After what seems like every retail investor--including Warren Buffett's wife--has bought in to the index investing mania, it appears the tide may be turning once again in favor of active management. Attracta Mooney writes for the Financial Times: Assets managed in passive mutual funds grew 4.5 times faster than active in 2016 to reach $6.7tn, according to figures from Morningstar, the data provider. On the back of this rapid growth, Moody’s, the rating agency, predicted in February that passive would overtake active management by 2024 in the US at the latest, controlling half the market, … [Read more...]

The finance industry has been fixated on the emerging robo-advisor trend. The concept sounds easy, right? You simply give your money to a robot and it takes care of the rest. Algorithms created by math geniuses do all the trading, and you reap the rewards of low fees and decent management. Then the reality check. Wouldn't you like to know what's going on with your money? What if your algorithm is losing your money? Who are you going to talk to about it? Robot-advisory firm Betterment has already been forced to add humans to the mix. Rather than robo-advice, it's offering "hybrid" advice. … [Read more...]

Here is a must read from the WSJ on the pitfalls of automated investing. James Mackintosh explains the pitfalls of algorithmic trading and the problems with artificial intelligence. He identifies three serious problems with using AI for investment. Ten years ago, computer-driven traders pulled the plug after their algorithms ran amok, leading to billions in losses and the eventual closure of Goldman Sachs ’s flagship quantitative fund. A decade on, artificial intelligence and machine learning are the buzzwords in automated investment. But for all the hype, applying AI to investment has … [Read more...]

Marketwatch reports that low-income families spend about 40% of their income on luxuries. That compares to the 65% that high-income families spend on luxury goods. Why are low-income families spending so much of their money on luxury goods? Marketwatch reports that nearly half of Americans attribute their profligate spending to emotion. Emotion and money don’t mix, particularly when it comes to investing. Some of the biggest investment blunders we’ve watched investors make are when fear or greed start to drive the decision making process. Successful investing requires a cold and … [Read more...]

When investors hire an advisor to help them make money fast, it often turns out that the only person making money is the advisor. Advisors not held to a fiduciary standard are likely to churn clients' portfolios, meaning they'll buy and sell, either chasing performance or generating fees and commissions for themselves by reinvesting the clients' money too often. With a new regulation taking effect from the Department of Labor, advisors traditionally held to the low "suitability standard" will be required to adhere to the more stringent "fiduciary standard" in some client retirement … [Read more...]

Even though short-term interest rates are now increasing, investors are telling Yellen & Co., the pace of hikes is still way too slow. The reach for yield remains a dominant theme in fixed income markets. Here the WSJ reports that the demand for leveraged loans is on fire. Investors are desperate for decent income and riskier companies are taking full advantage. The upshot is that the world of leveraged loans appears to be going slightly mad. Loan sales are running ahead of the pace of the past three years, fueled by a rush of money into the sector. Retail investors have piled … [Read more...]

One of the many great features of the stocks in Young Research's Retirement Compounders portfolio (RCs), is their dividend paying histories. Pair the RCs with a solid fixed-income investment, and you're on your way to being a world class investor. At MarketWatch, investing legend John Bogle echoes the call for defensive investing. One development could mitigate much of the advantage that index funds enjoy and slow the rush to own them, but you’re probably not going to like it. When the market suffers a prolonged decline, active managers can gain an edge over indexers by moving large … [Read more...]

Investing in the consensus isn't always the right course of action. Beware when the financial press and the majority of analysts agree on something. It can be a sign that the opposite is true. This idea was fleshed out nicely in 2008 by Stephen McClellan in Full of Bull: Do What Wall Street Does, Not What It Says, To Make Money in the Market. Now you can see evidence of the phenomenon of herd investing again in the case of Europe.  The Financial Times reports that Europe's strong performance is a big surprise among investors and economists. Chris Giles and Claire Jones write: The consensus … [Read more...]

Martin Fridson is one of the best high-yield bond analysts, period. I had a chance to meet Mr. Fridson when I started a small stock club at Babson College in Wellesey, Massachusetts in the early 90s. Two of my favorite professors at Babson are involved in this story. The first is Joel Shulman, who introduced me to Fridson. He suggested my stock group co-sponsor a talk by Fridson. Thanks to Professor Shulman, to this day, I have a signed copy of Fridson’s book Investment Illusions in my office. In looking up that book for this post, I found Financial Statement Analysis, now in it's fourth … [Read more...]