Bogle: Recession Will Be Long, But Market Bottom Has To Be Near

Vanguard Founder John Bogle continues to see a lengthy period of continued pain ahead for the U.S. economy — but now he says the stock market has to be getting near a bottom.

Bogle, who in mid-November of 2007 — just weeks before the current recession began — said there was a 75 percent chance that the U.S. would enter a recession as consumers pulled back, told Bloomberg that the recession could last another two years. “We’ve got a real problem on our hands in the economy,” he said. “I think it’s going to take at least a year-and-a-half to two years before we start to see some upturn in the economy.”

But, Bogle added, the stock market has “got to be discounting an awful lot of the bad economy that we see ahead. … We’ve got to be getting close to the lows in the stock market at this point, finally.”

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Gross: Be Bold — But Don’t Nationalize Banks

PIMCO’s Bill Gross says that the U.S. government needs to be bolder in its handling of the financial crisis — and says that bank nationalization is not the answer to the problem.

“The U.S. and global financial systems require credit creation and foreclosure prevention, not bank nationalization as currently contemplated by some,” Gross writes in his latest market commentary on PIMCO’s web site. “Trillions will be required in the U.S. alone and it is critical that there be a high degree of policy coordination among all nations, which avoids protectionist measures reflective of failed policies in the 1930s.” Rather than using the “shock and awe” tactic that PIMCO brass has recommended, government officials response “has been more like ‘don’t bother us, we’re working on it,'” Gross says, adding, “Get moving. Risk being bold – Washington.”

As for what investors should do right now, Gross reiterated PIMCO’s recent philosophy of “shaking hands with Uncle Sam”; that is, “buying agency mortgages, and other developing areas of government policy support in the credit markets”.

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Dreman on Why to Buy Bank Stocks, and How the Credit Crisis has Hurt Value Investors

Showing the contrarian bent that made him one of the most successful investors of all time, David Dreman says it’s time for investors to jump into banking stocks.

“They will come back at some point. It’s essential to the economy,” Dreman tells Q1 Publishing. “We need a banking system we’re confident in. We can’t work without a banking system. We can patch it up for a while and the government will probably take some stake in a lot of these banks they already had, but we need a banking system. So I would buy banks.”

Dreman says he wouldn’t go big on just a couple banks, however.

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Study: Index Funds Top Mutual & Hedge Funds

Index funds may sound boring, but in his latest New York Times column, Mark Hulbert offers some data that indicates index funds may, in the end, actually yield higher net returns than mutual funds and even hedge funds.

Hulbert details a study performed by Mark Kritzman, president and CEO of Windham Capital Management and a professor at M.I.T. In the study (presented in the Feb. 1 issue of Economics & Portfolio Strategy), Kritzman developed an complex method to measure the performances of thee hypothetical investments over a 20-year period — a stock index fund that averaged a gross return of 10 percent per year; an actively managed mutual fund that averaged 13.5 percent; and a hedge fund that returned 19 percent. Because the amount of taxes taken out of investment gains depends on the order and combination of positive and negative years, Kritzman factored in what he determined to be the industry average volatility for each investment, as well as the average turnover rate and fees, Hulbert notes. He used the tax rates of a New York state resident in the highest tax brackets.

The final results, after all those taxes and fees were factored in: The index fund averaged an 8.5 percent annual gain; the actively managed fund averaged 8 percent; and the hedge fund averaged 7.7 percent.

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Grantham: Investors Need to Avoid “Terminal Paralysis”

Fortune asks the million dollar question: “Have we hit the bottom, or will we resume our downward slide?

To try to find the answer they tap a number of investment experts, including Charles Schwab’s CIO Jeff Mortimer, BlackRock’s vice chairman Bob Doll, Doug Noland of the Federated Prudent Bear fund and GMO chairman Jeremy Grantham.

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A Crisis Crash Course from The Gurus

Forbes has put together an extensive guru-inspired special report entitled “Sage Advice to Save Your Portfolio”, explaining, “Extraordinary times require a special dosage of sage advice.”

The feature includes pieces about the strategies of such great investors as Warren Buffett, Ben Graham, Philip Fisher, Peter Lynch, William O’Neil, John Templeton, James O’Shaughnessy, Martin Zweig, and Joseph Piotroski.

In addition, the special report features articles from John Reese on what you can learn from the similarities shared by many of Wall Street’s best investors; Daniel Myers on how to sprout “fangs” when there is blood on the streets; and Nikhil Huthessing on why “The Graham & Dodders” deserve their legendary reputations. John Heins and Whitney Tilson also weigh in with some wisdom for value investors, and John Dobosz explains why many stocks may look deceptively cheap right now.

Want to Avoid Another Depression: Stop Talking About It

They say that those who don’t learn from history are doomed to repeat it. But, when it comes to the “Great Depression” comparisons now springing up amid this terrible economic climate, an equally fitting adage might be that those who dwell too much on history are doomed to repeat it — that’s essentially what Robert Shiller, the Yale University economist who predicted the housing bust and much of the current financial crisis, says.

“The attention paid to the Depression story may seem a logical consequence of our economic situation,” Shiller writes in an op-ed piece for The New York Times, saying that the recent bursting of the housing and stock market bubbles, huge failures of financial institutions, and low confidence have indeed created a picture not seen since the 1930s. “But,” he adds, “the retelling, in fact, is a cause of the current situation — because the Great Depression serves as a model for our expectations, damping what John Maynard Keynes called our ‘animal spirits,’ reducing consumers’ willingness to spend and businesses’ willingness to hire and expand. The Depression narrative could easily end up as a self-fulfilling prophecy.”

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Rodriguez on Energy Stocks, The Demise of The Style Box, and The Trouble with The Stimulus

Robert Rodriguez of First Pacific Advisors, who deftly avoided financials last year and earned praise for the strong performance of his bond fund, tells Barron’s that he remains hesitant about stocks, and thinks the government’s stimulus package is missing the point.

In 2008, Rodriguez’s FPA Capital equity fund lost 34.8% for the year despite his avoidance of financials, in part because energy companies got hit hard in the second half of the year. But he says the losses he sustained are different from those sustained by managers who got burned on financials. “For the value managers who owned, say, AIG, Lehman Brothers, Bear Stearns, Washington Mutual and on down the list, all of those are permanent losses of capital,” he explains. “But for the energy companies that we have owned and taken a hit on, they have cash, pristine balance sheets, virtually no debt, and their equipment is good for 25 years. … We see energy as just a deferral of performance, rather than a permanent loss of performance.”

Currently Rodriguez’s fund is 64% in equities and 36% in cash, and half of that 64% is in energy, with big bets in energy coming in the past few months.

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Why You Can Be Good — But Probably Not Great

Todd Sullivan often posts some great speeches or client letters from successful investors on his ValuePlays web site, and he recently featured a particularly interesting speech that former hedge fund star Mark Sellers gave to Harvard Business School students.

In the speech, Sellers tells these top students that they “have almost no chance of being a great investor”, the type who can compound money at 20%+ a year for the long run. “You have a really, really low probability, like [1 in 50] or less,” he says. “And the reason is that it doesn’t much matter what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that many people have and yet almost none of them end up compounding at 20% or 25% over their careers.”

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The “Expert on Experts” on Who You Can — And Can’t — Trust in Today’s Market

“Expert”. It’s a term that gets thrown around an awful lot in parts of our society, and the financial world is no exception. But in an interview with Money magazine, researcher Philip Tetlock warns not to trust someone just because they’re called an expert, and explains why so many of these supposed “experts” failed to see the market crash and economic crisis coming.

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