Tag Archives: onload

The Main Reason Why Indexers Will Likely Beat Active Stock Pickers

As we know most investors do not get the market returns that are available. Too many investors practice ‘loss aversion’ and sell stocks or funds when they see the stock markets collapse – this can contribute to losses and lower returns. Indexing is called ‘passive investing’ on the investment selection front; but its greatest gift is allowing investors to be passive on the emotional front. Vanguard research shows that indexers and those in low fee funds were able to stay the course and not react emotionally. Most of us likely know that most investors have historically underperformed the broad market indices and benchmarks to a very large degree. It is a very unfortunate trend and it is the reason why I write today, and the reason why I made the switch to a career in the land of finance and investing. Here’s a study that found that investors have turned very generous market returns into very modest returns. In 2001 Dalbar, a financial-services research firm, released a study entitled “Quantitative Analysis of Investor Behavior”, which concluded that average investors fail to achieve market-index returns. It found that in the 17-year period to December 2000, the S&P 500 returned an average of 16.29% per year, while the typical equity investor achieved only 5.32% for the same period – a startling 9% difference! It also found that during the same period, the average fixed-income investor earned only a 6.08% return per year, while the long-term Government Bond Index reaped 11.83%. Investors are attracted by the lure of the stock markets, company ownership, the juicy returns in robust bull markets, and they’re attracted by that gambling mentality – the chance that they might beat the markets, beat their neighbour and beat their brother-in-law. The studies on poor investor behaviour suggest that most investors are simply taking on too much risk. The problem is that gambling has not paid off; emotion gets the better of most investors whether they are individual stock pickers, holders of professionally managed mutual funds or index investors. There’s lots of bad behaviour to go around amongst all types of investors. That’s certainly why for most investors it’s prudent to evaluate that personal emotional risk tolerance level and match the risk or volatility level of the portfolio to said risk tolerance level. Investing should start with a few areas of questions or self-reflection, one being can I watch my paper net worth (the investment portion) get chopped in half or more and not panic? Find your risk tolerance level, create the matching portfolio. The bad behaviour and bad decision-making is across the board. We might conclude that humans do not make very good investors, for the most part. The task at hand might be to convince investors to stop looking, stop reading; even STOP THINKING! There is that wonderful expression that goes something like this … a portfolio is like a bar of soap, the more you handle it the smaller it gets. The most important part of investing is not stock selection or even style of investing. It’s about being able to stay the course. If you are an investor that has an incredibly high risk tolerance level (a very rare breed indeed), then it makes sense to seek out the assets that might deliver the greatest potential returns, risk can take a seat. For the risk averse investors (arguably that list would include the majority of investors), the greatest total return is achieved through the act of matching your portfolio to your risk tolerance level and simply taking the returns offered by that asset mix. The most important factor that might determine an investor’s success is patience, and being able to stick to the plan through thick and thin. Having a plan is key, sticking to that plan is crucial. It will come down to boring consistency and patience. Doing nothing is doing it right. OK, what we can do is invest on a regular schedule and that can often be set up so that the dollar cost averaging happens with a set-it-and-forget-it automatic investment plan. Vanguard has found that those who adopt a long term strategy in their 401k accounts and invest in the indexes or low fee managed funds have recently been able to ignore the market noise and simply stay the course. In 2011 during the European debt crisis the S&P 500 lost nearly 20% Vanguard investors didn’t panic (the correct move in hindsight). This comes from a previous study: In the first eight trading days of August [2011], including two of the most volatile days since 2008, just under 2% of 401(k) participants at Vanguard made a change to their portfolios. In other words, over 98% stayed the course. Ninety-eight percent took no action. Ninety-eight percent took the long-term view. Now it’s true, if choppy markets continue, we’ll see this number inch down. Ninety-eight percent of participants staying the course might become 97%. In October 2008, during the depths of the financial crisis, it became 96%-in other words, 4% of participants made a move. But the fact remains: those trading are a very small subset of investors. When we consider the findings of that Dalbar study and see only 4% of Vanguard 401k investors making any kind of move (reaction) during the most severe market correction since the Great Depression, I think that is very telling. There is value in being a passive investor in the emotional sense. There is value in investing without emotion. Don’t invest like the emotional James T. Kirk, invest like Spock. Letting the index or low fee fund manage your holdings for you simply means that you don’t have to watch, you don’t have to be emotionally involved. That detachment can pay dividends. Not to be morbid but studies have shown that the portfolios of the deceased have done quite well. Portfolios of investors who have forgotten that they have stock and bonds investments can also do quite well. It’s ironic that non-thinking (or less thinking) typically beats thinking when it comes to investing. This from a business insider article and a discussion between Barry Ritzhold and James O’Shaughnessy … O’Shaughnessy relays one anecdote from an employee who recently joined his firm that really makes one’s head spin. O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was…” Ritholtz: “They were dead.” O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.” Apparently the forgetful make for wonderful investors. I get to deliver that wonderful surprise once a week or more to Tangerine clients. Some investors will forget that they moved some monies to an investment account 3, 4 or 5 years ago and I can deliver the good news on the returns. It’s certainly an opportunity to then remind investors that leaving their investments alone is often wonderful behaviour. Getting emotionally involved with your investments and your ability to fund your retirement years can be dangerous. It’s not surprising that for many, the further they can stay away from their investment decisions, the better. The passive nature of indexing allows for this detachment. We know that most professional managers will not get the market returns that are available, over time. And the Dalbar study shows that individual investors can hamper returns by an even larger degree. Also from that Business Insider Article, here’s an interesting (and very famous chart) that makes the rounds in discussions about investor returns. Please note, the editorial comment (IN RED) is from the link, and perhaps was added by Mr. Ritzhold. 🙂 (click to enlarge) Now that’s not to say that an individual stock picker cannot be a successful investor. If a stock picker is well diversified, is investing within his or her risk tolerance level, and that investor is then very patient and able to stay the course, that investor might do quite well. But again, it might come down to that investor being able to invest without emotion. Investing without emotion appears to be a tough task for the professionals and retail investors alike. I love reading the comments of Seeking Alpha reader and commentor buyandhold 2012 . The comments are generally the same theme … buy and hold, don’t sell. buyandhold states that he has never sold a stock, the holdings can only come and go if a company is acquired or goes out of business. He makes investing more about marriage than dating. He claims to have beat the markets over the decades, and even though this is the world wide web and mr buyandhold is anonymous I believe him. He follows the suggestions of Mr. Benjamin Graham and largely buys companies that have paid dividends (and dividend aristocrats) for an extended period. And then he holds. Buy. And then hold. That seems like a simple strategy that all of us can understand, but very few of us would be able to execute. Here’s one of his recent comments on an Exxon Mobil (NYSE: XOM ) article. DGI, what trips up many investors is that they focus on the short term rather than the long term. It is true that Exxon Mobil is not going to be a rock star growth stock on the price appreciation side in the next 12 months. But Exxon Mobil has a good chance of being a rock star growth stock on the price appreciation side over the next 25 to 50 years. I have been an Exxon Mobil shareholder for 44 years so I know that this stock really delivers the goods over the long term. That comment post says so much in the context of all of the noise surrounding the energy space and energy aristocrats and long term dividend payers. Buy, and hold. On the other side of the ledger and on Seeking Alpha, even within the dividend space, we hear so much on buy and selling and we see chart tools with buy and sell signals, there’s plenty of debate on what to do on a dividend cut or dividend freeze. Buyandhold has a suggestion, buy more when they’re on sale. Investing should be easy. For many it will come down to the advice of Mr. Warren Buffett – buy the broader market indices in the most cost effective manner possible and stay the course, and reinvest on a regular schedule. For stock pickers it may come down to the advise of buyandhold 2012 – buy great companies when they are at reasonable valuations and stick with your companies through thick and thin. Leave that SELL button alone. Thanks for reading. Happy investing, always know your risk tolerance level, and give a thought to the notion of international diversification. Dale Additional disclosure: Dale Roberts is an investment funds associate at Tangerine Investment Funds Limited. The Tangerine Investment Portfolios offer complete, low-fee index-based portfolios to Canadians. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor’s overall opinion forming process. The views expressed are personal and do not necessarily represent those of Scotiabank

