Investing Archives - Page 7 of 11 - the patient investor

September 27, 2014

Australian investors

Australian stocks have taken a bit of a beating over the last few weeks, including a few of the momentum stocks in our portfolio. Risk of a bear market remains low, but a falling Aussie Dollar has prompted international investors to scale back exposure to Australian equities.

AUDUSD

This tends to become self-reinforcing as falling stock prices then prompt further sell-offs. And repatriation causes further weakness in the Aussie Dollar. The down-trend is likely to continue if support at $0.8650/$0.8700 is breached.

Investors who split their portfolio between the S&P 500 and the ASX 200 have been cushioned from the fall, with their US portfolio showing strong appreciation in Australian Dollar terms.

September 8, 2014

Risk versus volatlity

Ben Carlson cites Howard Marks on the difference between volatility and risk:

Volatility is the academic’s choice for defining and measuring risk. I think this is the case largely because volatility is quantifiable and thus usable in the calculations and models of modern finance theory.

However, while volatility is quantifiable and machinable – and can also be an indicator or symptom of riskiness and even a specific form of risk – I think it falls short as “the” definition of investment risk. In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility…. What they fear is the possibility of permanent loss.

September 6, 2014

To err is human

From Miles Udland at Business Insider:

[James O’Shaughnessy of O’Shaughnessy Asset Management] relays one anecdote from an employee who recently joined his firm….

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity….They were the accounts [of] people who forgot they had an account at Fidelity.”

There are numerous studies that explain why this happens. And they almost always come down to the fact that our minds work against us. Due to our behavioural biases, we often find ourselves buying high and selling low.

I have always called this “the Siemens effect” from an example I came across, in a completely different field, about 30 years ago. German electronics giant Siemens built a telecommunications exchange in a sealed container, with no human access and all maintenance conducted from an outside control panel. The exchange experienced only a small fraction of the equipment failures experienced in a normal telecommunications exchange, leading to the conclusion that human intervention by maintenance staff caused most of the faults.

Likewise in investment, if you build the equivalent of a sealed system. Where there is no direct human intervention, you are likely to experience better performance than if there is constant tinkering to “improve” the system.

The caveat is, during an electrical storm it may be advisable to shut down the telecommunications exchange from the control panel. Likewise, with stocks, when macroeconomic and volatility filters warn of elevated risk, the system should move to cash — or assets, like government bonds, with low or negative correlation to stocks.

September 4, 2014

Fidelity Reviewed Which Accounts Did Best And What They Found Was Hilarious | Business Insider

From Miles Udland:

[James O’Shaughnessy of O’Shaughnessy Asset Management] relays one anecdote from an employee who recently joined his firm that really makes your head spin.

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity….They were the accounts [of] people who forgot they had an account at Fidelity.”

There are numerous studies that explain why this happens. And they almost always come down to the fact that our minds work against us. Due to our behavioural biases, we often find ourselves buying high and selling low.

I have always called this “the Siemens effect” from an example I came across, in a completely different field, about 30 years ago. German electronics giant Siemens built a telecommunications exchange in a sealed container, where no human could have access and all maintenance was conducted from an outside control panel. The exchange experienced only a small fraction of the equipment failures experienced in a normal telecommunications exchange, leading to the conclusion that human intervention by maintenance staff caused most of the faults.

The caveat is, during an electrical storm it may be advisable to shut the telecommunications exchange down from the control panel. Likewise, with stocks, when macroeconomic and volatility filters warn of elevated risk, the system should move to cash or assets (e.g. government bonds) with low or negative correlation to stocks.

August 27, 2014

The Unintended Consequences of Risk Avoidance | Pragmatic Capitalism

Cullen Roche on risk avoidance:

Many investors have learned the hard way that trying to beat the market over shorter time frames can be more trouble than it’s worth. A singular mission to outperform can actually lead to underperformance. The same logic applies when trying to minimize losses. A sole focus on downside protection usually leads to the opportunity cost of no upside participation.

An illusion of safety in the short-term can lead to problems in the long-term. Judging your portfolio or your financial advisor over a six month period is a recipe for failure. No strategy can be assessed over that short of a time frame.

