Legendary Vanguard Founder Jack Bogle says stocks may well at some point face a “judgment day” that could mean big short term declines, but he’s not advising that investors try to time it.
Emerging markets have been scaring a lot of investors lately — and that makes them just the sort of play that top strategist Rob Arnott likes. Continue reading
Top fund manager David Herro says that, while stocks jumped far more than most expected they would in 2013, they still should have room to run going forward.
“Despite the strong past performance of global equities, I believe there is still value in global equity markets,” Herro writes in his fourth-quarter letter to Oakmark shareholders. “Certainly, stocks are not selling at the incredible bargains they were in early 2009 or even early 2012, but with global economic growth appearing to be poised to accelerate, and with stock valuations that are still attractive, I believe there are reasons to be confident that global equities will continue to be an attractive asset class.”
Herro, whose funds profited greatly from overweight positions in Japanese firms last year, says the big gains seen for Japanese stocks has led to him paring back on those positions. “Since the low of the Topix in 2012, the market climbed around 80%!” he says. “As a result of the extremely strong uplift in prices, our holdings became less undervalued and caused us to trim some of our positions. Given that prices rose faster than corporate value creation, by the end of 2013, we were actually well underweight in the Japanese equity market.”
Herro talks more about the corporate changes going on in Japan, and what he thinks is needed for the country to continue its progress. “I believe that in order for the economic recovery to endure, the Japanese government needs to implement real structural reform,” he says. ”This means that Japan’s government must complete at least three steps: take away protections from specific industries, like agriculture; remove impediments to productivity and workforce growth; and take away the barriers to mergers and acquisitions within corporate Japan.”
Marc Faber of the Gloom, Boom & Doom Report is worried about inflation given the Federal Reserve’s massive money printing efforts. But he doesn’t think diving headlong into gold and/or real estate is the best move. Faber tells FOX Business Network that he thinks investors should still use a diversified strategy, owning stocks, real estate, gold, and bonds as part of a disciplined approach. He also talks about his belief that US growth had been driven mainly by deficit spending and money printing.
While many believe that equity markets — particularly large-cap equity markets — are efficient, quantitative investing guru James O’Shaughnessy’s firm says the data shows otherwise.
“Our research shows that, with the right strategy and the right discipline, the U.S. large cap market remains very inefficient and — by selecting stocks using historically proven themes — investors can outperform it by significant margins,” writes Patrick O’Shaughnessy in a new research report from O’Shaughnessy Asset Management. In the report, entitled “The Myth of the Most Efficient Market”, O’Shaughnessy discusses how more and more investors are turning to index funds for the large-cap portion of their portfolios, since the vast majority of large-cap fund managers fail to be the market. But, he says, passive indexing approaches have a key weakness: “The stock selection and weighting criteria for the index are based on one factor: market cap.”
O’Shaughnessy talks about “proven factors” that OSAM has used to beat the market, like value and shareholder yield (dividend yield plus buyback yield). On top of those, OSAM overlays a “quality” test. “To replace market cap in the selection and weighting process, we’ve isolated the stock selection themes that are the most predictive of strong future excess return among U.S.-listed large cap stocks,” O’Shaughnessy writes. “Our research shows that we should favor companies with attractive valuations and strong shareholder yields and avoid companies with highly bloated and unsustainable balance sheets, poor earnings quality, and poor recent earnings growth trends. Each of these five themes can be measured objectively using data from financial statements and applied with the same discipline that characterizes the passive index investment process.”
The results, he says, have been stellar and show that the large cap market is not efficient. A live portfolio built with the above characteristics that was created in late 2001 has outperformed the Russell 1000 Value Index by an average of 5.5 percentage points per year, beating the benchmark in 96% of three-year periods. The same strategy beat the Russell 1000 Value by 5.0 percentage points annually and had a 95% three-year base rate when back tested from 1963 through 2012.
O’Shaughnessy also says that the current environment offers a particularly good opportunity for investors who focus on shareholder yield rather than dividend yield. With interest rates so low, high dividend yield stocks are trading at an 11% premium to the broader market as investors reach for income, he says. But high shareholder yield stocks trade at a 20% discount to the broader market. He also offers some intriguing data showing how high dividend stocks tend to perform in rising interest rate environments compared to high shareholder yield stocks. Bottom line: “We believe investors who index their large cap investments should instead consider an allocation to proven active strategies,” O’Shaughnessy says.
Fear is an incredibly powerful emotion that often serves humans well when it comes to survival. But in the stock market, acting on fear can be dangerous, something Chuck Jaffe notes in a recent MarketWatch column.
Jaffe highlights two recent studies showing how risk-averse investors are, even with the market teaching high after high. One found that Americans on average have nearly half of their portfolios in cash, and less than 20% in stocks.
“The … problem is that investors are looking for portfolios that are devoid of risk, as if such a thing actually exists,” he says. “It doesn’t. Put your money in the mattress and you have completely avoided stock market risk, the chance that your principal will be lost, but you have embraced purchasing-power risk, the potential for your money to fail to keep pace with inflation over time. (In your mattress, you also would have risks about how a fire, theft or other calamity might threaten your nest egg.)”
Jaffe says “It works that way for virtually every type of risk, where you can avoid each hazard only by exposing yourself to another one.” He stresses the importance of having a plan in combatting fear. “If you don’t ‘take your shots’ because you are taking a calculated risk and believe your portfolio will benefit long-term by waiting until later to try to score, then you have a strategy,” he says. “But if you are not taking shots because you are still scared about events now more than five years into the rearview mirror, you need to recognize how that is going to affect your ultimate score. You’re kidding yourself when you think that kind of strategy — even if it holds you steady — is not ‘losing.’”
Commodities guru Jim Rogers says that the Federal Reserve’s loose money policies will end in disaster, but that for now investors shouldn’t fight the Fed. “While madness is going on, you might as well play the madness,” Rogers tells FOX Business Network. “But be aware it’s madness. Be aware that you better get out before everybody else. because when it stops and this artificial sea of liquidity dries up, boy … it’s going to be not very much fun.” Rogers also talks about some big changes going on in China. “Just last week they decided we’re going to completely open up the economy, we’re going to change 6 or 7 sectors,” he said. “If you can invest in those sectors — forget the Federal Reserve — those sectors of the Chinese economy are going to boom for decades. The single most important thing they said was from now on the government is not going to make the decisions, the market is going to make the decisions.” Rogers didn’t say which sectors he was referring to, but did offer general ways to play the Chinese market.
Charles Schwab Chief Investment Strategist Liz Ann Sonders thinks we are still in the middle of a secular bull market that began in 2009. Sonders tells FOX Business Network that in the very short-term, sentiment levels may be a bit stretched, but overall valuations are reasonable and the market looks pretty good. Sonders says she would actually be glad to see a bit of a pullback in the short term to shake out some optimistic sentiment, however, noting that that is often what is needed for the market to move even higher. Heading into 2014, she’s high on industrials, tech stocks, and consumer discretionary plays, along with other cyclical areas of the market. She thinks the commodities supercycle has ended, however, which has her much less keen on basic materials stocks. She also is not enamored with utilities and consumer staples, noting that the most recent leg of the stock market’s rally has been led by more defensive type names. Sonders also talks about how correlations have fallen across the world, making diversification an important piece of strategy for investors
For more on Sonders’ take on the markets, you can also check out a recent piece she wrote for Barron’s.