Today on Straight Talk Money: Elon Musk’s Tesla Turnaround and More

I joined Peggy Tuck today on Straight Talk Money, and at the top of the agenda was Elon Musk and Tesla (TSLA). Tesla reported its worst loss in history, yet shares rallied hard as a more conciliatory Musk promised profits in the quarters ahead.

Musk, by the way, was the inspiration for Robert Downey Jr.’s Iron Man character from the Avengers movies. It’s debatable whether that makes Tesla stock worth buying.

 

In the next segment, we talk about Apple’s (AAPL) epic rise to $1 trillion… and whether it makes sense for billionaires like Amazon’s (AMZN) Jeff Bezos to keep substantially all of their net worth in their own company. My answer might surprise you.

 

In the final segment, we chat about the best places to invest should inflation make a comeback and look at a list of 10 stocks that have recently raised their dividends by at least 10%.

This article first appeared on Sizemore Insights as Today on Straight Talk Money: Elon Musk’s Tesla Turnaround and More

The Top 10 Presidents of All Time (At Least According to the Stock Market)

A more comprehensive version of this article covering all presidents back to 1889 was originally published on Kiplinger’s.

Mount Rushmore features massive 60-foot-tall busts of celebrated presidents George Washington, Thomas Jefferson, Abraham Lincoln and Theodore Roosevelt, each chosen for their respective roles in preserving or expanding the Republic.

But if you were to make a Mount Rushmore for presidents based on stock market performance, none of these men would make the cut. There really was no stock market to speak of during the administrations of Washington, Jefferson and Lincoln, and Teddy Roosevelt ranks as one of the worst-performing presidents of the past 130 years. In his nearly eight years in office, the Dow returned a measly 2.2% per year.

Just for grins, let’s see what a “stock market Mount Rushmore” might look like. And while we’re at it, we’ll rank every president that we can realistically include based on the available data.

Naturally, a few caveats are necessary here. The returns data you see here are price only (not including dividends), so this tends to favor more recent presidents. Over the past half century, dividends have become a smaller portion of total returns due to their unfavorable tax treatment.

Furthermore, the data isn’t adjusted for inflation. This will tend to reward presidents of inflationary times (Richard Nixon, Jimmy Carter, Gerald Ford, etc.) and punish presidents of disinflationary or deflationary times (Franklin Delano Roosevelt, George W. Bush, Barack Obama, etc.)

And finally, presidents from Hoover to the present are ranked using the S&P 500, whereas earlier presidents were ranked using the Dow Industrials due to data availability.

That said, the data should give us a “quick and dirty” estimate of what stock market returns were like in every presidential administration since Benjamin Harrison. (He ranks near the bottom, by the way, with losses of 1.4% per year).

