Mistakes to Avoid - Panicking When the Market Is Down

Panicking When the Market Is Down

Going against the grain takes courage but pays off.

Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. It's very tempting to look for VALIDATION - or other people doing the same thing - when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them. (Sir John Templeton: "The time of maximum pessimism is the best time to buy.")

1979: Business Week cover story asked the question, "The Death of Equities?"
Not long after, it was the start of an 18 year bull market in stocks.

1999: Barron's featured Warren Buffett on its cover, asking, "What's Wrong, Warren?" and bemoaning Buffett's aversion to technology stocks.
Over the next three years, the Nasdaq tanked more than 60 percent, and Berkshire Hathaway shares appreciated 40%.

Morningstar has conducted every year for the past several years, in which the performance of unpopular funds were looked at. The asset classes that everyone hated outperformed the ones that everyone loved in all but one rolling three-year period over the past dozen years.

The difference can be striking. For example, investors who went where others feared to tread and bought the three least-popular fund categories at the beginning of 2000 would have had roughly flat investment returns over the subsequent three years. That was much better than the market's average annual loss of about 15% over the same time period and miles ahead of the performance of the popular fund categories, which declined an average of 26% during the three-year period.

Going against the grain takes courage, but that courage pays off. You'll do better as an investor is you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavour of the month in the financial press.

One fund manager says it's time to buy when the chips are down - way down.

One fund manager says it's time to buy when the chips are down - way down.

NEW YORK (Fortune) -- Chris McHugh, manager of Turner Midcap Growth Fund, thinks it's time for investors to get back into buying mode and take on a longer-term view of the market.
"Historically you want to buy when things look absolutely at their worst," he says. "The traditional investor unfortunately always sells at the bottom and buys at the top."
While there are risks, he believes investors should accumulate during the dips if they don't want to miss out. For his fund, McHugh says that means buying high-quality growth names (like Kohl's (KSS, Fortune 500), its top holding), companies positioned to take market share, and early-cycle businesses that are the first to rally when the market bottoms.
"I think that's the right combination to be looking at to take advantage of very depressed valuation levels from a longer-term perspective in the marketplace," he says.
The Turner Midcap Growth Fund is up 14.94% year to date, beating out its category returns of 11.13% for the same period, according to Morningstar. The fund has dropped about 37% over a one-year period, but over five years it has fallen 0.53%, just beating out its category (-0.87%). Launched in 1996, the fund has about $840 million in assets.
McHugh places a special priority on earnings - both in their sustainability and quality. Crucial to him is that a company beats and exceeds expectations.
"At the end of the day, that's really the essence of the stock market," he says. "It all comes down to earnings, or lack thereof."
The fund's top holding in the "market-share gainer" category is McAfee (MFE), which provides computer security - one of the last tech items to get cut when a company is trimming costs, according to McHugh.
Another market-share gainer is Best Buy (BBY, Fortune 500), which he thinks is going to "take significant advantage of Circuit City's demise." McHugh believes the retailer can be stronger on its pricing strategy, which leads to better margins and earnings over time.
Early-cycle stocks, including housing, semiconductors, retailing, and certain industrials, will outperform when the economy improves, he says. In retail, McHugh likes Urban Outfitters (URBN) and Guess (GES), which he says have stayed on top of fashion trends and moved inventory, which means less discounting over the long run.
"There are some things that the consumer doesn't want to let go of," he says. "I think fashion and clothing are still high on the list as opposed to home furnishings or appliances."
McHugh's investment process involves three components - examining fundamentals, which included more than 1,000 meetings with management in 2008; technical analysis of stock charts to help with timing entry or exit points; and a quantitative component that examines 70 different factors considered predicative of future stock price performance.
Turner's 21 analysts divide the market into broad sectors and each specialize in one of five areas: healthcare, financial services, technology, consumer, and cyclical. While cyclical companies are not typically considered growth businesses, McHugh says one of the fund's strengths is being able to find growth stocks in what have not traditionally been considered growth sectors.
In the energy sector, which the fund categorizes as cyclical, McHugh likes natural gas companies, as he expects a price recovery in 2010 or 2011.
Southwestern Energy (SWN) and Range Resources (RRC), two of his long-time holdings, have grown production at more than four times the rate for the overall sector, he says. The two companies are big players in the U.S. oil shale industry, which he notes is the nation's fastest growing production area. Their production costs per barrel are also less than the industry average.
One of his fund's top holdings in tech - and one of its top 10 in the portfolio - is F5 Networks (FFIV), which produces software and hardware to make businesses' networks secure and more efficient. When its clients, which include Amazon, Microsoft, and Oracle, outgrow their networking needs, McHugh says, F5 allows them to expand without disrupting their operations.

http://money.cnn.com/2009/05/06/pf/growth_stocks_invest.fortune/index.htm

How Low Can Stocks Go?

How Low Can Stocks Go?
By Morgan Housel April 30, 2009 Comments (0)


Sure, the rally over the past few weeks has been a fun ride, but how quickly we forget: Between Feb. 9 and March 9, the Dow Jones Industrial Average dropped over 1,700 points. Repeat another of those plunges, and the "Dow's going to zero" camp might start gaining attention again.
Of course, we're not going to zero. No matter how ugly the markets get, the ferocity of what we've been through over the past few months can't continue for long.

But here's the bad news: That zero is out of the question doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.

And history agrees.

What goes up ... The history of long-term market downturns is hideous. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of fear. When panic sets in, nobody wants to own stocks at any price. Investors' palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, things get really, really ugly.

Just how ugly? Have a look at the average price-to-earnings ratio of the entire S&P 500 index over these three periods of market mayhem:

Period
Average S&P 500 P/E Ratio

1977-1982
8.27
1947-1951
7.78
1940-1942
9.01

And while stocks have plummeted over the past year, so have corporate earnings: With Standard & Poor's predicting the S&P 500 will earn $28.51 per share in 2009, the index currently trades at almost 30 times earnings. Compare that with the above table, it's pretty apparent that stocks could fall much, much further than they already have, just by returning to the lows they historically hover around during downturns.

Assuming earnings stay flat, revisiting those historically low levels could easily mean a 50% decline from here. For the Dow Jones Industrial Average, that could easily mean Dow 5,000, or worse. Now, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.

But what if it did happen? What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:

Company
One-Year Return
Decline From Current Levels With P/E of 8

Costco (Nasdaq: COST)
(36%)
(54%)
Cisco (Nasdaq: CSCO)
(26%)
(46%)
American Express (NYSE: AXP)
(50%)
(23%)
Google (Nasdaq: GOOG)
(31%)
(72%)
Procter & Gamble (NYSE: PG)
(26%)
(30%)
Baidu (Nasdaq: BIDU)
(39%)
(84%)
Johnson & Johnson (NYSE: JNJ)
(25%)
(28%)

Look scary? It is. And it could easily happen.

But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- are worth much more than a pitiful 8 times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.

Be brave

As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks are the ones who end up scoring the multibagger returns.

Need proof? Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.

And that's exactly where we are today.

Pick what side you'd like to be on
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.


This article was originally published on Oct. 18, 2008. It has been updated.
Fool contributor Morgan Housel owns shares of Procter & Gamble. Baidu and Google are Motley Fool Rule Breakers recommendations. Costco is a Motley Fool Stock Advisor pick. American Express and Costco are Motley Fool Inside Value picks. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of Procter & Gamble, American Express, and Costco. The Motley Fool is investors writing for investors.

http://www.fool.com/investing/value/2009/04/30/how-low-can-stocks-go.aspx

Welcome to the Oracle of Omaha’s “Long, Deep Recession”

Warren Buffett Investing: Welcome to the Oracle of Omaha’s “Long, Deep Recession”

by Alexander Green, Chairman, Investment U

Investment Director, The Oxford Club

Friday, May 30, 2008: Issue #801

Warren Buffett opined that the United States is already in recession, even if it’s not in the sense that economists would define it: two consecutive quarters of negative growth, in an interview with the German magazine Der Spiegel on Saturday. Furthermore, Buffett argues the recession “will be deep and last longer than many think.”

