A Wall Street Journal blog post by Jason Zweig profiles “superstocks” and suggests they provide a “reason why, for most people, index funds make superior sense.” Zweig notes that 44 U.S. stocks have generated cumulative returns of 10,000% or more over the last 30 years, and borrows the term “superstock” from William Bernstein of Efficient Frontier Advisors to describe stocks that grew at least twice the rate of the S&P 500. David Salem of Windhorse Capital Management says of the companies, “they have all undergone at least one near-death experience.” Apple, Inc., for example, fell 79.6% between 1992 and 1997, underperforming the S&P 500 by 771%. As David Salem observes, “there are no investment professionals in the world who bought Apple 30 years ago and held it continuously ever since” because of that steep decline. This is why Zweig sees superstocks as a reason for most people to favor index funds: “when companies decline 50% to 80%, index funds won’t sell them . . . if some of those companies bounce back and turn into superstocks, index investors get to go along for the full upswing.”
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Bill Miller of Legg Mason, a value investor with a strong record, told CNBC’s “Squawk Box” that it is “sort of hard to see why anyone would buy a 10-year Treasury when they could own the broader market at a higher current yield.” He sees “a disconnect between what’s really going on and what the markets are reacting to,” citing “strength in homebuilding,” “70% of companies are beating earnings estimates,” and other signs of a strong U.S. economy. Further, he stated a clear value position: “lower prices mean higher future rates of return.” Regarding oil, he commented: “historically, oil has had a negative 85% correlation with the stock market . . . and every recession since 1970 has been caused by higher oil prices, but today we have a 95-100% positive correlation . . . people make up a story to talk about that, [but] lower oil prices are unequivocally good for the U.S.” He also noted that “when the market hit its low, every major homebuilder [except one] was on the 52-week low list. Now I can assure you that nothing that’s going on in China is affecting homebuilders” and oil prices have little effect, providing further evidence that now is a good time to buy due to low valuations.
In his MarketWatch column, Mark Hulbert highlights the use of margin debt as a market indicator. Margin debt is the total amount investors borrow to purchase stocks. As Hulbert notes, research by Norman Fosback, former president of the Institute for Econometric Research, concludes that “a good long-term indicator can be created by comparing total margin debt with its 12-month moving average.” If the current level is above the 12-month moving average, it is considered a bullish indicator; if below, a bearish one. Fosback’s research suggests “an 85% probability that a bull market is in progress when the indicator is bullish, in contrast to only a 41% probability when the indicator is bearish.” The indicator appeared to work well in the 2007-09 bear market, but not as well in 2011. Currently, it has been sending bearish indicators for five straight months.
Liz Ann Sonders of Charles Schwab offered a cautiously bullish analysis of the market at the recent Inside ETFs conference. She cited Sir John Templeton’s statement that “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” She sees the current market in the “mature” phase of the bull cycle. “I don’t want to dismiss any of the concerns out there about the global economy, but if you look at the data, it’s not as bad as the doom-and-gloomers suggest,” she said, placing the risk of a U.S. recession at about 25%. Regarding China, she described herself as “in the soft-landing camp,” and suggested the risk to the U.S. is not large because of the minimal role exports to China play in U.S. GDP. She clearly stated the current market is “not another 2008,” describing it instead as possibly “another 1998 or 2011 based on market behavior.” She suggested the Fed is unlikely to tighten as rapidly as it had suggested, which portends well for the market in 2016. More broadly, she observed that “within secular bull markets, you can go through cyclical bear periods that have higher likelihoods of correction and volatility.” That is precisely where Sonders’ seems to believe we are now.
Financial Advisor reports on Wharton School of Finance Professor Jeremey Siegel’s comments at the annual Inside ETFs conference, where he critiqued the widely used Shiller P/E Ratio. Siegel did not necessarily attack the original logic of the Shiller P/E (which won its creator, Robert Shiller, a Nobel Prize). Instead, he noted that changes to the definition of generally accepted accounting principles (GAAP) earnings by Standard & Poor’s in 1990 have had an effect. Following the Financial Accounting Standards Board requirements, the GAAP change required mark-to-market accounting, which means companies mark down their assets when they have a loss but can only markup assets when they are sold.
Turning to the market, Siegel described himself as “the token bull.” He maintained that Fed policy is not “artificially inflating stocks” and we are not experiencing a new bubble. Nonetheless, he concurred with many observers that investors should expect lower returns going forward, but predicted about 5-5.7% real returns over the next decade. He cited slightly high valuations, slow economic growth, the risk aversion of an aging population, and a perplexing decline in productivity. On bonds, he predicted a bigger decline, with real returns around 1.0% to 1.5%.
Jeremy Grantham, Jonathan Jacobson, Seth Klarman and Jeffrrey Vinik: “Below the Radar” Philanthropy of Top Investors to Social Causes
The Boston Globe profiles philanthropy by leading investors. Jeremy Grantham’s foundations, including the $377 million Grantham Foundation for the Protection of the Environment, reflect a movement toward “making big bets on social change philanthropy,” according to Paul Grogan of the Boston Foundation. This is a shift apparent in Grantham’s own remarks: he noted that giving to traditional recipients of philanthropic dollars (such as arts and medical institutions) is “better than nothing. But it isn’t as good as medical research, or more to the point even, critical environmental donations.” Seth Klarman of the Baupost Group is another example of civic and community giving. The Globe says he “brings his penchant for contrarian investing to his charitible efforts: put money into areas few others are betting on and see potentially big gains, rather than follow the crowd.”
Much of the philanthropy of financial services leaders is “below the radar,” according to Grogan. Jonathan Jacobson, for example, is described by the Globe as “the most publicity shy” of the profiled philanthropers. His Jacobson Family Foundation Trust controlled $384 million as of 2012 and focuses on education, child welfare and Jewish causes.
These investment leaders also represent a trend of focusing more on philanthropy than their own wealth once a certain level of success is attained, according to Paul G. Schervish of Boston College. A prime example may be Jeffrey Vinik who has been directing half his income to his foundation annually for the last decade. “As you get older, you hopefully have more time to think about this, and really concentrate on those issues that are most important,” Vinik said.
Lee Freeman-Shor of Old Mutual Global Investors authored a piece for the AAII Journal that identifies differences in the strategies of investors who win or lose over time. After analyzing over 30,000 trades by 45 investors over seven years, he concluded that the difference is not in whether their ideas are right (“the chance of a great idea making money was a lousy 49%”) but in their execution style. He defines two winning approaches and one losing approach for when an investment idea proves wrong (i.e., loses money initially) as well as a winning and losing style for when an idea proves right. The five “tribes” of investors outlined by Freeman-Shor are:
For initial losses:
- Assassins: a successful strategy in which the investors “sold losing investments that fell by a certain percentage or that declined by any amount and showed no signs of recovery after a certain period of time.”
- Hunters: a successful strategy of “invest[ing] a lesser amount at the outset and with a plan of buying significantly more shares if the price fell” and of being “unafraid to sell” if it becomes clear the initial investment was a mistake.
- Rabbits: an unsuccessful approach that results from “not having a plan, or doing nothing,” which “opens up the possibility of losing big.”
For initial gains:
- Connoisseurs: a successful strategy that “make[s] high-conviction investments, hold[s] onto them for a long time and take[s] small profits along the way,” because it enables the approach expressed by Stanely Druckenmiller as follows: “[the] way to build long-term returns is through preservation of capital and home runs.”
- Raiders: an unsuccessful style of “tak[ing] profits as soon as practical,” which fails because “if your approach is to keep taking small profits, you will never have a big winner.”