Tag Archives: premium-authors

Growth Beating The Pants Off Of Value In 2015

2015 has been the year of the “FANGs.” Investors have fixated on just a handful of glamorous tech stocks – Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Google ( GOOG , GOOGL ) (now Alphabet) – that have held the broader market afloat even while earnings this year for American stocks have been mostly disappointing and the “average” stock has actually been falling. For lack of anywhere else to go, the investing public is crowding into a very small handful of recognizable names and hoping for the best. Consider the relative performance of the growth and value segments of the S&P 500. (Standard & Poor’s breaks the S&P 500 into two roughly equal halves, based on valuation, momentum and other factors.) Year to date through November 12, the S&P 500 Growth index – which includes the FANG stocks – was up 3.9%. Its sister, the S&P 500 Value index, was actually down by 5.5%. This is a peculiar market in which cheap stocks are getting cheaper and a handful of extremely expensive names keep getting more expensive. As a case in point, look at the advance-decline line, a simple measure of market breadth. Starting in April, the advance-decline line started to trend downwards and, apart from a brief rally in October, really hasn’t stopped sagging since. This means that fewer and fewer individual stocks are still rising, even while the market grinds slowly higher. In a “healthy” bull market, the advance-decline like rises along with the major stock indexes. So when you see an “unhealthy” market like this, one of two things has to happen. Either investors start to spread their bets across a wider swath of the market and market breadth improves… or they finally throw in the towel and sell the few remaining leaders. So, how on earth are we supposed to invest in a market like this? You really have two options. The first is simply to ride the momentum of some of these glamor names while it lasts. Sure, the FANGs are expensive. But that doesn’t mean they can’t get a lot more expensive in the short term. So, riding the momentum is a perfectly viable strategy so long as you’re ready and willing to sell at the first sign of weakness. The second option – and the one I am following in my Dividend Growth model – is to look for deep values amidst the carnage, or stocks that are already so cheap, you don’t mind if they get cheaper. While the S&P 500 Value index is down only 5.5% this year, there are plenty of stocks that are down 30% or more. Several midstream oil and gas pipeline stocks are currently sitting at multi-year lows and are sporting cash distribution yields I never expected to see again. And of course, there is always the third option: Keep a larger percentage than usual of your nest egg out of the stock market altogether, and simply wait for better prices across the board. My recommendation? Try some combination of the three. Keep your long-term portfolio heavy in cash and deep-value opportunities, but set a portion of your portfolio aside for more aggressive short-term trading. This article first appeared on Sizemore Insights as Growth Beating the Pants off of Value in 2015 . Disclaimer: This article 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. Original Post

Myopia And Market Function

Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Myopic loss aversion can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. We know that there will be future bear markets and probably another crisis or two in most of our lifetimes. By Roger Nusbaum AdvisorShares ETF Strategist The Wall Street Journal posted an article written by Shlomo Benartzi who is a professor at UCLA specializing in behavioral finance. The article primarily focuses on the behavioral problems, like myopic loss aversion, that can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Benartzi cites that the stock market has a down day 47% of the time, a down month happens 41% of the time, a down year 30% of the time and a down decade 15% of the time. We’ve talked about this before, going back before the crisis albeit with some different wording. Before and during the last major decline, as well as many times since then, I’ve said that when the market does take a serious hit that it will then recover to make a new high with the variable being how long it takes. While this seems obvious now, it is one of many things frequently forgotten in the heat of a large decline. Additionally, we know that there will be future bear markets and probably another crisis or two in most of our lifetimes. And those future bear markets/crises will take stocks down a lot which will then be followed by a new high after some period of time. This is not a predictive comment, this is simply how markets work with Japan being a possible stubborn exception that proves the rule. It took the S&P 500 five and half years to make a new nominal high after the “worst crisis since the great depression.” If you are one to use some sort of defensive strategy, it is hopefully one that you laid out when the market and your emotions were calm and your strategy probably doesn’t involve selling after a large decline. My preference is to start reducing exposure slowly as the market starts to show signs of rolling over. Very importantly though is that if you somehow miss the opportunity to reduce exposure, time will bail you out….probably. I say probably based on when a bear market starts in relation to when retirement is started. If a year after retiring, a 60% weighting to equities that cuts in half combined with a life event at the same time that requires a relatively large withdrawal (this is not uncommon) it will pose some serious obstacles. I think the best way to mitigate this is, as mentioned, a clearly laid out defensive strategy but not everyone will want to take on that level of engagement. In that case it may make sense for someone very close to retirement and having reached their number (or at least gotten close) to reduce their equity exposure. Not eliminate, but reduce. Back to the idea of myopic loss aversion and how to at least partially mitigate it. Knowing how markets work and then being able to remember how they work will hopefully provide an opportunity to prevent emotion from creeping in to process and giving in exactly as Benartzi describes.