Managing the Mental Aspect of Investing

Posted on December 10, 2012 | AAII Journal

Investors should consider whether they are being influenced by a good or bad herd behavior and who is on the other side of a trade.

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How Investors Miss Big Profits

Posted on November 26, 2012 | AAII Journal

Back in 1993, a curious thought crossed my mind while analyzing the federal regulations that were new at the time.

Mutual funds were permitted to report investment returns for one, three, five and 10 years (“alpha”), but how many investors actually kept their investments unchanged for those specific periods? If all investors did not hold on to their investments for those precise periods, then they had to be doing better or worse than was being reported.

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. Simply stated, alpha represents the value that a portfolio manager adds to or subtracts from a fund’s return. Investors’ alpha is the value a retail investor adds to or subtracts from the alpha delivered by the portfolio manager. The return of the respective index is considered to be zero alpha, so any excess over the index is considered positive investor alpha.

I developed a calculation that would measure whether mutual fund investors were actually earning more or less than the reported alpha. In 1994, DALBAR issued the first Quantitative Analysis of Investor Behavior (QAIB), showing that investors had severely underperformed the average mutual fund alpha! This underperformance continues to this day.

Investors were actually missing much of the alpha that mutual funds had earned. Using the S&P 500 index to approximate the returns that equity mutual funds produced, investors were leaving between 10.97% and 4.32% on the table, as Table 1 shows.

This shocking finding of underperformance led to research to understand how and why millions of investors were missing so much of the alpha and, ultimately, what they could do to capture more of the profits that funds were earning.

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Adherence to Rules Helps Model Shadow Stock Portfolio’s Performance

Posted on November 22, 2012 | AAII Journal

Following a consistent, well-defined approach has helped the portfolio achieve an average return of 16.1% over the past 20 years. Plus, see the latest buys and sells.

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Earnings Estimates and Stock Prices

Posted on November 20, 2012 | AAII Journal

Expectations play a key role in determining if a stock’s price “gains” or “loses” when actual earnings are reported.

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The Top Financial Apps

Posted on November 19, 2012 | AAII Journal

These are some of the best financial apps for iOS and Android devices currently.

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New Edge Stocks

Posted on November 13, 2012 | AAII Journal

Christina Wise of Investor’s Business Daily reveals which company traits make a story stock an attractive investment in her September 2012 AAII Journal article “The ‘New’ Edge: Characteristics of Winning Stocks.” These are the fundamental traits that past winning stocks possessed in bull market after bull market, decade after decade. This issue’s First Cut applies the key fundamentals highlighted in the article using AAII’s stock screening and fundamental database, Stock Investor Pro.

The starting universe of 5,564 stocks for this issue’s First Cut consisted of exchange-listed companies. The First Cut first looked for companies with positive current earnings per share that have been able to increase annual earnings at a 25% or higher rate for each of the last three years. Only 168 stocks met that stringent test. The First Cut then required that earnings per share for the most recent quarter be at least 25% higher than same quarter last year. We also looked for companies that have had an accelerating rate of quarter-over-quarter earnings growth. As a confirmation of the strength of earnings per share growth, the First Cut looked for quarter-over-quarter sales growth of at least 25%. Only 12 stocks possessed both strong historical year-over-year annual earnings growth and recent strong and accelerating quarterly growth.

To seek out companies with sustainable and improving profitability, the First Cut followed Wise’s fundamental test that firms have a return on equity of at least 17% and a net profit margin is better than the company’s average margin over the last three years. Since profit margins vary by industry, the First Cut also required that the company’s profit margin be higher than the industry norm. This type of filter helps to highlight companies that have a competitive advantage over their peers.

Only 10 stocks passed all of the fundamental factors exhibited by typical market winners and they made the First Cut. The table ranks these stocks by the price change over the last 52 weeks to highlight recent stock market success.

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The Top ETFs Over Three Years: Real Estate Dominates

Posted on November 5, 2012 | AAII Journal

Five real estate funds led all ETFs in terms of three-year returns. Dividend-focused ETFs led many equity fund categories.

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The November 2012 issue of the AAII Journal is now available on-line

Posted on November 2, 2012 | AAII Journal

AAII’s Best of the Net: 2012 Guide to the Top Investment Websites, 16th Edition – This annual guide highlights the best online resources for financial information and investment data.

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Charles Dow’s Theory Still Valid for the 21st Century

Posted on October 24, 2012 | AAII Journal

Dow Theory relies on both the Dow Jones industrial average and the Dow Jones transportation average to determine whether a true market trend exists.

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Websites for Exchange-Traded Funds

Posted on October 17, 2012 | AAII Journal

Where to find data as well as prospectuses and other reports on ETFs.

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