Sounds pretty ominous. After all, Buffett is now the world’s richest man - he recently surpassed Microsoft chairman Bill Gates - and is easily one of the planet’s most successful investors. If Buffett himself thinks the economic outlook is lousy, the average punter thinks, maybe I should get out of the market.

If you have money in the stock market that you will need in the next few months ahead, you should. (Not because the market is about to go down - although it may - but because money earmarked for short-term expenditures shouldn’t be in the market in the first place.) (Comment: The largest market losses, as you would expect, are in the beginning of any recession.)

However, if you own stocks to meet your long-term financial objectives, stay put. And look for fresh opportunities, too. After all, that’s what Buffett himself is doing… (Comment: The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )

Warren Buffett’s Global Investment Opportunities

One of the reasons Warren Buffett was in Germany is that he shares our view that you should search worldwide for the best investment opportunities. Right now Buffett would like to put Berkshire Hathaway’s cash war chest to work in a few well-managed German family-owned businesses.

But why would Buffett buy companies if the economic downturn is likely to be deeper and last longer than generally expected? (Ooops. Same comment: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )

Because he knows that nobody can accurately or consistently predict something as big, diverse, and dynamic as the global economy. (Work like this is better left to the experts: you know, palm readers and Ouija boarders.)

Warren Buffett knows that even if you somehow knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market. Stocks fall during good times. They often rally during bad times. Money manager Ken Fisher doesn’t call the stock market “The Great Humiliator” for nothing. (Same comment again: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )

Buffett knows that the stock market is a discounting mechanism. It takes the news and reflects it into stock prices immediately. Who in their right mind would sell their stocks today because he realizes the economy is slowing down. We’ve known that for months already. (And again: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )

And, finally, Buffett knows that nothing beats the long-term returns available in equities. Where else can you put your money to work today? In real estate that is in a death spiral? In bonds that pay less than 5%? In money markets yielding 2%?

Warren Buffett’s Investment Strategy

In the same interview with Der Spiegel, talking about his investment strategy, Warren Buffett said “If the world were falling apart I’d still invest in companies.” In other words, he gets it. There is no superior alternative to common stocks. The long-term returns of every other asset class pale by comparison.

In an interview in the April 28, 2008 issue of Fortune, Buffett said “I think we’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don’t want capital markets that function perfectly if you’re in my business. People continue to do foolish things… and they always will.”

Realize that when other investors sell too cheap or buy too dear, it creates opportunities for those of us on the other side of their trades.

Buffett ends his Fortune interview by saying, “Stocks are a better buy today then they were a year ago. Or three years ago… The American economy is going to do fine. But it won’t do fine every year and every week and every month… The only way an investor can get killed is by high fees or by trying to outsmart the market.” (And again the same comment: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )

Amen. They don’t call him the Oracle of Omaha for nothing.

Good investing,
Alex

Alexander Green’s recommendations have beaten the Wilshire 5000 Total Market Index by more than 3 to 1 over the past five years. To get access to a steady stream of the companies he expects to outperform this year, consider joining The Oxford Club, our premium service. You’ll have access to all of Alex’s growth-stock recommendations in a matter of minutes. Learn more.

http://www.investmentu.com/IUEL/2008/May/warren-buffett-investing.html

Align your portfolio with what a sustained market recovery

Get smart



For those who prefer to invest rather than speculate, there are far smarter ways to proceed -- and to align your portfolio with what a sustained market recovery will probably look like. As shell-shocked investors return to equities, they'll likely do so judiciously, newly aware of the benefits of bonds, for example. And for the equity sleeves of their portfolios, a focus on cash-flow kings with tremendous track records of success -- and beaten-down share prices -- will be in order.



http://www.fool.com/investing/value/2009/05/04/this-rally-is-ridiculous.aspx?source=iedsitmrc0000001

Recovering your market losses?

Saturday May 2, 2009
Recovering your market losses?
MARKETS
By SHERILYN FOONG


THESE challenging times for investors demand a well-thought out, personalised and well-diversified investment strategy. (Always important to have a good investment philosophy and strategy.)

Hard, tough and painful decisions will have to be made, be it in the cruel form of “amputation, that is cutting steep losses on stock duds, or ploughing in more good money (after bad?) via participation in invested companies’ cash calls. (It can be painful to cut the losses, sell the losers. But it is required surgery.)

However; the hardest decision to make is really regarding your personal risk appetite: should you or can you afford to take on more risk so as to (hopefully) recover some of your market losses in your investment portfolio? (Knowing one's ability and willingness to take risk is important. This has to do with the wealth effect, the house money effect, modest diversification and also knowing asset allocation.)

Do or die?

One needs to look at the current global scenario and form some rational conclusions involving an element of personal judgment calls. (The truth is no one knows the future. Just observe the experts giving opinions on CNBC. There are just as many on either sides of the argument. Decision should be a personal one based on ability to take risk. In particular, knowing the consequences of your decision is more important than the probabilities of the outcomes, which arguably is uncertain.)

From there-on, the decision as to whether or not you can or should take on more risk can be a highly daunting task.

But it cannot be helped because the alternative passive option of doing nothing can be even riskier! (Yes, if the consequences of a further fall in your portfolio can force you to do something silly. This assumes that the portfolio was constituted to be a winner. Of course, sell the losers, let the winners run. No easy solution here. There are errors of omission and commission too. But in this very down market, and for those with longer time frame in their investment, the probable upside gain compared to the downside loss is more likely favourable.)

A good starting point can be from taking a good look at all the stimulus packages announced globally and all that has been and still is being done by central banks the world over to stabilise and stimulate the global financial systems and real economies respectively, where the verdict as to its success and effectiveness is still out there. (Ah, looking at the macroeconomics and then adopt a top-down approach to pick stocks. It is just as profitable and safe to start at the micro level and select individual businesses. This is probably easier for the majority of the investors who may not be economists.)

The encouraging news is that some signs of bottoming out are in sight. Sure, one may prefer to opt for more concrete and sustainable evidence of recovery before taking on more risk. (Averaging down is also safe, ignoring some investors who preached this to be unsafe. This strategy is particularly useful for those who can value stocks. Buying a good quality stock at below the "intrinsic value" (that is, a bargain) ensures a margin of safety for possible loss should the decision turns out to be adversely affected by future events. Moreover, buying low ensures a higher return in the future.)

But such a typical “wait and see first” stance is not without its own risk. Because when that happens, when it’s a sure fire conclusion that the said policies have been accurately effective, the ever-efficient and nimble markets would have priced that in rather quickly such that taking risk at those material levels would prove more costly. (Missing the few best days of the market can also reduce one's potential gains significantly. Another is when the market starts to rally, some investors remain frozen outside the market. There is no easy answer for those who attempt to time the market. Staying invested long term based on a good investing philosophy and strategy is safe.)

The market’s ‘Limbo Rock’

What comes to mind here is the investment nugget blink of an eye move of Citigroup stock from a penny stock to multiple top performer before you can say “I’ll take the risk!”.

On this note, I would like to quote my wise friend Kumar who recently told me, ”Keep your money in Bank Simpanan and watch TV!”. Enough said.

The wealth preservation argument prevails here: suppose the markets fall substantially from here, hence doing nothing now and preserving what is left would turn out to be the best strategy. (Now that this chap is out of the market, when would be the right time for him to get back into the market? In the long run, the stocks give a better return compared to savings in the banks. Timing the market works for some "investors"; however, buying and selling stocks based on price is what guides the value investors. Once again, "The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement." - Benjamin Graham )

Playing God

However, what if the market has indeed bottomed and is in the long, slow but steady progress of recovery?

True, no one has perfect foresight. But it’s important to have a calculated and informed view on investments as opposed to pure speculation or it is no different from casino play.