Also, while fees are important over the long haul, investor behavior is much more important. Investors need to make sure they aren’t sacrificing other areas of portfolio management in a push to only reduce fees. Lower investment fees are only one of the many risk management techniques needed for a successful portfolio.

August 23, 2014

The Decline and Fall of Fund Managers | WSJ

Jason Zweig predicts the demise of active fund managers:

So active management won’t disappear entirely. But index funds and comparable exchange-traded portfolios now account for 28% of total fund assets, up from 9% in 2000. And no wonder. Over the past one, three, five and 10 years, only one-fourth to one-third of all stock funds have beaten the index for their category, according to investment researcher Morningstar.

Meanwhile, index funds effectively match the returns of those market benchmarks at fees that often run only one-tenth of those of active funds.

Skeptics have pointed out that if individual investors — those Wrong-Way Corrigans of the financial world — are rushing into passive funds, then active funds might be due for a resurgence….But the net supply of outperformance always is zero; one fund manager can beat the market only at the expense of another who must lag behind it.

Not quite true. Active management is not a zero-sum game. Zweig is ignoring individual investors who, as a body, consistently under-perform the benchmark index.

Mega fund managers are more likely to promote index funds because their size makes it difficult to beat the benchmark index, while smaller, more nimble players are able to do so.

August 23, 2014

108-year-old investor: ‘I doubled my money in 1929 crash and I’m still winning’ | Telegraph

Irving Kahn, of investment firm Kahn Brothers, is 108 years old and began his Wall Street career before the crash of 1929. He still works in the investment firm he founded, although nowadays his son manages the firm. Richard Evans asks what advice he would give to investors who go it alone:

Mr Kahn said: “I would recommend that private investors tune out the prevailing views they hear on the radio, television and the internet. They are not helpful. People say ‘buy low, sell high’, but you cannot do this if you are following the herd.

“You must have the discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets. If you recognise this, you can resist the urge to buy into a rally and sell into a decline. It’s also helpful to remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life.”

August 21, 2014

The Stock Market’s Missing Ingredient | Bloomberg View

Barry Ritholz discusses why military conflicts around the globe and civil strife in Ferguson, Missouri have little impact on market performance:

….None of this seems to matter to Mr. Market. He continues to power on, oblivious to issues that don’t affect corporate earnings. They have, by the way, been stellar, growing at a 9 percent annual rate. Meanwhile, interest rates are still low and inflation is subdued.

Rarely have conditions for market gains been so promising at a time when investor psychology has been so negative. Gallup reports that only 7 percent of those surveyed were aware of last year’s scorching [29.7%] gains in the Standard & Poor’s 500 Index.

via The Stock Market's Missing Ingredient – Bloomberg View.

August 9, 2014

When to sell and when to buy?

Investors are faced with the same emotional tug-of-war at every correction: Do I sell and abandon my positions or do I sit tight and ride out the storm? Here are a couple of useful perspectives:

What is your investment time frame?

Do you plan to invest for the long-term (5 to 10 years) or is your investment horizon a matter of months or weeks? If your investment horizon is long-term, you are investing for the primary trend. Your intention is unlikely to be to time secondary market movements.

Is timing secondary corrections profitable?

Our research shows that the average re-entry point, after brokerage and slippage is higher than the exit point and erodes performance.

Has the earning capacity of stocks you hold been affected by the correction?

A correction is a wave of negative sentiment, normally caused by an external shock — like the prospect of higher interest rates, oil prices, some new conflict or a threat to international trade. Where the market decides that earnings are unaffected and there is no permanent loss of value, it tends to recover fairly quickly. If, however, the market decides that there is a long-lasting effect on earnings then stocks are likely to be re-rated — resulting in a long-lasting drop in value. The probability of the former is far higher than the latter: the ratio of primary to secondary adjustments is low.

When is the best time to hold Momentum stocks?

We have not done a wide-ranging study of this, but the best two months performance for our ASX200 Prime Momentum strategy in the last two years were July 2013 (11.00%) and February 2014 (9.04%) — both in the middle of corrections.

ASX 200 Corrections

Attempt to time the correction and you may miss the best-performing months.

August 8, 2014