PresidentFirst Day in OfficeLast Day in OfficeStarting S&P 500*Ending S&P 500*Cumulative ReturnDaysCAGR
* Dow Industrials used prior to President Herbert Hoover
^ Data though 7/2/2018
Calvin CoolidgeAugust 3, 1923March 3, 192987.20319.12265.96%203926.14%
Bill ClintonJanuary 20, 1993January 19, 2001433.371342.54209.79%292115.18%
Barack ObamaJanuary 20, 2009January 19, 2017805.222263.69181.13%292113.79%
Donald Trump^January 20, 2017July 2, 20182271.312703.8919.05%52812.81%
William McKinleyMarch 4, 1897September 13, 190130.2849.2762.68%166511.26%
George H.W. BushJanuary 20, 1989January 19, 1993286.63435.1351.81%146011.00%
Dwight EisenhowerJanuary 20, 1953January 19, 196126.1459.77128.65%292110.89%
Gerald FordAugust 9, 1974January 19, 197780.86103.8528.43%89410.76%
Ronald ReaganJanuary 20, 1981January 19, 1989131.65286.91117.93%292110.22%
Harry TrumanApril 12, 1945January 19, 195314.2026.0183.17%28398.09%
Lyndon JohnsonNovember 22, 1963January 19, 196969.61102.0346.57%18857.68%
Warren HardingMarch 4, 1921August 2, 192375.1188.2017.43%8816.88%
Jimmy CarterJanuary 20, 1977January 19, 1981102.97134.3730.49%14606.88%
John KennedyJanuary 20, 1961November 21, 196359.9671.6219.45%10356.47%
Franklin RooseveltMarch 4, 1933April 12, 19456.8114.05106.31%44226.16%
Woodrow WilsonMarch 4, 1913March 3, 192159.1375.2327.24%29213.06%
Theodore RooseveltSeptember 14, 1901March 3, 190951.2960.5017.95%27272.23%
William Howard TaftMarch 4, 1909March 3, 191359.9259.58-0.56%1460-0.14%
Benjamin HarrisonMarch 4, 1889March 3, 189340.0737.82-5.61%1460-1.43%
Richard NixonJanuary 20, 1969August 8, 1974101.6981.57-19.78%2026-3.89%
Grover ClevelandMarch 4, 1893March 3, 189737.7530.86-18.25%1460-4.91%
George W. BushJanuary 20, 2001January 19, 20091342.90850.12-36.702921-5.55%
Herbert HooverMarch 4, 1929March 3, 193325.495.84-77.08%1460-30.82%

At the very top of the list is Calvin Coolidge, the man who presided over the boom years of the Roaring Twenties. Coolidge, a hero among small-government conservatives for his modest, hands-off approach to government, famously said “After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world.”

It was true then, and it’s just as true today.

In Coolidge’s five and a half years in office, the Dow soared an incredible 266%, translating to compound annualized gains of 26.1% per year.

Of course, the cynic might point out that Coolidge was also extraordinarily lucky to have taken office just as the 1920s were starting to roar… and to have retired just as the whole thing was starting to fall apart. His successor Hoover was left to deal with the consequences of the 1929 crash and the Great Depression that followed.

The second head on Rushmore would be that of Bill Clinton. Clinton, like Coolidge, presided over one of the largest booms in American history, the 1990s “dot com” boom. And Clinton, particularly during the final six years of his presidency, was considered one of the more business-friendly presidents by modern standards.

The S&P 500 soared 210% over Clinton’s eight years, working out to annualized returns of 15.2%.

Not far behind Clinton is Barack Obama, who can boast cumulative returns of 181.1% and annualized returns of 13.8%. President Obama had the good fortune of taking office right as the worst bear market since the Great Depression was nearing its end. That’s fantastic timing. All the same, 181% cumulative returns aren’t too shabby.

Interestingly, the infamous “Trump rally” places Donald Trump as the fourth head on Mount Rushmore with annualized returns thus far of 12.8% It’s still early, of course, as President Trump is not even two years into his presidency. And given the already lofty valuations in place when he took office, it’s questionable whether the market can continue to generate these kinds of returns throughout his presidency. But he’s certainly off to a strong start.

After Trump, the next four presidents – William McKinley, George H.W Bush, Dwight Eisenhower and Gerald Ford – are clumped into a tight band, each enjoying market returns of between 10.8% and 11.3%. And the top 10 is rounded out by Ronald Reagan and Harry Truman, with annualized returns of 10.2% and 8.1%, respectively.

We’ve covered the winners. Now let’s look at the losers; the “Mount Rushmore of Stock Market Shame,” if you will.

Herbert Hoover occupies the bottom rung with a truly abysmal 77.1% cumulative loss and 30.8% annualized compound loss. In case you need a history refresher, Hoover took office just months before the 1929 crash that ushered in the worst bear market in U.S. history.

Don’t feel too sorry for Hoover, however. 1,028 economists signed a letter warning him not to sign the Smoot Hawley Tariffs into law… yet he did it anyway. This helped to turn what might have been a garden variety recession into the Great Depression. That’s on you, Hoover.

