I am a phenomenal index fund investor because my diversified U.S. stock index fund is taking the S&P 500 index funds to the cleaners. My fund is beating the Vanguard S&P 500 Index Fund (VFIAX) by 1.0% year-to-date through November 30, and it’s up by more than 1.4% over the trailing one-year period. This isn’t […….]
Jeffrey Rosenberg Blackrock Blog:-
The end of the year is always a good time for reflection, and for thinking about what went well in our lives and what didn’t. From an investment perspective, one thing that fits in that latter category are investments in traditional bonds.
But the New Year also brings with it the time to make resolutions and changes. We believe that all investors should consider reviewing their bond portfolio to be sure it remains built to deliver their goals, whether those be income, principal protection or both.
We touched on this in BlackRock’s recently released list of five things to know and five things to do in 2014, and with our view that interest rates are likely to rise, we believe the risks embedded within certain parts of the market have increased. Thus, you should rethink how you’re invested. Let’s discuss the outlook first:
1. Modestly stronger growth should lead to slightly higher interest rates. But we do not expect a sharp or rapid acceleration. As the Federal Reserve begins to slow its extraordinary bond-buying program, we believe the 10-year Treasury yield will modestly climb around 0.5% by the end of 2014.
2. Low for Longer. It’s important to note that while the bond-buying program will be slowed, to avoid negative economic consequences of a sharp rise in rates, the Fed will likely promise to keep the fed funds rate low for some time.
3. Given the continued slow growth nature of the recovery, inflation, now at a four-year low in the United States, is likely to stay low at least through 2014.
The key point in #1 above is made nicely in this graphic below:
What does this mean for bond investors? And what investing resolutions should you make in 2014?
Here are three we would offer:
1. Traditional bonds could experience losses. For example, if we take a broad category of bond funds held by investors such as the Morningstar Intermediate Bond Category, a 1% rise in interest rates would mean approximately a 5% loss in principal. A 0.5% rise in rates could mean a 2.5% loss of principal, which would offset the income from the coupon payments and lead to overall losses. Longer maturity bonds hold more of this interest rate risk than shorter-maturity bonds, so be mindful of the maturities in your bond portfolio.
2. Since inflation is near flat, bonds designed to protect against loss of value to inflation might not be worth owning such as Treasury Inflation Protected Securities (TIPS). Except in the longest maturities, in our view, they are expensive and we would keep them at a minimum in a portfolio.
3. Bonds that trade based on credit, or the ability of the issuer to pay back its obligations, offer a way to gain income with lower interest rate sensitivity. While not inexpensive, they generally offer higher yields and less sensitivity to interest rate increases. In particular, we favor high yield bonds.
The opinions expressed are those of Jeffrey Rosenberg as of 12/11/13 and are subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of any individual holdings or market sectors.
Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.
A recent AFR article questions the vigour with which Australians are buying up property with their superannuation money.
Morgan Stanley Australia chief executive Steve Harker has renewed alarm over the vigour with which investors are borrowing money in their self-managed super funds to buy property, saying it’s sowing the seeds of a future economic wreck.
Harker also predicts Australia is “going to be in a low-growth, low interest-rate environment for a sustained period of time, and that will be very challenging for the fiscal position of the federal and the state governments”.
In general, the investment banker says, low interest rates boost the appeal of real assets – such as property. However, he is deeply worried that Australia is sowing the seeds of its next financial crisis by allowing people to borrow money in their SMSFs in order to buy property.
“We have a tax system and culture that drives property investment in a way that can lead to its own strong risks”, he argues. “At present, people can take what amounts to a triple bet on property.
“They own their own home, which is capital gains tax free. They can also negatively gear investment properties to the point where it eliminates all income from other sources and now people can gear their self-managed super funds into property.
“It’s the third aspect of the triple bet that concerns me. I think the single biggest economic wreck – and one that will occur in this country in the next five to 10 years – will be in the SMSF space.”
