Daily Investment Interpretations

Thursday, March 28, 2009

2009-3-28:   BusinessWeek, when it arrives on Monday, will have this article in it: This Market Rally May Be for Real. The magazine recommends "muted optimism.   
    You talk about corporate responsibility, and men who are all heart! Lloyd C. Blankfein, the CEO of Goldman Sachs, is mulling the return of Goldman Sachs' TARP money to the government so that the Congressionally mandated pay caps won't apply to Goldman Sachs' management: Goldman CEO compensation dropped 98% to $1.1 mln in 2008. What we need is a return to the obscene compensation numbers for top executives that rip off the shareholders and the general public and make the rich richer and the rest of the us poorer. But it's for a good cause. More of the top managers at U. S. corporations will be able to afford new Gulfstreams and Dassault Falcons

3-28 (Morning):   This morning, I'm going to concentrate on what kinds of investments I (and you) might make when the stock market and a little later, the economy, actually do bottom and start back up.   
Evidently, it's possible to consistently outperform the popular market averages, and by a wide margin.
    First of all, it's apparent that there are ways to make money in the stock market, and there are a few hedge fund gurus who are consistently doing so. (Berkshire Hathaway is too big to be nimble.) Their approaches require the most sophisticated techniques available. By now, they have large staffs of the brightest individuals they can hire, in addition to whatever else they can muster. It's clear that we would do much better for ourselves if we could place our money with one or two of these funds. But hedge fund investments require, by law, a household net worth of at least $1,000,000, and after last year's meltdown, many households can no longer muster this kind of net evaluation. So what other choices do we have?
    In 2007, I was extolling the virtues of the two leading investment advisory newsletters tracked by the Hulbert Financial Digest: the Prudent Speculator and No-Load Fund X. They had registered between a 16%- and a 19%-per-annum rate of total return over the past several decades, and over the long haul, had outperformed all the other newsletters that over five-year intervals, had outperformed these two long-term leaders. I thought that No-Load Fund X would outperform the market because of their practice of constantly switching to the best-performing mutual funds (and Exchange-Traded Funds--ETFs). 
    So how well have these newsletters done over the past year-and-a-half?
    The answer is: not terribly well. Both newsletters have mutual funds that apply the newsletters' investment strategies, and that may serve as a proxy for their performances. No-Load Fund X' flagship fund, FUNDX, looks like this:

    No-Load Fund X' exchange traded fund, UNBOX, Looks like this:

    UNBOX looks a little better than FUNDX because it rose a little higher by October, 2007, than FUNDX, but it fell just as hard:
    The Prudent Speculator's Al Frank Fund, VALUX, looks like this:

    These funds will presumably rebound to new highs once market conditions improve, but they've closely tracked the S&P 500 all the way down.
    Cabot's China and Emerging Markets newsletter has done very well over the past few years, including the past year-and-a-half, so that's one avenue I'm pursuing. I particularly like the fact that it's focused on emerging markets and especially, China, where I think a recovery might begin begin before, or independently of the United States. Also, I want part of my money to be in  expert hands.
    Two "portfolios" that were promising in 2007 were the
American Association of Individual Investors' Martin Zweig stock screen, and O'Shaughnessy's Tiny Titans. I have just checked these stock screens for the first time since the end of 2007. As of February 28th, 2009, both of these simulated portfolios had total returns of a little over 10:1 over the 11.16-year period from January 1, 1998 through February 28, 2009: 10.55:1 for the Zweig portfolio, and 10.37 for O-Shaughnessy's Tiny Titans. These are pretty spectacular results, approximately tripling every five years, at a time when the stock market is down about 50%. (In 2007, they were showing better than 25:1 returns--35:1 for the Tiny Titans--over the trailing 10-year period.) So these are worthy possibilities. Both portfolios are off 60% or more since their October, 2007, peaks. (I won't reprint their charts since this may require AAII membership... $29 a year.) The Zweig portfolio is off about 60% from its 2007 high, while the O'Shaughnassy Tiny Titans portfolio is down 70%.
    The Tiny Titans might offer the best possibilities because they've been depressed a little more than the Zweig portfolio.
    Another portfolio that has done uncommonly well is O'Neill's CAN SLIM (from Investors. Business Daily) It reached a peak of
18:1 in late 2008 (!), and as of February 28th, was at 14:1 over the 11.16-year period. It's obviously an all-weather portfolio.
    Maybe I should add what I've done on my own. Three times, I've multiplied my money several-fold in the stock market. 
    The first time was in the 1977-1981 time frame. I
quintupled my money, primarily through good luck. I lost part of my gains because of tax considerations. (We were in a 55% tax bracket.)
    The second time, was during the first leg of the 1982-1983 bull market. This time, I
6-folded my original investment capital through a combination of skill, and the good luck to have entered the market at what later turned out to be its 16-year secular bear-market low. (I was aiming for the cyclical bull market low.) Once again, I lost most of my gains through a combination of bad advice from financial gurus, tax considerations (we were still in the 55% tax bracket.), and the fact that I wasn't expecting the deep, 14-month pullback that followed the first leg of the 1982-2000 super-bull market. (Then, too, after the double-digit inflation of the 70s, it was hard to know what was coming next. Was Fed Chairman Volcker really going to throttle inflation long-term?)
    The third time was in the two-month period between August and October, 2007. This time, I
tripled my money (more than 6-folding the ~40% of my money that I had invested at high risk) primarily through skill. I "lost" (at least temporarily) my gains because of this historic "Great Recession", coupled with the fact that I followed the advice of Mark Hulbert's leading market timers to stay in the market (given, I'm sure, in good faith). (After all, the market had corrected in August and had gone on to a new high in October. Normally, that's an all-clear signal at least for a few months. But not this time.) Luckily, I only invested about 40% of my money in this  high-risk/high reward mode.
    Can I do it again? I hope so. I'm counting on at least recouping my losses, although I'm still operating in a decidedly defensive mode. But I'm certainly receptive to other, more-passive ways of investing.
    For me, the big question remains: is it safe yet to go back in the water?

(To be continued)