The Stingy News Quarterly (Q1/2014)
New @ StingyInvestor
4 Graham Stocks for 2014
"If you had bought equal dollar amounts of the Graham stocks and replaced them with the new batch each year, you would have gained 830% (or 19% annualized) over the full period."
3 Stingy Stocks for 2014
"Over the last year the Stingy Stocks have climbed by an average of 37.8% while the S&P500 (as represented by the SPY exchange traded fund) advanced only 29.7%. Both fared well but the market trailed by 8.1 percentage points."
Asset Mixer Update
We've updated our Asset Mixer to include nominal data for 2013.
Periodic Table Update
We've updated our periodic table of annual returns for Canadians to include nominal data for 2013.
Disappointing balanced index funds
"New investors should think seriously about opting for low-fee balanced funds like those offered by Mawer, Steadyhand, and PH&N. They represent good picks for active investors. Regrettably, there are relatively few balanced options that are worth recommending to index investors."
Take a vacation
"The mood is glum in Valueville these days. Conditions are so depressed that its inhabitants can be spotted packing up their Bloomberg terminals and heading off on extended vacations."
Benj likes gold
"When you think about the sort of people who grow up and go into the investment business, you might imagine characters such as Alex Keaton from the 1980s TV series Family Ties. Michael J. Fox brought the role to life and played a straight-laced conservative kid who was a little too obsessed with money. But it's best to ignore such stereotypes, because more artistic souls can also become great investors, and Benj Gallander is a prime example."
Don't play the prediction game
"With a spectacular 2013 in the record books, stock market forecasters have been busily looking forward to what 2014 might bring. You should avoid listening to them."
Market timing by indexers
"The investing world is awash in simple mechanical strategies that promise prosperity. But they all suffer from a fundamental problem: They're well suited to robots, but humans control the cash. Finding a sound strategy is less than half the challenge for most people. If they can't stick with it, then it's not very useful."
A bargain from Tweedy
"These days more than a few famous value investors are selling stocks and allowing cash to pile up in their portfolios."
A big day for value investors
"Value investors are set to descend upon Toronto for the Fairfax Financial annual meeting. They're making the trip from all over the world to hear Prem Watsa, the firm's CEO, talk about strategy and investing in early April."
Newspaper stock, really?
"Flint knapping was an important skill many years ago and then technological change made it obsolete. But, in a strange twist of fate, it has been making a bit of a comeback thanks to the Internet. It's now easy to learn how to knock out an arrow tip the old-fashioned way. While the Internet is a great boon to hobbies such as flint knapping, it's knocking the stuffing out of some businesses. Newspapers are a case in point."
Is Berkshire Hathaway too big?
"My biggest worry is related to the firm's size. Berkshire Hathaway is the fifth-largest stock in the U.S. by market capitalization and the fourth-largest by revenue, according to S&P Capital IQ. Problem is, it is extraordinarily difficult for giant companies to grow at above average rates for a long time."
Glamour tech stocks not tempting
"When it comes to the stock market, glamour stocks are much like marshmallows. They're exciting, fired with rosy growth prospects, and offer the dream of riches. While they might provide a speculative sugar rush, their long-term prospects tend to be quite poor."
Three easy ways to mimic the best
"Thrift is a rare virtue in the investment world, and it tends to go unheralded. Instead, hordes of salespeople try to lure in investors with the possibility of big returns, while charging a pretty penny. But you don't have to pay up. I'll walk you through three ways to benefit from the wisdom of the best investors in the world without paying a fortune."
"Focusing solely on the winners can lead to a dangerously skewed view of the world. It's a particularly acute problem in the markets, where luck often plays an important role. Problem is, the market tends to bury its failures, which slip out of both sight and mind. Investors who don't account for them may find their decisions swayed by survivorship bias. It's a factor that fund investors should be particularly wary of."
Glidepath to oblivion
"The stock market regularly makes a mockery of reasonable strategies and smashes them to pieces like a deranged bull rampaging through a china shop. Its latest victim is the idea that investors should invest heavily in stocks when they're young and then gradually move into bonds as they prepare for retirement."
Don't let envy ruin your returns
"With the markets making new highs, I know the temptation to run headlong into stocks is strong. But it's far better to stick to a good long-term plan than it is to succumb to return envy."