The losses, he says, won’t be triggered by a collapse in the property prices, but by the proliferation of unviable property schemes that are now being peddled.
“The SMSF space is ripe for property spruikers and promoters, high-yield schemes and fraud. We’re talking about potentially $200 billion in superannuation savings being completely blown up. It will make Storm and Pyramid look like insignificant blips,” he says.
New analysis suggests the US dollar is undervalued on a purchasing power parity basis against 15 of the 18 major countries/currencies. The purchasing power parity (PPP) theory states that the exchange rate between two countries should adjust so that a basket of goods in Country X costs the same as it does in Country Y when priced in the same currency. It is a useful theory in understanding the relative strength of a currency, especially for a reserve currency such as the USD.
An amusing blog from Vanguard that spoofs some of the trendy new ‘smart’ beta product being touted around. Worth a quick read. http://vanguardadvisorsblog.com/2013/12/04/introducing-vanguards-new-alphabet-etfs/.
The point it makes quite clearly is most strategies can be back tested and shown to have outperformed the index.
That said, given the relentless rise in U.S. stocks, it’s hard to argue with the fact that certain market indicators, including a few valuation metrics, are flashing yellow.
To gauge when (and if) the market has officially tilted into bubble territory, I would suggest that investors focus on two sets of data: valuation and sentiment.
- Valuation. My main argument against a bubble in U.S. equities is that while valuations are no longer cheap, they are a far cry from previous peaks. However, some measures – notably the Tobin Q Ratio, gross domestic product (GDP) to market capitalization, and the Cyclically Adjusted P/E – are high, arguably too high.
I would pay particular attention to the Shiller P/E Ratio, which is a variation on the Cyclically Adjusted P/E or CAPE. This indicator is worth watching as it has historically correlated with long-term stock market returns. Today’s reading, in the mid 20s, suggests below average returns in coming years. A further advance would suggest a more serious problem. By way of comparison, the indicator reached a high of around 30 prior to the 1929 crash and was close to 45 in 2000.
2. Sentiment. While valuation is important, investors should also pay attention to sentiment. The goal is to gauge how – to steal a phrase – “irrationally exuberant” investors have become. In measuring sentiment, investors should focus on two types of indicators: what are investors doing and what are they thinking.
While there are dozens of different indicators, I’ll focus on two: put/call ratios and Bullish/Bearish Sentiment. The put/call ratio is a short-hand proxy for positioning among options traders. Lower readings correlate with more bullishness. The ratio was 0.48 at the end of November. While this is modestly below average, it is a far cry from the lows of early 2000. In other words, options investors are positioned bullishly, but not excessively so.
A second measure to watch is a survey conducted by the American Association of Individual Investors (AAII). The survey tracks the percentage of self-described bulls and bears. As of the end of November, the percentage of self-described ‘bulls’ was slightly more than 47%, while those characterizing their views as ‘bearish’ was at 28%. Again, both metrics suggest bullishness, but not craziness.
The bottom line is that there is no one indicator that will definitely answer the question: Are we in a bubble? Investors need to piece together a conclusion based on multiple measurements, using metrics about both valuation and investor behavior.
For now, the preponderance of the evidence still suggests that stocks are not so overvalued, nor investors so exuberant, as to justify the ‘B’ word just yet.
I have 26 bank accounts. I never meant for it to happen but it has. Fourteen are current accounts, eight savings, and four are cash ISAs.
That’s not counting the credit cards, broker accounts and other stuff I can’t remember any more.
For a long time it seemed normal. I only realised I was different when it slipped out recently in conversation. One friend said they were shocked.
That’s when I looked at myself in the mirror and I saw what they saw.
I’m a rate tart. I open bank accounts for money. For their competitive rates of interest. Once they’ve outlived their usefulness, I move on to the next. No emotion, no goodbyes, no looking back.
It’s just a transaction, right?