Southern Company Doesn’t Look As Good As It Did 12 Months Ago

Summary I’ve recommended buying SO twice over the past 12 months, once at a dividend yield of 5.00% and once at 4.84%. At the current price per share of $49.70, shares are yielding only 4.19%, which I believe is too low, considering the slow rate of dividend growth. I will reconsider if the stock drops by 10% or more. Shares in Southern Company (NYSE: SO ) are currently trading at a price of $49.70, which is $8.32 or 20.1% higher than twelve months ago. I’ve recommended buying SO twice over the past 12 months, once in January of 2014, when the dividend yield reached 5.00%, and once in June, at a current yield of 4.84%. With the recent growth in share price however, the yield has gone down and investors getting in at the current level will get a yield on cost of only 4.19%. SO data by YCharts The dividend growth rate for SO is very low, at 3.74% over the past 3 years and 3.90% annually over the past 5 years. This means it would take 5 years to get back to the yield on cost of 5.0% investors could get 12 months ago. SO Dividend Per Share (5 Year Growth) data by YCharts SO’s revenue for the current fiscal year is expected to reach $18.17 billion, which is an increase of 6.9% to last year’s $17.09 billion. For next year, a further 3.1% increase to $18.73 billion is expected. The trailing twelve month revenues stand at $18.38 billion. The average price to sales ratio for SO over the past 5 years has been 2.2, which is well above the industry average of 1.5 . The current market cap is $44.72 billion. Here’s what SO’s p/s ratios look like at today’s prices:   Dollar amounts Price to sales ratio % above 5 year average Price per share at p/s = 2.2 Trailing twelve month revenue $18.38 billion 2.43 10.5% $44.98 Current FY expected revenue $18.17 billion 2.46 11.8% $44.45 Next FY expected revenue $18.73 billion 2.39 8.6% $45.76 SO Revenue (5 Year Growth) data by YCharts Southern’s 5 year average p/e ratio stands at 18.7. If we aply this multiple to the trailing twelve month earnings per share of $2.34, we get a price per share of $43.76, which is well below the current price. Earnings per share for the current fiscal year are expected to be somewhat higher, at $2.80, putting the forward p/e ratio at 17.8. For next fiscal year, EPS is expected to grow a further 2.5%, to $2.87, which means the 1 year forward p/e ratio is 17.3. SO PE Ratio (NYSE: TTM ) data by YCharts SO Current Ratio (Quarterly) data by YCharts I usually look for current ratios in excess of 1.0, as this indicates current assets are larger than current liabilities. However, with utility companies such as SO, a slightly lower current ratio isn’t an immediate cause for concern, as income streams tend to be very steady and reliable. As we can see in the next graph, SO’s long term debt has slowly but surely been growing in recent years. Low interest rates mean the company is more than able to finance this debt, as net interest costs over the past 12 months were only $800 million, or 4.35% of the company’s trailing twelve month revenue. SO Total Long Term Debt (Quarterly) data by YCharts Conclusion: Buying SO at a dividend yield of 5.0% would have been a great idea. However, considering the company’s slow dividend growth rate, investors getting in now would likely have to wait for roughly 5 years to get to a yield on cost of 5%. Both on a p/e and p/s ratio basis, the company appears expensive compared to historical averages. The long term debt is growing, which isn’t a problem so long as interest rates stay low. I don’t see any reasons to buy at these levels, but may reconsider if the stock drops by 10% or more from its current price of $49.70. Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.

Where To Look For Cheap Stocks In 2015: CAPE Around The World

2014 was a lousy year for global value investors. Cheap markets, as measured by the cyclically-adjusted price/earnings ratio (“CAPE”) got even cheaper, while expensive markets got even pricier. (Note: the CAPE takes a ten-year average of earnings as a way of smoothing out the economic cycle and allowing for better comparisons over time.) I expect this to reverse in 2015. At some point – and I’m betting it could be as early as the first quarter – global market valuations should start to revert to their long term averages. That’s fantastic news if you’re invested in cheap foreign markets. It’s not such fantastic news if your portfolio is exclusively invested in high-CAPE American stocks. Let’s take a look at just how skewed the numbers are. The S&P 500 managed to produce total returns of 13.7% in 2014. But as quant guru Meb Faber pointed out in a recent blog post , globally, the median stock market posted a loss of 1.33%. The cheapest 25% of countries saw declines of 12.88%, while the most expensive markets actually gained 1.36%. I should throw out a couple caveats here. These were the returns of U.S.