference in ultimate returns comes from the above three questions. Putting it another way, the results of dollar cost averaging depend on returns after you put in the last dollar of the lump, as does investing the lump sum all at once. Thinking about price momentum and mean reversion are also lesser matters, because if your time horizon is a long one, the initial results will have a modest effect on the ultimate results. Now, if you care about price momentum, you may as well ignore the rest of the piece and start trading in and out with the waves of the market – assuming you can do it. If you care about mean reversion, you can wait in cash until we get “the mother of all sell-offs” and then invest. That has its problems as well: What’s a big enough sell-off? There are a lot of bears waiting for rock-bottom valuations, but the promised bargain valuations don’t materialize, because others invest at higher prices than you would, and the prices never get as low as you would like. Ask John Hussman . Investing has to be done on a “good enough” basis. The optimal return in hindsight is never achieved. Thus, at least for value investors like me, we focus on what we can figure out: How long can I set aside this capital? Is this a promising investment at a relatively attractive price? Do I have a margin of safety buying this? Those are the same questions as the first three, just phrased differently. Now, I’m not saying that there is never a time to sit on cash, but decisions like that are typically limited to times where valuations are utterly nuts, like 1964-65, 1968, 1972, 1999-2000 – basically, parts of the go-go years and the dot-com bubble. Those situations don’t last more than a decade, and are typically much shorter. Beyond that, if you have the capital to spare, and the opportunity is safe and cheap, then deploy the capital. You’ll never get it perfect. The price may fall after you buy. Those are the breaks. If that really bothers you, then maybe do half of what you would ultimately do, but set a time limit for investment of the other half. Remember, the opposite can happen, and the price could run away from you. A better idea might show up later. If there is enough liquidity, trade into the new idea. Since perfection is not achievable, if you have something good enough, I recommend that you execute and deploy the capital. Over the long haul, given relative peace, the advantage belongs to the one who is invested. If you still wonder about this question you can read the following two articles: In the end, there is no perfect answer, so if the situation is good enough, give it your best shot. Disclosure: None.

Buying The Next Hot Idea

If you want to know what is the core problem of the average person approaching the market (though this applies more to males than females, women have more native caution on average), it is chasing a hot idea. This can take a number of forms: Getting tips from friends who have bought some stock that is currently popular in the market. Doing the same thing with investors who talk or write about investing. The best investment advice is not flashy, and does not make for good video. Looking at charts and buying something that is rising rapidly, because popular media say this is “The Next Big Thing.” Buying the mutual fund or other pooled vehicle of some manager who has done very well in the past, and seems to never fail. (If you buy a mutual fund, don’t buy one that has had a lot of money pile into it recently… usually a bad sign. Spend more time to see if the manager thinks in a businesslike way about assets that he buys.) Going to a broker who is very well-dressed and confident, and talks really well, but who has no obligation to act in your best interests. If you don’t know how he is earning his money from you, avoid him, because it usually means investments with high fees or hidden ways that you can lose, e.g. structured notes that offer a nice yield, but where possibilities to lose are more significant than you think. At best, he will give you consensus ideas and managers that deliver him above average remuneration. Buying the newsletter of some overly confident person who claims to know the secrets of the market, which he will share with you and 100,000 other close friends for a mere $299/year! (Please read Mark Hulbert before buying a newsletter.) Worse yet, giving into the fakery of those who try to bring you into a hidden opportunity. It can be a Ponzi scheme, a promoted stock, but they suggest returns that are huge… or, like Madoff, decent but not exorbitant returns that are altogether too regular. Many of these appeal to our desire to get something for nothing, which is endemic – we all have it to some degree, and marketers play off this regularly by offering us “free” this, and “free” that. Earning returns from your investable assets is a business in its own right, and there are costs to doing it well. You should not be surprised that doing well with it will take some time and effort. You also have to avoid the impulse that there is some hidden knowledge, or group of insiders that have found an easy road to riches. The markets aren’t rigged in any material way. The principles of investing are well-known, but applying them takes creativity, time and effort. There are no significant players with a new theory who make amazing money investing in secondary markets for stocks and bonds. Most of the things that I listed above involve low-thought imitation of others. There is little advantage in investing to mimicry. Even if it worked for someone else, the prices are different now, and easy gains have been made. You will do worse than the one you are trying to imitate with virtual certainty, and likely worse than average. You need to plan to take an independent course, and learn enough such that if you do choose to use advice of any sort, that you can evaluate it rationally. If you choose to do it yourself, you will need to learn more than that. It takes effort, but that effort will pay off, if not in investing itself, but there are spillover effects in intelligent management of your finances, and in improving your abilities in the businesses that you serve. In most areas of life, most things that pay off well take effort. If people present you with easy or hidden ways to make above average money, be skeptical. Doing it right takes discipline and effort. (If you want the easy route while avoiding all the pitfalls see the postscript. It is boring, but it works.) As an aside – you can always index, and beat most average investors over the long haul. Buy broad funds that invest in a large fraction of all of the stocks that there are, and those that replicate the bond market as a whole. Make sure they have low fees. Buy them, hold them, and be done. You will still face one hurdle: will you be able to maintain your strategy when everything is in a crisis, or when your friends tell you they are earning a lot more than you, and it is easy to do it? Size the bond portion of your assets to the level where you can sleep soundly in all circumstances, and you will be fine. Disclosure: None