A recent study in Financial Analysts Journal (FAJ) found that a portfolio of small-capitalization stocks is no more risky than a portfolio of large-capitalization stocks. And if the number of stocks in a small-cap portfolio exceeds 25 or so, that portfolio may be less risky than a large-cap portfolio. The authors compare volatility in two time periods, 1963 to 1984 and 1985 to 2008. In the earlier period, a portfolio of small-cap stocks was found to be significantly more volatile than the market, even for a portfolio of 50 equally weighted names, but in the more recent period, once a small-cap … [Read more...]
Beat the S&P 500 by 2 to 1
My chart shows the long-term performance of $1 invested in the consumer non-durables sector in June of 1926 to $1 invested in the S&P 500 at the same time. The consumer non-durables industry includes companies that make and sell everyday items. Demand for non-durables, or what are more commonly referred to as consumer staples, is not heavily influenced by the business cycle. You don’t stop eating or brushing your teeth just because the economy is in recession. The consistency and stability of consumer staples companies definitely appeals to investors in or nearing retirement, but all … [Read more...]
The #1 Investment Book
You may be surprised to hear that Moneyball by Michael Lewis is my #1 investment book, given that it’s about baseball, not Wall Street or the stock market. Moneyball is a story about how one of the poorest teams in baseball, the Oakland A’s, and their GM, Billy Beane, built a roster chock full of talent and won 103 games. Beane did it by discovering hidden value through faith in his convictions and obscure stats, like a hitter’s pitches per plate appearance—helpful in tiring out a pitcher and getting on base. He drafted baseball players who were overlooked by other GMs blinded by their … [Read more...]
Emerging Market Stocks Up Over 110%
Emerging market stocks are up over 110% since hitting lows in March of last year. Net flows into foreign stock funds, much of it into emerging market funds, have been positive for 11 months in a row while U.S. stock funds have seen outflows in six of the last seven months. Those investors liquidating U.S. stocks and piling into emerging market stocks could be disappointed over coming quarters. Our relative strength chart shows that emerging market stocks have a very toppy look vs. U.S. stocks. Individual country and issue selection in emerging markets is now more important than ever. … [Read more...]
Stay Defensive
Confidence in the economic recovery is improving, and retail investors are moving back into equities. Here are four reasons to remain defensive in the face of this renewed optimism: Stocks are now discounting a sustained and robust economic recovery. A second contraction in economic output is no longer priced into the market. If the economy contracts or comes up short of expectations, stocks could be in for a significant correction. Taxes on income, capital, and possibly even consumption are going up. Higher taxes resulting from Obama’s health-care boondoggle are only the tip of the … [Read more...]
Comparing Bull Markets
Based on the historical performance of four bull markets that were preceded by devastating bear markets, the current bull market is approaching exhaustion. … [Read more...]
The Payday Indicator
Alert! My Payday Indicator is signaling the worst environment for investors during my investment career. Conservative investors have been left with scraps on the floor; there isn’t even a decent chuck burger to be had, let alone a T-bone steak. At the end of 2009, investors were asked to take on more risk and receive less reward than at any other time since I’ve been in this business. My Payday Indicator replicates a portfolio invested 50% in Dow Jones Industrial Average stocks, and 50% in three-month T-bills. As you can see from my chart, the yield on this portfolio is the lowest on … [Read more...]
Here’s the $64,000 Question
The current bull market in stocks is now 12 months old. The S&P 500 has risen 74% since the March 2009 lows. After a mini-correction to start 2010, investors have aggressively bid up shares, driving the S&P 500 up 11% over the last two months to a new 52-week high. Many institutional investors jumped in early and as a group they are now fully invested, as evidenced by the low liquid asset ratio of stock mutual funds (read more here). But individual investors were late to the party. Two damaging bear markets in ten years caused some hesitation. The most likely catalyst for a … [Read more...]
The Recovery’s Winners
The Young Research Affluence Index has outperformed the Young Research Discount Goods Index by 100% since the economic recovery began. Our chart indicates that the economic recovery has still not reached low and middle income consumers. Quite shocking considering the populist majorities in both branches of government. … [Read more...]
A Must Own Asset Class
If the last decade has taught investors anything, it is that taking greater risk does not always result in greater return. An investor who put his entire portfolio in a basket of developed-world equity markets at year-end 1999 would have earned all of 2.34% over 10 years. And to earn that 2%, this investor would have endured two of the worst bear markets in history, with peak-to-trough declines of 45% and 53%. What's more, an investment in conservative full-faith-and-credit-pledge short-term U.S. Treasuries was up 55% over the last 10 years. The 2000s were without a doubt a dismal decade … [Read more...]