June 9, 1997 was the first time the DJIA crossed and closed above 7465.95.
Today, 2.19.09 the DJIA closed below the previous low ( 11.20.08 ) in the current bear market.
Some suggest this is bad sign, others, a very bad sign.
It will be interesting to see if the SP500 @ 778.94 remains above it's closing low from 11.20.08 of 752.44.
We shall see.
Thursday, February 19, 2009
Monday, February 16, 2009
The next time your advisor says "92% of returns...."
The next time you hear your advisor say "92% of your returns comes from asset allocation" ask them what that means. Just say "explain that to me." Have them walk you through it in detail.
I'll bet you $5 they won't have a clue....not a chance. Some advisors out there do, some get it inside and out. But they are few and far between and I'd guess about <5%.
"Specifically, data from 82 large pension plans over the 1977–87 period indicate
that investment policy explained, on average, 91.5 per cent of the variation in quarterly total plan returns."
I'll bet you $5 they won't have a clue....not a chance. Some advisors out there do, some get it inside and out. But they are few and far between and I'd guess about <5%.
Most advisors are unaware of what they are actually misquoting, who wrote it, or what it means. By reading this post you'll move to the head of the class.
Here is the quote:
"Specifically, data from 82 large pension plans over the 1977–87 period indicate
that investment policy explained, on average, 91.5 per cent of the variation in quarterly total plan returns."
The quote is from an article, a study really, by Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, written in 1991, in the Financial Analysts Journal. ( http://tinyurl.com/bdmgug pdf )
This article was a follow-up to a similar study they did in 1986.
The KEY point, which I bolded above, is that investment policy ( asset allocation ) explains 91.5% of the variation in returns !
It does NOT explain or determine WHAT your return will be....just how VOLATILE it will be...or how the returns will vary. That's it.
Example = If your asset allocation is 100% cash, the variability of your returns will be not so much. Cash does not move around in value. The interest rate may change, but that's it.
If your asset allocation is 100% stocks, or stock mutual funds, then the variability of your returns will be all over the map ! Because we know the stock market, even in 'normal' times, can be + 20% or - 20% within the same year.
So, asset allocation ( investment policy ) has everything to do with how your returns will be jacked around by the market, or by whatever major asset class you expose them too. No more, no less. Asset allocation does not predict, ensure, or make more likely a certain return %, nor does it guarantee you'll achieve an investment goal.
This is not to say that asset allocation is without merit. Not at all.
Asset allocation has plenty of merit, use and investment application.
It is unfortunately oversold as a solution and severely misunderstood. (9)
Overused and misused quotes...
Too often we hear or read "...in the long run we are all dead." (Keynes )
Here is the entire quote:
"The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
Here is the entire quote:
"The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
One of us is a HUGE Jeremy Grantham fan...
One of us is a HUGE Jeremy Grantham http://tinyurl.com/dh39ke fan and aims to read his every word. The passages excerpted below are from his most recent Jan. 2009 GMO Quarterly Letter.
"Never underestimate the power of a dominant
academic idea to choke off competing ideas, and never
underestimate the unwillingness of academics to change
their views in the face of evidence. They have decades
of their research and their academic standing to defend.
The incredibly inaccurate efficient market theory was
believed in totality by many of our financial leaders, and
believed in part by almost all. It left our economic and
governmental establishment sitting by confidently, even
as a lethally dangerous combination of asset bubbles, lax
controls, pernicious incentives, and wickedly complicated
instruments led to our current plight. “Surely none of this
could happen in a rational, efficient world,” they seemed
to be thinking."
"Heavy buy-and-hold equity positions are fine for long-lived
computers, but for impatient humans – given as we are to
waves of overconfidence and abject fear – they are simply
dangerous and unsuitable."
"Never underestimate the power of a dominant
academic idea to choke off competing ideas, and never
underestimate the unwillingness of academics to change
their views in the face of evidence. They have decades
of their research and their academic standing to defend.
The incredibly inaccurate efficient market theory was
believed in totality by many of our financial leaders, and
believed in part by almost all. It left our economic and
governmental establishment sitting by confidently, even
as a lethally dangerous combination of asset bubbles, lax
controls, pernicious incentives, and wickedly complicated
instruments led to our current plight. “Surely none of this
could happen in a rational, efficient world,” they seemed
to be thinking."
