In his latest Washington Post column, top strategist Barry Ritholtz lays out some of the most important “rules of investing” that he has learned over the years.
Among the key tenets Ritholtz lays out:
Cut your losers short and let your winners run: Ritholtz calls this “perhaps the best investing advice ever”. He says letting winners run “allows compounding to occur, gives you the benefit of time and keeps your transaction costs, fees and taxes low”, while cutting your losers short “forces you to be humble and intelligent. It rotates you away from the sectors and stocks that are not working. Best of all, you are forced to admit your own fallibility — crucial for all investors.”
Asset allocation is crucial: Ritholtz says investors’ weighting of stocks, bonds, real estate and commodities within their portfolio is an issue that gets little attention in popular finance media. “Yet all of the academic studies show that it’s the most important decision an investor makes,” he says. “It’s far more important than stock selection, yet that’s all anyone seems to want to talk about.”
Think like a contrarian: “The crowd can be fickle, overly emotional or even irrational,” Ritholtz says. “The contrarian learns to recognize when the crowd turns into an unruly mob. When that happens, it’s time to stop betting with the group, and take the other side of the trade — betting against the crowd.”
In his latest article for Nasdaq.com, Validea CEO John Reese looks at the benefits of investing in stocks that get high marks from more than one of his guru-inspired strategies.
“What’s better than one investment guru?” asks Reese. “Two investment gurus, of course. That’s what I’ve found over the years using my Guru Strategies, each of which is based on the approach of a different investing great. When one of these models is high on a stock, it bodes well for those shares. But when two or more of these guru-inspired strategies like a particular stock, it can really mean good times are ahead.”
Reese looks at several stocks that his Validea Pro Trade Alerts feature has targeted recently because of their multi-strategy appeal. Among them: Florida-based insurer Homeowners Choice, which jumped more than 30% in three months after Reese’s system issued a trade alert for the stock.
Bill Gross says PIMCO’s strategy is pretty simple: Buy what the Federal Reserve and other central banks are buying.
“We continue to anticipate what the Fed is buying,” Gross recently told CNBC. “They’ve told us they will buy $40 billion to $70 billion of agency mortgages every month until the cows come home. It pays to own these mortgages even though they’re overvalued.”
Another area PIMCO is looking, thanks to central banks: Spanish and Italian bonds. “[The European Central Bank] told us they are going to buy Spanish and Italian 1- to 3-year debt should those countries apply for a rescue,” he said, adding that he thinks the ECB will be buying Spanish bonds in two to four weeks.
Has the bond market reached a peak? Not if history is any guide, says MarketWatch’s Mark Hulbert.
Hulbert recently looked at the average bond market exposure for bond market timers he tracks at Hulbert Financial Digest. He found that those with the best track records on average have an 89% exposure to the bond market; those with the worst track records on average had -42% exposure.
“The more typical pattern at market tops is for the spread between the consensus of the best and worst timers to begin shrinking — either because the top performers have reduced their recommended exposure levels, or because the bottom performers increased theirs, or both,” writes Hulbert. “This is not what we’re seeing right now, needless to say. Since the beginning of this year, for example, the consensus of the top bond timers has stayed both high and constant, while the worst timers have become even more bearish.”
Hulbert uses a similar approach to show that the gold bull market may not be done, either, even though it looked like the end might be coming earlier this month.
Templeton Emerging Markets Group’s Mark Mobius says he’s bullish on Chinese coal companies.
“These companies are not only mining but also producing power and the demand for power is insatiable in China and everywhere else in the world,” Mobius tells Bloomberg. His funds currently hold shares of coal companies Shenhua, Yanzhou Coal Mining Co., and China Coal Energy Co.
Chinese coal companies have been rebounding from their cheapest levels on record, Bloomberg reports, and Mobius thinks some may be ready to expand. “The slowdown that we’ve seen in global markets means there’s an opportunity for these companies to buy mines at low cost,” Mobius said.
Though he didn’t get as much attention as some of his fellow Benjamin Graham disciples, Walter Schloss produced an impeccable investing track record. And, he did it with a simple, patient approach, writes Norman Rothery in Canada’s Globe and Mail.
From 1955 to 2002, Schloss’s investment partnership averaged annual returns of 16% — “and that was after deducting Mr. Schloss’s performance fee of 25 per cent of profits,” Rothery writes. “He generated these outstanding returns by methods that seem almost painfully straightforward. He started by looking for stocks trading at new lows both over the last year and over the last several years. He then winnowed down these candidates by looking for companies with simple, understandable business models and little debt that were trading below book value. He reviewed each company’s financial statements over the last 10 to 15 years and tried to avoid firms with greedy or unethical management and those with products that seemed likely to fail.”
Schloss, who passed away earlier this year, often held over a hundred stocks in a very diversified portfolio, Rothery says. He adds that while Schloss’s approach isn’t intricate or complicated, not many people follow it. “The problem may be people’s reluctance to buy stocks that aren’t obvious winners,” he says. “The outlook for value stocks is generally poor and most people won’t buy unprofitable companies after they’ve declined.”
While some are questioning whether the bull market is nearing its end, top strategist Kenneth Fisher says the bull is only halfway done.
“People are optimistic about their own lives, but they’re skeptical about everything else,” Fisher tells CNBC. “Therefore, we’re going to move from that skepticism, eventually, to some form of optimism, or lack of skepticism, and that means people who haven’t been in the market will get in, will capitulate and put prices higher.”
Fisher reiterated his belief that large-cap stocks are now the place to be. “This year, we started the process where the very largest stocks started outperforming,” he said. “Usually that happens just about 40 to 60 percent of the way through the time of a bull market, so therefore I think we’re probably about halfway through the bull market and we have several years fully to run.”