AAII Journal January 2017 Issue Now Available


Feature Article:

Downward Estimate Revisions Screen Tops Unconventional Year

Bucking its historical trend during a year marked by unusual events, Estimates Revisions Lowest 30 Down was the top-performing AAII screen of 2016.


In This Issue:

Stock Strategies: Deep Value Investing Has Not Gone Out of Style

An updated version of Benjamin Graham’s Deep Value screen identified nine stocks in 2012; the portfolio has outperformed since then with no losing positions.

First Cut: Stocks With the Largest Percentage Change in Earnings Estimates

The 15 stocks with the largest positive (and negative) percentage changes to their consensus earnings estimates for the current fiscal year.

Behavioral Finance: The Role Meditation Can Play in Investing

Meditation helps investors by relieving stress, increasing mental functioning and overcoming behavioral biases.

Portfolio Strategies: Vanguard’s Dynamic Spending Strategy for Retirees

This hybrid approach adjusts withdrawals within preset limits, allowing retirees to benefit from good markets and more easily weather bad markets.

AAII Model Portfolios: Model Shadow Stock Portfolio: New Additions, Plus Value Leads

Two new stocks were added. Plus, a shift in favoritism back toward micro-cap and value stocks helped to propel the portfolio to a new all-time high.

Briefly Noted:

Letters to the Editor: Letters

Comments from members on AAII’s Tax Guide, Ellis’ indexing approach, and asset returns during high and low inflation.

Letter From The Editor:

AAII Journal Editor photo This year, I want you to try something. Every time before you place an order to buy or sell, stop and breathe. Not subconsciously as we all do, but consciously. Sit quietly, close your eyes and concentrate on your breath. Afterward, you will find yourself more relaxed and alert.

Merely pausing to consciously breathe can be the break you need to separate your investing decisions from your emotions. It’s critical to do so because one of the biggest threats—if not the biggest threat—to an investor’s portfolio is the human brain’s System 1, which is quick and reactive. Left to its own devices, System 1 can cause an investor to make colossally bad decisions. Studies and analyses conducted by Nobel Laureate Daniel Kahneman and many others have documented the negative effect on returns that behavioral errors have. As such, I believe that anything individual investors can do to reduce the chance of making such errors should be considered.

Controlled breathing fits into this toolbox. It’s easy to do and can be done anywhere at any time. One of my favorite exercises is to simply count my breath backward. I count from 20 down to one, but it’s the awareness that matters more than the number. If you find the exercise helpful or want more ideas, do an online search for “Breathe. Exhale. Repeat: The Benefits of Controlled Breathing” in the November 9, 2016, issue of The New York Times.

A focus on breath is a key part of meditation, a practice which has a following in the investment world. Last May, I saw Jeremy Hunter of Claremont Graduate University talk about the benefits of meditation and mindfulness to a pretty packed room at CFA Institute’s Annual Conference. CFA Institute, for its part, published “The Meditation Guide for Investment Professionals” last October. The guide’s author, Jason Voss, also moderates the CFA Institute Members Meditation Group on LinkedIn. The group has 223 members (including myself), most of whom are CFA charterholders. As you will see here, some well-known people within the investment industry meditate, including Ray Dialio and Paul Tudor Jones II. BlackRock and Goldman Sachs, among others, offer meditation programs for their employees.

I’m not going to pretend that meditation is a magic pill; it’s not. I’ve used the Headspace meditation app for nearly seven months (the screen shot here is of my actual timeline). While I have not perceived a significant change in my personality, I do find myself being more aware of my mood and emotions. I am more conscious of how I feel and what I’m doing. Even though that awareness sometimes occurs in the midst of an activity as opposed to before I engage in it, the awareness is progress. Applying this awareness to the field of investing can give you the prompt to reconsider what might be a feel-good action in the moment, but a bad decision for the long-term success of your portfolio.

There is another benefit to controlled breathing and meditation: They give you the tools for taking a productive time-out. Among the advantages we individual investors have over institutional investors is the ability to slow down. Since we will never be as fast as the high-frequency traders, we should adopt a different game plan. Slowing down is one of the ways we can win.

I realize some of you are probably thinking, “That’s all well and good, but what I really want help on finding a good investment.” You’ll find plenty of ideas in this issue. AAII’s Wayne Thorp reveals what strategies worked best last year, and over the long term, in his annual review of the 63 AAII Stock Screens. Bob Johnson, Steve Horan and Tom Robinson explain what happened to a portfolio of Benjamin Graham Deep Value stocks created in 2012. AAII founder and chairman Jim Cloonan gives his latest AAII Model Shadow Stock Portfolio update and discusses the portfolio’s newest additions. Finally, AAII president John Bajkowski features the 15 stocks with the biggest upward estimate revisions in his latest First Cut.

Wishing you a healthy and prosperous new year,


Charles Rotblut, CFA
Editor, AAII Journal


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