One-Third of AAII Members Cautious About Increased IPO Activity

Posted on September 18, 2014 | AAII Survey

This week’s special question asked AAII members what they thought about this year’s increased initial public offering (IPO) activity. Slightly more than 30% of respondents expressed a negative viewpoint, saying it was either a sign of a market top or frothy valuations. At the other end of the spectrum, more than 17% viewed the increase in IPO activity positively. Several of these members said the larger amount of IPO activity was a sign of good economic and/or business conditions. Nearly 21% of respondents said they don’t follow or don’t invest in IPOs.

Here is a sampling of the responses:

  • “It makes me cautious about the future because it might indicate frothiness.”
  • “It’s an indication that we are nearing a market top.”
  • “A vote of confidence for the economy. Companies feel this is a good time to be looking for investors.”
  • “It’s a positive indication of business growth.”
  • “Couldn’t care less. Never invested in an IPO and probably never will.”


AAII Sentiment Survey: Bullish Sentiment Above Average for 6th Week

Posted on September 18, 2014 | AAII Survey

Optimism among individual investors about the short-term direction of the stock market remained above its long-term average for the sixth consecutive week, according to the latest AAII Sentiment Survey. This is the longest such streak since early January. Neutral sentiment also rose this week, while pessimism declined.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 1.9 percentage points to 42.2%.  The last time bullish sentiment stayed above its historical average of 39.0% for a longer period of time was a seven-week stretch between November 28, 2013 and January 9, 2014.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.8 percentage points to 34.8%. This is the third consecutive week and the 35th out of the past 37 weeks with a neutral sentiment reading above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell by 3.6 points to 23.0%. The drop keeps pessimism below its historical average of 30.5% for the 43rd time in the past 49 weeks.

Keeping many individual investors optimistic about the short-term direction of stock prices is the S&P 500’s overall upward momentum, earnings growth, sustained economic expansion and the Federal Reserve’s tapering of bond purchases. Causing other AAII members to be pessimistic are prevailing valuations, the failure of the S&P 500 to set new highs, events in the Middle East and Ukraine, the pace of economic growth and Washington politics.

This week’s AAII Sentiment Survey results:

  • Bullish: 42.2%, up 1.9 percentage points
  • Neutral: 34.8%, up 1.8 percentage points
  • Bearish: 23.0%, down 3.6 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.



Sell OF THE WEEK 9/17/2014

Posted on September 17, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Radio Shack (RSH) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week





Allocate by Market Weight (And Adjust for Personal Circumstances)

Posted on September 16, 2014 | AAII Journal

Charles Rotblut (CR): I’d like to discuss allocation, starting with rebalancing. A lot of people either psychologically have a problem doing it or just won’t do it. What are your thoughts?

William Sharpe (WS): I think, by and large, people probably shouldn’t do it. In particular, rebalancing by selling winners and buying losers. Basically, if you’re going to sell your winners and buy your losers, then you have to trade with someone. And that person has to take the other side of the trades. If you’re smart doing that, then the other person must be dumb to trade with you. So the questions are: Why is that a good thing to do, and what’s the matter with the other person for trading with you?

We can’t all rebalance, because rebalancing to pre-selected proportions means selling relative winners and buying relative losers. Since we can’t all do that, the question is: If this is the obvious thing to do, with whom are you going to trade? Who is it? And why should the other person trade with you? In an efficient, sensible or informed market, such rebalancing will not be a good strategy.

I would like to see a very-low-cost index fund that buys proportionate shares of all the traded stocks and bonds in the world. Unfortunately, there are none at present. It would be good if there were one or more used by a great many investors as their main investment vehicle. While such a fund is not available, you can construct one from existing index funds, but then you have to monitor the current world values of the components—for example, the value of all the U.S. bonds for the U.S. bond index fund, the value of all the non-U.S. bonds for that fund and the value of all the world stocks for that fund. I’ve talked to my friends in the index fund business, and thus far nobody seems to be interested in producing that. It is a huge hole and individual investors could really use such a fund.

CR: What about adaptive allocation? I know you’ve written about the subject.

WS: Here is a simple way to think about this. Assume that at the moment stock values are 60% of the total value of bonds and stocks, that bond values are 40% and that you just want to have the risk and return of the average investor. Then you should invest 60% in stocks, 40% in bonds. And now, let’s say, stocks go up and bonds go down, so the market values are now 70%/30%. If you want to continue to be the average investor, you should have 70%/30% proportions. But when you look at your portfolio values, you are likely to find that they are already close to 70%/30%. And you didn’t have to do anything. This won’t be exactly the case due to new security issues and things of that sort, so you might have make some minor adjustments, probably when reinvesting dividends and bond payments. But the trades will be small. The idea is to have a policy that indicates what proportions you want when the market proportions are, say 60%/40%, and then keep your relative risk constant as market values change (Figure 1). The formula that I suggest for adaptive asset allocation works from this basic policy and indicates the proportions that you should have as market proportions change.

