If you’ve been obsessing over the issue of whether stocks are overvalued or not, Jason Zweig says you’re asking the wrong question.
In a recent piece for The Wall Street Journal, Zweig says the real question is “how much can I stand to lose before I bail out”? Why? “Because even if your assessment of market valuations is perfectly accurate, that won’t do you any good if you lack the financial or psychological fortitude to follow through.” Zweig says to use past losses for stocks or any other asset as a gauge for what future losses could be. For example, he says U.S. stocks fell 51% from late 2007 through the end of the bear market so investors should consider that such a decline could hit again before investing.
“None of this means you shouldn’t own stocks — or any other asset,” Zweig says. “It just means your have to think more honestly about what you are getting yourself in for.” By doing so, you can help avoid the fate of so many investors who bail after declines hit, locking in what should have been only temporary losses.
In a recent Intelligent Investor column for The Wall Street Journal, Jason Zweig provides some interesting data on how investors — and their advisors — often underperform the funds in which they invest.
In the 12 months ending Sept. 30, Zweig says that investors in 47 funds with at least $1 billion in assets underperformed the funds by at least 3 percentage points, according to Morningstar. Over the past five years, the average gap between fund returns and the actual returns of investors in those funds has averaged 1.17%. Similar performance gaps have been found by researchers looking at stock fund and hedge fund investors, and even exchange-traded fund investors will lag their funds, Zweig says.
One big reason for these gaps is that investors chase hot funds and dump cold ones at the wrong times. What’s particularly interesting is that some research shows that professional advisers are guiltier of such behavior than individuals. One study found that from 1991-2004, investors underperformed their U.S. stock funds by an average of 1.6 percentage points. For load funds sold by brokers, the gap was 1.9%, Zweig says; for no-load funds bought directly by investors, it was 1.0%. That led one of the study’s authors, Geoff Friesen, to tell Zweig that instead of shooting themselves in the foot, many investors “are paying someone else to do it for them.”
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With stocks at all-time highs, is it time to bail? Not if you want to make money over the long haul, says Jason Zweig.
On the Wall Street Journal’s Total Return blog, Zweig responds to a reader who contended that continuing with a buy-and-hold strategy “when you see a train [that is, a market downturn] coming at you” is foolish. ”If only it were that simple,” writes Zweig. “Does history show that there are indisputable and unambiguous signs that consistently forewarn that the stock market is about to crash? There’s no such thing. Which market forecasters have reliably, repeatedly seen — and publicly warned about — the train coming down the track? None. Who discloses the complete track record of all market predictions, right and wrong, so we can evaluate the overall accuracy of prediction? No one.”
Zweig notes how few investors saw big downturns coming over the past decade or so — and that those big downturns were often preludes to huge gains. He says that his point isn’t that “all investors should tie themselves to the mast” — that is, put in place measures designed to force themselves to stay disciplined during tough times (a reference to Ulysses, who asked to be tied to a mast so he wouldn’t succumb to the song of the sirens). “It was that if you can’t tie yourself to the mast, you probably shouldn’t buy stocks at all — because your willpower alone will not be enough to enable you to stay the course. And the ultimate benefits of owning stocks accrue only to those who can buy and hold. Investors who either can’t afford to take the risks of short-term losses or can’t stand the psychological trauma don’t belong in stocks — and should feel no shame about staying on the sidelines.”
Zweig also offers some interesting data on just how much stocks returned over the past two turbulent decades — it’s more than you might think. “Along the way,” he says, “investors lost roughly half their money twice, in 2000-02 and in 2008-09. That’s what stocks do.”
If you don’t want to put all your faith in luck, you need to have an advantage to beat the market over the long haul. But The Motley Fool’s Morgan Housel says that many investors don’t really think about what their advantage is — or whether they even have one.
Housel notes that, late in his life, value guru Benjamin Graham actually talked about how he thought stock-picking wasn’t for most investors. So many investors had adopted the in-depth, analytical techniques Graham pioneered that it had become tougher to make money with them. Housel thus asked The Wall Street Journal’s Jason Zweig, who wrote the commentary and footnotes in the latest updated version of Graham’s classic The Intelligent Investor, if he thought that meant Graham would have simply had all his money in index funds today. ”No, I don’t think so,” Zweig said. “He would advise knowing your advantages and your disadvantages, and not playing a game you have no advantages in.”