It is imperative to form a personal view of the market outlook to form the foundation of your investment decisions.

This personal investment decision-making process also incorporates your personal investment objectives which has to be realistic. High returns come with higher risks. (There are quite a few stocks delivering 7% - 8% annual return with little downside risks that investors can buy for the long term in our local market. The harder task is to seek out higher returns without undue unacceptable risks.)

Going through this personal investment thought process is a practical exercise in figuring out your acceptable risk levels. (Yes, an investor should regularly goes through this exercise with the preexisting portfolio. Tracking one's investment and reassessing the individual stocks for returns versus risks is part and parcel of intelligent investing.)

Bear in mind that extremely high levels of fear in the markets often exaggerates the real market risk. (And this is the best time to invest in the market, when the fear is at its highest. One need to be wired or re-wired to take advantage of this.)

The lessons of diversification

Over the last year of unprecedented crunch, investors have been battered by losses across almost all asset classes and thus, are predictably retreating from further investing in a herd-like manner. (Faced with this uncertainty, how should one react? Those with the right philosophy and strategy well thought out and observed strictly will be better guided. Understanding the consequences of risk is paramount.)

The point that has been missed is really, how much would have been lost if there had been no diversification at all? (Start with the asset allocation that is appropriate based on various personal factors, including your risk tolerance. According to Buffett, after diversifying into 6 stocks, the 7th stock is unlikely to give a higher return though the risk may be lower.)

Despite the unfortunate highly positive correlation among almost all asset classes in the current financial crisis, one should only look at the converse situation to conclude that diversification still has its magic.

>Sherilyn Foong, who is attached to a private equity firm, believes that the only thing constant in the market is its inconstancy. So, she maintains that the markets will surprise, as they always do.

http://biz.thestar.com.my/news/story.asp?file=/2009/5/2/business/3819025&sec=business

Top Investors: How They Beat a Scary Market

Top Investors: How They Beat a Scary Market

Ben Steverman
Monday, April 27, 2009
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BusinessWeek asked successful portfolio managers how they navigated a nasty recession and financial crisis

Hardly anyone predicted the size and scope of the recent market meltdown. At the depths of the crisis, which started in 2007 and continues today, there was almost no place for investors to hide.

Still, some investors protected their portfolios far better than others at a time when the concept of investment risk seemed to take on a new dimension. BusinessWeek talked to these investing pros in search of their secrets to success.

The bottom line: There was no simple solution. Successful investing strategies in the past couple of years represented a wide range of philosophies and investment choices. Yet nearly all these top investors, relying on years of experience, sought out only high-quality investments, and many of them were aware of financial and housing difficulties early.

Who Dodged a Bullet?

Which pros managed to sidestep the worst of the market mayhem? What were their strategies? Here's a look:

Ann Benjamin and Thomas O'Reilly, Neuberger Berman High Income Bond Fund (LBHBX)

For Benjamin and O'Reilly, investing is about keeping an eye on the big picture. In 2005, their Neuberger Berman High Income Bond Fund pulled out of bonds exposed to the overheated housing market.

They didn't predict a big housing crash, Benjamin says, but "we thought there was significant oversupply being built in the market."

In 2007 they lightened exposure to more cyclical industries—the sort that would be hurt by the coming recession. "You have to be ahead of the curve," O'Reilly says. "You can't sell on the news." Rather, you need to anticipate the news.

Last year was tough on high-income bond funds, but the Neuberger Berman High Income Bond Fund fell 19% in 2008, beating its Morningstar (MORN) category by 22.5 percentage points. The fund is rated five stars by Morningstar.

Benjamin and O'Reilly are looking ahead, trying to predict the market and the economy's next moves. Fearing the economy could keep dragging longer than predicted, they carefully examine companies to make sure their investments "make it through the cycle," Benjamin says.

Rich Gates, TFS Market Neutral (TFSMX)

By contrast, Rich Gates doesn't shift approaches depending on his predictions of the future. His TFS Market Neutral fund has used the same quantitative strategy since it was started five years ago. It's an approach similar to the hedge fund strategies TFS has run since 2001.

This U.S. equity fund fell just 7.3% in 2008, beating the broad Standard & Poor's 500, which dropped 37.2%, and doing 7 percentage points better than its Morningstar category.

The fund protects assets not just by buying stocks, or going "long," so the fund benefits when prices rise. It also shorts other stocks, by borrowing shares and selling them so the fund benefits when prices fall. The fund stays three-fifths in long positions and two-fifths short.

The fund's computers automatically rank equities according to consistent (and proprietary) criteria, seeking out stocks to buy and short for a few days or up to a month. The shorting strategy limited losses in a tough year, but TFS has also chosen the right stocks to outperform the market in good years like 2006. "It's definitely harder in an up market than a down market," Gates says.

Eric Cinnamond, Intrepid Small Cap Fund (ICMAX)

For Cinnamond, investing starts with close examination of individual companies. "We're just focusing business by business," Cinnamond says. The Intrepid Small Cap Fund buys a stock if it is a "good business"—with a strong balance sheet and consistent cash flow—and if it's priced 20% less than Cinnamond thinks it's worth.

In 2007, when stocks peaked, Cinnamond says nothing was meeting his criteria. "I couldn't find anything," he says. He also avoided financial stocks, believing the rapid increase in mortgage debt was a bubble that would burst.

With much of the market overvalued, Cinnamond had much of his portfolio in cash—perhaps the safest place to be—as the market slid during 2008. At the start of 2008, cash was almost 40% of his portfolio.

In the past 12 months, the fund, rated five stars by Morningstar, has lost just 2.5%, 36 percentage points better than the S&P 500. In early March, when stocks hit their bear market lows, the fund had almost no cash at all, because it was fully invested in equities.

"Now we're able to buy some great companies at deep discounts," he says. "It's the perfect scenario."

Roger Vogel, Silvercrest Asset Management

Vogel also focuses on individual companies, and especially their management teams.

"We get our feel for what's happening in the economy from our companies," Vogel says. Like most "value" investors, he looks for companies trading at a discount. But his fund is "quality-oriented." Sticking with financially secure firms has helped during the credit crisis.

As the crisis unfolds and recession continues, "the strong will emerge stronger and the weak will go away," Vogel says.

He judges firms not just by their numbers but also by their executives. More than two decades of experience help in evaluating management presentations, he says. "If you're an experienced investor, you tend to come out of those with a different mindset," he says.

Silvercrest's small-cap value portfolio—managed for the firm's private clients—is down 6.7% in the past three years, compared to a 17.5% decline for the Russell 2000 Value index.

Jim Moffett, UMB Scout International Fund (UMBWX)

Moffett also focuses on quality, though he does so in international stocks.

Quality "means starting with a balance sheet with not too much debt," Moffett says. His UMB Scout International Fund has traditionally avoided financial stocks because of their reliance on debt and their lack of transparency, he says.

He also avoids too much risk by, for example, staying out of China and Russia, which saw huge market declines. "That's where the reward is, but that's also where the risk is," he says. "We thought the risk was higher than people appreciated."

His fund picks stocks for the long term only after careful vetting, he says. There's "not a lot of razzle-dazzle," he says. "Just stick to the basics."

Moffett's fund, rated five stars by Morningstar, fell 38% in 2008, a disastrous year for overseas stocks, but it beat its benchmark and Morningstar category by more than 5 percentage points.

Emmanuel Ferreira, Oppenheimer Quest Opportunity Value Fund (QVOPX)

For Ferreira, the key to investing is flexibility. The Oppenheimer Quest Opportunity Value Fund can buy or short almost any asset, from bonds to stocks to commodities.

"It's really a mutual fund format where we are allowed to have hedge fund flexibility," he says, adding, "When you have a fund that's flexible, you can take advantage of a lot more opportunities."

Ferreira spotted problems in housing and mortgage debt early. In 2005 and 2006, the fund started shorting—or betting against—subprime mortgage securities. By the time the fund had unwound those bets, it had earned about $200 million—"30 times the money we put at risk."

