• The Death of Buy and Hold?
    Posted by on November 11th, 2008 at 12:34 pm

    Last night, the Fast Money crew talked about the death of buy-and-hold investing. I agree that as a strategy, it’s in intensive care, but I’m not so sure it’s quite dead yet.
    First, whenever people start talking about the death of something, particularly with investing, it often the moment it’s about to surge. The classic example of this is Business Week’s “Death of Equities” cover from 1979.
    The other reason for my skepticism is a misunderstanding of the arguments for buy-and-hold. I often hear people say, “Ha! The market’s down! Where’s your buy-and-hold NOW?” Well, the case for buy-and-hold isn’t that the market always goes up. Rather, it’s that buy-and-hold beats anyone else’s ability to time the market consistently, successfully and in a practical way. It’s that last part in italics that’s often overlooked.
    If you can time market successfully, fine. Go do it. In my opinion, I’ve never seen anyone who can do it consistently, successfully and in a practical way.
    The other part of buy-and-hold obviously depends on what you buy and what you hold. Since I don’t believe in efficient markets, I don’t see buy-and-hold as synonymous with index investing. Many do. I think it’s certainly possible for investors to make reasonable decisions that will lead them to beat the market over the long haul. For example, if you had taken some basic steps like underweighting large-cap tech stocks at the height of the bubble, you’d be in far better shape today. Small-cap value stocks have had a pretty nice run over the last ten years (except for the last three months). This year, I avoided energy stocks and large-cap financial stocks, and it’s served us well.
    There’s also the issue of how long to hold a stock. I don’t see the importance of holding a stock forever, but I do see value in holding them for a considerable amount of time. Each year, I change five out of my 20 Buy List stocks. That’s translates to an average holding period of four years, which seems reasonable to me, though I can understand some buy-and-hold purists objecting.
    Lastly, there’s also the issue of how long it takes a stock’s performance to reflect its true value. I think this may be one of the least-understood topics in investing. I’ll give you a brief summary. Let’s say that the stock market gains, on average, 0.05% a day with a daily standard deviation of 1%. (These numbers aren’t accurate. My point here is descriptive. I’m also aware of the problem of stocks returns and the normal distribution, but I’ll out that aside for now). That means that 95% of a stock’s daily move is simply nonsense. It had zero bearing on the stock’s true worth.
    After 25 days, more than a month of trading, the stock’s average return should be 1%. The standard deviation, however, is now 5% (note: this rises by the square root of the number of days). So even after one month of patience, the noise value has dropped to 83%.
    At 625 days, or nearly two-and-a-half year, the average return and the standard deviation are both 25%. This means that even after holding a stock for 30 months, it’s perfectly reasonable to expect a loss or a minimal gain.
    As I mentioned before, I used those numbers for descriptive purposed. The real figures would show that even more patience is required. Buy-and-hold could be dead, but the evidence isn’t close to be full. The bottom line is that the long-term advantage of holding stocks is real, but it takes a long time to show up.

  • 90 Years Ago
    Posted by on November 11th, 2008 at 11:00 am

    poppies.jpg
    In Flanders fields the poppies blow
    Between the crosses, row on row
    That mark our place; and in the sky
    The larks, still bravely singing, fly
    Scarce heard amid the guns below.
    We are the Dead. Short days ago
    We lived, felt dawn, saw sunset glow,
    Loved and were loved, and now we lie
    In Flanders fields.

  • Investor Quiz
    Posted by on November 10th, 2008 at 10:50 am

    Guess what stock was up over 430,000% in the last quarter of the 20th century, or nearly 40% a year?
    Give up?

    Read more…

  • Now That’s a Price Target
    Posted by on November 10th, 2008 at 10:40 am

    Deutsche Bank lowered GM to a sell today. That’s not what caught my attention, although I’m not sure why anyone would have rated GM anything else but sell.
    No, what struck me was their new price target: $0.

  • The Recession Is On
    Posted by on November 7th, 2008 at 2:18 pm

    Duh.

    The head of the panel that officially dates U.S. economic cycles said there’s no doubt now that a recession is under way following a surge in the unemployment rate to a 14-year high.
    “The evidence is more than compelling” Robert Hall, the Stanford University economist who leads the National Bureau of Economic Research’s business cycle dating committee, said in an interview. “It’s conclusive, in my personal opinion.”
    With today’s remarks, Hall joined fellow panelist and Harvard University Professor Martin Feldstein in calling a recession. The eight-member panel will meet at a later date to make an official determination because it needs additional details on gross domestic product figures, Hall said.
    Feldstein and other analysts have said the economic slump is likely to be deeper than the past two recessions, in 2001 and 1990-91. Today’s employment report reinforced that pessimism, with the unemployment rate climbing to 6.5 percent in October from 6.1 percent the previous month.

