In my post earlier I published a chart showing the asset class returns for the past 15 years. If you look closely, you’ll see that commodities have been the worst performing asset class for three years running. Three down years with a high probability of 2015 being the fourth. Investor sentiment is so negative it may be close to a turning point.
On the face of it, the Bloomberg Commodity Index has had meaner bear markets than this one; just look at the cliff-drop in late 2008 below.
Source: Commodities Are Sounding an Alarm – Bloomberg View
Understanding your retirement expenses is an equally important step in successful retirement planning. Take the time to carefully consider some of the most overlooked retirement expenses:
- Health Care
- Income tax on traditional 401(k) and IRA withdrawals
- Income tax on Social Security benefits
- Adding a vacation spot
- Helping elderly parents
- Helping adult children
- Helping grandchildren
- Insurance Premiums
Source: 10 Most Forgotten Retirement Expenses | BlackRock
At the 2015 CFA Institute Fixed Income Management Conference in Boston, I learned that almost every speaker is concerned about the liquidity of corporate bonds. Many pointed the finger at Dodd-Frank and Basel III, which require greater amounts of high-quality capital. This means that investment banks, long-time facilitators of corporate bond-market making, are doing very little of it as they are reluctant to hold the inventory. This flies in the face of evidence that the bid-ask spread is narrowing. Speakers pointed out that much of the liquidity is being provided by hedge funds running algorithms designed to make money based on mispricing. But what happens when the conditions in which algos normally trade are violated? Most of the speakers think there would be no liquidity. Ouch!
Source: Weekend Reads for Investors: The “What about the Economy?” Edition
Has anyone figured out a better way of compounding your money in stocks beyond increasing your holding period? Not many.
Source: Playing the Probabilities – A Wealth of Common SenseA Wealth of Common Sense
Perhaps risk parity isn’t effective in the current deflationary environment. Diversifying across asset classes is a sound investment strategy that reduces risk and volatility, but there are periods where bad performance in one of the asset classes will drag down returns. This should not lead investors to abandon the strategy, only realize that every strategy has cycles of underperformance and sticking to the plan during those times is the difficult part of investing.
“Risk parity” has been touted as a better way to build diversified portfolios because it aims to equalize the risks investors take in asset classes such as stocks, bonds and commodities.But lately, a depressed commodities market and an untiring bull market in stocks are bringing risk-parity mutual funds down.
Source: Are Risk-Parity Funds a Better Strategy for Diversification? – WSJ
In a Fortune article written by Paul Krugman, he lays out the Seven Habits of Defective Investors listed below:
1. Think short term.
2. Be greedy.
3. Believe in the greater fool
4. Run with the herd.
6. Be trendy
7. Play with other people’s money
Even though the article was written almost 20 years ago, the behavior still and will always apply to a certain type of investor who wants more from investing than an average return. They are looking for the easy win, the ride, the outperformance, the moonshot, or whatever buzzword they are using to justify owning the hot stock of the day.
Valeant Pharmaceuticals fit the bill perfectly for these investors. It was engineered by short term thinking to produce growth and attract shareholders who are looking for the next big winner. It was a momentum stock run by management and investors who were greedy and playing with other people’s money.
Now with stock down 70% from its high, the management and investors that were pushing the stock higher through short term financial engineering will be forced out. Investors have already lost faith in management and the “smart, aggressive” CEO Michael Pearson will soon be jettisoned. Investors like Bill Ackman and Ruane, Cunniff & Goldfarb, will be forced to sell by investors pulling their money from the funds they run.
See Also: Goldman Sells Valeant Shares Used as Collateral by CEO and A Bunch of Hedge Funds Got Burned by Valeant
From Josh Brown at The Reformed Broker:
A nonsense game we play on Wall Street – did such and such company meet or beat The Street? Or god forbid, did they miss? By a f***ing penny? Oh no!
Real businesses are not run this way off Wall Street. As the CEO and co-founder of a startup investment advisory, I’ve received the crash course of a lifetime in this stuff. I have yet to make a single decision that needed to reflect well inside of any given 90 day period. My partners and I are mapping out the next five years, at a minimum, every time we choose one course or another.
Here’s hedge fund legend Stanley Druckenmiller on why he likes Netflix’s style:
“I only heard 30 seconds of [Netflix CEO Reed Hastings] … but he said, ‘If you manage for quarterly earnings, you’re dead.’ Then somebody on CNBC says, ‘Well, it’s easy for him to say with a stock price like that.’ Well, why do you think he has a stock price like that? Because he thought about the long term and not cared about quarterly earnings and all this short-termism the whole time.”
More of his comments about Amazon etc at the link below.
Source: Hedge fund legend Stan Druckenmiller raved about Amazon, one of his newest investments (Business Insider)
Skill is very difficult to determine, much less to recognize in advance.
Star fund managers come and go. This year Jeff Gundlach is the hot hand while Bill Gross has lost his Midas touch. If we look back at the hot fund managers we see a pattern that emerges, they are usually aligned with the asset class that is outperforming the market.
The distinction between skill and luck is of more consequence when grapeshot is whizzing overhead than when trying to beat an index. But the difficulty of distinguishing the two is at the heart of money management, and the distortions it creates in the market.
Source: Even great investors can suffer bad luck – FT.com
In the early 90’s Peter Lynch invested in growth stocks, in the late 90’s it was the tech stock gurus like Kevin Landis that were the stars, and in the years since the 2008 crisis it is the bond fund managers like Gross and Gundlach that are getting all the accolades.
How much of the performance attribution is from the asset class and how much is from the skill of the manager. According to a study of 2,076 actively managed US open-end domestic equity funds between 1975 and 2006, 75.4% are zero alpha funds (funds that have managers with some stock picking ability, but extract all the alpha generated through fees) 24.0% of the funds generate no excess return, and only .6% generate any alpha after fees. (Barrras,Lauren Scaillet, Oliver and Wermers, Russ “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas” Journal of Finance February 2010 pp. 179-210)
Out of 2,076 funds, that means only 12 are generating any excess return. What are the odds that you are going to know in advance which 12 those will be?
Warren Buffett has advised his wife to invest her bequest 90% in stocks and 10% in bonds—and this asset allocation mix could work for retirees, according to a study.
Source: Chief Investment Officer – Warren Buffett’s Way to Invest for Retirement