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Wednesday
Apr092014

Not Rocket Science

When the media raises the subject of beating the market through astute stock picking, the name Warren Buffett is usually cited. But what does this legendary investor actually say about the smart way to invest? 

Buffett is considered to have such a track record of picking stock winners and avoiding losers that his annual letter to shareholders in his Berkshire Hathaway conglomerate is treated as a major event by the financial media.1

What does he think about the Federal Reserve taper? What could be the implications for emerging markets of a Russian military advance into Ukraine? What does an economic slowdown in China mean for developed markets?

Buffett has a neat way of parrying these questions from journalists and analysts. Instead of offering instant opinions about the crisis of the day, he recounts in his most recent annual letter a folksy story about a farm he has owned for nearly 30 years.2

Has he laid awake at night worrying about fluctuations in the farm’s market price? No, says Buffett, he has focused on its long-term value. And he counsels investors to take the same sanguine, relaxed approach to liquid investments such as stocks as they do to the value of their family home.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations,” Buffett wrote. “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

While many individuals seek to ape Buffett in analyzing individual companies in minute detail in the hope of finding a bargain, he advocates that the right approach for most people is to let the market do all the work and worrying for them.

“The goal of the non-professional should not be to pick winners,” Buffett wrote. “The ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

As to all the predictions out there about interest rates, emerging markets, or geopolitics, there will always be a range of opinions, he says. But we are under no obligation to listen to the media commentators, however distracting they may be.

“Owners of stocks … too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally,” Buffett wrote. “Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits—and, worse yet, important to consider acting upon their comments.”

The Buffett prescription isn’t rocket science, as one might expect from an unassuming, plainspoken octogenarian from Nebraska. He rightly points out that an advanced intellect and success in long-term investment don’t necessarily go together.

“You don’t need to be a rocket scientist,” he has said. “Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”3

 

1. “Buffet Warns of Liquidity Curse,” Bloomberg, Feb 25, 2014.

2. Berkshire Hathaway Inc. shareholder letter, 2013, www.berkshirehathaway.com/letters/2013ltr.pdf.

3. “The wit and wisdom of Warren Buffett,” Fortune, November 19, 2012, management.fortune.cnn.com/2012/11/19/warren-buffett-wit-wisdom/.

Tuesday
Apr082014

Seven Ways to Fool Yourself

The philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. But while most self-delusions are relatively costless, those relating to investment can come with a hefty price tag.  Click below to read more…

Thursday
Apr032014

Putting a Value on Good Advice

A new Vanguard research paper, Putting a value on your value: Quantifying Vanguard Advisor’s Alpha, by Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering, expands on the 2001 concept of Vanguard Advisor’s Alpha™, which outlines how advisors can add value, or alpha, through relationship-based services such as financial planning, discipline, and guidance, rather than by trying to outperform the market.

The authors attempt to quantify the benefits that advisors can add relative to others who are not using such strategies. The paper includes seven “quantification modules” summarizing key wealth-management best practices and providing a reasonable framework for describing and further differentiating advisors’ value proposition.

Wednesday
Feb052014

854 Days and Counting

 

Recent stock market weakness has stoked fears that we’ve hit a top in the S&P 500 and a “correction” is right around the corner.  A “correction” is usually defined as a decline of at least 10% that was preceded by a rally of at least 10%.  Since October 3rd, 2011 the S&P 500 has rallied 58.46%% over 854 calendar days without a correction of at least 10%. The run up can be seen in the chart below.

A correction of some kind is eventually inevitable, but timing when that 10% drop comes is not possible.  Market timing always costs performance.  There have been 4 rallies in the history of the S&P 500 that have had a longer streak than the current one, so this correction-free stretch is definitely not unprecedented.  

There have been two periods in the last quarter century that had a longer streak, including the period between October of 1990 and October of 1997.  During that 7 year period, the streak without a correction got all the way to 2,553 days before finally losing steam.  More recently we saw a streak of 1,673 days (twice as long as our current distance from a 10% drop) between March 2003 and October 2007.  Over those periods, returns were 232% and 95% respectively; taking money off the table in mid-1993 or early-2005 would have been a serious drag on returns versus the market.

If we were to see a streak as long as the early 2000s bull market, we would be 5 months into the first term of President Obama’s successor. A run as long as the mid-90s bull streak would put us at October 14th, 2018…more than a decade removed from Lehman Brothers’ bankruptcy.  If returns were to hold out in the same pattern as the 90s streak, the S&P will be at an impressive 2,558.  Of course, that outcome is not particularly likely.  In order to put the current streak in context, the below chart shows the length of streaks without a 10% correction dating back to 1928.

Charts from Bespoke Investment Group

 

Tuesday
Nov262013

Barron's: For Long-term Investors, Rising Rates are Nothing to Fear