Archives for January 2010

Global Inflation Rates

There has been a lot of talk about the possibility of rising inflation in the US. Warren Buffet believes that inflation is a real threat.  We have also blogged about it quite a bit.  See our list of previous posts below for further reading.

So far, inflation has remained stable.  Compared to the rest of the world the US’s inflation rate actually seems quite low (see infographic below).  However, we do expect to see higher inflation ahead.  Here’s why:

Click to Enlarge

Infographic by BillShrink

For further reading:

4 Funds With 10%+ Annual Returns For the Decade

Were the 2000’s really a lost decade? That’s what the media is telling us.

Don’t believe it. For me and for the investors I know the 2000’s were not a lost decade.

In a previous post I gave you four reasons why a good investor should not have had a lost decade. One of my points was that good stockpickers should have made money over the last 10 years.

So, let me show you who some of the best stockpickers were over the last decade.  I searched Morningstar’s mutual fund database as of December 31, 2009 to find all large cap U.S. stock funds that had an average annual return of 10% or more over the past 10 years.  I came up with 4 funds that met this criteria:


10-year annualized return: 17.89%

Manager: Ken Heebner

Strategy: This fund is usually invested in fewer than 25 stocks.  Mr. Heebner will trade very frequently among stocks and sectors often making large sector bets. The manager is also able to short stocks and will occasionally short a large position in the portfolio.

Fairholme (FAIRX)

10-year annualized return: 13.21%

Manager: Bruce Berkowitz

Strategy: This fund manager has adopted the principles of Warren Buffett.  The fund primarily seeks to buy good businesses that are run by great managers.  The fund will also invest up to 25% in turnaround stories or “special situations”. Mr. Berkowitz invests in  a small number of postions (currently 20), often holds large amounts of cash (currently 22%), and will make large bets on single positions (currently PFE is nearly 13% of the portfolio).

Yacktman (YACKX)

10-year annualized return: 11.90%

Manager: Donald Yacktman and Steve Yacktman

Strategy: These fund managers prefer to invest in profitable companies that generate lots of cash, have little debt, and are selling at discounts to what they think the whole business is worth. The fund is concentrated in just a few names (around 40) and they hold most of their stocks for a long time.

Yacktman Focused (YAFFX)

10-year annualized return: 11.82%

Manager: Donald Yacktman and Steve Yacktman

Strategy: The strategy for this fund is the same as the Yacktman fund, but with one difference.  This fund will own a fewer number of stocks and focus on the managers’ best ideas.

As I reviewed this list I came up with 3 obvious takeaways from the results:

  1. Active management works. Every one of these funds employ an active investment strategy where they have a method that results in a portfolio that looks much different than the benchmark (the S&P 500 Index).  Every one of these funds also beat the benchmark by over 12% a year for the last decade.
  2. Concentrated portfolios can pay off big when the manager is right. Each of these funds have a portfolio of 40 stocks or less. The managers each had a strategy to determine which stocks had the greatest investment potential.  Each manager focused on buying just their best ideas for the fund. Concentration can also hurt a fund when the manager is wrong. If you’re going to invest in a fund that has a small number of positions you want to be sure the manager has a successful track record of being right over the long term.
  3. Owning too many stocks can hurt you. If you owned an S&P 500 index fund you would own 500 stocks in your fund.  None of these funds own more than 40 stocks.  The more stocks you own the more diluted your portfolio becomes.  Owning a large number of stocks prevents you from making large bets on companies you really believe in.  Companies that give you confidence and conviction.

Buy Stocks Like You Buy Clothes

Do you like to shop? I do.

I also love to find a bargain. You know what I mean, don’t you?  Nothing feels better than buying those new pair of jeans at 20%, 30%, or even 50% off regular price.

Do you view investing the same way?  You should.  In fact you should like the fact that the stock market is volatile. It goes up and it goes down. My favorite time to buy stocks is when the market is down.  Why? Because I’m buying at a discount.

Watch this video from financial blogger RJ Weiss.  He does a nice job explaining this concept.

No Brown M&Ms

Dr. Gawande tells the story of rock band Van Halen who buried a clause in its lengthy touring contract that a bowl of M&Ms was to be provided backstage with the brown M&Ms removed.  When the group arrived with its nine truckloads of heavy equipment, the appearance of the bowl of M&Ms – the brown ones removed – was a sign that the rest of the venue’s preparations were likely correct.  If not, they knew that all of the other preparations were suspect – including whether the stage would support the weight of their equipment.

What does all this mean to you?  When trusting a manager to invest your money, be sure this person is a compentent, well-degreed professional that realizes that shortcuts to research only puts you further behind.  Digging to the financials of a company or reviewing key ratios in researching mutual funds is key to investment returns.  Ask the right questions when hiring a money manager.  One important question would be “do you use checklists”.  Well documented step-by-step procedures can eliminate errors in your account, and can ultimately lead to better portfolio management and a much better relationship with your porfolio manager.

Photo by Cameron Cassan

First 5 Trading Days

The S&P 500 posted a gain in each of the first five trading days in 2010. It was up 2.74%. That is just the fourth time that has happened since 1928, according to Howard Silverblatt, senior index analyst at S&P indices. The first five trading days has been a fairly accurate barometer for forecasting the direction of stocks in a given year. It has about a 75% success rate in terms of predicting whether stocks will be up or down at yearend, according to Dan Greenhouse, chief economic strategist at Miller Tabak. Since 1950, there have been just five occasions when the indicator failed to predict the direction of the market, according to the Stock Trader’s Almanac.


Over $1 Trillion is Invested in ETFs

The ETF industry is booming. ETFs are currently one of the fastest growing areas of the market. ETF assets rose 46% over year-ago levels, and now make up more than 7 % of all mutual fund assets.