The Best of Stingy Links
Stingy Links: Academia
Evasive shareholder meetings
"We study the location and timing of annual shareholder meetings. When companies move their annual meetings a great distance from headquarters, they tend to announce disappointing earnings results and experience pronounced stock market underperformance in the months after the meeting. Companies appear to schedule meetings in remote locations when the managers have private, adverse information about future performance and wish to discourage scrutiny by shareholders, activists, and the media. However, shareholders do not appear to decode this signal, since the disclosure of meeting locations leads to little immediate stock price reaction. We find that voter participation drops when meetings are held at unusual hours, even though most voting is done electronically during a period of weeks before the meeting convenes."
Stock picking skills of SEC employees
"These results raise questions about potential rent seeking activities of the regulator's employees."
The shorting premium
"Short-rebate fees are a strong predictor of the cross-section of stock returns, both gross and net of fees. We document a large "shorting premium"; the cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha. We show that short fees also interact strongly with the returns to seven of the most well-known and large cross-sectional anomalies. These anomalies disappear among the 80% of stocks with low short fees, but are greatly amplified among those with high fees. We propose a joint explanation for these findings wherein the shorting premium is compensation for the short-side risk borne by the small minority of investors who do most shorting. It therefore raises prices rather than lowers them. We use the CME portfolio return as a proxy for this short risk and demonstrate that a Fama-French CME factor model largely captures the returns to all seven anomalies within both high- and l! ow-fee stocks."
Volatility and mutual fund manager skill
"Low volatility mutual funds outperform high volatility funds to a remarkable degree, and, in a standard four factor framework, past volatility is a reliable, persistent, and powerful predictor of future abnormal returns. Analyses patterned after Kosowski, Timmerman, Wermers, and White (2006) and Fama and French (2010) indicate that low volatility fund managers have significant skill. However, the addition of a factor contrasting returns on diversified portfolios of low and high volatility stocks eliminates differences in risk-adjusted performance. We conclude that either our volatility measure is associated with a pervasive, systematic pricing factor, or else the volatility effect is a market inefficiency of extraordinary size. Either way, failure to account for the volatility effect can lead to substantial mismeasurement of fund manager skill."
Stingy Links: Arnott
The Glidepath Illusion
"Rob Arnott explains why target-date funds fail to either maximize wealth or minimize uncertainty about future income."
Stingy Links: Behaviour
TED talks are lying to you
"This was not science, despite the technological gloss applied by writers like Jonah Lehrer. It was a literature of superstition, in which everything always worked out and the good guys always triumphed and the right inventions always came along in the nick of time." [Warning: The grumpiness is strong with this one]
Standing out from the crowd
"Two approaches can be used to assess and monitor the level of 'crowding' in different quantitative strategies. The authors introduce these measures and present anecdotal evidence suggesting that many quantitative strategies were crowded in the period leading up to the global financial crisis."
Stingy Links: Buffett
Berkshire Hathaway report for 2013
"Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans."
How to hold stocks: Buffett
"In an exclusive excerpt from his upcoming shareholder letter, Warren Buffett looks back at a pair of real estate purchases and the lessons they offer for equity investors."
Buffett the market timer?
"So yes, Buffett did retire in 1969 due to the lack of investment opportunity so in that sense it does sort of smell like market timing; he got out at the top. But does his retirement really mean that he lost faith in stocks as good long term investments at the then prices? His expectations suggest not."
Buffett smashed the EMH
"Warren Buffett's hero was Ben Graham and with good reason - the lessons of Graham and his writing partner Dodd made Buffett an extraordinarily good investor and a billionaire many times over. Although, to a believer in the Efficient Market Hypothesis, Buffett's not supposed to even exist - a fact which both Buffett and Charlie Munger derive quite a bit of humor from."
Stingy Links: Crime
Stock promoters make inroads
"Several finance websites have published articles by guest contributors who were allegedly paid to promote the stocks they were writing about, raising ethical concerns."
Optimism and credibility of stock spam
"This study examines attention-driven investment decisions using a sample of firms essentially unknown to investors prior to becoming the target of a stock spam campaign. We show that the market reaction to spam varies predictably with the content of the spam message. Spam date returns and volume are significantly higher for stocks targeted by spam emails containing optimistic target price projections bundled with ostensibly credible information quoted from a previously issued company press release. There is also some evidence that disclaimers in spam messages reduce, but do not eliminate, the market response. Attention effects also contribute to spammers. selection of stocks to target and to spam.related enforcement actions by the Securities and Exchange Commission."
