The Ignorant Investor

Ignorance Can't Stand in the Way of My Opinion

Friday, March 24, 2006

 

Corporate America Will Rediscover the Point of Benefits . . . Someday

Every now and then something happens at a job, and you think to yourself, "Man, I'm getting tired of this bullshit. I need to find something else."

Then you think, "Yeah, but I've got time in here and it's not good to run around switching jobs."

Then you think, "It's not like I've got a pension, and it's not like the company is giving me much with a 401k. With almost no matching funds, it's really nothing more than a tax-free savings program that they run. And they keep increasing the money I need to pay to get health insurance."

Which leads to, "Basically, I could leave here tomorrow and not give up a thing. A job today is all about what the corporation gives you now. And if someone will give me more now, I may as well make the move when the chance comes. Screw these guys..."

The result: Higher turnover, which is almost always a bad thing.

Thursday, March 23, 2006

 

Man, Did I Blow the Timing on the Trade

I've been holding out selling a big position in Glaxo Smithkline for a week or two as part of a broader move from holding individual shares to holding index funds. I was ready to sell on Monday, but the shares have been doing so well lately I figured I'd hold out, even though I kind of knew that the upside potential was shrinking with every move upward. In other words, I got greedy. So what happens? The stock drops 2-3% over the past few days.

Oh, well. This is the story of my investing life. Yet another episode telling me in very clear terms: "Don't try to time the stock market, you schmuck."

I should put that in a little index card and post in the mirror above the bathroom sink. Read it every morning as I shave.

[Update- Sold the shares on March 24 after GSK ticked up about a percent. So it wasn't a total fiasco, and I escaped my doom wiser and only a little poorer]

Monday, March 20, 2006

 

Hey, This Guy at JP Morgan Stole My Idea....

It's always pleasant to find out that one's own analysis is mirrored by someone with much more education and experience in the market. The other day, I pointed out that I was buying shares in an S&P 500 fund because small caps and international stocks had gone through such a huge run-up in recent years. So what do I see in the New York Times website over the weekend?

Stuart A. Schweitzer, global markets strategist at JPMorgan Asset and Wealth Management, said there were many explanations for megacaps having underperformed the market for six years.

Initially, he said, megacaps were simply too expensive. By the end of 1999, the 50 largest stocks in the S.& P. 500 had outperformed the index by 4.6 percent a year, on average, during the prior six years. But in the six years since the turn of this decade, the 50 largest stocks have underperformed the index by exactly the same amount, 4.6 percent a year on average.

"In 2000, megacaps were overvalued because expectations were too high," Mr. Schweitzer said. But when stocks started rebounding in 2003, he said investors began pouring money into small caps, which usually do better coming out of a recession. Now, he said, smaller stocks are overpriced. "It's the mirror image of 1999," when megacaps were too expensive and small caps were cheap, he said.

Mr. Schweitzer said he thought that megacaps would shine again "when it's cloudy out." If the market hits a rough patch, megacaps would probably fare better than small caps, he said.

Also worth noting: In the modern global system, there isn't necessarily much difference between an American company and an international one- the big players like those in S&P are already hedged against currency risks because of their foreign operations:

Megacaps might also benefit if the dollar declined, he said, because they earn much more of their profits overseas than most other United States companies. For instance, the 50 largest companies in the S.& P. 500 earn about 40 percent of their revenue outside the United States. The rest of the companies in that index earn on average less than a quarter of their profit abroad.





Saturday, March 18, 2006

 

An Explanation on Infrequent Posts

I haven't posted much here in the past couple of weeks, and the lack of production is likely to continue. When I started writing the blog I saw it as a way to think through some ideas that had troubled me for years: namely, that I was losing money or failing to capitalize on trends like other, more successful investors.

One of the brutally efficient aspects of writing is that it forces you to take a vague thought and rip it down into something specific enough to be recorded in sentences and paragraphs. Feelings are amorphous and can alter themselves over time, but the rules of grammar and word choice tend to transform even the foggiest thought into concrete. Only when it's fixed in cement, sitting on the floor in front of you, do you finally get a really good look at it. That's when you know whether what you've got is gold or something resembling a pile of manure. So even if the finished product is clumsy or lacks elegance or, indeed, is utterly banal, the process of writing itself is still valuable to me as a thinking tool.

