My late mother always used to say that the anticipation of Christmas was a major part of its allure. C.S. Lewis capitalized on that truth in The Lion, the Witch and the Wardrobe by making the White Witch’s evil spell on Narnia mean that it was “always winter, but never Christmas.” Heinz used the power of our anticipatory feelings to its advantage in the following commercial (using Carly Simon’s classic song – you can view a rare Simon live performance of it here). Even though it’s just ketchup, albeit very s-l-o-w ketchup, it works.
Anticipation has a negative counterpart, of course. It’s dread – the feeling that you know something isn’t quite right, you fear it’s bad (and maybe really bad), but you still aren’t quite sure what will happen or how it will happen. Terror seems on the way. Horror is possible, even likely. But, for now, all we have is a foreboding dread.
Does that feel familiar? Continue reading
It is now fairly well established (see here, for example) that low volatility stocks have, over the longer term, persistently delivered market-beating returns. This finding applies to the U.S., to other developed countries and to emerging market countries. In essence, it appears that low volatility stocks are deemed boring and underappreciated but outperform because investors and money managers are busy looking for the big score. To many, this concept is an anomaly in that it at least seemingly contradicts a basic premise of economics — that risk and reward are inherently connected.
However, as very serious practitioner is well aware, volatility and risk are hardly the same thing (see here and here, for example). Continue reading
John Hussman is a really smart guy as well as an interesting and often insightful analyst. But forecasting is exceedingly difficult even for the best of us. Notice what he wrote on March 5, 2012:
“The present menu of investment opportunities continues to be among the worst in history.”
It was thus an “awful time to invest.” Since that piece was written, the S&P 500 is up 20.91 percent. Oops.
The question is a common one for many institutions – For the real estate allocation, should we use publicly traded REITs or private real estate? The usual answer is to mix them. Yet recent research highlighted by Institutional Investor magazine notes that public “REITs have beaten private funds by almost 5 percent a year over the past three decades.” For the 30 years ended December 31, 2011, listed REITs returned 11.95 percent annually while private funds returned 6.97 percent.
That’s a huge performance gap. Continue reading
Yesterday I recommended that investors employ the scientific method even though investing is the last liberal art. That may sound like a contradiction, but it isn’t.
The Oxford English Dictionary defines the scientific method as “a method or procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.” What it means is that we observe and investigate the world and build our knowledge base based upon what we learn and discover, but we check our work at every point and keep checking our work. It is inherently experimental. In order to be scientific, then, our inquiries and conclusions need to be based upon empirical, measurable evidence.
Thus the scientific method can and should be applied to traditional science as well as to all types of inquiry and study — including investing. The great scientist Richard Feynman even applied such experimentation to hitting on women. To his surprise, he learned that he (at least) was more successful by being aloof than by being polite or by buying a woman he found attractive a drink. Continue reading
Being human, we want investing to be easy. We want formulas to plug-in, systems to follow and outcomes to be assured. Instead, successful investing requires hard work, mental acuity and the willingness to adapt when things (inevitably) don’t go as planned.
But how should we go about it?
Here’s my (very tentative) listing of lessons and guideposts, a baker’s dozen in total, that we would all do well to abide by and internalize as we try to navigate the investment process.
The Price Action Lab has a post up this morning stating what seems to be obvious.
“[M]arkets will not reward naive perceptions of inter-market relationships that one learns in school because mass knowledge carries no edge.”
That’s true generally. But there’s a big but….
Value has persistently outperformed over the long-term. Why is that?
In the most general terms, growth stocks are those with growing positive attributes – like price, sales, earnings, profits, and return on equity. Value stocks, on the other hand, are stocks that are underpriced when compared to some measure of their relative value – like price to earnings, price to book, and dividend yield. Thus growth stocks trade at higher prices relative to various fundamental measures of their value because (at least in theory) the market is pricing in the potential for future earnings growth. Over relatively long periods of time, each of these investing classes can and do outperform the other. For example, growth investing dominated the 1990s while value investing has outperformed since. But value wins over the long haul.
PBS aired an important documentary Tuesday evening examining retirement planning in America and entitled The Retirement Gamble. One particularly noteworthy comment came from Vanguard founder Jack Bogle on the “tyranny of compounding costs.” In contrast to the “miracle of compound interest” (often attributed to Albert Einstein, probably falsely, but that doesn’t lessen the import of the concept), which shows how quickly interest can accrue when it is compounded, the tyranny of compounding costs addresses how dramatically returns are diminished on account of excess fees. Note the chart below from The Journal of Financial Planning. As always, fees matter – a lot.
Bill Barnwell’s excellent article in Grantland today examining whether NFL teams have any idea what they’re doing at the annual NFL draft is both interesting and instructive with respect to how we make investment decisions. Beforehand, a choice between Peyton Manning and Ryan Leaf will seem daunting and easy to screw up while, obviously, the consequences of choices like that are enormous. Continue reading