In the simplest case where you just want to take the risk of the average investor, the formula just says that your policy should be to hold the same proportions as the market. If you want to have a policy of being more risky than the average investor, then you have to look at the formula. But it’s a very easy formula.

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Figure 1. How Adaptive Allocation Works




BUY OF THE WEEK 9/16/2014

Posted on September 16, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Olympic Steel, Inc. (ZEUS) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the week




THE September 2014 PASSING COMPANY LISTS AND PERFORMANCE DATA IS NOW AVAILABLE ON-LINE

Posted on September 15, 2014 | Stock Screens

YTD Return of Top Performers: Rule #1 Investing 50.3% — ADR Screen 37.0%

See the results and passing companies »



September 2014 AAII MODEL PORTFOLIOS UPDATED – Race to the Top

Posted on September 15, 2014 | Model Portfolios

The S&P 500 index climbed 4.0% in August, pushing past any resistance to trade at new all-time highs. Eventually, the bears will be right and there will be a pullback, but it hasn’t happened yet. While global worries ranging from war in Ukraine, Syria and Iraq to a possible European Union recession continued to dominate headlines last month, these concerns didn’t slow down the indexes like they did in July. Data continued to point to a slowly strengthening economy, and with Fed chair Janet Yellen insisting that the Federal Reserve is in no rush to raise interest rates, the market’s climb had little to oppose it. Earnings were overall better than expected and supported the story of a strengthening economy. The positive momentum carried over to both the Model Shadow Stock Portfolio and the Model Fund Portfolio, although only the Model Shadow Stock Portfolio beat its benchmark in August. The Model Fund Portfolio was up 3.6% for the month, while the Model Shadow Stock Portfolio, which concentrates on small-cap stocks, rose 6.4%. The Model Shadow Stock Portfolio can experience greater short-term volatilities because it is made up of stocks trading in the “shadows” of Wall Street, and are therefore more likely to be mispriced. While there may be negative periods in such a portfolio, over time the portfolio tends to significantly outperform the S&P 500. Short-term volatility is the price to be paid for higher long-term expected returns. While in July this worked against the Model Shadow Stock Portfolio, in August it turned in the portfolio’s favor.

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Does Social Investing Generate Higher Returns?

Posted on September 15, 2014 | Financial Planning

Investor-Update

Socially responsible investments have attracted much money, many investors, and many studies. We have studies of socially responsible mutual funds, socially responsible indexes, “sin” stocks, stocks with good and bad environmental records, and stocks with good and bad employee relations. But some parts of our knowledge are inconsistent with other parts and some gaps in our knowledge remain.

The Social Investment Forum, a national nonprofit organization promoting the concept, practice, and growth of socially responsible investing, describes socially responsible investing as “an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis.”

Screening is the most prevalent form of socially responsible investing, followed by shareholder advocacy and community investing. Negative screening excludes or reduces the portfolio weights of companies with weak environmental, social, or governance records, and positive screening includes or increases the portfolio weights of companies with strong records.

Negative screens that exclude tobacco companies have been the most popular screens among socially responsible mutual funds, followed by screens that exclude companies associated with alcohol, gambling, and weapons. Negative and positive screens related to community relations come next in popularity, followed by screens related to the environment, labor relations, products and services, and equal employment.

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August 2014 AAII ASSET ALLOCATION MODELS UPDATED

Posted on September 12, 2014 | Asset Allocation

STOCKS – 1 YEAR

Large-Cap Stocks: 25.04%
Mid-Cap Stocks: 22.75%
Small-Cap Stocks: 22.06%
International Stocks: 16.27%
Emerging Markets Stocks: 22.29%

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Total Returns Are Nice, but We Prefer Dividend Yields

Posted on September 12, 2014 | Dividend Investing

Last weekend, Barron’s ran an article about total yield, which encompasses dividends and share buybacks.

Buyback yield quantifies the impact of stock repurchases at the share ownership level. In our Stock Investor Pro stock screening program, we calculate the buyback yield as the change in share count for the current period versus the past period. For example, if a stock had 90 million average shares outstanding in the second quarter of 2014 and had 100 million average shares outstanding in the second quarter of 2013, the buyback yield would be 10%.

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