Wednesday, June 29, 2011

At Least You Have to Applaud Putnam For Trying

Asset Allocation RIP

I love the idea of what Putnam is trying to do: “critically examine key investment theories, strategies and assumptions and suggest changes that can achieve better outcomes for companies, institutions, plan sponsors, investment advisers and individual investors.”

Most people just assume that the conventional wisdom is both conventional and wisdom when it is often neither. However, if they truly examined things with an impartial eye they would realize that most of their actively managed funds that are basically closet indexers are useless. Doubt we will see that coming out of the study.

Is China a Problem Waiting to Happen?

Just read a couple of articles in the Wall Street Journal this morning about accounting issues in China. This jives with things I have been hearing from others about problems and concerns in China. Those who know us realize that while all of this is interesting we don't base investment decisions on conjecture and prediction, only based on what the market is telling us. We don't have any direct exposure to China except for a small amount in two strategies because the market has shown that China is not the place to be. We do a lot of work with trends and momentum/relative strength so I took a look at the iShares China 25 Index Fund (FXI) vs. its 200 day moving average and vs. the S&P 500. From a trend following standpoint the FXI is below its 200 day moving average and from a momentum/relative strength standpoint it has been trounced by the S&P 500 since late last year. Now remember, we do not make recommendations on this blog so I am not saying sell China if you own it or don't buy it if you are considering it. All I am saying is that you should seriously consider a methodology that puts you in harmony with the market trends vs. a methodology that comes up with a specific asset allocation and holds it through thick and thin.

Friday, June 24, 2011

John Paulson is Not Perfect

John Paulson Also Is Taking a Bath on Gold Mining Stocks

I have nothing against John Paulson, he made the greatest trade in history and you have to respect that. If you haven't read Greg Zuckerman's book on this I highly recommend it. The point I want to make is that there are many money managers who place large bets based on prediction and nobody can be right 100% of the time. You will have spectacular successes and equally spectacular failures. One of Paulson's funds is down 20.9% for the year. You can have a small part of your money with a manager like this but your core money should be invested in such a way where you have a methodology that puts the odds of success in your favor, doesn't rely on predicting anything, and avoids the large losses (like 20.9%) that can take years to recover from.

Thursday, June 23, 2011

Weren't Oil Prices Supposed to Go Up?

As oil prices hover around $90/barrel I can't help but remember it wasn't that long ago that oil was above $100 and certain to go up. Just about everyone agreed, the only uncertainty was how far and how fast. Now I have no idea what direction oil prices will go, nobody has a crystal ball, me included. That is the point. Nobody can predict what direction markets will go in, all you can do is react to what they are doing and stay in harmony with the trend. The trend in oil is down right now until it isn't. Please note I am not recommending that anyone short oil, just making a point.

Tuesday, June 21, 2011

Only 40% of Fund Managers Invest in Their Own Funds

A recent study by Morningstar found that only 40% of fund managers invest any money in their own funds. I cannot understand why the other 60% won't put at least $1,000 in their funds so they don't get a zero. Makes me wonder what they know that the average investor doesn't. If someone who worked at a restaurant refused to eat there that is information I would like to know before I make a reservation.

Tuesday, June 14, 2011

Stocks Are Going Up, No They Are Going Down

Just reading my daily email from InvestmentNews, the first article is about Nouriel Roubini talking about we have a 33% chance of hitting the skids (not sure where he comes up with 33%, why not 40%?). Below that is an article about Bob Doll's prediction that this correction was a buying opportunity. Who's right? Who knows and who cares, they each have a 50/50 chance so somebody will come out of this looking good and someone will look bad (of course everybody will forget the bad call they made, they just remember the times when the coin flip came up in their favor). This is no way to invest your money.

Monday, June 13, 2011

Past Performance Still Doesn't Predict Future Results

Berkowitz, Heebner and Miller in tight battle — for last place


When you are a traditional buy and hold, style box based, mutual fund manager there will be times when your style is in favor and you look like a genius and there will be times when it is out of favor and you look stupid. There will also be times when your market/economy calls are right and times when they are wrong. The key to making money in the market is not trying to call what way the economy is going or find a manager with a good long term track record. The key is to stay in harmony with the market trends and avoid the large long term loss, simple as that.

Morningstar to Introduce New Forward Looking Ratings

Morningstar to Introduce New Forward Looking Ratings

I have never been a big fan of the star rating system as on one hand they tell you past performance doesn't predict future results and then on the other hand they ask you to pick funds based on a rating that only takes past performance into account. On the surface a forward looking ranking sounds like a great idea, but like many things in finance it won't work. Stock analysts have shown over and over that you just can't predict how a stock will do, fund analysts will have the same problem. It is better than nothing but far from perfect.

Friday, June 3, 2011

Principal Protected Notes Don't Always Protect Principal

Principal-protected notes don't always protect principal, regulators warn


Another example of "if it sounds too good to be true it probably is". In this volatile market environment the path of least resistance for many financial products salespeople are things that offer some sort of principal protection. These products are usually so complex the salesperson often has little idea of how they work. I don't blame people for aggressively pushing things like equity indexed annuities and principal protected notes. The commissions are often extremely high and the people pushing them often don't know any better. Investors need to better understand what they are getting into with this stuff.

Wednesday, June 1, 2011

Finra Sues David Lerner Firm

Finra Sues David Lerner Firm

I have often had people ask me to look into these REITs and I have often had trouble figuring out how they were structured, this lawsuit could explain why. Lerner proclaims their innocence so we will see who is right here but this is another sign that investors need to be careful with things that are not publicly traded and they have to rely on the provider to tell them the market value.