    By my estimate, I think they’ll say the recession began in May.

  • The Pro-Obama Wealthy
    Posted by on November 5th, 2008 at 5:27 pm

    According to exit polls, the percentage of voters in households that make over $200,000 a year doubled from 2004 to 2008, rising from 3% to 6%.
    In 2004, those voters went for Bush over Kerry, 63% to 35%. This time, they voted for Obama over McCain, 52% to 46%. That’s an amazing 17-point pick up.

  • NICK’s Earnings
    Posted by on November 5th, 2008 at 11:44 am

    Nicholas Financial (NICK) reported third-quarter earnings today, and it was basically what I expected. The company earned eight cents a share, which was a big drop from the 25 cents a share it earned in last year’s third quarter. Still, they’re making money, and that needs to be stressed. Revenues increased 7.4% to $13.5 million.
    I was impressed to see that most of the measures of their business were fairly stable compared with previous quarters. The big exception is NICK’s prevision for credit losses. That grew by 225% over last year’s third quarter, and it’s nearly 50% from the second quarter.
    This confirms my earlier view—NICK’s business is in a lot of trouble right now. However, any fear that the company is about to go under isn’t yet shown by the evidence. By my guess, I would say the current market price probably reflects a 50% chance that NICK will go bankrupt sometime in 2009.
    This investment will take awhile to be worthwhile, but it looks to reward patient investors.

  • Our First First Black President
    Posted by on November 5th, 2008 at 10:54 am

  • How Stocks Work
    Posted by on November 4th, 2008 at 11:15 pm

    Felix Salmon put three questions to Jim Surowiecki on the mechanics of stock valuation. I have some differences with Surowiecki’s answers so here’s my take:
    Felix Salmon: What’s the relationship, in theory, between a company’s return on equity, on the one hand, and its stock price, on the other? Does a high return on equity mean a rising stock price, or is it a rising return on equity which means a rising stock price? Or, to put it another way: if one company has an ROE which is (expected to be) flat at 4%, and another company has an ROE which is (expected to be) flat at 14%, would you expect the latter to rise more than the former, or indeed either of them to rise at all?
    Eddy: A company’s share price is the net present value of all future cash flows. A company’s return-on-equity is a measure of profits for the next year relative to present equity, so the two are connected. However, a high ROE does not translate to a rising share price, but a rising ROE should. Regarding your question, I would assume that the market has discounted both stocks’ net present value which incorporates ROE. Therefore, I would only expect the stocks to rise at the pace of the risk-free rate plus the equity risk premium.
    This may help: ROE can be broken down into three parts; profit margin, asset turnover and leverage. It goes like this:
    Profit margin is earnings divided by sales. Asset turnover is sales divided by assets. Leverage is assets divided by equity.
    Earnings……….Sales…………..Assets
    —————X—————-X————–
    Sales…………….Assets………..Equity
    Note that the sales and assets cancel each other out to give you Earnings divided by Equity.
    FS: What’s the relationship between stock price, ROE, and risk-free rate of return? Would one expect ROEs in a country with a zero risk-free rate to be lower than ROEs in a country with a higher risk-free rate? How does that feed in to stock prices, if at all?
    Eddy: Again, a company’s share price is the net present value of all future cash flows. ROE is the best measure of the growth of future cash flows. How do we discount that? We discount it by the cost of capital which is risk-free rate plus an equity-risk premium. That’s why a lower risk-free rate tends to boost equity prices.
    According to the Gordon Model, it should look something like this:
    Price = Earnings/(Risk Free Rate + Equity Risk Premium – ROE)
    FS: How can a company with a positive ROE destroy economic value for shareholders?
    Eddy: All companies in all industries are in phantom competition with the cost of equity capital. Even though you can’t see it, you’re struggling against it every day. So even if a company manages to squeak out positive ROE, capital will not flow your way if you keep losing to everybody else.

  • Press Release from the NY Fed
    Posted by on November 4th, 2008 at 3:02 pm

    Wonderful:

    Michael Alix has been named a senior vice president in the Bank Supervision Group of the Federal Reserve Bank of New York. He will serve as a senior advisor to William L. Rutledge, executive vice president, Bank Supervision Group. Mr. Alix’s appointment was made by the Bank’s board of directors and is effective, November 3, 2008.
    Most recently, Mr. Alix worked for the Bear Stearns Companies, Inc., where he served as chief risk officer from 2006-2008 and global head of credit risk management from 1996-2006. His prior experience included eight years at Merrill Lynch & Company where he was a director, Asia chief credit officer and a vice president, head of North America financial institutions credit. He began his career with the Irving Trust Company where he served as an assistant vice president and lending officer.
    Mr. Alix holds an M.B.A in finance from the Wharton School of the University of Pennsylvania and a bachelor’s degree in economics from Duke University. He is a resident of New Jersey.