"Heavy buy-and-hold equity positions are fine for long-lived
computers, but for impatient humans – given as we are to
waves of overconfidence and abject fear – they are simply
dangerous and unsuitable."
Citizen observations...
Two weekends in a row I've heard a series of radio commercials for 'massive liquidation sale..! everything must go ! !'
These events are being held at decent sized 'expo' and civic centers ( small arenas.)
It's all Retails items / goods; clothes, shoes, belts, purses, perfume, bags, small furniture sets, etc.
I'm guessing there is tons of unsold, post-holidays retail stuff which, as the ads say, must go !
I'm also guessing there will be many more of these liquidation events.
Stay tuned. (9)
These events are being held at decent sized 'expo' and civic centers ( small arenas.)
It's all Retails items / goods; clothes, shoes, belts, purses, perfume, bags, small furniture sets, etc.
I'm guessing there is tons of unsold, post-holidays retail stuff which, as the ads say, must go !
I'm also guessing there will be many more of these liquidation events.
Stay tuned. (9)
Part man, part monkey
This excerpt is from James Montier, who at the time ( 11.22.2002 ) was with Dresdner Kleinwort Wasserstein and is now with SocGen in London.
The 10 page pdf can be read here http://tinyurl.com/d927rz and we suggest re-reading it at least annually.
This piece was titled "Part man, part monkey" enjoy. (9)
"Leaving the trees could have been our first mistake.
Our minds are suited for solving problems related to our survival, rather than
being optimised for investment decisions.
We all make mistakes when we make decisions.
The list below gives a top ten list for avoiding the most common investment mental pitfalls.
1 You know less than you think you do
2 Be less certain in your views, aim for timid forecasts and bold choices
3 Don't get hung up on one technique, tool, approach or view - flexibility and pragmatism are the order of the day
4 Listen to those who don't agree with you
5 You didn't know it all along, you just think you did
6 Forget relative valuation, forget market price, work out what the stock is worth (use reverse DCFs)
7 Don't take information at face value, think carefully about how it was presented to you
8 Don't confuse good firms with good investments, or good earnings growth with good returns
9 Vivid, easy to recall events are less likely than you think they are, subtle causes are underestimated
10 Sell your losers and ride your winners "
The 10 page pdf can be read here http://tinyurl.com/d927rz and we suggest re-reading it at least annually.
This piece was titled "Part man, part monkey" enjoy. (9)
"Leaving the trees could have been our first mistake.
Our minds are suited for solving problems related to our survival, rather than
being optimised for investment decisions.
We all make mistakes when we make decisions.
The list below gives a top ten list for avoiding the most common investment mental pitfalls.
1 You know less than you think you do
2 Be less certain in your views, aim for timid forecasts and bold choices
3 Don't get hung up on one technique, tool, approach or view - flexibility and pragmatism are the order of the day
4 Listen to those who don't agree with you
5 You didn't know it all along, you just think you did
6 Forget relative valuation, forget market price, work out what the stock is worth (use reverse DCFs)
7 Don't take information at face value, think carefully about how it was presented to you
8 Don't confuse good firms with good investments, or good earnings growth with good returns
9 Vivid, easy to recall events are less likely than you think they are, subtle causes are underestimated
10 Sell your losers and ride your winners "
Investor behavior...
This excerpt below comes to us from Louis Gave of GaveKal, courtesy of John Mauldin.
"Most investors have a natural tendency to project their most recent experiences far out in the future."
This is a dangerous behavior which can have disastrous results.
In working with investors we've seen this far too often.
Currently = clients reflect upon their % losses or $$ losses and extrapolate them forward into to the future...which quickly leaves them 'broke!' Or, 'I'm going to loose it all !'
Early 2007 = 'Does this thing have any China in it ? How about emerging markets, gold or oil ? That's what's making the gains...'
The same was true in the summer and fall of 2002 and the early winter / spring of 2000. (9)
"Most investors have a natural tendency to project their most recent experiences far out in the future."
This is a dangerous behavior which can have disastrous results.
In working with investors we've seen this far too often.
Currently = clients reflect upon their % losses or $$ losses and extrapolate them forward into to the future...which quickly leaves them 'broke!' Or, 'I'm going to loose it all !'
Early 2007 = 'Does this thing have any China in it ? How about emerging markets, gold or oil ? That's what's making the gains...'
The same was true in the summer and fall of 2002 and the early winter / spring of 2000. (9)
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