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.”
Tag Archives: Jason Zweig
Jason Zweig of the Wall Street Journal draws parallels between the 19th century emerging U.S. market and today’s emerging markets, especially China. “Emerging markets aren’t lucrative investments just because they are ’emerging,'” according to Zweig. From 1802 to 1870, stocks in the emerging U.S. market gained an average of 6.7% annually. Since 1926, the average annual return has been 6.9%. Bubbles tend to arise in emerging markets when developed markets face very low returns, as was the case with U.K. investors pumping money into the U.S. in the 19th century, and high U.S. investment in today’s emerging markets. Sandy Nairn of Edinburgh Partners says, “when you pull down returns on deposits to zero or below, then you create a portfolio effect that distorts markets elsewhere.” As the Journal reports, “emerging markets deliver their best results not when hopes are highest, but after they break investors’ hearts.” Following a 30% loss in 2000, emerging markets doubled over the next decade, peaking in 2010. Since then, they’ve lost 22% even as global stocks increased 44% and U.S. stocks gained 75%. The piece suggests that the Shanghai Composite Index, down about 23% so far in 2016, may be getting close to turning around.
Jason Zweig of the Wall Street Journal highlights the effects of surprises on investor psychology, drawing on neuroscience and historical events back to the 18th century. Robert Shiller of Yale says, “Metaphors and stories are important in investors’ thinking, and they can become a self-fulfilling prophecy,” noting that such stories are adjusted partly “by the almost instinctive urge to look at others’ emotions.” The journal notes that “all investors have a narrative in their head . . . the simpler that story is, the more likely you are to feel in control and the more confident you will be that your investment decisions are sound.” It is when something conflicts with the story “that can lead to a sudden fear of the unknown.” Neuroscience has shown that specialized brain cells “respond to unexpected outcomes in as little as three-tenths of a second, firing out warning signals.” The psychological impacts of surprise help to explain rapid shifts in markets, all the way back to the 18th century when the London, Paris, and Amsterdam markets “levitated together and then crashed in lockstep.” As a current example, Zweig highlights potential impacts of recent indications that Chinese economic policy is not as infallible as it may have once seemed.
The Wall Street Journal offers some broad lessons from the oil bust. “If oil stocks have burned you, use that as motivation to rethink how you form your expectations of the future,” author Jason Zweig suggests. Citing Ipreo data, he notes that between the end of 2007 and the end of 2014, oil and gas companies raised $255.7 billion in IPOs and other offerings. Further, almost 100 Energy-specialized funds brought in $64 billion from the investing public during the same period. He notes: “almost no one foresaw oil below $40,” analogizing the situation in oil to the 2008-09 drop in real estate prices. Why? Zweig suggests that “analysts’ view of the future was consistently anchored to the present.” When oil shot up in summer 2008, analysts ramped up their year-end predictions; when it dropped by January 2009, they ramped down their year-end 2009 predictions.
This type of anchoring tendency is supported by the findings of Werner De Bondt, a behavioral economist, who has found that for every 1% rise in the Dow over the previous week, people became 1.3% more likely to be bullish in predicting the subsequent six months.
Charlie Munger of Berkshire Hathaway urges investors to “invert, always invert,” which is to say that one should consider what happens if predictions are wrong. Mr. Munger put millions into Wells Fargo when many others predicted collapse of the financial system. He says that success in investing requires “the crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself. Zweig summarizes: “the best way to raise your yield is not to buy what’s popular, but wait until other investors are extrapolating misery – and then buy.” Some areas where this approach may work at the current time, according to Zweig: energy, high-yield bonds, and emerging markets.
Generally accepted investing wisdom has always called for long-term investors to “buy the dips” and add to their positions as the market declines. This advice makes sense in most cases, but as the WSJ’s Jason Zweig points out, the “buy the dips” refrain needs to be thought about in the context of an investor’s time horizon and how market returns occur. For younger investors, by the dips can be a very sound philosophy, but for older investors close to retirement, the exact opposite is often true. Zweig explains that “sequence risk”, which refers to the order in which stocks produce good and bad returns, is a very important factor in determining whether buying during market declines is an appropriate approach. For example, according to Zweig, “a 30-year period in which the stock market drops at the beginning and rises toward the end can have the identical average annual rate of return as a three-decade period in which stocks rise at the beginning and fall at the end. But the results will be drastically different.” Zweig highlights a few ways investors near or in retirement can try to eliminate sequence risk, including:
- Buy value stocks during periods of market overvaluation – Zweig’s article highlights research from GMO supporting this idea.
- Hold a high level of cash on hand or defer social security – This provides a cushion to help absorb market declines
- Purchase single-premium income annuities – These could work for some, but may not in many cases due to their cost and financial advisors lack of familiarity with them.
- Draw from home equity during market declines – The government’s home equity conversion program allows for borrowing at competitive rates to raise cash and avoid selling stocks during market declines.
Zweig’s overall point is that staying prudent and understanding the risks of stocks is one of the best ways to try and combat sequence risk. In the end, Zweig says that “the advice to buy more stocks every time they drop probably doesn’t apply” to those who are nearing or in retirement.
Just what can individual investors learn from Warren Buffett’s incredibly successful career? In a recent column, The Wall Street Journal’s Jason Zweig takes a look at that question.
After 15 years, the Nasdaq Composite Index recently eclipsed its March 2000 record high. But The Wall Street Journal’s Jason Zweig says that before they get too excited, investors would be wise to remember the lessons of the Nasdaq’s decade-and-a-half of struggle to regain its high.