Investing Blog

Only the Disciplined Beat the Market

Research Affiliates, a highly respected market research firm, recently conducted a study on 45 years of mutual fund returns. The results were not surprising. Of 350 mutual funds available to investors in 1970, only 45 beat the market through 2014. Underperforming mutual funds is old news here, as I’ve covered in many other updates. The remarkable aspect of the study was that the mutual funds that beat the market significantly spent, on average, a third of the time underperforming the market on a rolling three-year basis. Read more

A Look Ahead For Small and Mid-cap Stocks

This was a historically rough year for small-cap and mid-cap stocks. Small-caps underperformed large-caps by more than 10% in 2014. This sort of gap is very unusual; it has happened only a handful of times over the last half century. The last time was during the deflation of the dot com bubble; there had been lots of speculation in small-caps as the bubble inflated. The good news is that small and mid-caps historically outperform large-caps, this holds true especially for value small-caps. Looking back from January 1927 to August 2014, small-cap value stocks beat large-cap stocks by 6.24% annually. Over that same period, the premium to small-cap value was positive over 99% of 10-year rolling periods. As small-caps in general close the gap, we will take additional advantage using a value strategy. Read more

Small-Cap and Mid-Cap Volatility Creates Opportunities in the Long Run

This year was a rough year to be invested in small and mid-cap stocks, which make up the backbone of our portfolio. As I write, small-caps have underperformed the S&P 500 by more than 10 percentage points, returning a negative return for 2014, and mid-caps have performed about the same. Liberty Hill Investing portfolios have done better than the small-cap average, but they have been pulled down by this broader trend. According to research by Morgan Stanley, this year saw one of the largest divergences between small-cap and large-cap stocks in the past 15 years. This is a good time to remember that small-cap investors need volatility, with years like 2014, in order to create the market inefficiencies that offer value and outsized returns in the long run. Read more

Earnings Season

Earnings season really brings out the investors with short attention spans and even shorter memories. During these fascinating few weeks every quarter you can find headlines like: “Amazon Plunges After Earnings Miss/Beat Because They Suck” (this was an actual article on Jim Cramer’s website Analysts criticize corporations for earning a few pennies less than what their spreadsheets predicted, and short-term traders jump in and out of stocks they’ll never trade again. Read more

Are Market Corrections Risk Or Opportunity?

It’s axiomatic that past market corrections are viewed as opportunities, but current and future corrections are viewed as risk. For most of the year, investors had been saying a pullback was inevitable, healthy, and should be welcomed. When the correction finally happened in September and October, the S&P 500 dropped about 10%. And, not surprisingly, everyone freaked out. The financial media used words like “carnage” and “slaughter”. I started hearing about selling to protect portfolios. Of course, you want to sell before the correction and buy during it (as I did for my clients), but human psychology can make that hard to put into practice. Read more

Quick Update On the Market Ahead

This past quarter was interesting for market returns. The S&P 500 was essentially flat (up about 1%), while mid-caps were down about 9% and small-caps were down about 11%. This sort of phenomenon is common as markets begin to correct. The first stocks to drop are the one investors see as riskier and then the larger stocks follow. Of course, this is one of those investor actions that strays from the rational; as we saw during the Great Recession, small-caps carry no more long-term risk than large-caps, but they are more volatile in the short-term. So, indications point to a corrective period, although the market can always move in unexpected directions (and often does). Read more

Underreported And Ignored, Long-Term Economic Progress is Key to Investing

Print and television economic reporters spend most of their time reporting on short-term events, but the most important economic story over the last five years is one that is hardly reported on: the economy slowly improved. You hear about jobs reports, earnings reports, economic forecasts, currency declines, GDP revisions, and so on. It’s easy to get caught up in each event and find a new trend line each time something important happens. All these events paint a broader picture, however, and if we step back and look, we’ll see that the U.S. economy continues its slow progress. Read more

Investment Selection and Patience Are Keys to Long-Term Success

I’ve been fielding a lot of questions on my website about how to take advantage of the current market. The market is bullish, so many feel it’s time to go all in. In response, I caution patience and selectivity. If we ignore our selection criteria to take advantage of a hot market, we make one of the classic mistakes in investing: seeing opportunities because we want them to be there, not because they’re actually there. Read more

Quarterly Update

This was another quiet quarter for the markets. There was a brief dip early in the quarter, but mostly the market moved slowly upwards. It’s an interesting time for markets, valuations are on the higher side, but the economy continues to show signs that it has reached escape velocity from the sluggishness created by the Great Recession. I’m maintaining my target of about 15% cash for client accounts right now because there isn’t a lot of value out there. When a market correction creates more value, I’ll put that money back into the market. I’m not targeting a higher percentage in cash because, despite my expectation that there will be a near-term market correction, the market may not correct in a significant way for a while. Short-term market movement is unpredictable and beating the market in the long-term is about holding superior stocks, not market timing. Read more

What China’s Ownership of U.S. Debt Tells Us about Emotional Investing

There are many economic pressure points that push often rational people into the outer reaches of emotional hyperbole. China’s ownership of U.S. debt is a great example of this. As Vox writer Matt Yglesias put it: “No subject attracts as much wrong commentary from people in positions of authority and influence as China’s purchases of American government debt.” Part of being a value investor is looking for the most rational explanation to potential threats or market events. Even when there is a chorus of opinion, by very smart people, value investors dig into the facts. Read more

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