You know you want it
Nobody starts out thinking, “I want a massive collection of bank accounts.” You don’t think to yourself, “Wouldn’t it be great if I was the Imelda Marcos of online passwords?”
You start off small-time:
“I just want to get ahead.”
“I won’t have to do this forever.”
“It’s easy money.”
“Just one more won’t make any difference.”
And it’s so easy to find everything you need to get into it.
A Best Buy table puts you in touch with the right people. Even if you only look at it once a month, temptation soon comes your way.
And if you’re nervous – maybe it’s your first time – there are plenty of old hands out there to show you the tricks. You’ve just got to know where to look.
You open your first account and they pay you a sweetener to lure you in. An extra £100 or so because you’re fresh.
In the early days I was pulling down a few hundred extra quid a year in bounties alone.
But by the time you’re using a spreadsheet to keep track of it all, and standing orders to keep the money moving, and Google alerts so you don’t stay in the same place for too long…
…well, you know you’re not with Virgin anymore.
The rules of the game
I guess a lot of people don’t even know it’s possible to live like this. I read the stories in the papers about people getting 0.25% on their money and I laugh.
It’s not like that where I’m from. I can get you 3%, 4% easy.
It seems like a no-brainer when you put it that way. But not everyone could live the way I do.
There’s a price to pay, y’know? You’ve got to do certain things.
You need a bit of capital for a start.
£1,000 that you move from Peter to Paul – because you’re using current accounts as savings accounts. It sounds wrong, but that’s the way the world is these days. I didn’t make the rules, I’m just showing you how to work ‘em.
So everyone wants a piece of the pie, but you just give them the same old slice and keep it moving through the system so they don’t notice. Or maybe they do notice, I don’t know.
What I do know is: they don’t care.
Some places, the more ‘respectable’ ones, they like to make things harder. They want extras like direct debits on every account.
That’s easy. Just use a feeder savings account that sets up direct debits. There aren’t many, but you can find them, and you just channel £1 a time from one account to the other and back again. It’s like plumbing.
And if someone offers you a complimentary regular savings account – take it. You can get up to 6%! Sure, it’s only on a small bit of money, and they’re not as easy to get now, but you might as well take everything you can get.
Don’t forget cashback. Generally only the Spanish ones are into this, but look, as you get older you can’t afford to be too fussy, alright?
Money for old rope
What most people don’t realise is that you can double-dip. Triple-dip even.
Let’s say you can get 3% from a prospect but only up to £5K. They might allow you to open multiple accounts. Now you can get a good rate on £15K.
And the same people might go by a different name, so you can stash away another £15K.
And maybe they have yet another name. It’s more common than you might think. Everyone’s got something to hide, but that’s another story. Anyway that’s another £15K taken care of.
It helps if you’ve got a partner. It’s more lucrative if you work in pairs, y’know? You can cover more ground, recommend a friend, all that.
But even that will cost you. After a while, your ‘friend’ may not thank you for dragging them into your world.
Some people worry about their reputation: ruining their credit score and that kind of thing.
You’ve just got to keep your head down. Take it easy and don’t take on the whole world at once.
Keep it as straight as you can. Ditch old accounts when the interest drops… refuse overdrafts, credit cards, rates that are too good to be true, accounts with benefits… Stay away from the weird stuff, keep on moving, and you’ll be okay.
Don’t judge me
That’s pretty much all you need to know. Maybe more than you wanted to know, right?
Am I proud of it? Listen, I blame the Government. I didn’t ask to live in a zero interest world. Funding for lending has only made things harder.
I didn’t grow up dreaming of this. It’s not how I thought things would turn out.
You’ve just got to do what you’ve got to do. That’s it.
How to Make a Million – Slowly, is a book about the lessons learned and experiences gained by a private investor over a 50 or 60 year investment lifetime. The book is written by John Lee (Lord Lee of Trafford) who for many years wrote a column in the FT, and excerpts from that column feature heavily in the book.