By the end of 2006, the worry was "too much excess in the financial system and the global economy," Ferreira says. The fund's response was to shift assets into cash.

The fund, rated five stars by Morningstar, is down 17% in the past 12 months.

Michael Cuggino, Permanent Portfolio (PRPFX)

Expect no bold predictions from Cuggino, who says his fund is "based on the premise that the future is unpredictable and investors should prepare themselves for a variety of a different outcomes."

People—even and especially portfolio managers—are bad at predicting the future, he says. So, the Permanent Portfolio is diversified in a wide array of asset classes, a classic risk-management strategy. Gold is 20% of the portfolio, silver 5%, and Swiss-denominated assets are 10%. Equities based on natural resources are 15%, while U.S. growth stocks are 15%, and 35% of the fund sits in U.S. and corporate bonds.

The fund might underperform in a fast-rising bull market for stocks, but there's stability and protection in its broad strategy.

There's little room for managers to make a big bet on one lucrative strategy, but on the flip side, the chance for big losses is reduced. The approach has worked: The five-star Morningstar fund lost just 8.4% in 2008.

Steverman is a reporter for BusinessWeek's Investing channel.

http://finance.yahoo.com/special-edition/active-investor/7_market_pros;_ylt=A0S00ta4tfpJcngBG3dsLKJ4

8 Questions That Define Your Investing Style

8 Questions That Define Your Investing Style
By Dayana Yochim April 29, 2009 Comments (3)


We're celebrating Financial Literacy Month in numeric style. Follow our crash course on maximizing your portfolio and finances with The 10 Essential Money Lessons.

The path to financial literacy follows a logical sequence from start to success. So far in this series you've:

1. put your financial house in order,
2. set aside the cash that you need for the near term,
3. brushed up on some classic investing tomes,
4. learned some key investing metrics,
5. and kicked the tires on a couple of investment ideas.

Ready to invest? Set! And ... wait!

One more thing -- well, eight more things, actually.

Your moment of investing Zen
How well do you know yourself? Do you know your tolerance for risk and loss? Have you pinpointed your investing time horizon? To what degree are you interested in digging into stock research? In other words, what color is your investing parachute?

As Warren Buffett says, "Success in investing doesn't correlate with I.Q. ... what you need is the temperament to control the urges that get other people into trouble in investing." You've gotten this far, so it would be a shame to get sidetracked by emotional triggers that lead to bad investment decisions.

How are you wired?
Before you deploy your money in the market, take this quiz to identify your natural inclinations (both good and bad) so you can find the methods, philosophies, and strategies that best match the way your brain is wired.

1. You're at the store and on the shelf is an array of options for the product you need. Which are you most likely to toss into your shopping cart?

A. The brand you've purchased in the past, even though it lacks the bells and whistles of some of the others.
B. A pricier brand you've always wanted to try because it's on sale for 20% off today.
C. A brand-new product that promises revolutionary results.
D. A reasonably priced version that has not been FDA approved, but has gotten favorable reviews from its customers.

2. You log onto your brokerage account. Which scenario are you happiest to see?

A. The market's up a whopping 10%, but your stock gained just 1% during the run-up.
B. One of the companies you own missed hitting its earnings target and is down 30% as a result, giving you the opportunity to buy more shares at fire-sale prices.
C. Over the past six months a stock in your portfolio has traded anywhere from $10 to $80. It's at the low end of that range right now, but you think it has the potential to double or even quadruple over time.
D. One of your stocks is up 15%, but there's no obvious reason why, so you'll have to do more research to find out.

3. Which activity are you most likely to choose at the theme park?

A. A spin on the merry-go-round with your kids.
B. The newly revamped 3-D laser Zombie show.
C. The Nitro at Six Flags.
D. Forget the rides and head to the "Tastes of the World" food court.

4. How much information do you need to comfortably make buy, sell, or hold decisions?

A. You like to get regular company updates that are widely followed and analyzed by Wall Street, the media, and individual investors.
B. You prefer to check in on the business -- or its customers -- firsthand either in person or via online forums.
C. You regularly consult SEC filings, trade journals, and industry forums and do all your own analysis.
D. You're content with fairly regular coverage of the sector in which the company operates, even if news about your particular company can be spotty.

5. One of your companies is in the headlines today. Which event would not cause you to lose sleep tonight?

A. The company says it may have to temporarily suspend paying its dividend.
B. The launch of the company's next product has been delayed for at least several months.
C. The Board of Directors is making noises about ousting the CEO in order to install an industry veteran.
D. The currency of the country in which your company operates has taken a haircut.

6. If this were an "I'm a Mac/I'm a PC" ad, which company would you be?

A. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)
B. Buffalo Wild Wings (Nasdaq: BWLD)
C. Google (Nasdaq: GOOG)
D. America Movil (NYSE: AMX)

7. The business trajectory that most excites you is ...

A. A stable, mature company with some room to grow via cost-cutting efforts, strategic acquisitions, and/or partnerships.
B. A newcomer that has not yet made a name for itself (and may not for many years) and has no heady expectations priced into the stock.
C. An innovative -- and often volatile -- company that challenges the status quo and has the potential to dominate (or create) a business niche.
D. A company that is ideally positioned to capitalize on fast-growing economies overseas.

8. What kind of volatility are you willing to endure on the road to wealth?

A. I'm not looking for massive growth -- I'm willing to settle for a couple of years of so-so returns just so I don't lose a lot of money.
B. I'm willing to endure a few white-knuckle periods until my investment hits the bull's-eye.
C. I'll hold on for dear life -- even while everyone else is bailing -- if I truly believe that the long-term payoff will be big.
D. I can stomach volatility that is beyond the company management's control (e.g. currency fluctuations, political messes) if it means being in the right place at the right time.


The Key: What's your investing temperament?

Let's see how you're wired.

Mostly As: You've worked hard for your money and even if it means passing up headier potential returns, you're most comfortable limiting your exposure to risk. Patience is your investing virtue. Like the great Warren Buffett, you have the temperament to wait for a quality company to go on sale.

Your stocks probably won't wow anyone at a cocktail party -- after all, big-name, been-around-forever companies don't typically make for riveting chitchat. But when the confetti settles, it's your time to shine. If your portfolio were a party guest, it'd be the designated driver: sober but reliable. It gets you where you need to go with no hairpin turns or squealing wheels.

Look for quality companies that have seen their share prices temporarily discounted. You'd also do well to seek steady growth with investments that literally pay investors back -- dividend stocks. (These are the investing strategies we practice in our Inside Value and Income Investor services.)

Mostly Bs: Sound business practices (e.g., strong balance sheets, good management) are as important to you as any investor. But you're willing to look for these things where few others dare to tread -- in small-cap territory.

While the rest of the world is fixating on the name-brand players, you're prowling for their smaller, nimbler, lesser-known competition. At The Motley Fool, we call such companies Hidden Gems.

Because of their size, these companies fly well under Wall Street's radar. The flip side is, of course, that they can often wildly fluctuate in a single trading day. But if "Bs" dominated your quiz results, then you have the stomach to tolerate the volatility, particularly in the pursuit of bigger returns.

You could build a market-beating portfolio solely comprised of Hidden Gems (or any other type of investment, in fact). But it's probably more reasonable to devote just a portion of your investible assets to the best-of-small breed of stocks -- anywhere from 10% to 40% of a portfolio depending on your comfort level.

Mostly Cs: Innovation gets your heart racing. When high-def, Bluetooth-enabled, surround-sound rocket boots hit stores, you'll probably be the first person on your block to own a pair.
In investment terms, you seek companies that challenge the status quo -- those that take on an established business, reinvent it, and eventually usurp the original. Even better are those that create an entirely new market for something everyone didn't even realize we couldn't live without.

