IT’S INTUITIVE THAT, the cheaper a stock is when you buy it, the greater the expected risk-adjusted return. Indeed, academic research has shown this to be true. Eugene Fama and Kenneth French demonstrated in a 1992 academic paper how, over the long term, so-called value stocks have delivered significantly higher returns than growth stocks.
Fama and French defined value stocks as those companies with a book value—the accounting difference between corporate assets and liabilities—that was high relative to their stock market value.
YOU’VE NO DOUBT heard this before: Asset allocation is the single most important investment decision. If you have the right mix of stocks, bonds, cash and maybe real estate, you sharply increase your chances of success.
But how do you pick the right mix? There are rules of thumb based on age, there’s a statistical approach called Modern Portfolio Theory, there are risk tolerance questionnaires and there are cash flow-based approaches. Each delivers a different answer—because each emphasizes different factors.
I’M A FAN OF EMERGING stock markets—for two key reasons. But I also have qualms—for two key reasons.
Readers frequently write to me about emerging markets, and those messages usually coincide with periods of stomach-churning volatility, which is what we’ve witnessed recently: MSCI’s emerging markets index tumbled 15% in 2018 and was up just 4% in 2019’s first five months—after being up as much as 14% earlier this year. But as I tell my nervous correspondents,
DAD GAVE ME $1,000 in the mid-1980s on condition I start an IRA and make my own annual contributions, which I did at least some of the time. He recommended doing business with Vanguard Group, which was headquartered near my hometown of Wayne, Pennsylvania.
I can remember reading about the STAR fund, Windsor II, Wellington, Wellesley, the gold and precious metals fund, and the very highly regarded health care and energy funds.
I’VE LATELY BEEN getting a lot of questions about a pair of lookalike investments: U.S. Treasury bonds, which are currently yielding around 1.8% to 2.6%, and online bank savings accounts, which offer similar yields. In other words, you could earn just as much interest in a simple savings account as you could if you tied up your money for a period of months, or even years, in a government bond.
The question I keep hearing: “Why in the world would anyone choose government bonds?
WISH YOU COULD invest in one of those exclusive investment funds that buy private companies? Maybe it’s lucky you can’t.
It’s easy to see why institutional investors and wealthy individuals are so keen on private equity. It’s a useful diversifier. It also offers the potential for higher returns than publicly traded companies at a time when, for a variety of reasons, pension plans, university endowments and other bigtime investors are under pressure to improve investment performance.
IN THE FINANCIAL world, making money is the most popular pastime—but having a good argument is a close second.
What do folks argue about? HumbleDollar’s online money guide has always included a handful of sections labeled “great debates.” I decided to expand that collection to 12—and gather them together in their own chapter. Below you’ll find one of the new sections, plus links to the other 11.
Debate No. 8: Is Indexing Dangerous?
ONE SPRING DAY in 1995, McArthur Wheeler walked into two banks near his Pittsburgh home and robbed them at gunpoint.
His plan had one critical flaw: The disguise he chose didn’t hide his face at all. Instead of the usual stocking cap or hat and sunglasses, Wheeler made an unconventional choice. He applied a coating of lemon juice to his face. His reasoning: Lemon juice could be used to make invisible ink, so Wheeler figured it would have the same effect on his face,
WHEN WE ROLLED OVER into May, I was reminded of a saying I used to hear when I worked in the world of stock-picking: “Sell in May and go away.” The idea—based on questionable data—was that stocks lagged during the summer months.
This notion always seemed suspect to me. But even if it were true, I was never quite sure what to do with it. Should an investor sell everything on May 1 and then buy back on Labor Day?
I WORKED FOR MORE than 30 years in manufacturing, poring over data and paying attention to every detail that would impact production. As a project manager, I was responsible for making sure hardware was delivered on time, with no cost overruns or quality issues.
If we weren’t meeting deadlines or spending too much money, I was required to report these problems to upper management. They would ask me three questions: “What are you going to do about it?
I RECENTLY CAME across an academic paper with an attention-grabbing title: “It has been very easy to beat the S&P 500.” Not just easy, but very easy.
That got my attention because, in recent years, beating the S&P 500 has been anything but easy. In fact, it’s been maddeningly difficult. In eight of the past 10 years, domestic markets have outperformed international markets—by a wide margin. A dollar invested 10 years ago in the S&P 500 would be worth $4.37 today.
AS THE OLD SAYING goes, there are lies, damned lies and statistics. And then there’s investment performance, which may deserve a category all its own.
This topic came to mind recently when I saw a press release heralding the accomplishments of a retired nonprofit executive. Among the claims: that he had doubled the organization’s endowment. This struck me as impressive—until I considered it more critically. What did it mean that he had doubled the endowment?
I RECENTLY HAD the opportunity to attend a panel discussion that included the prominent investment manager Seth Klarman.
Not familiar with Klarman? The simplistic version of his biography has him as a hedge fund billionaire. While that’s true, it doesn’t do him justice. Klarman is more like a cult hero, at least in the investment world. Some call him the “Oracle of Boston.”
Google his name, and you’ll see him described as “the next Warren Buffett.” Search YouTube,
WHO DOESN’T LIKE free money? I know I do. If you’ve worked for a major U.S. corporation, you have probably also been offered free money. But there’s a potential downside—in the form of a large, undiversified investment bet.
What am I talking about? Let’s start with the matching employer contribution that’s offered in about half of 401(k) plans. You put in a portion of every paycheck and your company then matches all or half of your contribution.
INDEX FUND INVESTING seems to grow more popular by the day—for good reason: For very little in investment costs, you can get a diversified basket of stocks, a return that matches the targeted benchmark and a tiny annual tax bill.
But now that you have yourself such a fine financial vehicle, the responsibility to be a good investor lies in your hands. Or should I say, with your emotions? Even the best investments suffer downturns and spikes in volatility.