Swensen on The Active/Passive Debate

Yale endowment guru David Swensen says investors should either be totally active or totally passive in managing their money.

“There are two sensible approaches to investing — either 100 percent active or 100 percent passive,” Swensen said at the John C. Bogle Legacy Forum hosted by Bloomberg Link, according to Bloomberg. Unless an investor has access to “incredibly high- qualified professionals,” they “should be 100 percent passive — that includes almost all individual investors and most institutional investors,” he said.

A big reason is that most funds are focused more on compiling fees than on increasing returns for clients, Swensen said. He also criticized the high fees that many hedge funds charge, and offered a critical take on high-frequency traders. “I’ve always viewed high-frequency trading as a tax on the rest of us,” he said. “A bunch of smart people taking advantage of order-execution rules as opposed to doing something good for the market place.”


Greenblatt: Less Is More In Portfolio Management

The more you try to do with your portfolio, the worse your returns will often be, according to hedge fund guru Joel Greenblatt.

In a column for Morningstar.com, Greenblatt explains why investors who tried to implement his “magic formula” investing plan by themselves have fared worse than those who have asked for the plan to be professionally managed. And he says that “the best performing ‘self-managed’ account didn’t actually do anything. What I mean is that after the initial account was opened, the client bought stocks from the list and never touched them again for the entire two year period. … I don’t know if that’s good news, but I like the message it appears to send — simply, when it comes to long-term investing, doing ‘less’ is often ‘more.'”

Greenblatt offers a handful of reasons why self-managed investors tend to underperform. They include:

Self-managed investors avoid buying many of the biggest winners.

“Most people and especially professional managers want to make money now,” Greenblatt explains. “A company that may face short term issues isn’t where most investors look for near term profits. Many self-managed investors just eliminate companies from the list that they just know from reading the newspaper face a near term problem or some uncertainty.” Unfortunately for them, Greenblatt says, many of those stocks end up being the biggest winners.

Many self-managed investors change their game plan after a strategy underperforms for a period of time.

A case in point, Greenblatt says, can be found in the best-performing mutual fund of the 2000s. While the fund gained 18% per year during a period in which the broader market was flat, the average investor in the fund actually lost 11% per year, he says, “because of the capital movements of investors who bailed out during periods after the fund had underperformed for awhile”.

Many self-managed investors buy more AFTER good periods of performance.

“Most investors sell right AFTER bad performance and buy right AFTER good performance. This is a great way to lower long term investment returns,” Greenblatt says.


Advice from the Best — In 10 Words or Less

Could you distill your investment philosophy into 10 words or less? In his latest post for The Wall Street Journal’s Total Return blog, Jason Zweig poses that question to some of the world’s most successful investors.

Zweig says that when someone recently asked him the question, he “laughed and said, ‘Of course not!’ But right afterward, I realized to my surprise that I could. I banged this out almost instantly: Anything is possible, and the unexpected is inevitable. Proceed accordingly.”

Here’s what some top investors told Zweig when asked the same question:

David Herro, Morningstar Fund Manager of the Decade:

Determine value.  Then buy low, sell high.  ;-)

Robert Rodriguez, managing partner, First Pacific Advisors:

Plan for the worst. Hope for the best.

Christopher C. Davis, chairman, Davis Advisors and co-manager, Davis New York Venture Fund:

Fallible, emotional people determine price; cold, hard cash determines value.

Zweig also notes that Benjamin Graham, the man known as “The Father of Value Investing”, distilled his philosophy into just three words in his classic book The Intelligent Investor, saying, “In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, ‘This too will pass.’ Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”



Dreman Likes U.S. & Canadian Markets

Contrarian guru David Dreman says he’s finding the biggest investing opportunities right now in North American stocks.

Dreman tells Canada’s Globe and Mail that over the long term — the past 25 years — the S&P 500 has basically been in a dead heat with more glamorous foreign markets. And, he adds, “There isn’t a lot of liquidity in markets in developing countries, so you’re taking extra risk for the same gain.”

Asked how he would invest $100,000 right now, Dreman says he’d buy “good-quality stocks in a portfolio large enough to diversify, or, for the average investor, an index fund.” He thinks inflation is going to be a major issue, and says stocks have traditionally gone up when inflation is coming.

Dreman also cautions against following the crowd. “On the whole, investors don’t do as well as markets,” he says. “Even money managers want to buy hot stocks, and they waive their valuation rules. It’s very hard not to go along with something that’s exciting. The Internet, for example, was going to change our lives forever — and it did. But people paid 50 times what stocks were really worth.”