-traded single-country ETFs, which are priced in dollars, and not the national benchmarks. The strength of the U.S. dollar relative to virtually every other world currency last year was a major contributor to the underperformance of the rest of the world. All the same, it’s worth noting that we’re in uncharted territory here. As Faber noted in a recent tweet , U.S. stock valuations relative to foreign stock valuations closed 2014 at the highest spread over the past 30 years. Four out of the five biggest relative valuation gaps resulted in outperformance by foreign stocks the following year. The only exception was 2014. Let’s dig into the numbers. The CAPE for the S&P 500 is now 27.2. That’s a full 63.9% higher than the historical average of 16.6 , more expensive than at the 2007 peak, and close to the 1929 peak. The only time in U.S. history where the S&P 500 was significantly more expensive based on CAPE was during the peak of the 1990s tech bubble. Sure, the “fair” CAPE is going to be a little higher today than in decades past due to record low bond yields (all else equal, lower yields mean higher “correct” valuations). But I should point out that yields are even lower in most of Europe and Japan, yet valuations are significantly cheaper. So while low bond yields might partially explain why U.S. stocks are expensive relative to their own history, it doesn’t explain why the U.S. is expensive relative to the rest of the world. No matter how you slice it, U.S. stocks aren’t the bargain they were a few years ago. Research Affiliates calcuates that U.S. stocks are priced to deliver returns of about 0.7% over the next 10 years. Using a similar methodology, GuruFocus calculates an expected return of about 0.3% . I’ve driven home how expensive U.S. stocks are. Now, let’s take a look at other global markets. Here are the world’s markets as measured by the CAPE and sister valuation metrics cyclically-adjusted price/dividend (“CAPD”) cyclically-adjusted price/cash flow (“CAPCF”) and cyclically-adjusted price/book (“CAPB”). All figures reported in Meb Faber’s Idea Farm using original data from Ned Davis Research. Country CAPE CAPD CAPCF CAPB Average Rank Greece 2.8 6.5 1.5 0.4 1 Austria 7.3 21.6 3.0 0.7 3.75 Portugal 7.7 12.9 3.2 1.0 4.25 Hungary 5.9 23.0 3.0 0.9 4.75 Italy 9.6 16.6 3.7 0.9 5.25 Russia 5.2 29.8 3.5 0.8 7 Czech Republic 10.3 15.3 5.3 1.6 7.75 Poland 10.8 22.9 5.0 1.5 8.75 Brazil 10.0 23.2 6.4 1.5 9.25 Spain 11.6 19.4 5.7 1.6 10.25 Ireland 11.0 24.7 7.7 1.3 11 France 13.8 29.3 7.6 1.5 15 Norway 12.1 29.2 6.6 1.9 15 New Zealand 14.6 18.2 7.5 1.9 15.25 U.K. 12.1 26.9 8.1 1.9 17.25 Egypt 13.2 27.7 7.9 2.1 18.25 Turkey 11.3 39.5 8.0 1.9 19 Korea 12.4 73.3 7.3 1.5 19.25 Finland 14.5 24.3 8.6 2.1 19.75 Singapore 13.8 32.6 10.3 1.7 20 Belgium 14.6 30.3 9.4 1.8 20.25 Germany 15.8 37.8 7.8 1.8 21 Australia 15.7 22.8 11.3 2.1 23 Netherlands 15.5 35.9 10.1 2.1 24.75 Israel 14.8 38.8 11 1.9 25.5 China 14.3 43.3 9.2 2.2 25.75 Chile 17.4 40.9 10.2 1.9 26.25 Hong Kong 18.2 40.1 13.8 1.7 27.5 Peru 14.3 33 12.2 3.5 28.25 Japan 23.4 69 8.8 1.6 28.5 Taiwan 19.7 30.8 9.7 0 30.25 Thailand 17.8 41.6 11.5 2.9 31 Canada 19.2 45 10.5 2.4 31.5 Sweden 19.1 39.8 13.6 2.8 31.75 Malaysia 19 42.7 12.8 2.5 32 Colombia 23.1 43.7 18.8 2.2 36.25 South Africa 20.9 45.3 14.8 3.4 36.5 Switzerland 22.4 47.9 17.4 3.2 37.25 Mexico 22.6 73.6 12.4 3.6 38 Indonesia 20.9 52.6 14.3 5.0 38 U.S. 23.6 69.0 14.7 3.4 38.75 Philippines 26.1 65.9 16.1 3.9 40 Denmark 30 99.4 18.6 3.9 42.25 (Note: The U.S. figures use the MSCI U.S. index rather than the S&P 500, hence the difference in CAPE value.) We see some familar names on the list. Greece remains the world’s cheapest market by a wide margin. Of course, Greece is also in the middle of an election cycle that may well result in the country getting booted out of the eurozone. Interestingly, Russia is cheap following Western sanctions and the collapse in the price of oil, yet there are several far more stable countries that are cheaper, such as Austria, Portugal, Hungary and Italy. Two countries that I’ve liked for years based on valuation – Brazil and Spain – round out the top ten. To put things in perspective, the most expensive market on this list–Spain–trades at nearly a 60% discount to the U.S. market based on CAPE. Yes, Spain has its problems. Its economy is stuck in a slow-growth rut, and unemployment remains over 20%. But Spain is also home to some of the world’s finest multinationals, such as banks BBVA (NYSE: BBVA ) and Banco Santander (NYSE: SAN ), telecom giant Telefonica (NYSE: TEF ) and fashion retailer Inditex ( OTCPK:IDEXY ). There are different ways to use this data. You could buy and hold country ETFs, such as the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ), the Market Vectors Russia ETF (NYSEARCA: RSX ) or the iShares MSCI Spain ETF (NYSEARCA: EWP ). Or you could go with a convenient one-stop shop like Faber’s Cambria Global Value ETF (NYSEARCA: GVAL ). GVAL is nice collection of cheap stocks from around the world. As of last quarter, GVAL’s largest country weightings were to Brazil, Spain and Israel. Disclosures: Long GVAL, EWP, BBVA, SAN, TEF This article first appeared on Sizemore Insights as Where to Look for Cheap Stocks in 2015: CAPE Around the World Disclaimer : This site is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.