At the Fool we call these companies Rule Breakers (apt, eh?). And in every way, these businesses defy the rules. Traditional valuation metrics like P/E ratios and discounted cash-flow calculations don't fly in the land of Rule Breakers. The numbers often look wacky because the Street simply doesn't have the tools to accurately assess these companies' merits, so as a shareholder you need to stay alert and be psychologically nimble enough to reevaluate your investment thesis. Flexibility is a must.

Also be aware of the rule of Daedalus: You can't keep flying higher and higher without eventually getting burned. This may be the most exciting kind of investing there is. But you must recognize the big-risk/big-reward connection. Your mistakes will cost you. But it's a lot less painful if you spread the risk around with other asset classes.

Mostly Ds: You are a worldly Fool. In the pursuit of investment opportunities, you're not afraid to tread into foreign territory -- literally. You recognize that the rate of growth of our economy versus others has changed. The U.S. will still grow, but there are countries where the growth opportunities are astronomical.

"International" is not an investing strategy per se. In our Global Gains newsletter service we seek investment opportunities overseas no matter what label they carry -- small cap, value, Rule Breaker, etc.

If you pine for foreign flavor in your portfolio get comfy with a little less clarity from the companies in this universe. Your comfort level with different accounting methods, shareholder laws, currency risks, and even "political risk" will determine how much of your portfolio to devote to international fare.

A combination of As, Bs, Cs, and Ds: No, you're not fickle. You simply seek a variety of opportunities to make your money grow. In your heart you know that investing in the stock market is the one true way to build inflation-beating wealth over the long term. But sometimes your doubts overcome your determination to stay the course. You can be gun-shy, perhaps because of a few investing missteps in the past (burned by a hot tip, perhaps?). Or maybe the stock market's recent contortions have left you questioning how much risk you really can stomach.

Your answers reveal a temperament that recognizes the true price of opportunity (taking on some amount of risk) and the real cost of waiting out the storm (missing the market's brief yet inevitable uptick). You've got a mind-set that's well-suited to allocating portions of your portfolio to the best investments from a variety of stock-picking approaches.

Establishing clear parameters -- an asset allocation model -- is the way to go. As to how much to put into which pot, the correct answer is the one that best lets you sleep at night and stick it out through thick and thin. Don't fight your natural tendencies ... instead play to your strengths and seek investments that sit well with you.

Finally, consider that the stock market's recent gyrations may be influencing your answers. That's understandable; even the best investors have been rattled, and may even be questioning their own core strategies. However, in volatility, there is opportunity. Not just in finding bargain stocks, but in taking the pulse of your own investing temperament in a real-world/real-money scenario.

Now that you've gotten a handle on your finances and have tuned into your inner investor, you're ready for our bonus tip. Tomorrow, we're going to give you the rundown about Foolishly investing in the stock market. Check back then!


In the mood for more financial know-how? Check out the rest of our 10 Essential Money Lessons.

Before joining The Motley Fool, Dayana Yochim's investing temperament could be confused for that of an 87-year-old widow. Today she is a mix of As, Bs, Cs, and Ds -- a true investing moderate. The Fool's disclosure policy is steady as she goes. Berkshire Hathaway is a Stock Advisor and Inside Value recommendation. Google is a Rule Breakers selection and America Movil is a Global Gains pick. Buffalo Wild Wings is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Berkshire Hathaway and Buffalo Wild Wings.

http://www.fool.com/investing/general/2009/04/29/8-questions-that-define-your-investing-style.aspx

'Nothing is an all-the-time good investment. Certainly not cash'

'Nothing is an all-the-time good investment. Certainly not cash'
People have been going back to risk and leaving the bomb shelters.

By James Bartholomew
Last Updated: 7:10AM BST 23 Apr 2009

I have to admit that I find the extreme ups and downs in the markets in recent months rather exciting. I am sorry that fortunes have been lost and people have suffered. I myself have lost a considerable amount.

But this has been exciting in a similar way, I imagine, as the view of London burning in the blitz was once thrilling for my mother when she recklessly went to the roof of Broadcasting House, where she was working, to have a look.

It is a jolly sight more fun, to be sure, when things are going well and they have certainly been a lot better since the rally started early last month.

I have had an extraordinary time with my shares in the pub-owning company, Enterprise Inns. Some readers may remember that 11 weeks ago, I wrote here, "I don't normally manage to lose money quite so quickly…"

I had bought shares in Enterprise at 69.75p. By the end of the week, they had halved. They reached a low of 32p.

Then they stabilised and eventually rose somewhat. But at the beginning of the week before last, I was still nursing a loss. Then, suddenly, whoosh! Up they went, leaping upward like a drug-enhanced mountain goat. A 15pc rise, then another 20pc. Out of the blue, I found myself in profit and still climbing.

The shares zoomed up to over 100p. They then fell back hard but got another lease of life. Having failed to buy more when they had been 32p, I found the courage to buy again when they were 93.5p.

There is human nature for you. As to whether this further purchase was wise, you can find out if you go to the business section of the main paper and look at the stock market prices under Travel and Leisure. They were trading at 117p on Monday.

The amazing downs and ups of Enterprise Inns reflect the abrupt return, since early March, of the appetite for risk. My defensive shares, such as Telecom Plus, a utility provider, have been shunned.

But shares that were heavily sold down because the companies are cyclical or heavily indebted, revived strongly. I also have shares in Tolent, a building company. It has performed like an investment Lazarus, leaving death's door at high speed.

Meanwhile, my investment in yen, through bonds, has done badly in the last couple of months. The yen has weakened precisely for the same reason as Enterprise Inns strengthened.

People have been going back to risk and leaving the bomb shelters. I have lightened my holdings in the yen, at least for the time being. This is because my view of what is going to happen in the economy and to investments has shifted a bit.

My rough idea, currently, of how things will pan out is this:

• first, the "quantitative easing" will work in ending the economic decline. The stock market will respond positively and go higher.
• Second, after a lag, inflation will pick up strongly. This will cause a flight to gold and inflation index-linked government stocks (and perhaps the yen).
• Third, in response to the inflation, interest rates will rise which will hurt shares somewhat – though it is difficult to tell how much.
• And finally, when inflation seems to be coming down and interest rates fall back again, there will be big rises in shares and property.

This forecast could easily be partly or completely wrong. But even if this guess/forecast of the future is right, the timing is uncertain. How long will the lag be before inflation? How much will people anticipate it and buy gold beforehand? It is hard to predict.

I have already bought some gold in the form of units in an exchange traded fund, ETFS Physical Gold and I have bought some Treasury 2.5pc 2024 inflation index-linked stock. But, at the time of writing, they have done nothing.

Yes, there is a risk of hyper-inflation, but a rush for inflation-protection investments may not really get going until the danger is clear and present. In the meantime, I suspect that shares are the investments that may do best.

That is why I bought extra shares in Enterprise Inns. I have also increased my holding in Home Products, a Thai company that runs DIY stores.

Its latest results were surprisingly good and the shares have risen by a third in the last two months but even at the price I paid, 4.59 baht, the shares have a historic dividend yield of 7.5pc.

I had better add that, of course, I could be completely wrong. Many people think this is a bear market rally. We each must make our own judgements and arrange our investments accordingly.

But in these financially dangerous times, I believe that anyone with savings should be thinking hard about it. Nothing is an all-the-time good investment. Certainly not cash.

http://www.telegraph.co.uk/finance/personalfinance/investing/5202598/Nothing-is-an-all-the-time-good-investment.-Certainly-not-cash.html

Yes, You Can Still Be Rich

Tuesday, March 31, 2009, 4:55AM ET -

Ramit Sethi: Yes, You Can Still Be Rich
by Kimberly PalmerTuesday, March 31, 2009

Ramit Sethi, 26, author of the just-released I Will Teach You To Be Rich (and blog of the same name), recently spoke with me about how young people are dealing with the recession. He also argued for why 20 and 30-somethings should continue to put money into the stock market, even if most of their so far have shrunk in half. Excerpts:

How do young people think about money?

