Peculiar Facts From 500 Years of Finance

Posted on May 30, 2014 | AAII Journal
Tags: >

Lesser-known but notable events that not only have led us to the present day, but also had an impact beyond the financial markets.

If you are like most people, you learned history in classes that largely covered facts related to dates, places, and people…and you probably couldn’t wait until the school bell rang.

Sadly, children’s exposure to history is often framed in a way that is less interesting and engaging than it could be, and it robs students of a curiosity about the past that could benefit their own future by understanding the richness of the human experience.

When it comes to the intersection of the financial markets and human history, there is a kaleidoscope of tales drawn from centuries of market mischief, mishaps and mayhem. This article reveals a few less-known but notable events drawn from the past half-millennium that might pique your own interest in the rivers of time that have led us to the present day.

You are probably acquainted with the fabled “tulipmania” that gripped Holland during the early 1600s. What most people don’t know is that two viruses played central roles in this drama.

The tulip bulbs themselves were classified into three groups: the single-colored, the multi-colored, and the “bizarres.” This last category is most important, as bizarres were the rarest and most sought-after tulip. The reason these unusual flowers came about was due to a virus that interfered with the plant’s ability to create a uniform color on the petal. It is today known as a “breaking” virus, since it breaks the plant’s lock on a single petal color without killing the plant. The effect on the flower was striking, producing mosaic-like flames of color on each petal. Of course, the Dutch of the time knew nothing of such things; they merely took a strong liking to these rare and unusual flowers.

Read more »

Corporate Revenues Are Going to Change

Posted on May 30, 2014 | Dividend Investing

The manner in which many corporations report sales is going to change. This week, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) agreed on a proposal for when companies should recognize revenues. The change resolves what had been a mix of various rules. Here is how the IASB and FASB described it:

Read more »

A Record Setting Week, Plus Changes to the SSR Portfolio

Posted on May 30, 2014 | Stock Superstars Report

The June SSR Monthly Report is now available at the SSR website. There are two new portfolio deletions and new two portfolio additions to announce.

Read more »

The Difference Between Stock Screens and Portfolios

Posted on May 29, 2014 | Investor Update
Tags: >

Many of the more common questions I get asked pertain to our stock screens. Specifically, members ask about the performance of the screens and how replicable it is. Often, the screens are initially mistaken for being portfolios, which they are not.

I’ll use the O’Shaughnessy: Tiny Titans screen and our Model Shadow Stock Portfolio to explain the difference between a screen and a portfolio. Both target micro-cap stocks, but with different approaches. The performance figures for both also have important differences to be aware of.

A stock screen is essentially a database filter. It seeks out stocks matching a specific set of criteria. For example, the Tiny Titans screen identifies U.S. exchange-listed stocks with market capitalizations between $25 million and $250 million, a price-to-sales (P/S) ratio below 1.0 and a 52-week relative strength price rank of 85% or higher. (The last criterion restricts the screen to only those stocks whose price appreciation is better than at least 85% of all other stocks.) Any stock matching these criteria passes the screen, regardless of how positive or negative any of its other characteristics are. This is why it is important to conduct analysis beyond what the screen is designed to look for and not simply buy a stock because it passes a good screen.

The performance reported for each of the more than 60 stock screens on is calculated based on the month-end list of passing companies. We determine what stocks pass, group them into a hypothetical portfolio, hold the portfolio for a month and then restart from scratch the next month. This monthly reconstitution works fine for giving you an idea of the type of performance of the screen has produced, but your actual real-world returns may differ. The performance calculations exclude any transaction costs—such as commissions, bid-ask spreads and taxes. They also use prices that may differ from what you would actually be able to trade it at.

Read more »

Individual Investor’s Outlook Largely Unaffected by Q1 Earnings

Posted on May 29, 2014 | AAII Survey

This week’s special question asked AAII members how first-quarter earnings impacted their six-month outlook for stock prices. Nearly half of all respondents said the profit reports did not impact their outlook. Approximately 15% said the earnings reports made them more optimistic. A smaller group, 9% of all respondents, said they are more pessimistic about the short-term outlook for stock prices.

Here is a sampling of the responses:

  • “No, I think an improving economic outlook will be more of a favorable driver of stock prices.”
  • “Earnings have not influenced my outlook.”
  • “First-quarter results were dampened by the weather. I expect that we will continue now with the old, slow growth.”
  • “Positively, as good companies have maintained solid results despite the weather’s hit.”
  • “I have not been impressed!”

Relative Portfolio Returns Influence Happiness

Posted on May 29, 2014 | AAII Journal

How a portfolio performs relative to your expectations may impact how happy or unhappy you will be.

Whether an investor is happy or unhappy with his performance is significantly influenced by how his portfolio performs relative to the market. Investors are likely to be happy even if they lose money as long as their portfolio declines by a smaller magnitude than the broad market. Conversely, the proportion of investors likely to be unhappy rises during periods of strong market returns.