In second place is George W. Bush, with annualized losses of 5.6%. Poor W had the misfortune of taking office just as the dot com boom of the 1990s went bust and shortly before the September 11, 2001 terror attacks helped to push the economy deeper into recession. And if that weren’t bad enough, the 2008 mortgage and banking crisis happened at the tail end of his presidency.

Sandwiched between two of the worst bear markets in U.S. history, poor W never had a chance.

Rounding out the Mount Rushmore of Stock Market Shame are Grover Cleveland and Richard Nixon with annualized losses of 4.9% and 3.9%, respectively.

Nixon’s presidency was marred by scandal and by the devaluation of the dollar, neither of which was good for market returns.

Poor Cleveland, on the other hand, was just unlucky. By any historical account, he was a responsible president who ran an honest and fiscally sound administration. But then the Panic of 1893 hit the banking system and led to a deep depression. The fallout was so bad that it actually led to a grassroots revolt and to a total realignment of the Democratic Party. After Cleveland fell from grace, the mantle of leadership shifted to Progressives Woodrow Wilson and William Jennings Bryan, and the rest is history.

To see the full rankings of all presidents since 1889, see The Best and Worst Presidents (According to the Stock Market)

 

This article first appeared on Sizemore Insights as The Top 10 Presidents of All Time (At Least According to the Stock Market)

Tiny Houses, Tiny Wallets

This post originally appeared on The Rich Investor.

My buddy Ari was a self-made millionaire by his early 30s. But he didn’t earn his nest egg the way you might expect.
It seems like most of the young and well-to-do hit the jackpot by writing a popular app or creating a viral YouTube video.
That’s not Ari. For a young guy, he made his money in a surprisingly old-fashioned manner: building an empire of mini-storage units, strip malls and other steady income-producing properties.

(Ari looks old fashioned too, by the way. Despite being a Millennial in his mid-30s, he wears a three-piece suit and wingtips to the office every day. Give him a fedora, and he’d look like my grandfather circa 1940.)

Ari is my go-to “real estate guy,” the person who can reliably give me a boots-on-the-ground account of what’s happening in the property market. So I asked him the other day about the health of the Dallas apartment market. Everywhere you turn, there are cranes and construction crews throwing up towers full of luxury apartments.

“It’s a joke,” Ari deadpanned. “Most barely break even. They’re just looking to sell to a private equity fund and take the money and run.”

That might sound like a flippant answer, but Ari was just getting started.

“This property market is a house of cards, bro. Look at the trend of microapartments. Do you think anyone actually wants to live in one of those? They do it because they can’t afford anything bigger.”

Ari’s phone rang, and that was the end of the conversation. But he left me with some good food for thought.

In case you’re not familiar with them, “microapartments” are tiny one-room apartments of 50 to 350 square feet. Your toilet doubles as living room chair. They’re that small. (I’m only slightly exaggerating.)

Microapartments are billed as a great option for the young and trendy. They are tiny and thus eco-friendly. You’re not cooling or heating a lot of unused space. They tend to be located in urban areas close to public transportation and close to bars and other entertainment options.

All of that sounds great. But again, your toilet is doubling as a living room chair.

And living within walking distance to your job and to your local Starbucks matters a lot less when you can actually afford a car.

I think Ari was on to something.

So much of what is viewed as eclectic Millennial behavior – microapartments, not owning a car, the “sharing economy,” no immediate plans to marry or start families, etc. – has a lot less to do with the fickle preferences of the young and a lot more to do with them struggling to stay afloat financially.

Let’s look at the broader housing market.

Since 2000, the Case-Shiller 20-City Composite Home Price Index is up 111%, and this includes the major collapse in home prices starting in 2006. In most markets, home prices are at new all-time highs.

Average wages, in contrast, have risen a little over 50% in that same period (neither data series is indexed for inflation).
You don’t have to be a math whiz to see that it’s a real problem when housing prices have more than doubled while wages of the would-be buyers of those houses have risen by barely half.