More from USNews.com: • Smart Money-Saving Tips You Need Now • The Twenty-Something Financial Survival Guide • How to Plan for Your Financial Future

As young people, we don't pay attention to our money. When there's something you're neglecting and you just hear bad news, you again don't pay attention, but you feel guilty about it. It's a combination of apathy and guilt that comes with money, just like eating and working out. 'I know I should go to gym four days a week, I shouldn't eat that pizza.' We know that we should be figuring out something about money and should probably do a Roth IRA, but we don't know where to get started. There's so much conflicting advice out there.

Will the recession make 20 and 30-somethings more pessimistic and risk averse for the rest of their lives?
Yes. There's a lot of research to suggest that. It's a particularly bad situation for young people because we're already not investing as much as we need to. Going forward, there will be people who say, 'I'm not investing in the stock market,' or 'Crooks can still my money.' It's hard to convince people, 'No, you have to look long term.' In any 30-year period, the stock market has always gone up.

How can you encourage people to invest when those who were doing so have lost upwards of 50 percent of their money over the last eight months?
There are two separate things: The intellectual and mathematical part, and the emotional part. If I told you nine months ago that you could pick the same investments on a 50 percent sale, it sounds very attractive. But we think of it as a 50 percent loss. Tremendous wealth has been lost, nobody can deny that. But if you're in your 20s or 30s, you don't need money for 30 or 40 years. So on an intellectual and mathematical side, you think, 'I'm going to continue dollar-cost averaging into the market.'
As for the emotional part, I can understand the emotion of saying, 'I've lost so much, I'm going to pull it all out. People often think they have just two levers to pull, put money in or pull money out. But there are other options. You could pull less in, put more in savings, re-allocate investments to put more in fixed income -- there are so many different levers you can pull. If you pull money out, you're guaranteeing you won't be in the market when it returns.

But what if it doesn't return?
Japan's stock market has been virtually stagnant for decades.
There are functional and structural differences between us and Japan, but without getting too deeply into that, what strongly effects my belief going forward is what happened in the past. The past doesn't predict the future, but it gives us a fairly accurate view of what's likely to happen. Whether it returns 6 percent or 8 percent -- we can split hairs over that -- the question is, do you fundamentally believe the stock market will go up. If you believe that, then invest.

If you don't, where do you put your money?
If you only put it in a savings account, it's not going to give you the returns you need to live on. You have to take risks to get potentially high returns.
People like to complain about the economy, but the economy versus your finances are very different. My question is, 'Have you automated your accounts? Do you use a bank account with overdraft fees? Have you set up a conscious spending plan? How much is dedicated to a savings account versus going out and eating?'

I assume you follow your own advice and have money in the stock market, and it must have lost significant value lately. How do you not get down about that?
I built an infrastructure where I only focus on one thing -- earning more. It gets automatically disbursed -- 20 percent to investments, 5 percent to savings, etc. In terms of dealing with losses, first of all, I don't check into my investments every day, and I don't think anyone should. Second, there's a difference between losing when everyone is gaining and losing when everyone has lost.

I'm resolutely focused on the long-term. I do believe the long-term prospects are great, but I'm not a prognosticator. My focus is on living a rich life, which also means being able to visit a friend or buy what you want. Being rich is just partially about money.

Copyrighted, U.S.News & World Report, L.P. All rights reserved.

http://finance.yahoo.com/focus-retirement/article/106827/Ramit-Sethi-Yes-You-Can-Still-Be-Rich;_ylt=Asoz5hNRUsqy80OnfTXpXR27YWsA?mod=fidelity-startingout

Bull market looks premature

Discounting mechanism
By Edward Hadas

-----
Context News

The Dow Jones Industrial Index has risen 21% since March 9.

The index previously rose 19.2% from November 20 until January 2, before falling 28% until March 9.

The International Monetary Fund predicted global activity to decline by 0.5% to 1% in 2009 and growth to return in 2010, in its economic forecast on March 19.

-----

Stock markets: All of a sudden, it’s a bull market. The Dow Jones Industrial Index has risen by 21% since March 9, just crossing the traditional 20% threshold that some chart-watchers use to separate a mere rally from the real thing, But this three-week old may not live to a ripe age.

The previous Dow rally started after the November 2008 rescue of Citigroup, lasted until the New Year and came a mere 0.8 percentage points short of qualifying as a bull market – before yielding to a 28% rout. The current recovery has largely been a vote of confidence in a subsequent US banking system rescue, along with massive government help.

Will this upward market movement prove more durable than the last? Mathematically, it has the advantage of starting from a much lower base. From Thursday’s close, the Dow will have to rise a further 14% just to match the 2009 high, hit on January 2.

The economic case is less clear. True, after the nationalisation of financial risk through guarantees and money-printing, panic over a possible imminent financial sector collapse looks overdone. And while GDP in the first quarter of 2009 looks to have been substantially lower than in the fourth quarter of 2008, the pace of decline seems to have slowed.

But the global downward economic momentum remains strong. The International Monetary Fund doesn’t expect growth to return until “the course of 2010”. While waiting, profits are going to be slaughtered.

Profits at non-financial US corporations fell by 9% in 2008. In severe recessions, the average drop is more like 25%, according to BNP Paribas. Globally, the rate at which analysts are cutting their earnings forecasts – a fairly accurate indicator of current profit, according to Société Générale – suggests a 40% decline for quoted companies this year. That suggests investors are paying 20 times current earnings for stocks.

The bull market will only last if it can trample over a thicket of terrible earnings announcements. That is a lot to ask from investors who have not yet fully recovered from a too long series of financial shocks.

edward.hadas@breakingviews.com

http://www.breakingviews.com/2009/03/27/Stock%20markets.aspx?sg=nytimes#

Lowered Expectations for the Bulls’ Return

Fundamentally
Lowered Expectations for the Bulls’ Return

By PAUL J. LIM
Published: March 21, 2009

THROUGHOUT the 1980s and ’90s, investors took comfort in knowing that short-term setbacks were just that: short. Back then, it took only about a year and a half, on average, for stocks in a bear market to slide from peak to trough and then climb all the way back.

Jeremy Grantham of the investment firm GMO says a roaring bull market is possible, “but it may still take us 10 years” to return to the previous peak.

But this is a different era. The downturn, which cut the Dow Jones industrial average in half, is already nearly a year and a half old, and despite recent gains there’s no clear sense that the worst is over.

So it’s time for investors to reset their expectations, many market strategists say. At the very least, don’t count on the market normalizing, or “reverting to the mean,” with much speed. And don’t count on the market recouping all its losses for several more years.

Setting aside specific problems now facing the economy — like the credit crisis and the continuing troubles in the housing and financial sectors — the math of recovering from downturns of this magnitude is hard to overcome quickly. James B. Stack, editor of the InvesTech Market Analyst, a newsletter in Whitefish, Mont., studied bear market recoveries since 1929; he found that after the most significant downturns — like this one — it has taken more than seven years for stocks to fully recoup losses.

For example, it took 7.2 years after the start of the bear market in 2000 for stocks to reach a bottom and then to climb back to the 2000 peak. After the bear started growling in 1973, it took 7.5 years to return to the high. And after the 1929 crash, equities didn’t return to their previous peak for another quarter of a century.

The current bear market started on Oct. 9, 2007. Based on the average recoveries of the past, the Dow may not make it all the way back to its peak of 14,164 until late 2014. And some market observers say it could take significantly longer.

But don’t stocks usually bounce aggressively off their lows? And aren’t stocks supposed to perform much better than average after years when they perform much worse than average?

Maybe not. A recent report by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School found that the payoff for investing in stocks following bad years was only slightly better than after good ones.

The report looked at global stock market performance going back to 1910. In five-year periods after the worst years in the market, stocks returned 7.1 percentage points above the prevailing yield on a three-month Treasury bill. Following the best years, stocks gained 6.8 points above cash. The study was part of the 2009 Credit Suisse Global Investment Returns Yearbook.

“Betting on quick mean reversion is a dangerous thing,” Professor Dimson said.

