The Ignorant Investor

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.

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.