Given this, it’s not surprising that something as ridiculous as a 50-square-foot apartment is now fairly common.
Most of our readers tend to be professionals that are well advanced into their careers, so if you’re reading this it’s pretty unlikely that you’re living in a microapartment and taking the bus to work.

But if you also want to save your children and grandchildren from that fate, teach them to save and invest early. They don’t have to swing for the fences. Regular, disciplined investment into a portfolio yielding 6% to 10% will grow a nest egg quickly, at any age, really.

Investing just $200 per month will grow to a nest egg of well over $30,000 in 10 years if invested at 6%. That number jumps to nearly $40,000 if invested at a 10% annual return.

If you can convince your child or grandchild to start saving like that at age 20, they’ll have plenty of cash on hand to make a nice down payment on a proper house.

I can’t make your kid save. But in Peak Income I can help them (and you) grow their savings steadily and conservatively through some of my favorite long-term income producers.

 

This article first appeared on Sizemore Insights as Tiny Houses, Tiny Wallets

Competing with the Quants

I was having a drink a while back with my friend and fellow Rich Investor contributor John Del Vecchio, and we were reminiscing about how much this business has changed since we started our careers.

John is a forensic accountant who knows exactly where to look in the financial statements for accounting shenanigans; where “the bodies are buried,” so to speak. I call him the “Horatio Caine of finance” after David Caruso’s character on CSI: Miami. John has the same no-nonsense demeanor.

The late 1990s were a fantastic time to be a short seller. With the internet bubble entering the final blow-off stages, a disciplined forensic account had an almost unlimited supply of short candidates.

But you had to know what warning signs to look for. This often meant spending hours digging through the footnotes of a company’s income statement, cash flow statement and balance sheet.

Back then, John spent 10 hours per day on the LexisNexis database, pouring over every line of a short candidate’s financial statements. And often, it would all be for naught. Not every investigation ended with a perp walk.

Today, John presses a button and his system does the heavy lifting for him in a matter of seconds.

When the system finds irregularities, John still has to roll up his sleeves, put on the green visor, and dig into the books. But his quantitative system saves him hours (if not days) of exhausting research.

And the 1990s weren’t all that long ago. Let’s go a little further back in time.

Benjamin Graham – Warren Buffett’s mentor and the man that invented value investing as a discipline – made a fortune in the 1930s and 1940s by doing painstaking research.

He’d dig through the financial statements and calculate valuation ratios (price/earnings, CAPE, etc.) by hand.

As early as the 1950s, after Wall Street had starting hiring armies of analysts to do the same work, Graham had started to question whether he could still find bargains using his old methods.

By the 1970s, Graham has more or less given up and converted to an efficient market advocate.

Warren Buffett is most famous for owning large positions in household names like Geico and Coca-Cola. But earlier in his long career, Buffett literally walked door to door in Omaha asking little old ladies if they were interested in selling their paper stock certificates to him.

In today’s world of instant stock trading on your smartphone, that seems ridiculously quaint and old timey.

Fundamental investors have flocked to quantitative tools to help them pick through mountains of data faster than their competitors.

Forbes even coined a term for it – “quantimental” investing.

But is more data always better?

That’s a lot less certain. Last week, Bloomberg reported that quant funds are “reeling from the worst run in eight years.” AQR – considered one of the best quant managers in history – is down nearly 9% this year in one of its flagship funds after suffering a miserable June.

There are so many points to be made here, it’s actually hard to know where to start. But here we go…

1. You can’t realistically invest today without using at least some basic quantitative tools.

There are simply too many stocks to research and not enough hours in the day. Not all of us are crunching numbers using computers designed for NASA, of course. But even something as basic as a simple screen or ranking system can narrow your universe to a manageable size.

