10
Feb
2015
The Wrong Kind of Diversification
Some kinds of diversification are better than others. Legendary investor Peter Lynch often referred to corporate ‘deworseification’ back in the conglomerate days when companies like ITT owned businesses as varied as hotels, insurance, defense contracting and for-profit education. One kind of diversification that Morningstar has popularized, but that I don’t think is particularly useful, is diversification by style box. As you can see in the image, Morningstar has cut the… Read More
9
Feb
2015
New Data for the Fed to Chew On
Economists had expected that the economy would produce 235,000 jobs in January, so at first blush, it was hard to see why markets were excited by the actual number, which was 257,000. The good news came on two fronts. First, the previous two months were revised higher by a combined 147,000 jobs, which amounts to another month of job creation (a weak month, to be sure, but we’ve had plenty… Read More
6
Feb
2015
Investing Made Simple
In finance, the value of any asset is the present value of all of the future cash flows. When someone first told me that, I had no idea what it meant, so let’s run through a quick example. Assume that someone asks you to borrow $100 for one year. If you think inflation might be three percent in the next year, you’re going to need to charge a three percent… Read More
5
Feb
2015
Smart Money Kids
Many readers know that I have two grade school daughters because I’ve written about them in the context of saving for college. Like any parent, I want smart money kids. While this is a common goal among parents, it’s easy to say and much more difficult to actually accomplish in practice. There was an article in the New York Times over the weekend that described a guy who withdrew his monthly… Read More
4
Feb
2015
The Peril of Being Different
January was a tough month for value stocks, as the S&P 500 Value index fell by -4.57 percent compared to the S&P 500 index, which lost -3.00 percent. When stocks have a tough month, it’s axiomatic that mutual fund managers who invest in stocks also had a hard time. That was particularly true for one well-known value investor, Bruce Berkowitz, manager of the Fairholme Fund (FAIRX), which lost -9.83 percent… Read More
3
Feb
2015
Inside the Belly of the Yield Curve
Yesterday, I wrote that the yield on the 30-year US Treasury closed at an all time low at 2.25 percent. I also wrote that the yield on the 10-year was 2.66 percent, which was completely wrong: it closed at 1.66 percent on Friday, I simply made a fat fingered mistake – sorry. This mistake notwithstanding, I was struck by the two yields because the all-time record-low yield on the 10-year… Read More
2
Feb
2015
The Vastness of the Emerging Markets
There are only a handful of index providers globally and their intense competition breeds some very interesting innovation. Recently, one of the large providers, MSCI, launched a series of indexes that attempt to reflect the performance of companies based on their economic exposure rather than the location of their headquarters. When indexes were first created, most companies economic reach didn’t expand much beyond their own borders. Today, however, businesses are… Read More
30
Jan
2015
Those Clever Institutional Investors
Maybe I’m a little hung-up on this, but I am always a little annoyed when institutional investors look down their noses on retail investors. When a bull market is finally getting going, you’ll hear them sniff that ‘retail is finally waking up,’ or when markets are falling, they’ll say that the losses are exaggerated because retail is selling into the downturn. No matter what markets are doing, institutional investors seem… Read More
29
Jan
2015
Expected Returns for Stocks
A friend recently forwarded me the address of a fascinating investment website that I have spent hours studying. The site, found here, beautifully displays market forecasts for stocks, bonds, commodities and currencies from around the world. This site is run by Research Affiliates, an investment research firm that develops indexes and strategies that other investment managers license. They say that as of the end of the third quarter last year,… Read More
28
Jan
2015
Size Matters, If You Control Your Junk
It should be no surprise that small cap stocks struggled last year compared to large cap stocks. While the S&P 500 enjoyed above average results earning 13.7 percent, the Russell 2000 index of small cap stocks only gained 4.9 percent (click here for a chart of major asset class results). A little more than a year ago, I wrote that there is a long-running debate in academia about whether small… Read More