Recently, however, I've come to think that I'm writing and thinking too much about the market. Reading too many news stories and econoblogs, worrying too much about what may come down the road. For a market professional or trader, that's a way of life. But for the individual, buy-and-hold investor, it's a recipe for a big fat cup of anxiety. The tendency when you try to anticipate what will happen is to act, either to catch a rising market or to avoid some market precipice. But since it's usually unclear what the future holds, the urge to act creates the uncomfortable sensation of feeling the desperate need to do something while not knowing which move to make. In such circumstances, the urge to do something becomes irresistable even though I know rationally that doing nothing is usually the wisest course. You can imagine how well I sleep....

Based on what I've been reading in books like A Random Walk Down Wall Street and Winning the Loser's Game, the urge to act is what causes so many ignorant investors so much grief. Put the money in index funds, walk away and do something fun. Come back in 20 years and you should do better than you would have stock picking or timing the market. That's a message that appears to be backed up by research by academics outside the Wall Street mainstream (in other words, writers who don't have careers centered in institutions dedicated to rapid training and active management).

So I'm going to back off for a while. Most of what I was thinking about six months ago when I started the blog is now fixed in the archives. I'm really running out of ideas. I expect I'll continue to post intermittently if a good snippet of wisdom catches my eye and needs recording, or if I make a new move in my portfolio. Earnings season is coming up, so that will be worth a post or two. But other than that, there's not much reason for me to make daily or semi-daily posts on the market. I'm not telling anyone anything they don't already know, and there's no good reason for me to do it for my own purposes.




Tuesday, March 14, 2006

 

Current Account Deficit Sets New Record

WASHINGTON - America's deficit in the broadest measure of international trade surged to an all-time high of $804.9 billion last year as the country went deeper into debt to foreigners.

The Commerce Department said the deficit in the current account was up 20.4 percent from the previous record of $668.1 billion set in 2004. The current account is the best measure of trade because it tracks not only goods and services but also investment flows between countries.


On my list of phrases that make me nervous, "all-time high" occupies one of the top ten spots. It's right up there gems like, "this time it's different..." and "we don't see any problems going forward...."

But rather than just panicking at the idea of our massive trade deficit, I guess I should be asking what happens when the inevitable rebalancing occurs. So far, I haven't seen a clear answer come out on that question. The options range from "nothing bad" to "mass horror on a biblical scale."

Who to believe? Everyone makes a pretty good case. Perhaps I'll just flip a coin....

Friday, March 10, 2006

 
DUBAI, United Arab Emirates - Gulf investors, feeling scorched by what they see as an anti-Arab backlash in the U.S. Congress, will likely be wary of high-profile investments in the United States after the ports controversy with a Dubai company. In a possible early sign of trouble, free trade talks between the United States and the United Arab Emirates due to start Monday were postponed.


I'm crying, CRYING, for the Emir of Dubai and his family. The poor little guy, flush with cash and enjoying all the fruits of lording it over his subjects, feels humiliated because we don't think of him the way we think of, say, the Queen of England. That's totally unfair. I mean, the Queen of England always used to have family members off visiting the Taliban, and we didn't say a thing. What gives?

In any case, if the Emir no longer sees the U.S. as a good place to invest, he should invest elsewhere. The only consideration for a good businessman is what return he's going to get on his money. Sometimes, the things you want to buy aren't for sale. So you move onto something else. It's not personal. It's just business.

Wednesday, March 08, 2006

 

S&P 500 Looking Better than Most This Year .... Finally

Not much has caught my eye these past few days. There have been various news items- the productivity report, for one- that are probably worth comment, but I have nothing even arguably new, profound, or interesting to say on the issue of productivity in the last quarter of 2005.

Over the past few days I've sold about half my GE and BP stock and placed the proceeds into an S&P 500 fund. This move was part of a long-range plan to get out of owning individual stocks and move into index funds and ETFs, and on the bright side for GE shareholders, it almost guarantees a sharp rally in GE's stock over the next few months.

As of the beginning of March, year to date performance of the S&P 500 is pretty good relative to other products that led returns last year. After a long stretch of subpar performances, the Spyders are beating out the commodity ETFs, the emerging market ETF, gold, etc. Still trailing real estate and small caps, but both those products have been bid up so high, I'm constantly amazed at how well they continue to do. REITs . . . man, I don't know when that mania is going to end.

Definitely got no certainty on whether '06 will be bad or good for stocks, or just more of the same. Bond yields are up, and this might be a year where we eke out a 5% return. Adjusted for inflation, that would be something between nothing and crumbs.

Okay, obviously I'm not feeling to sparkly right now. Maybe that's why I haven't been posting....

Monday, March 06, 2006

 

International Funds vs. The S&P 500- The Current Bet

"We've gone through an amazing run in international equities," says Matthew Chope, a partner at the Center for Financial Planning, based in Southfield, Mich. "Over the last three years, every single foreign fund [tracked by researcher] Morningstar -- 1,057 -- has outperformed the S&P 500."