But assume for a moment that the market is due for a big snap-back. Even if that were to occur, stocks would still have a steep mountain to climb.

“We could have a legendary run off the lows, but it may still take us 10 years to get back to our old highs,” said Jeremy Grantham, chairman of the investment management firm GMO.

Historically, bull markets have gained around 38 percent in their first 12 months. That amounts to more than a third of the total gains throughout a typical bull market’s life. Let’s assume that such an initial surge happens this time.

The Dow is trading 7,278. A 38 percent rise would lift the Dow to 10,043. Even assuming a 10 percent annual climb thereafter — a big assumption in tough times — it would take nearly four more years to get back to even. That would bring us to 2013.

Investors who bank on 10-percent-plus returns may be fooling themselves, says Robert D. Arnott, chairman of the investment management firm Research Affiliates. “The folks who are thinking that we could go back to a sustained period of double-digit annual returns for stocks haven’t really studied their history,” he said.

Based on long-term returns of the Standard & Poor’s 500-stock index, including dividends, Mr. Arnott said it was reasonable to expect that stocks might generate annual returns of around 8.5 percent.

IN the 1990s, he noted, earnings growth was higher than average. That, as well as investors’ willingness to pay higher prices for each dollar of earnings, accounted for the outsize market gains in that decade, he said.

But that kind of euphoria about stocks will probably not be repeated anytime soon, as price-to-earnings ratios for stocks have fallen back in line with their historical norms and are well below their recent highs. “We have to move people away from the mind-set that anything less than double-digit returns is disappointing,” Mr. Arnott said.

Here’s another way to think about it: Even if it takes 10 years for the Dow to claw back to its old highs, at an annual rate of nearly 7 percent, “you would have still done very well — certainly better than in T-bills,” Mr. Dimson said.

Single-digit stock returns may not seem all that thrilling, compared with the huge numbers posted during the bull market of the ’90s. But for many investors, a stretch of modest returns might be a great relief after the losses of the last few years.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://www.nytimes.com/2009/03/22/your-money/22fund.html?em

Now the Long Run Looks Riskier, Too

Strategies
Now the Long Run Looks Riskier, Too

By MARK HULBERT
Published: March 28, 2009

CAN investors count on the stock market to produce handsome long-term returns?

The conventional answer has been, emphatically, yes. After all, despite downturns like the one we’ve endured recently, stocks over periods of 30 or more years have almost always outperformed other asset classes. And numerous studies have found that the stock market’s long-term returns have tended to fall within a surprisingly narrow range.

But those studies were based on the stock market’s past performance, which, famously, provides no guarantee of future performance. New research, using different statistical techniques aimed at capturing the uncertainty of future returns, suggests that the market may be much riskier than many investors have understood.

The new study, which began circulating last month as a working paper, is titled “Are Stocks Really Less Volatile in the Long Run?” Its authors are Lubos Pastor, a finance professor at the University of Chicago Booth School of Business, and Robert F. Stambaugh, a finance professor at the Wharton School of the University of Pennsylvania. A copy is at http://ssrn.com/abstract=1136847.

The professors don’t disagree that, historically, the stock market’s returns over various 30-year periods have been surprisingly consistent. Periods of particularly good returns have been followed by subpar ones, and vice versa — a process that statisticians call reversion to the mean. Prof. Jeremy Siegel, also of Wharton, and the author of “Stocks for the Long Run,” is often credited with demonstrating that mean reversion has been at work in the American stock market since 1802.

In an interview, Professor Stambaugh said that while Professor Siegel’s research shows that mean reversion is powerful, it is hardly the only force affecting the stock market’s long-term returns. Because estimates of those other forces are imprecise, Professor Stambaugh said, uncertainty about market fluctuations increases with the holding period — the opposite of what happens because of mean reversion.

One example of such a force, Professor Stambaugh said, is global warming. Its impact on the economy over the next 12 months is likely to be quite small, he said. But expand the horizon to the next several decades, and the possible effects of global warming range from negligible to catastrophic.

It is one thing to acknowledge the existence of uncertainty, but quite another to measure its influence on long-term market volatility. To do that, Professors Pastor and Stambaugh rely on a statistical approach pioneered by the Rev. Thomas Bayes, an 18th-century English mathematician. Bayesian analysis is often used to assess the uncertainty of future outcomes, based on a formula for updating the probabilities of given events in light of new evidence. This approach is quite different from traditional statistical measurements of probabilities based on historical data.

Applying Bayesian techniques, the professors found that reversion to the mean isn’t powerful enough to overcome the growing uncertainty caused by other factors as the holding period grows. Specifically, they estimated that the volatility of stock market returns at the 30-year horizon is nearly one and a half times the volatility at the one-year horizon.

Why don’t traditional measures of volatility, such as standard deviation, pick up this phenomenon? Those measures focus only on how much the stock market’s shorter-term returns fluctuate around the long-term average, Professor Stambaugh says.

As a result, they ignore uncertainty about what the average return might itself turn out to be. For example, he said, it is possible that the standard deviation of the market’s returns over the next 30 years could end up the same whether its average annual return over that period is 20 percent or zero.

What about Professor Siegel’s finding that the stock market has produced an annual average inflation-adjusted return of close to 7 percent since 1802? In an interview, Professor Pastor emphasized that the last two centuries could easily have been less hospitable to the United States, most likely lowering the stock market’s returns. An investor couldn’t have known in advance that the United States would win two world wars, for example, or emerge victorious from the cold war. In any case, he said, there is no guarantee that the next two centuries will be as kind to the domestic equity market as the last two.

IN an e-mail message, Professor Siegel acknowledged the theoretical uncertainty of forecasting stock market returns, but said it was hard to quantify it. He said the methods that Professors Pastor and Stambaugh used to measure the uncertainty were “very much outside of the standard statistical techniques.”

But Professor Pastor says that these methods are better suited than the standard techniques for quantifying the uncertainty faced by real-world investors. Even if Bayesian approaches have yet to become mainstream in financial research, he adds, they have become much more widely used in recent years.

What is the investment implication of the new study? Other things being equal, Professor Stambaugh says, you would probably lower your portfolio allocation to stocks. But by how much? It’s impossible to generalize, since the answer depends on your time horizon and what else is in your portfolio.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.


http://www.nytimes.com/2009/03/29/your-money/stocks-and-bonds/29stra.html?_r=1&em

If this rally is the real McCoy, most people will miss out

If this rally is the real McCoy, most people will miss out
Winter on the markets could finally be ending, but it will take time for investors to shed their bearskins.

By Tom Stevenson
Last Updated: 10:25AM GMT 26 Mar 2009

Comments 5 Comment on this article

Perhaps it was all that gloriously unseasonal weather last week. It's hard to maintain a bearish scowl in the face of catkins, daffodils and blue skies. Whatever the reason, investors have had a spring in their step on both sides of the Atlantic. The obvious question is whether the 22pc two-week gain on Wall Street, or the rather more subdued 13pc three-week rise over here, is just another bear market rally or the real McCoy.

The US reversal has certainly been spectacular, especially the Geithner-inspired 7pc surge in the S&P 500 on Monday. That was the fifth biggest one day rise and the best performance in a single session since last autumn's gyrations. Over here things don't look quite so special – we've been here several times already during this bear market.

Since the FTSE 100 peaked in June 2007, there have been four rallies of 10pc or more. The first was the phony war between August and October 2007 when we kidded ourselves that the problem was "over there" and could be contained in the financial and property sectors. Shares rose by 15pc.

Next was the 18pc Bear Stearns relief rally between March and May last year. Phew, we thought, that gets all the bad news out of the way. There was another 10pc rise in the holiday lull before the collapse of Lehman Brothers ensured that all bets were off in September and October.
Finally the year ended with a 15pc act of collective self-delusion when we thought the "real economy" might escape the worst effects of the credit crunch. Even as investors were crossing their fingers, the economy was in fact falling off a cliff.