There is now over $1 trillion invested in ETFs.

There is clearly momentum in the ETF industry. To quote an industry expert, Matt Hougan, “ETFs have arrived.” Will ETF assets top mutual fund assets?  It will be awhile before that happens, but Matt makes a compelling case for accelerating growth in ETFs.

I think ETFs are great investment vehicles. I also expect to see rapid growth as new ETFs are developed and as investors educate themselves on the benefits of ETFs.

While we’re on the topic, don’t forget to check out the 4 reasons I like ETFs.

So, tell me, do you own ETFs in your portfolio?  What do you like or dislike about them?


Photo by YtseJam Photography

Don’t Chase Performance

Well, it’s that time of year again.  It’s time for the annual lists of top performing stocks, mutual funds, and ETFs of 2009.  Since it’s the end of the 2000’s we also see lists like “The 11 Best Performing Stocks of the 2000’s“.

For many investors, it will be tempting to “chase performance” and buy last year’s winners or the hot performers of the last decade.

Bad idea!

Here’s why:

Often the best performing stocks from last year will be this year’s losers.  It also works the other way….last year’s losers often turn out to be this years winners.

As Bespoke Investment Group brilliantly points out, the worst stocks of 2008 have become the best stocks of 2009.

  • the 50 stocks in the S&P 500 that did the worst in 2008 are up an average of 101% in 2009!
  • The 50 stocks that did the best in 2008 are up an average of just 9% in 2009.

2009 was definitely a year when buying last year’s losers worked and buying last year’s winners failed.  However, I can guarantee you that it won’t always work that way.  You should never base your investment strategy simply on last year’s performance.

By the way, I hope you didn’t buy Medifast (MED) at the beginning of this year just because it was the best stock of the last decade.  As of 1:30pm on Tuesday it was down 30% for the year-to-date.

Don’t chase performance!

Graph by Bespoke Investment Group

Quick Facts on Unemployment

Throughout 2009 unemployment rates increased throughout the US.

  • Michigan was hit the hardest and has the nation’s highest unemployment rate at nearly 15%.
  • 5 states have an unemployment rate greater than 12%. (MI, RI, NV, SC, CA)
  • Only 3 states have an unemployment rate less than 6%. (ND, NE, SD)

Below is another great infographic from This map shows the year-over-year change for each state, along with the current unemployment rate as of November 2009.

budget planner –

Were the 2000’s Really a ‘Lost Decade’?

It’s been well-reported in the media that the 2000’s were a “lost decade”, meaning that the US stock market is trading where it was 10 years ago.  Tony warned you back in April that the media would have a heyday with this news.

The media calls this a “lost decade” because an investor who bought and held an index fund at the beginning of the decade has not made money.

Why does the media assume we invest like this?  Most people don’t.  In fact, I have yet to meet anyone who invested a lump sum of money in an S&P 500 index fund on 12/31/99, let it sit, never added to it, and never withdrew from it.

The “New Normal” was the most overused phrase of 2009. The “Lost Decade” is quickly becoming the most overused phrase of 2010!

I don’t know about you, but I know for sure that the 2000s were NOT a lost decade for me.

There is no excuse for an astute investor to have a lost decade. Consider these four points:

#1 – Good stockpickers should have made money over the last 10 years. Although the S&P 500 index was down for the decade, many individual stocks were up!

There are 80 stocks currently in the Russell 3,000 that were up 1,000% or more last decade.

The 50 best performers in the Russell 3,000 were all up more than 1,200% for the decade.

The top performing stock for the decade was Medifast (MED) with a gain of 16,209%.

#2 – Most people don’t invest 100% of a lump sum of money into an S&P 500 index fund and let it sit for a decade. Ron Lieber wrote an excellent article for The New York Times making this point:

If you invested $100,000 on Jan. 1, 2000, in the Vanguard index fund that tracks the Standard & Poor’s 500, you would have ended up with $89,072 by mid-December of 2009. Adjust that for inflation by putting it in January 2000 dollars and you’re left with $69,114.

But that is not how most real people invest. They don’t pour everything they have into just one type of asset and then add nothing to it for 10 years. Instead, they buy stocks of all sorts, and bonds and perhaps other things, too. And many millions of them dutifully add more money regularly, usually into a retirement account that they won’t touch for longer than a decade.

#3 – Savers end up dollar cost averaging their investments. Rather than investing a lump sum at the beginning of the last decade, many investors would have been regularly adding to their stock portfolio on a monthly, quarterly, or annual basis.  For these investors, buying stocks at different prices throughout the decade could have dramatically improved their returns.

#4 – Trend followers would have identified sustainable trends in the market and adapted to them. Brian Shannon wrote a book on how to do this.  I highly recommend it if you invest your own money.

So what can we learn from the last decade?  I think the biggest lesson from the last decade is that active management matters.  Good stockpicking matters.  Finding great mutual fund managers matters.  Identifying changes in the trend of the market and adjusting your portfolio to benefit from them…matters.

The only thing the “Lost Decade” promoters prove is that an active investment strategy is a much better approach than passively buying index funds and holding them forever.

So, what do you say? Were the 2000’s a lost decade for you? Or, did you come out a winner?


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China now Globes Biggest Exporter

Already the biggest auto market and steel maker, China edged past Germany in 2009 to become the top exporter.  This signals yet another sign of the rapid rise and the spread of power from West to East.

  • China – 2009 exports were $1.2 trillion
  • Germany – 2009 exports were $1.17 trillion

China’s unseating of longtime export leader Germany reflects its ability of agile, low-cost Chinese manufacturers that can keep selling abroad even as other exporters have been hammered by a slump in global demand.  Already, China overtook Germany in 2007 as the 3rd largest economy and is expected to oust Japan as No. 2 (behind the US) as early as this year.

Source: AP