That led Housel to think about what his own advantages might be when it comes to stock picking. He offers a couple that pertain to individual investors, including “time”. ”I’m patient to the point of obsessive when it comes to delayed gratification,” he says. “I bought stocks all the way down in 2008 and 2009, dreaming about what they’d be worth in 2038 and 2039. That’s a big advantage over Wall Street, whose definition of ‘long term’ is the time between Lightning Round segments on CNBC. If Wall Street is thinking about the next ten months, and you’re thinking about the next ten years, case closed — that’s your advantage.”
Two other advantages individual investors can have, Housel says: the ability to think about stocks as businesses, not stocks, and a steadfast belief in reversion to the mean. “It’s simple stuff, but it’s one of the most powerful forces in finance because, by definition, only a small portion of investors can be contrarians,” he says of mean reversion. “It’s much easier to say ‘I’ll be greedy when others are fearful’ than to actually do it. But those who can truly train themselves to be skeptical of outperformance and attracted to underperformance will likely do better than most. They have an advantage.”
With fixed-income yields still exceptionally low, where should investors go to find income? The Wall Street Journal’s Jason Zweig says they may want to look no further than their own portfolios.
“Just as the removal of oxygen from a room can make you lightheaded, artificially low interest rates could make some income-oriented investors lose their ability to think clearly,” Zweig writes. “Those who want ample income must either wait patiently until rates finally rise — or must violate the rule of thumb that says you never should fund income needs by dipping into capital. Above all, you must be skeptical of anything that purports to offer high current yields.”
Zweig looks at closed-end funds that use “covered call options” to generate juicy-looking yields, but find some big dangers in the strategy. Instead, he says, investors looking for income should consider violating that unwritten rule about dipping into capital. “There is no logical reason why you can’t manufacture your own dividends, and that is probably what [many] investors should consider,” he writes. “Rather than taking income only from dividends or interest, you could selectively harvest gains from your stock portfolio.” He says this can be done by trimming “winners or the stocks you think are fully valued, [and] consulting your accountant to ensure those withdrawals will be taxed as long-term capital gains.” Withdraw 1% or less each quarter, and a diversified stock portfolio “should come within spitting distance of maintaining its value, after inflation, in the long run.”
Most investors are jittery thanks to the stock market’s recent troubles. But Jason Zweig says long-term investors should be happy about the declines — and hope for more.
“Investors should welcome the falling prices that make assets cheaper,” Zweig writes Intelligent Investor column for The Wall Street Journal. “Instead, the markets resemble an immense school of fish, shifting from feeding frenzy to reversal in a single silvery flash. Lately, with so many people trading under the influence of cheap money, the customary buy-high/sell-low behavior of the crowd has bordered on the absurd.”
Zweig notes how money “gushed” into high-yield bond funds earlier this year, for example, even while the yields on those bonds were hitting record lows. Then in late May, when fears about the Federal Reserve tapering its bond-buying program hit, investors yanked huge sums from those funds.
With European and emerging market stocks getting hit particularly hard by the recent declines, those areas are now full of opportunity, Zweig says. International stocks “look like a steal,” he writes. Brian Singer, whose William Blair Macro Allocation Fund is in the top 1% of funds in its class over the past year, according to Morningstar, told Zweig that “almost every single investor tells me the same thing. The only place they’re seeing any opportunity is in the U.S. If it’s the global consensus, you can be pretty sure it’s priced in”. He thinks European and emerging market stocks have gotten very attractive amid the recent declines. He estimates future returns of as much as 14.5% annually over the next eight years for European stocks and 11% for emerging markets.
Warren Buffett and Ray Dalio are two of the most well-known, successful investors in the world. And The Wall Street Journal’s Jason Zweig says they have at least one key trait in common: They are open to criticism and self-doubt.