John’s own portfolio became even more famous when he mentioned in 2003 that his ISA account was valued at more than £1 million (hence the name of the book). So how did he do it?
The answer is through the patient application of what he calls a DVD investment strategy. DVD stands for Defensive Value plus Dividends, which explains itself quite nicely. I only wish I’d thought of it first, because it neatly captures my own approach to investing as well.
The book is full of ideas on how to find good companies and how to value them. There is some very small amount of theory, but the bulk of the book is from John’s actual experience, with many detailed accounts of how he found, analysed, visited, bought, held and occasionally sold many companies over many decades.
The book is full of many insightful comments, and here are a few of my favourites:
He looks for companies with strong finances, committed managers, and improving outlooks – and buys their shares when they are at attractive prices. Then he waits, for years if necessary. This is essentially the same approach followed by legendary value investors such as Warren Buffett and Benjamin Graham. It worked in the US back in the 1930s, and it works now in the UK. With patience, method and discipline, anyone can do it.
I have called the book How to Make a Million – Slowly because it sums up my approach to stock market success – building up a portfolio brick by brick, share by share over many years.
There are those who treat the stock market like a casino – constantly dealing in and out – not knowing or caring what activities the companies they buy and sell are engaged in. Good luck to them – that is their choice – but it is not my way.
12 guiding principles:
1. Endeavour to buy shares on modest valuations
2. Ignore the overall level of the stock market
3. Be prepared to hold for a minimum of 5 years
4. Have a broad understanding of the PLC’s main business activity
5. Ignore minor share price movements
6. Seek established companies with a record of profitability and dividend payments
7. Look for moderately optimistic recent comments
8. Focus on preferably conservative, cash-rich companies or those with low levels of debt
9. Ensure the directors have meaningful shareholdings themselves and ‘clean’ reputations
10, Look for a stable board
11. Face up to poor decisions
12. Let profitable holdings run
I have always believed that most investors and analysts over-complicate matters. I try to focus on just two yardsticks when investing in a trading company… dividend yields and PERs, and two for an investment or property company… net asset values (NAVs) and gearing.
I like to buy shares on a modest valuation – ideally say a dividend yield of 5-6% – and on a single-figure PER.
The payment of a dividend acts as a significant discipline on the Board of a PLC in that it has to find the cash, each year, to pay those dividends.
What we want is a company that increases profits (and hopefully dividends) each year and where the rating (PE ratio) that the stock market/investors place on the company’s shares increases significantly. This is the ‘double whammy’ any investor should be seeking.
Today  we are in an extraordinary period when not only do large-caps yield 5-6% and ‘proper’ small-caps twice that, but returns on cash deposits are minuscule.
Stock market movements are often exaggerated both ways – sometimes too bullish, sometimes too bearish.
The key to building an appreciating portfolio is to avoid the losses – don’t take unnecessary risks or buy at inflated levels.
I like the alignment of board and shareholder interests, the focus on conservative growth and “stewarding” a business through generations, their generally low borrowings and usually progressive dividend policy.
My core investment philosophy is that ‘value’, i.e. real worth, always comes through in the end, but you must be patient.
Smaller caps, established, profitable, conservative dividend-paying companies, cash positive, or with low levels of debt are for me, preferably having a recognised ‘brand’ or unique selling point (USP) and preferably also trading internationally.
Nothing is certain in stock market investing – equity investing always involves a degree of risk.
I have been a happy holder for 36 years – today it is one of my largest holdings, with an annual dividend return of approximately 38% on original cost. This is what long-term investment is all about.
To be a successful investors requires commitment and time, and you’re only going to put in the required effort if you find the stock market enjoyable and absorbing.
Apart from the financial columns I regularly subscribe to the weekly Investors Chronicle, having done so for many years, and find it an invaluable source of comment and ideas.
I would not invest in a PLC unless the directors themselves held serious personal shareholdings in it.
Investing by watching screens is all very well, but you can’t beat human contact. So get out there.