Don't Jettison Foreign-Stock Funds, Wall Street Journal 3/5/06

I've been putting a little money into international funds recently, but when I read something like this factoid, I lean back towards the S&P 500. It's a betting issue more than anything else. The probability of outsized gains for international stocks goes down the longer the run-up lasts; likewise, the probability of better performance by the S&P versus international stocks rises.

The longer the current situation goes on, the less compelling the story becomes on international stocks. I'm probably going to wait for them to go out of fashion before buying in for the long term. The S&P 500 still isn't cheap, but it just seems to me to offer a slightly better value right now.

Saturday, March 04, 2006

 

Worried About Inflation? Read this....

This morning I read a presentation by Merrill Lynch economist David Rosenberg on the current state and future prospects of the U.S. economy for 2006-07. Its a very readable and straightforward effort. Key points, based on my reading (granted, I might have got what he was saying wrong, so caveat emptor rules here:

1) Current factors indicate disinflationary environment rather than inflationary- the risk of high inflation from energy is outweighed by anemic wage growth and weak labor markets. The idea that government statisticians are massaging the data seems improbably given that all other industrialized economies have low core inflation.

2) The current economic numbers are being misinterpreted- the economy is slowing down, not continuing to boom. People are stressing current numbers rather than leading indicators.

3) Cheap credit fueled high consumer spending, which accounts for huge percentage of GDP. High debt service costs will cut into consumer spending as the home equity debt craze fades under new, tighter credit standards. Slower economic growth is likely.

4) The housing boom is unsustainable and is already losing steam. Prices have risen so far from the historical mean that we could see equally large declines in prices in a new buyers market.

Bottom line, Rosenberg says, is that there is currently about a 30% chance of a hard landing in 2007. This could rise even higher if the Fed continues to tighten into the summer. Rosenberg thinks that the Fed is overstating economic growth and may well overshoot, leading to recession.

Friday, March 03, 2006

 

Overstock.com- SELL! SELL!

SALT LAKE CITY - The chairman of Internet retailer Overstock.com told a newspaper Thursday that he may step down in a disagreement with his son's "jihad" against market analysts and financial writers

Amazing. Patrick Byrne, the CEO of Overstock.com, thinks that hedge fund Rocker Partners and Gradient Analytics, an independent research firm, colluded to publish negative research on his company in an effort to drive down the share price. So he's filed a lawsuit.

The stock currently sells for about $22, but the company hasn't made an annual profit since going public back in 2002, the AP says. Now I can't imagine why anyone would want to short the stock. Can you?

Either the CEO is cracking up, or he is trying this stunt to discourage negative reports on his company. Either way, what he's telling me is SELL SELL SELL. If I had a position in the company, that is.

Thursday, March 02, 2006

 

If the Economy is So Good, Why is GE's Stock Slowly Sinking?

Got to be quick here. GE is a huge conglomerate with its fingers in a lot of pies. I'd figure as GE goes, so goes the economy. The analysts' consensus is buy, outperform, strong buy, etc. The yield is at 3%. Balance sheet solid. Sounds good, right? Better than a lot of other companies out there. But right now the Street is down on the company. The share price has dropped 7% this year even as the DOW broke 11,000. I'm wondering why.

I guess it must have something to do with valuations. The trailing p/e ratio is running around 21, which is substantially higher than the market average. Arguably, this is a holdover from the Jack Welch days and the late 1990s when GE commanded a huge premium over other big cap stocks. Jack's gone now, obviously. As is the optimism of the 1990s. So GE may still be finding its new place in the market. Going from a star athlete to a solid, journeyman player means a drop in the salary, if you get my drift.

Now here's the bind: I'm sitting on top of a lot of GE stock. Do I sell now while the valuation is high and before any further losses? Or will the stock stabilize at 19-20x earnings- i.e., at a small premium to the market? Or is it going to be ruthlessly punished like former market-leader Intel by the trader crowd, leaving it prostrate in the Wall Street gutter with with its pants around its ankles and a deep sense of shame? These are all questions I need to answer.

I know the trader's response: sell now cause momentum is down and buy back in when it's a better value. Problem is, I've got to pay 15% taxes when I sell, and a 1-2% brokerage commission (I know, I know- I should be in a discount house, but I'm not). The buy and hold crowd would say that transaction costs can't be ignored and that this is just a small bump in the long term road.

Don't know who to believe, but I've got to make a decision soon....

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