“A deliberate, lifelong effort to find people to tell him why he might be wrong is one of the keys to Mr. Buffett’s success,” Zweig writes on WSJ’s MoneyBeat blog, discussing how Buffett took the rare step of inviting questions from a bearish investor at Berkshire Hathaway’s recent shareholder meeting. “It doesn’t come naturally to most investors.” (Hat tip to The Stingy Investor for highlighting the piece)
Buffett, Zweig says, once noted about scientist Charles Darwin that “whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man’s natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience.”
Dalio, meanwhile, believes in “thoughtful disagreement”. He told Zweig that “when two intelligent parties disagree, that’s when the potential for learning and moving ahead begins. The most powerful thing that [an investor] can do to be effective is to find people you respect who have opposite, different points of view [from yours] — and have an open-minded exchange with them about what’s true and what to do about it.” Dalio says investors could improve their chances of being right by 30% to 40% by seeking out those who disagree with them in an intelligent way, and trying to understand the opposing argument.
Cabot Research Chief Executive Mike Ervolini recommends that investors look back through their account statements to see how long it typically takes for their average winners to stop outperforming. When future winners reach that average, he says to seek out a contrary opinion to re-evaluate whether the stock is still a good one to hold.
What will the next big emerging market be? Africa? Southeast Asia? Nope, says the man who created the “emerging market” moniker. He says the next big “EM” will be the United States, in a manner of speaking.
“Antoine van Agtmael is arguably the founding father of emerging-markets investing. He still is an evangelist for investing in parts of Africa, Asia, Latin America and other less-developed regions, where he thinks the future remains bright,” writes The Wall Street Journal’s Jason Zweig. “But he believes the U.S. is at the beginning of an industrial revitalization that most analysts only have begun to recognize.”
Van Agtmael told Zweig that, when he visited China in 2012, many manufacturing executives complained about American competition — a concern he hadn’t ever before heard in 40 years of monitoring Asian markets. Cheap oil and natural gas in the U.S. and stagnant wages are making America more attractive to locate a business, while rapidly rising labor costs — 15% annually — have been making China less attractive, van Agtmael noted. Cellphone infrastructure and the use of robots and three-dimensional printing are also areas where the U.S. has an advantage, he says, and investors haven’t fully absorbed the impact that these factors will have going forward.
“A decade ago, nine out of 10 companies would tell you they were thinking about building their next plant in China,” van Agtmael said. “Today it’s more like three out of 10, and maybe five out of that 10, say they want to build in the U.S. … U.S. manufacturing is becoming more competitive than you would think, and China’s less. And the idea that manufacturing is old-fashioned is itself old-fashioned.”
Van Agtmael thinks U.S. investors should have up to a quarter of the equity portion of their portfolios in emerging markets — much more than most have. But he’s quite high on the U.S. “Why has everybody been surprised by how well the U.S. stock market has done lately?” he said. “Because they’re only beginning to realize the glass is half-full again instead of half-empty.”
In a recent column discussing a proposal to reward shareholders who invest in stocks for longer periods of time, The Wall Street Journal’s Jason Zweig highlights some interesting data on how trading frequency can impact returns of both businesses and investors.
“Patience is a rare virtue in today’s high-speed markets. The average diversified U.S. stock mutual fund holds its typical position for just 15 months, according to investment researcher Morningstar,” Zweig writes. “This past week, Oracle’s stock lost 10% in a day after the company fell short of quarterly earnings expectations by one penny per share, and shares in FedEx dropped by 9% in two days after a sharp decline in quarterly profits.” He says that makes corporate managers “gun-shy”, which may be impacting long-term profits. “A survey of more than 400 senior corporate executives in 2003 found that 59% wouldn’t invest in a project that would generate significantly higher long-term profits if it reduced earnings in the short run,” Zweig notes.
He also points to another study, performed by University of California economists Terrance Odean and Brad Barber, which found that investors who traded the least frequently outperformed those who traded the most by 6.8 percentage points per year.
Zweig’s advice: “Buy an index fund and hold it forever. Or find a mutual fund with expenses under 1% and a turnover rate of 33% or less, meaning it holds its typical stock for at least three years. Or pick a few stocks yourself, buying on bad news and then holding stubbornly through all the short-term noise. Before you buy, write down at least three reasons why you believe the company is a good investment; sell only if those reasons have become invalid.”