Stingy Links: Economics
The law of demand is a bummer
"The debate over the minimum wage, which, thanks to Barack Obama's state-of-the-union address, we appear to be having again, is a debate over the question of whether raising the price of something - low-skilled labour, in this case - will reduce demand for that thing. That is to say, it is a debate over the relevance of the law of demand, an enormously robust generalisation about human behaviour confirmed and re-confirmed each day by billions of individual decisions."
Stingy Links: Government
When hedge funds lobby
"The worrying thing is that the Ackmans and Westhuses of this world have discovered what you might call the Buffett Arbitrage. Rather than investing in advertising or capital stock, they invest instead in lobbying, with the aim of getting very specific legislation passed which will make them very rich."
Now with less democracy
"Quebec is vowing to act fast and make changes that would give the corporate boards of locally-headquartered companies more power to reject hostile takeovers."
Stingy Links: Hallett
Smart beta needs to come out of the closet
"Some suggest that Smart Beta blurs the line between active and passive management. But it's clear to me that Smart Beta is simply active management in disguise."
Fund risk rating reform
"More importantly, the rating doesn.t adequately inform investors about the risks that lie ahead during the next credit market freeze or when the PIMCO managers show their humanity and get some of their bets wrong. PIMCO is following the rules. But assessing this as a low risk fund simply shows the inadequacy of the status quo that so many fund companies have argued to maintain."
Check out your advisor
"Securities regulators, insurance regulators and organizations governing financial designations all have online searchable databases that allow you to check out an advisor."
Making sense of experts' picks
"Among the flurry of recommendations, it's important to keep a few things in mind in the spirit of sound portfolio construction."
Should you follow your fund's star
"Mutual fund companies have a love-hate relationship with so-called 'star fund managers'. The love stems from such managers' typically strong performance and their ability to tell good stories about how they invest clients' money."
Stingy Links: Indexing
Why do ridiculous portfolios outperform?
"Jason Hsu on why monkeys and upside-down portfolios produce better results than cap-weighting over time." [video]
The growing case against ETFs
"Whether you are racing, cruising, stopping or crashing, safe driving comes down to a mix of equipment and personnel. The same can be said for mutual funds and exchange-traded funds, and while there is growing consensus that ETFs are the better vehicle, there's growing evidence that the people using them may not be so skilled behind the wheel. That's a real issue because a number of studies seem to indicate that the 'better' investment vehicle isn't delivering better results"
Stingy Links: Law
Now with more democracy
"Ottawa should reform its key corporate legislation - the Canada Business Corporations Act - to entrench majority voting as a legal requirement for all companies with public shareholders. The CBCA is under review for potential amendments, so the time is right to push for change. A fundamental reform of shareholder democracy is long overdue. Annual board elections should be more than an empty gesture."
Stingy Links: Markets
Is a smooth ride priced like a Cadillac?
"Here's a sure-fire way to get gouged: Walk onto a car lot, ask a salesperson to point out the vehicle with the smoothest ride, then purchase that vehicle regardless of price. It sounds reckless, but this is not far from the logic individual investors are using when shopping for the smoothest ride in the stock market."
How indexing distorts investment reality
"Is indexing the perfect investment solution for the majority of investors - or is it the most dangerous threat to free markets since Communism? Is the investment management business an intelligent way for an investor to access expertise - or is it a collection of greedy and incompetent thieves? Like most things in life, reality is somewhere between the extreme portrayals that tend to inhabit the media, and taking time to peel away the more nuanced layers is a valuable and productive exercise."
Lose as little money as possible
"LeBaron, 80 years old, spoke to Zweig from his home near Sarasota, Fla. He believes that the name of the game for investors has been to make as much money as possible, but from now on, the prime directive will be to 'lose as little money as possible.'"
Getting around the CAPE
"Shiller's cyclically-adjusted price-earnings ratio is, as recent research has shown, one of the best ways of predicting long-term returns in the stockmarket. But it is not popular because it shows the US market as expensive in historical terms. There are various attacks upon it. One is that the inclusion of the 2008 downturn in profits distorts the ratio by pushing it higher; on the contrary, the 2008 experience shows the benefits of averaging profits over the long term and not relying on a single year's measure. Profits fell in 2008 because they had been overstated in preceding years. Another line of attack is that the measure is irrelevant because accounting standards have changed. But that argument applies to all profits-based measures for valuations, like the prospective p/e on which bulls rely."
