Three Dividend Hikes!

Posted on September 19, 2014 | Dividend Investing

We’ll start this week’s commentary with some good news. Three DI companies raised their dividends.

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New Week, New Records

Posted on September 19, 2014 | Stock Superstars Report

Don’t fight the Fed. The value of those words was proven again as Fed complacency, indicated by the statement they released on Wednesday, removed any obstacle to higher equity prices. Once it became clear that the Fed would not be aggressive in hiking interest rates, the markets resumed their inexorable march higher. Market participants felt comfortable with what were perceived to be ‘dovish’ comments from the Federal Reserve. Additionally, instability across the globe was good for any dollar-based assets as investors abroad looked to the U.S. for safety.

Industrial production last month was slightly worse than expected, but it did little to dampen the mood. The August consumer price index came in lighter than expected, supporting the Fed’s case that they have room to maneuver. The September Philadelphia Fed Survey dipped, but still was strong. No data from this week counters the idea that the economy is slowly strengthening.

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Be Careful Not to Let Biases Impact Your Decisions

Posted on September 18, 2014 | Investor Update


There is a new study about superstitions and portfolio returns. It should not surprise you to hear that superstitious individual investors have worse performance than those who are not superstitious. Any time biases are introduced into financial decision making, returns will be affected.

The study looked specifically at Taiwanese traders. The researchers found a far higher ratio of orders placed at prices ending in the number eight than they did for orders ending in the number four. This was attributed to the fact that Chinese culture views the number “8” as lucky and the number “4” as unlucky. The researchers noted that in Mandarin, “four” is pronounced similar to “death,” whereas “eight” is pronounced similar to “good fortune.”

Traders who were the most superstitious trailed investors who were the least superstitious on an intraday, one-day and five-day basis. The reason is simple. The superstitious traders let their biases toward certain numbers govern their investing decisions, rather than making purely objective choices.

The study’s authors pulled no punches when discussing the results. They called superstitions “a separate dimension of an investor’s cognitive disability in making financial decisions.”

It’s not fair to solely call out Taiwanese traders for being superstitious. A bias toward or against certain numbers exists in many cultures and religions. Here, in the United States, 13 is viewed as an unlucky number. Some buildings go so far as to rename their 13th floors to avoid having it as an option on elevators, including our own office building. Conversely, 13 is a lucky number in many other countries, as is three. It is not uncommon for a Jewish person to give monetary gifts or make donations in multiples of 18. Based on anecdotal evidence, it seems fairly common for people to use birthdates when choosing lottery ticket numbers.

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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:

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


Posted on September 16, 2014 | Weekly Features

This week’s AAII Weekly Features has been updated.
View this week’s Top AAII Articles, Featured Stock Screen and Member Question.

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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


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 »

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