Investing Blog

Taking Advantage of a Market Correction

The market has fallen quite a bit recently. I know most people don’t like to see red in their portfolios, but if you have cash to buy stocks, a falling market can actually be your friend. Over the past couple years, as the market has moved steadily forward, I’ve remained cautious and defensive. I’ve kept cash in client accounts, despite the general market euphoria and a strong economy. I don’t want that cash to sit there forever, but I do want to be able to take advantage of a market correction. Back in 2008, I didn’t have cash positions in client accounts. Client accounts still did fine and outperformed the market on the way back up Read more

Insights from the Berkshire Hathaway Shareholders Meeting

Berkshire Hathaway recently conducted its annual shareholders meeting. This is often an important and interesting event for value investors. I’ve put together some of the more interesting points made in the question and answer session with Warren Buffett and Charlie Munger. Read more

A Look at What Rising Interest Rates Might Mean for Your Portfolio

I do not like to hold cash positions in client accounts as a general rule. These are unusual times, however, as stock valuations are on the high end and the Federal Reserve (the Fed) is set to raise interest rates soon. We’re holding that cash so that should the market take a downward turn, we’ll be able to take advantage and buy at better valuations. This approach takes patience and an understanding that the market won’t necessarily react in the way one expects. Many newer investors may have never faced this situation before, since the last time the Fed raised rates was between 2004 and 2006 Read more

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

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