Friday, September 30, 2011

Hold onto your hat and ride out the swings---no thanks

Jack Bogle's advice for the long term investor---hold onto your hat and ride out the swings. Sounds like a lot of fun at the carnival but not a smart way to invest. Instead investors should stay in harmony with the trends in the market. Why ride out the swings when you don't have to?

Tuesday, September 27, 2011

Your Balanced Fund May Be Riskier Than You Think

According to the WSJ in an article this morning entitled "Balanced Funds Tilt Toward Stocks, While Investors Want to Scale Back":

"Among fund managers with the flexibility to invest in a mix of stocks, bonds and other assets, the trend has been stocks, stocks and more stocks. According to the latest data available from fund researcher Morningstar Inc., stocks represented 55% of the average allocation fund at the end of August, up almost five percentage points from the start of the year and up from 41% at the end of 2009."


"The division between investors' actions and those of the managers who run their money is only more pronounced in the international arena. Among funds that invest in a mix of global stocks and bonds, stocks made up 58% of portfolios at the end of last month, up from 37% at the end of 2009, according to the Morningstar figures."


"Some funds have made even more significant shifts: The $75 billion American Funds Capital Income Builder's stock allocation has risen to 73% from 64% at the end of 2009, the $10.8 billion T. Rowe Price Capital Appreciation Fund's stake is up to 72% from 65%, and the $1.1 billion Templeton Global Balanced Fund's stock portion is at 63%, up from 46%."

You would think that with the trend of the market going down funds that have flexibility would be moving out of stocks and getting less risky. It seems that the opposite is true. There are times in the market where it pays to take more risk (2003, 2009) and then there are times like now when it doesn't.

Friday, September 23, 2011

Gold is not THE safe haven

If you listen to the radio or watch TV you will see a ton of commercials telling people to buy gold because it never goes down, it is a safe haven, etc. Gold is A safe haven asset, but it is not THE safe haven asset. Sometimes during a crisis money will flow to Gold, it did that last month. However, this is not always the case as this week has shown. We have had the same issues crop up this week that we had last month but this time Gold has sold off in a big way. Treasuries are still the safe haven asset of choice, they are more liquid and not as volatile as Gold.

I am not recommending you sell your Gold and buy Treasuries. We happen to own both because they have been in an uptrend and we follow the trend. If the downtrend in Gold continues we will sell, if things turn around we will stay in it and perhaps buy more. What I am recommending is that you view these types of commercials and pitches with a healthy skepticism.

Retesting 1100 on the S&P 500

Regular readers of our newsletter know that we have been calling for a retest of the 1100 low we made on the S&P 500 last month. As I write this the S&P 500 futures are at 1111 (close is good enough in horseshoes, grenades, and stock market levels). Our readers might also remember that we called for 7200 on the Dow back in 2008 when the market was still near 13000. Does this mean we have a better crystal ball than everyone else? No. A simple understanding of market dynamics would tell you that a retest of 1100 was nearly inevitable, unless you still believe that markets are efficient or random.

Markets cannot be efficient or random because they are traded by human beings, who are not efficient or random. Because human beings are driven by greed, fear, and ignorance there is an emotional interplay that goes on in markets. Certain important lows and certain important highs become important. When we make a significant low, like 1100 in August, we typically will test it one or more times before a rally. Therefore, with the crisis in Europe far from over and nothing improving in our economic picture it was fairly safe to assume that we would see 1100 on the S&P 500 again.

Monday, September 19, 2011

Wall Street Optimism Fades

Just read an article in the WSJ talking about how after months of high forecasts for the year end value of the S&P 500 Wall Street Analysts are now cutting them back. What is funny is why this matters. If we can't predict where the market will be in 10 minutes how can we predict where it will be in 3 months. Also, if you have followed some analyst all year who was predicting a great year for the market what do you do now?

Tuesday, September 13, 2011

The Market Could Crash So Buy Stocks Now

S&P Could Fall 20%, 2-Year Treasury Hit 0%: Analyst

Ever wonder why the public doesn't trust Wall Street? Merrill Lynch's technical analyst is predicting the market could crash. If you think that could happen then it would make sense to move to cash but Merrill doesn't make any money if you just sit in cash, so what is her advice?

"Bartels suggests buying consumer staples, mining stocks and betting against consumer discretionary stocks to protect from the decline and volatility."

Why not just move to cash to protect from the volatility?

Friday, September 9, 2011

Mark Cuban is Right, Buy and Hold and Traditional Diversification Don't Work

Just watched as much of a video interview with Jack Bogle from Vanguard as I could stand. He is responding to claims from Mark Cuban that diversification and buy and hold don't work. Bogle of course built Vanguard on the idea of indexing, buy and hold, and diversification. He had the advantage of timing as the market went up in pretty much a straight line from 1982-99 and indexing is better than most of the actively managed funds out there. However, if he came up with this idea in 1999 he would be thought of pretty differently in the investing world because investors in his funds wouldn't have made much, if anything over the past 10 years or so.

Buy and hold works in an up market, along with anything else, but why give back all or your gains when the market goes down? Traditional diversification doesn't work either. Adding bonds to a portfolio can reduce risk but it sacrifices return. Other asset classes like international stocks and commodities tend to highly correlate to U.S. stocks in a downturn. It is time for investors to put these old ideas to bed and pursue strategies that seek to be in harmony with the trends of the market and strategies that are diversified by methodology and time frame.

Wednesday, September 7, 2011

Morningstar on Momentum

Momentum and Market Inflection Points

It is great to see a modern portfolio theory shop like Morningstar admit that momentum beats the market handily over time. Of course you then would expect them to try to find all the flaws in the data. No investment strategy is perfect. No investment strategy will work in every environment all the time, they all experience drawdowns at some point and will underperform at others.

To just lump momentum investing into one bucket is like lumping stock investing into one bucket. There are a number of different ways to pick stocks just as there are a number of different ways to implement a momentum strategy. For example, what will my basket of securities be, what constitutes a measure of momentum, what time frames will I use, etc?

All the research clearly shows that there is something to momentum just like the science in the middle ages clearly showed there was something to the theory that the Earth and planets revolved around the sun. Instead of sticking to the accepted dogma to say that momentum can't really work as well as advertised because it would invalidate everything else we hold to be true, a better approach would be to study different momentum strategies to see if the simple stratgies that were studied can be improved upon (hint: yes they can).

Thursday, September 1, 2011

Hedging Your Exposure to Fire by Dousing Yourself With Gasoline.

Overheard: Surreal Collateral .

Another reason why we think it will take a long time to fix the European problem.

Something to Keep an Eye on

Fitch Reiterates Warning on China's Banking System .

We have been preoccupied lately worrying about what is going on in Europe and the U.S. but potential problems in China are worth keeping a close eye on.