Monday, March 27, 2017 9:25 PM
Recently, Warren Buffett reminded us that in Berkshire Hathaway’s 2005 annual report he had “argued that active investment management by professionals—in aggregate—would over a period of years underperform the returns achieved by rank amateurs who simply sat still.” The culprit: fees. In 2008, Buffett wagered $1 million that, over a 10-year period, the S&P 500 would outperform a portfolio of funds of hedge funds. While there is still a year remaining in the bet’s term, it’s clearly all over—the S&P 500 won by a mile. Here, then, are some lessons from America’s most admired—but least imitated—investor. Read more.
Sunday, February 26, 2017 6:30 PM
The “volatility equals risk” movement was born in academia with the advent of modern portfolio theory. Out went the quaint notion of defining risk as the erosion or permanent loss of capital, and in came the quantification of risk as “variance,” or fluctuations around a mean. It’s madness—just the latest financial fad that promises to achieve the unachievable: suppress volatility without also suppressing returns. Don’t buy it. Read more.
Monday, February 06, 2017 9:17 AM
The correlation between earnings and stock prices since 1935 has been 95%. Since 1975, earnings have compounded at about 7% per year, and the S&P 500 price (excluding dividends) has compounded at about 8% a year. The earnings recession caused by the drag from the energy sector over the past three years has ended. Given projected earnings for 2017 and current interest rates and inflation relative to their historical averages, the equity market is not overvalued. Earnings will rise over time—and the stock market along with it—so stay fully invested in the great companies of the world. Read more.
Tuesday, December 06, 2016 12:01 AM
Did 2016 seem like an unusually volatile year? We experienced the worst first five days of any year ever, Brexit, and an unprecedented presidential election. But from a stock market perspective, it was only ordinary—with a peak-to-trough intra-year decline and a year-to-date return dead in line with historical averages. Investors who acted on these headlines got whipsawed by the market and saw lousy returns; investors who stayed the course enjoyed another solid year. The key to successful investing is to think in decades, not days. Read more.
Tuesday, November 01, 2016 8:33 AM
Nobel laureate Robert Shiller’s cyclically adjusted price earnings (CAPE) ratio has been flashing a warning sign that the stock market is severely overvalued. Between 1981 and 2015, the CAPE ratio signaled that equities were overvalued in 416 of 422 months—99% of the time. Building on insights from Wharton professor Jeremy Siegel, new information in the form of a reconstructed CAPE measure explains how and why accounting rule changes have depressed GAAP earnings and inflated the ratio. We explain why CAPE has now been fully discredited as a market timing tool. Read more.
Tuesday, October 11, 2016 12:06 AM
Institutional investors are piling into private equity because of disappointment with managers and strategies of all varieties—but also because other smart investors are increasing their allocations to the category. This is a prime example of the psychological phenomenon known as social proof. We deconstruct and explain the building blocks of private equity returns and provide an analytical framework for forming rational return expectations about this asset class. You might be unpleasantly surprised. Read more.
Tuesday, September 27, 2016 8:32 AM
Harvard’s $36 billion endowment—the world’s largest—has had humbling investment returns relative to its peers at Yale, Princeton and Columbia over the past 10 years. Part of the reason is that Harvard Management Co., which oversees the endowment, has had a revolving door of leaders. As one of the early pioneers of the endowment model of investing, Harvard’s recent results have been disappointing. It’s time for Harvard—and other universities—to return to a simpler approach to endowment management. Read more.
Tuesday, September 20, 2016 8:09 AM
The index mutual fund recently turned 40, and right on cue came a catastrophist research note arguing that passive investing is worse than Marxism. To explore the active vs. passive debate more seriously, we summarize Nobel laureate William Sharpe’s elegant proof of why the after-cost return from active management must be lower than that from passive management, explain the social good created by the price discovery of efficient markets, and highlight the role of the overconfidence effect in the investing public’s insatiable quest for market outperformance. Read more.
Tuesday, September 13, 2016 7:54 AM
Regardless of the methodology used for valuing equities, there is always some measure or stream of cash flows—such as dividends or earnings—that must be discounted by some interest rate. In its simplest form, it’s a two-factor model. Valuing equities solely relative to a historical average crucially ignores the second variable of interest rates, which are currently at an unprecedented low. Such one-dimensional, narrowly framed thinking has caused many investors to shun equities and miss the historic bull market of the past five years. Don’t listen to the pundits; in the current rate environment, equities are not overvalued. Read more.
Tuesday, August 30, 2016 7:44 AM
The new mantra on Wall Street is that you buy stocks for income and bonds for capital gains. This is, of course, backward. Money has been pouring into stocks that pay above average dividend yields, resulting in pumped up prices and valuations for current market darlings such as consumer staples, with P/E ratios doubling over the last three years. There is a self-reinforcing momentum effect at work, with investors making decisions based on recent price action. Valuations will eventually regress to their long-term means, spelling disaster for those who have followed this foolish approach. Read more.