This conclusion is based on a study of British individual investors. Over 600 self-directed investors at Barclays Stockbrokers were surveyed during the period of September 2008 through September 2010. Respondents had a median age of 53 and median wealth of approximately $252,000. Answers were compared against actual returns.

The average threshold for anticipated happiness was a three-month gain of 5.4%. The average threshold for anticipated unhappiness was a three-month decline of 0.2%. Expectations for the level of returns that would lead to happiness did not alter much after the initial quarterly survey period, even though the FTSE All-Share Index (benchmark for the UK equity market) rebounded strongly from the financial crisis. Individual thresholds varied greatly; some respondents were happy even with a modestly negative return, while others required returns in excess of 20%. A strong positive relationship existed between return expectations and the minimum return an investor would be happy with.

Read more »

AAII Sentiment Survey: Optimism Rebounds to Two-Month High

Posted on May 29, 2014 | AAII Survey

Optimism among individual investors hit a two-month high in the latest AAII Sentiment Survey. Neutral sentiment, meanwhile, stayed above 40% for a fifth consecutive week.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 6.0 percentage points to 36.5%. This is the highest level of optimism registered by our survey since March 20, 2014 (36.8%). The improvement was not big enough to keep bullish sentiment below its historical average of 39.0% for the 11th consecutive week, however.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 2.8 percentage points to 40.3%. Even with the drop, neutral sentiment remains above its historical average of 30.5% for the 21st consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.2 percentage points to 23.2%. The drop keeps pessimism below its historical average of 30.5% for the sixth straight week.

The spread between bullish and bearish sentiment (the “bull-bear spread”) is now at 13.3 percentage points, the widest it has been since March 13, 2014.

The ongoing streak of +40% neutral sentiment readings is unusual. The last time neutral sentiment stayed above 40% for five consecutive weeks or longer was the six-week period of July 2, 1993 through August 20, 1993. Throughout the entire history of the survey, there appear to have only been six occasions—five occurring before 1990—when neutral sentiment stayed above 40% on consecutive weeks for longer periods.

The new record highs set by the S&P 500 as well as the rebound in technology, biotech and small-cap stocks likely contributed to the higher level of optimism. Also contributing to individual investor optimism are continued signs of economic expansion, the Federal Reserve’s tapering of bond purchases and low interest rates. Offsetting this optimism are the rate of economic expansion, Federal Reserve tapering, the events in Ukraine and frustration with Washington politics. The unusually high level of neutral sentiment suggests many individual investors remain uncertain about the short-term direction of stock prices or expect stocks to remain essentially unchanged over the next six months.

This week’s AAII Sentiment Survey results:

  • Bullish: 36.5%, up 6.0 percentage points
  • Neutral: 40.3%, down 2.8 percentage points
  • Bearish: 23.2%, down 3.2 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:

Retirement Income: Repairing the Damage to Assure the Flow

Posted on May 28, 2014 | Financial Planning

Having suffered severe losses in their retirement nest eggs last year, many retirees living off of their savings are reviewing their investment and spending plans, searching for new plans of action to ensure their savings can sustain them throughout their lifetime.

There is no question that bear markets can be devastating—particularly for new retirees—if action is not taken to compensate for the loss. The sooner you adjust, the better.

But what is your best course of action?

While the instinct may be to flee the risk of equity markets, postpone retirement or go back to work, an alternative strategy would be to consider temporarily reducing annual withdrawals from your nest egg.

A new T. Rowe Price retirement income study compared various withdrawal adjustment strategies for new retirees who suffered a 30% decline in their portfolios in their first year of retirement, under two different assumptions of future stock market performance, and compared to a switch to a 100% bond portfolio.

Our study found retirees can boost their chances of not outliving their assets over a full 30-year retirement period by simply holding their withdrawals constant for the next five years. In fact, simply holding withdrawals steady over the next five years provides a much more secure solution than switching to a 100% bond portfolio allocation in the second year.

Read more »

Sell OF THE WEEK 5/28/2014

Posted on May 28, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Airgas (ARG) 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

10-K Filing Size Impacts Volatility

Posted on May 27, 2014 | AAII Journal

The size of a 10-K report, an annual filing required from public companies by the Securities & Exchange Commission SEC, is correlated with a stock’s price volatility. Stocks of companies with larger 10-K file sizes experience more price volatility in the period immediately following the filing date. These stocks also experience larger earnings surprises and have a greater dispersion of forecasts by the covering analysts.

These were the conclusions reached by two University of Notre Dame professors, Tim Loughran and Bill McDonald, in a forthcoming Journal of Finance paper. The two professors proposed replacing The Fog Index, a commonly used measure, with file size as a gauge for determining how readable a 10-K filing is. The professors believe the goal of readability should be “the effective communication of valuation-relevant information, whether it is directly interpreted by individual investors or assimilated and distributed by professional analysts.”

Read more »

Older Entries »