Stingy Links: Montier
A CAPE Crusader
"Having spent a large proportion of my career prior to joining GMO working at investment banks, I'm well aware of what Andrew Smithers describes as 'Stock Broker Economics,' the second tenet of which is 'The market is always cheap.' Over the years I've witnessed many attempts by the practitioners of this most dark art to justify why tried and tested measures of valuation are no longer meaningful, or occasionally create new measures of valuation that purport to show the market to be cheap."
Equity markets are overvalued
"James Montier, member of the asset allocation team at Boston-based GMO, has a hard time finding attractively valued assets these days. His advice to investors: Cash - and lots of patience."
Stingy Links: Pricing
People really like free stuff
"Neoclassical economics assumes that we are rational and that buying is as straightforward as performing a cost-benefit analysis. But when given the option to get something for free and its cost is zero, some fairly wild consumer behavior takes place."
Stingy Links: Real Estate
How much did your house cost?
"In the case of the Irish property market, it would appear that mortgaged households have considerable difficulty in accurately recalling the actual house price paid for their property."
Stingy Links: Stocks
Professor Damodaran's updated stock data
"In 1992, I had just finished a spreadsheet that contained the average PE ratios for companies in different sectors in the United States. There was little of substance in it, but I decided that since I had it, I might as well share it. I posted that spreadsheet for students in my class to download and made it available to others who visited my website (more hopeful thinking than an actual plan, since there were relatively few people looking for data online). Each year since, I have added to the data collection, initially expanding my list of data items for US companies, and in the last decade, adding to the collection by looking at non-US companies. It is my first task each year and it takes up the first week of the year, and I just uploaded the data today for the 2014 update."
Stingy Links: Taxes
Boost after-tax returns
"If you happen to be an investor, you're no doubt looking for ways to increase your returns. Look no further than your own tax return. If you can achieve tax savings related to your investments, this will increase your after-tax returns. So, consider the following ideas when filing your tax return this year."
Stingy Links: Thrift
Our number-one tax shelter
"Investing in a Tax-Free Savings Account should be a priority for most Canadians"
Stingy Links: Value Investing
Investment principles and habits
"David Kostin, Goldman Sachs' chief U.S. equity strategist, explained that investor demand for 'value' has been so pervasive that low-valuation stocks had outperformed higher valuation peers by 12 percent in 2013. As a result, the distribution of S&P 500 P/E multiples was now its tightest in at least 25 years, implying less differentiation of companies based on valuation."
Mohnish Pabrai's Boston College talk
Set aside some time to watch Mr. Pabrai's presentation.
Casting a wide net for deep value
"In 1651, Thomas Hobbes described the life of mankind as "nasty, brutish and short." He could also have been describing the list of Canadian stocks that typically pass the Ben Graham net-net working capital screen."
David Winters interview
"Wintergreen Fund's David Winters, a value investor who describes himself as the opposite of an index hugger, has more than 60% of his portfolio invested in companies based overseas and has recently taken a stand against Coca Cola management and Warren Buffett"
Chou's 2013 letter
"We believe that the market is currently fairly valued and we sincerely doubt the overall returns from equities in general over the next five to 10 years will be compelling. On the contrary, we believe the returns may be far more modest than those hoped for by investors. Not only are the P/E ratios and price-to-book values still high and dividend yields low relative to historic valuations, but the number of companies that are underpriced is at an all-time low. In light of this scenario, and with its obvious lack of bargains, we would not hesitate to sell our investments and be 100% or 50% cash -- or whatever the number may be."
Stingy Links: Watsa
What would you do?
"Every investor has held his hand out in the dark and blindly touched the fine line between being very early and very wrong"
"In this environment, with zero interest rates and high debt levels prevailing in most developed countries, giving them limited flexibility to react to unintended consequences, we think it is prudent to have a very strong balance sheet with a large cash position and to be protected on the downside. When problems hit, only those with cash and very liquid assets can take advantage of them. While it is very painful and costly waiting, we think your (and our!) patience will be rewarded."
Stingy Links: World
Bill Gates interview
"The majority of the foundation's money goes to a finite number of things that focus on health inequity - why a person from a poor country is so much worse off than somebody from a country that's well-off. It's mostly infectious diseases. There's about 15 of those we're focusing on - polio is the single thing I work on the most. And then, because of the importance of nutrition and because most poor people are farmers, we're in agriculture as well."
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