So why should the latest bounce be any different? The rise so far is bang in line with the other rallies that came to nought. Why shouldn't it also peter out when investors find something new to worry about?

The first reason is that, with every downward lurch, the valuation argument becomes ever more compelling. Yes, shares have been cheaper but on increasingly few occasions. Buying shares when they have been available at the current multiple of earnings has in the past given investors a better than evens chance of achieving a 10pc a year return for a decade or more.

So even if this doesn't turn out to be the actual bottom of the market, on any sensible timescale for buying shares any further short-term losses are likely to be quickly clawed back. The more people who realise that this is the case, the more likely it is that this will indeed be the bottom.

The second reason to think the low point is near is the sheer length and depth of the bear market. The dot.com crash was longer but we've already matched the scale of drop. Only the 1970s and 1930s come close in size and duration.

Third, the market is holding up in the face of bad news, the best sign of all that the gloom and doom is already in the price. It is hard to imagine the market shrugging off Mervyn King's comments about the dire state of the public finances six months ago.

Finally, there are some tentative signs that the economy, if not exactly improving, is deteriorating less quickly than it was. Bear markets do not end when things get better but when they stop getting worse.

Signs to watch out for are things like the copper price – up by a third so far this year – and the Baltic Dry Freight index, which has risen sharply. Another straw in the wind is the very low level of inventories companies are holding. The smallest uptick in demand will immediately feed through into higher industrial production, so economic expectations might even be exceeded rather than endlessly disappointed later this year.

Another positive to note about the jump in share prices in March was the breadth of the rally. The ratio of risers to fallers exploded in this month's rally, a classic signal that we have seen a real low rather than what the traders call a "dead cat bounce".

Of course, no one knows whether March 2009 will mark the bottom or not, but if it proves to be the low point one thing is certain: most people will miss it. Data from the US shows that the ratio of cash held in money market funds compared to mutual fund assets peaked more or less as the market hit rock bottom in 2002. The stock market had risen by 30pc over the subsequent 15-month period before cash levels had returned to average so most people got back into the market way too late.

That wouldn't matter if bull markets were steady affairs adding value smoothly from trough to new peak. But they are not. It has been calculated that more than a quarter of the total return from all the bull markets since 1930 came within the first six months of the bottom of the market being reached. A third came within nine months.

One of these warm spells will really mark the end of winter. How long will you keep your coat on?

Tom Stevenson writes on investment for Fidelity International. The views expressed are his own.

http://www.telegraph.co.uk/finance/comment/tom-stevenson/5050205/If-this-rally-is-the-real-McCoy-most-people-will-miss-out.html

Stock market: 'Eventually shares will have the mother of all rallies'

Stock market: 'Eventually shares will have the mother of all rallies'

The stock market has jumped by about 500 points in the past couple of weeks, but investors thinking of putting their Isa money into shares want to know one thing: is this the start of a sustained recovery or a dead cat bounce?

By Richard Evans
Last Updated: 1:08PM GMT 25 Mar 2009

Stock markets have shown signs of life in the past few weeks. Since London's benchmark FTSE100 touched a six-year low earlier this month, falling below 3,500 at one stage, it has rallied strongly, closing at 3,912 on Tuesday.

America's Dow Jones index has also put in a good performance, posting one of its largest ever one-day rises following the announcement of a bail-out for banks' toxic assets.

But British investors wondering whether to use this year's Isa allowance before the deadline of April 5 have reason to be cautious: the markets have staged several apparent recoveries during the economic crisis, only to fall back again.

So is it different this time – is this a long-term recovery or just a dead cat bounce? Should you forget taking out a stocks and shares Isa this year, or dip a toe in the market? We asked the experts where they thought the market was heading and which equity investments, if any, Isa buyers should consider buying.

MARK HARRIS, FUND OF FUNDS MANAGER AT NEW STAR

"The direct answer is that there is no way of knowing for sure whether the recent rallies are a blip or something more sustainable, but in my view the March lows were significant.

"In early March we saw markets deeply oversold and widespread investor pessimism. Conditions were ripe for a bounce. Interestingly, a number of markets such as Brazil and China did not make new lows – they did not fall below their levels of November 2008.

"We have seen a marked increase in the determination of the US Federal Reserve to combat the various issues plaguing the financial system. This has resulted in a 20pc-plus bounce in most equity markets, which is the extent of the rallies in 2008 to January 2009.

"Valuations are supportive at lower index levels, but we have little visibility on earnings. In fact the earnings season through April is likely to be extremely difficult and may result in the markets retracing some of this rally's gains.

"I think the lows in March may prove to be significant, but that a 'test' may occur in April. If we can make a higher low for equities in April, it will be positive for further gains. But I should reiterate that I still believe that we are in a very challenging environment, and that it will be a couple of years before we can say that this bear market is truly over.

"So, put simply, we will see the rally which is just unfolding, then a correction of about 15pc, and then a further rally to take the market up in total by about 40pc from the lows."

JUSTIN URQUHART STEWART OF SEVEN INVESTMENT MANAGEMENT

"Shares on a five-year view may be OK, although prices could be highly erratic.

"I think it's too risky putting all my money into one asset class so I've diversified my investments into a mix of commodities, property, international shares and fixed interest securities such as bonds.

"You can do this yourself in a self-select Isa but it could be expensive and time consuming. An easier way is to buy a multi-asset fund, which you can hold within an Isa.

"Multi-asset funds can be actively or passively managed. I favour the passive type because costs – which can make a big difference over 10 years – are lower. Active funds can have total expense ratios of 2pc.

"Passive funds track the performance of the various asset types using exchange traded funds (ETFs). Examples include Seven's own and products from Evercore Pan Asset.

"Among the managers to offer active funds are Jupiter, Merlin, Seven, Midas, Credit Suisse, M&G, Fidelity and Jupiter. Fidelity's Wealthbuilder has a good record while Jupiter's fund is higher risk but well managed."

MARK DAMPIER, HEAD OF RESEARCH, HARGREAVES LANSDOWN

"Come what may, do buy an Isa – use your whole allowance (£7,200, of which £3,600 can be cash).

"Unless you trust politicians – and I don't – they are going to try to get more money out of you by raising taxes. So shelter as much as possible from tax while you can.

"Some people think the Isa allowance is so small that it's not worth bothering. But the yearly sums accumulate: a couple who had used their full allowances for every year that Isas and their predecessors, Peps and Tessas, have existed could have built up £190,000 by now – and that's discounting investment growth.

"If you are nervous about the markets you can keep your money in cash, even in a stocks and shares Isa (although without the tax breaks), to drip feed into the market. This prevents you from putting it all in just before a fall.

"I suspect this rally is more of a dead cat bounce; it comes from a very low position. There seems to be a base at about 3,500. Let's be a bit careful but with the market about 50pc below its peak it has to be an interesting time to think about investing.

"I don't believe, as some do, that corporate bonds are a bubble. If you buy through a fund such as M&G Strategic, Jupiter or Investec Sterling Bond, you will get a yield of 5pc to 6pc. If equity markets do eventually improve, bonds will have risen first.

"If you do want to buy equities, I would always go for a fund manager with a long-term track record such as Neil Woodford of Invesco Perpetual. But at the other end of the spectrum I also back emerging market funds such as Aberdeen's – that's where real long-term growth will be found, although prices will be volatile.

"With inflation of over 3pc on the CPI you would normally have interest rates at 5pc, not 0.5pc. So given the risk of inflation taking off I'd consider gold, via a fund such as BlackRock Gold & General.

"This rally is still more hope than anything else, the kind that has a habit of disappointing. I wouldn't push a load of money in; I'd wait for bad days and drip-feed it in then. The markets are not about to race away but one of these days they will, so don't wait for ever.

"Eventually, there will be the mother of all rallies."


http://www.telegraph.co.uk/finance/personalfinance/investing/shares/5047837/Stock-market-Eventually-shares-will-have-the-mother-of-all-rallies.html