Visiting a PLC such as Cropper’s is for me part of the interest and enjoyment of serious investing – an opportunity to embrace our industrial heritage and to appreciate the role that founding families and their businesses have played in the life of their communities.
Major institutions rarely attend AGMs (having their own private briefings) so the meetings are the private investors’ theatre. But be strong-willed. Do not waste time in which you could be gathering crucial information by going back for a second helping at the buffet. Circulate – and make sure you stay sober.
Few investors apply much consistency or logic to the creation of their personal investment portfolios. Your average investor will usually hold a range of stocks, with substantially differing values, delivering wildly varying yields, with no obvious theme or structure.
In my current portfolios, putting together my ISA and non-ISA holdings, I hold around 35 different stocks.
One of my cardinal principles has been to focus on avoiding losses rather than chasing profits.
As the legendary Warren Buffett famously said: “Lethargy bordering on sloth remains the cornerstone of our investment style.”. Definitely an attitude to be encouraged.
My late father jokingly used to say that money was not for spending but for buying shares.
For me, equity investment is about long-term growth in both capital and income. I have never worried too much about annual performance comparisons.
I ask 10 questions, applying a score from 1 to 10 for each. The subject areas cover trade/activity, profits record, dividend yield and cover, asset backing, cash/borrowing, board shareholdings, institutional holdings, the price/earnings ratio, professional advisers/non-executive directors, and company optimism/brokers’ forecasts.
A number of groupings of private investors have been formed in recent years. For example, ShareSoc, with 3,000 members, takes up investors’ grievances, and Mello Meeting, with over 800 members, arranges regular company presentations.
Overall it was an enjoyable and interesting read, and certainly gave me a look inside the activities of an investor who likes to visit the companies that he invests in. It’s also good to see that Lee also covers his mistakes, which is very helpful for other investors, and should help to ease the fear that investors feel when an investment performs badly. Mistakes are inevitable, and you just have to accept that.
I’ll end with one final quote that sums up this whole Defensive Value plus Dividends (DVD) approach in a nutshell:
A substantial portfolio can be built, brick by brick, by applying common sense and basic investment principles. But it does take time!
Foreign Stocks for the Long Run
Nearly every financial adviser will tell you that foreign stocks should be part of a well-diversified portfolio. Yet, an analysis of the data shows that non-US (foreign) stocks as an asset class have underperformed the US market by a meaningful amount for more than 40 years, in addition to having higher risk. So, why do it?
While the Dow Jones Industrial Average and the S&P 500 Index have been regularly notching record highs, the Nasdaq Composite made news last week, moving past the 4,000 mark for the first time in 13 years.
The last time the index was at these levels was September 2000, toward the end of the dot-com boom. In addition, broader market indices like the S&P 500 continue to post new record highs.
While valuations are less compelling than they were a year ago, equities still remain compelling alternatives to bonds and cash. Taking a closer look at the Nasdaq helps illustrate this point. The current trip above the 4,000 level looks quite different from what was happening in 2000 for two reasons:
1. Not frothy valuations. From a valuation perspective, the Nasdaq today trades at around 24x trailing earnings. That’s not cheap, but it’s below the index’s 18-year median of 30x trailing earnings and far below the 150x level the index touched the first time it crossed 4,000 in 1999.
2. A closer look at the technology sector. The technology sector is still a very heavy component of the Nasdaq, though less so today than 13 years ago, as Matt Krantz of USA Today and Barry Ritholtz recently pointed out, and it doesn’t look expensive. The sector is currently trading at around 17x earnings—roughly in line with the broader market and much less than the 67x earnings we saw in 1999. In fact, it’s one of the sectors I currently like.
So, simply put, while some areas of the market are looking frothy (including U.S. small-cap stocks and social media companies), today isn’t 1999 and we feel stocks aren’t in a broad market bubble.
Source: Weekly Commentary, Bloomberg