Last July we examined two industry leaders in two very different cyclical industries: Oracle Corporation —a stock I own — and International Paper.
ORCL is a leader in enterprise software and IP is a leader in paper and packaging (think: corrugated boxes and paper cups). At that time the two companies traded at comparable valuations of approximately 13 times estimated earnings. Both stocks paid a dividend. ORCL yielded 1.2 percent, while IP yielded a more substantial 2.9 percent. Both stocks were cheap as measured by their respective p/e’s, and, in particular, when compared withtheir peer group companies and the S&P 500.
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Despite their similar valuations in July 2014 both stocks had very different earnings histories. ORCL’s five-year earnings registered in the mid-double digits, and was expected to slow to the low double digits in the subsequent five year period. IP’s five-year earnings growth, on the other hand, was flat due largely to a restructuring; five-year estimated earnings growth was expected to grow in the mid-single digits.
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The age-old maxim —”sell in May and go away,” is often quoted by traders as a sure-fire strategy. And, for seemingly good reason.
According to Yardeni Research, since 1928, the S&P 500 has risen an average of 1.9 percent from May to October but an impressive 5.2 percent from November to April. Yet since the beginning of this bull run the old adage has not held true. If you had sold in May during this cycle you would have underperformed the overall market by a cumulative 70 percent. Since 1926, the stock market has generated positive annual returns more than 70 percent of the time, so it turns out that despite market tradition, being out of stocks is often riskier than remaining invested.
So what strategy should an investor follow—if exiting is either too risky, or at the very least, undesirable—when convinced that the market is becoming fully, or overvalued? One of my tried-and-true investment rules? Buy stocks like you buy toilet paper — focus on price and yield.
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I am asked frequently if stocks can continue to go up. Would that I knew. Bespoke Investment Group recently provided some insight as to where the current bull market ranks historically. Six years into it, this rally qualifies as the fourth-longest of the 33 Dow Jones industrial average bull markets since 1900.
Since the 2009 low, the Dow Jones industrial average has risen approximately 175 percent — the fifth-largest gain since 1900. That is a nice run, but Bespoke also notes that in the 1990s bull market, the Dow rose 400 percent. All the more impressive since interest rates were a good deal higher then
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Active money managers are having a tough time beating their benchmarks again this year. In fact, fewer than 15 percent of money managers were exceeding the market by the end of November.
You might say active management has hit a rough patch. According to Ben Levisohn of Barron’s, who cites the University of Chicago’s Center for Research in Security Prices, “From June 1983 to June 2014, the median fund underperformed the market by more than 80 percentage points.” That’s 30 long years of underperformance. Ouch.
If you invest in mutual funds, this information should be important to you. In addition to the high fees most funds charge, the majority have underperformed yet again in 2014.
What is an investor to do? Read the rest here: The Arizona Repbulic
Lower prices are often synonymous with value. Surprisingly, the same is true when selecting investments. Look for the lowest-priced, diversified exchange-traded funds (ETFs), the cheapest mutual fund or any investment vehicle or manager that ranks among those with the lowest costs. For top long-term returns, be more focused on the cost of your investments than in seeking the top-performing fund.
How can I make such a definitive statement? Because the research supports it.
Morningstar reports that the average actively managed stock mutual fund sports an annual expense ratio of more than 1.4 percent. (Compare that to the average ETF fund fee of 0.2 percent.) If we assume a long-term return on stocks of approximately 9 percent and an average annual inflation rate of 3 percent, we obtain a real rate of return of 5.8 percent annually. Before accounting for the compounding of the expense ratio — yes, fees compound and erode total return just as dividends and interest compound and increase total return — you can see that an average annual fee of 1.4 percent consumes a significant portion of the average annual real total return of stocks of 5.8 percent.
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The Arizona Republic
Recency effect is the tendency to remember a more recent experience better than a previous experience.
Behavioral economists call this recency effect “availability” and it is programmed into our DNA: I touch a hot stove — ouch!; I learn not to touch a hot stove again. Eventually I use the contained flame to my advantage, to prepare meals for my nourishment. But the result of touching the stove and getting burned is still stored in my memory, inspiring me to use a hot pad and keep my hands well away from the heat.
For investors, recency effect can bias investing decisions based on recent market performance. Whether up or down, we tend to extrapolate the recent event into the future. If the market is going up, we are more likely to act on expectations of a rising market. The converse is also true. Both tendencies can be dangerous.
The Arizona Republic
Most of us won’t have 97 years to save and invest. But Stephanie Mucha, who recently was featured in Barron’s, has. Ninety-seven long and productive years. And she has made the very most of each one.
Mucha’s peak annual earnings of $23,000 were modest even in 1994, when she retired. Still, she has managed to grow her assets to more than $5.5 million. Mucha has given $3 million to charity and retains $2.5 million — still percolating — in her portfolio. Her goal: to donate $6 million before she dies.
Mucha is obviously blessed with longevity, an enviable work ethic and a high financial IQ. But she doesn’t have any unusual advantages. She reads financial publications and uses good sense and, incredibly, does not even own a computer. Still she has succeeded. Fabulously.
Read the rest of Stephanie Mucha’s story here: The Arizona Republic