Don’t Assume Beating the Market Is Easy
Posted on August 22, 2014 | Investor Update
The majority of investors use active strategies for a single reason: to beat the market. There are other reasons, of course, to handpick securities (or pay a fund manager to do so), such as realizing a higher stream of portfolio income or reducing volatility. Today, though, I want to focus on what you should consider when trying to beat the market.
The financial industry has done a great job making beating the market seem easy. Go to just about any financial media outlet (traditional or social) and you’ll find plenty of chatter claiming index funds are for suckers. What you often won’t find is a frank discussion about the long-term results actually realized by a large group of investors or fund managers.
There is a good reason for this: The numbers aren’t good. Consider the performance data published in our 2014 Guide to the Top Mutual Funds. Just 35% of funds with 10-year track records beat the S&P 500 index on a 10-year annualized basis. In other words, you had nearly a two-thirds chance of trailing the S&P 500 over the past 10 years if you bought an actively managed fund. The actual odds are worse because funds that folded over the last 10 years are excluded (“survivorship bias”) from the current guide and taxes are excluded from the return calculations.
The performance hurdle is not just limited to mutual funds. Barry Ritholtz, who writes The Big Picture Blog, says an active trader has to beat the S&P 500 by 25% annually to come out ahead. The large margin primarily reflects the impact of taxes. The active trader pays short-term taxes, and these costs add up. The long-term passive investor, conversely, pays little in taxes until he or she retires and makes withdrawals at a potentially lower tax rate.
SSR August Appears to Be Better Than Expected
Posted on August 22, 2014 | Stock Superstars Report
On Monday, the NASDAQ hit a 14-year high and the Dow Jones industrial average is well on its way to having its best month of performance since February. The S&P 500 index hit a new all-time high of just over 1,992 on Thursday, which marks the 28th record close this year for the index.
Inversions Can Lead to Capital Gains Taxes
Posted on August 22, 2014 | Dividend Investing
In an inversion transaction, the foreign corporation “buys” the American corporation. This allows for the domicile of the new corporation to move from the United States to the foreign country. (In the case of Medtronic, its headquarters will move from Minneapolis to Dublin.) Shareholders of record as of the date of the merger will see their existing shares swapped for stock in the new combined entity.
August Appears to Be Better Than Expected
Posted on August 22, 2014 | Stock Superstars Report
On Monday, the NASDAQ hit a 14-year high and the Dow Jones industrial average is well on its way to having its best month of performance since February. The S&P 500 index hit a new all-time high of just over 1,992 on Thursday, which marks the 28th record close this year for the index. August’s impressive performance comes as a surprise; many analysts were warning of an impending correction.
Individual Investor Optimism Reaches an 8-Month High
Posted on August 21, 2014 | AAII Survey
Optimism about the short-term direction of stock prices jumped to an eight-month high in the latest AAII Sentiment Survey. Neutral sentiment, meanwhile, dipped below its historical average for the first time since early January.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 6.3 percentage points to 46.1%. This is the largest amount of optimism recorded by our survey since December 26, 2013 (55.1%). It is also just the second time since March with a bullish sentiment reading above its historical average of 39.0% on back-to-back weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 3.0 percentage points to 30.2%. The drop ends a 32-week stretch of neutral sentiment readings above its historical average of 30.5%. It was the third-longest such streak in the survey’s history.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.3 points to 23.7%. Pessimism is now at a seven-week low. Bearish sentiment is also below its historical average of 30.5% for the 38th time in the past 45 weeks.
Bullish sentiment has risen by a cumulative 15.2 percentage points over the past two weeks, while bearish sentiment has dropped by a cumulative 14.5 percentage points. The reversal comes as the S&P 500 has rebounded off of its short-term lows and ended the survey period near record highs. This rebound has alleviated fears among some individual investors about a possible correction having started. Other factors contributing to the optimistic stance are second-quarter earnings, sustained economic growth and the Federal Reserve’s tapering of bond purchases. Keeping some individual investors 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.
At current levels, both bullish and bearish sentiment remain within their typical historical ranges, as does the bull-bear spread. The bull-bear spread measures the difference between bullish and bearish sentiment.
This week’s AAII Sentiment Survey results:
- Bullish: 46.1%, up 6.3 percentage points
- Neutral: 30.2%, down 3.0 percentage points
- Bearish: 23.7%, down 3.3 percentage points
- 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.
Q2 Earnings Not Influencing Outlook for Many Individual Investors
Posted on August 21, 2014 | AAII Survey
This week’s special question asked AAII members if, and why, second-quarter earnings have impacted their six-month outlook towards stock prices. Slightly less than half of all respondents (49%) said the quarterly results haven’t impacted their outlook. Many of these members said either they are more focused on the economy or that quarterly earnings are too short-term of an indicator. Just under 23% of respondents said second-quarter earnings have positively influenced their outlook. Many of these respondents said earnings are improving. Earnings were viewed negatively or not good enough to justify current valuations by about 12% of respondents.
Here is a sampling of the responses:
- “Earnings are not necessarily the real indicator of the underlying economy.”
- “They are too short-term and thus unimportant in the long-term.”
- “I believe the market is showing strength in varied sectors and the corporate profits are improving.”
- “Earnings were good overall in the second quarter. The economy is slowly improving.”
- “They’re still not high enough to justify the sky-high valuations.”
Sell OF THE WEEK 8/20/2014
Posted on August 20, 2014 | Podcast
AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why FLIR Systems (FLIR) 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
The Top 8 Sites for Company, Industry & Sector and Economic News and Analysis
Posted on August 19, 2014 | Computerized Investing
Welcome to Computerized Investing’s “Best of the Web.” Here we have brought together what we consider to be the “best of the best” when it comes to online investment analysis, research and tracking. These are the sites that we editors and staff of CI use ourselves, almost on a daily basis.
The Internet has grown into an invaluable tool for investors, but for every quality website, there are dozens (if not more) that are only marginally useful. Here we provide you with the best online resources for data and analytical tools to help you make informed investment decisions. Beyond looking for sites that offer useful information, we try to find those that are easy to use and do not swamp you with ads. Whenever possible, we seek out websites that are free, though when subscriptions fees are charged, we clearly tell you. (Keep in mind that many websites offer both free and subscription-based content.)
Our primary criterion for analyzing a website is to consider whether it offers value for its visitors. There are a large number of websites with well-designed pages and lots of content, but that possess little that is unique enough to make them stand out from their peers. We pay a lot of attention to the quality of content and whether it is credible or not.
BUY OF THE WEEK 8/19/2014
Posted on August 19, 2014 | Podcast
AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why WR Berkley (WRB) 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 August 2014 PASSING COMPANY LISTS AND PERFORMANCE DATA IS NOW AVAILABLE ON-LINE
Posted on August 15, 2014 | Stock Screens
YTD Return of Top Performers: Rule #1 Investing 50.3% — ADR Screen 35.1%