Wien Sees Oil Prices Falling, S&P Rising in 2012

Blackstone’s Byron Wien has released his annual list of “surprises” for the coming year, and among the predictions are a decline in oil prices to the $85 range, the housing market hitting bottom, and the S&P 500 hitting 1,400. He tells Yahoo! Finance’s Daily Ticker that the oil prediction is based on a few factors, including the U.S. producing more oil than it did last year and natural gas production increasing due to the rise in “fracking”. “The prospect of the U.S. becoming less dependent on Middle East oil is a game changer,” says Wien. “It’s a big deal.”




Mobius Sees Soft Landing For China, Increasing Role For Renminbi

Emerging markets guru Mark Mobius says he sees a soft landing for China, and thinks it is “very possible” that the country’s renminbi will become one of the world’s reserve currencies by 2020.

“The high-growth economies of China and other emerging Asian and Latin American countries lost some momentum as 2011 wore on, but to me they now appear poised for softer landings than their developed-market counterparts,” Mobius, of Templeton Asset Management, tells Citywire. “During the last quarter, inflationary pressures eased further in China and the industrial sector again recorded strong growth. … China will boost domestic consumption to offset an export slowdown and allow for faster gains in the renminbi to tame inflation. We also see consumer stocks benefitting from rising incomes. Among consumer stocks favoured are Dairy Farm International and, within energy, companies such as CNOOC.”

Mobius has about 20% gross exposure to China across his portfolios, he says. And he thinks the country’s currency will gain in prominence in coming years. “Despite global reservations stemming from China’s status as a developing country and its cautious approach to monetary policy, it is very possible that the renminbi could become a global reserve currency by 2020,” he says. “The renminbi might potentially replace the role of the Japanese yen, given that its usage was driven by Japan’s former economic dominance.”


Sonders Says Bottom “Largely In” for Housing

Charles Schwab’s Liz Ann Sonders has made some very prescient calls on the economy and housing in recent years, and now she says that the much-maligned housing market may have finally hit bottom.

“It’s time for a fresh look at housing. My conviction level does not match that in 2006, but I do think the tide is turning for housing and that the bottom is largely in,” Sonders writes on Schwab’s web site. She says a myriad of factors, including significant recent upturns in both existing and pending home sales, a rebound in construction activity, big declines in housing supply, and record affordability all contribute to her take.

“When combining record-low mortgage rates with flattish income growth and lower prices, you have record-high affordability,” she says. “In fact, the burden of new mortgage debt has never been lower. … Record-low mortgage rates, an improving jobs picture, greater credit access and rising demand for apartments are all driving [housing] starts.”

Sonders says housing is also returning to its pre-bubble state, one in which housing performance is largely regional. “One of the key characteristics of housing going forward brings us back to one of its key characteristics historically, save for the bubble period: housing is becoming ‘local’ again,” she says. “During the real-estate bubble’s inflation and subsequent bursting, housing could be analyzed nationally and somewhat monolithically. The rising tide was lifting all (house) boats, and when the tide went out, it took everything with it. But what we’re beginning to see is a broadening of conditions, with a widening spread between the have and have-not regions of the country.”

Sonders also says that while renting has taken the lead over owning in the real estate market, that won’t last forever. “A longer-term story about rent versus own is that rising rents will eventually push would-be buyers to purchase homes — a process could begin sooner than many expect,” she writes.

There are still problems with the housing market, Sonders notes, saying that one is that real mortgage rates are still too high. But overall, she seems to be optimistic, saying she thinks we may see housing actually contribute positively to gross domestic product in 2012 for the first time since the mid-2000s.

Top Forecaster: Market Fundamentals Best in 20 Years

Top forecaster Norman Fosback says “the market’s fundamental position has evolved to the most favorable alignment in 20 years,” and sees big gains for stocks over the next year and the next five years.

Fosback, who served as head of the Institute for Econometric Research for three decades, has a “long and eminent a record”, according to MarketWatch’s Mark Hulbert. Hulbert notes that in the latest Fosback’s Fund Forecaster newsletter, Fosback says his econometric model is calling for the stock market to rise by 19% over the next 12 months, and 89% over the next five years — that’s almost 14% annualized.

Fosback’s model uses several indicators that he has found to have predictive value, Hulbert says, and right now Fosback says the major underlying issues that will drive the U.S. market higher are “domestic corporate profits, valuations of domestic stocks, and Federal Reserve policy.” He says corporate profitability is at an all-time high, but market P/E ratios are back where they were in 1990.

As for the European debt crisis, Fosback doesn’t think it will take down U.S. markets, saying all the talk in the media about Europe is little more than “sleight of hand: Look over there … while the real action is right here.”