If Ben Graham were alive today, he wouldn’t be calculating ratios by hand after digging the numbers out of a quarterly report. It’s also highly unlikely he’d be using the same screening criteria that he recommended using in the 1930s.

Graham was a smart guy, and he would have evolved with the times, probably coming up with new ratios we’ve never heard of.

2. You’re never going to be able to compete with the big boys in technology investment. 

The biggest Wall Street banks and hedge funds really do use computers that were designed for NASA and have teams of PhD eggheads to run them. You can’t realistically compete with that, so you have to play a different game.

Look for opportunities in small- and medium-sized companies that the big boys can’t realistically touch. (A large fund can’t take a meaningful position in a smaller company without moving the market.)

3. Beware of false correlations. 

I wrote a couple months ago that butter production in Bangladesh was statistically proven to be the best predictor of U.S. market returns.

Now, this is obviously a quirky coincidence. No rational human being would really believe that dairy production half a world away makes a dime’s bit of difference to the stock market here.

But quantitative investing is full of little traps like these. So before you trade, your screen needs to pass a “smell test.”

If the criteria seems farfetched (seriously, Bangladeshi butter?) it’s likely that you’re mistaking statistical noise for worthwhile information.

 

 

This article first appeared on Sizemore Insights as Competing with the Quants

Dividend Growth Portfolio 2nd Quarter 2018 Letter to Investors

At the halfway point, 2018 is shaping up to be a good year for us. The first quarter was rough. In addition to the correction that dinged virtually all long-only portfolio managers, rising bond yields punished some of our more rate-sensitive positions, particularly REITs and MLPs. Though as yield fears subsided in the second quarter, the Dividend Growth portfolio recouped nearly all of its losses and entered the third quarter with strong momentum.

Through June 30, the portfolio returned 0.39% before management fees and -0.36 after all fees and expenses. Encouragingly, the returns for the second quarter were 7.92% gross of management fees and 7.17% net of all fees and expenses. [Returns figures compiled by Interactive Brokers and represent the real returns of a portfolio managed with firm capital. Returns realized by individual investor may vary based on account size and other factors. Past performance is no guarantee of future results.]

By comparison, through June 30, the S&P 500 index was up 1.67% through June 30 and up 2.93% in the second quarter.

So, while 2018 got off to a rough start, our portfolio has significant momentum behind it as we enter the second half. Our positions in energy — most notably midstream oil and gas pipelines — in real estate and in private equity managers have been the strongest contributors to returns. Our positions in European and emerging market equities have been the biggest drag on returns.

As a portfolio with a strong income mandate, the Dividend Growth portfolio is naturally going to have more interest-rate sensitivity than a broad market index such as the S&P 500. When yields are rising – as they were in the first quarter – this presents a risk. But when yields are stable or falling – as they were in the second quarter – it presents an opportunity.

The question we now face is this: What are interest rates likely to do in the second half of the year?

Ultimately, I expect that the path taken by interest rates will depend on two factors: inflation expectations and fears stemming from the nascent trade war.

I’ll address inflation expectations first. The unemployment rate has been hovering around the 4% mark for all of 2018. Traditionally, many economists have considered a 5% unemployment rate to be “full employment,” as there will always be some segment of the population that is either between jobs or not reasonably employable. Also, there are new would-be workers that come out of the woodwork (students, stay-at-home mothers, bored retirees, etc.) when the labor market gets sufficiently tight as it is today.

At 4%, we are significantly below “full employment,” which has led many economists to expect an uptick in inflation. Thus far, however, inflation has remained muted. PCE inflation (the rate used by the Federal Reserve in its decision making) has been running near or slightly above the Fed’s targeted 2% rate over the past six months, but it is not trending higher, or at least not yet.

If you’ve followed my research for any length of time, you know my view of inflation and the tools used to measure it. I don’t believe it is realistic to expect inflation at the levels seen in previous expansions due the demographic changes affecting the country. America’s Baby Boomers as a generation are well past the peak spending years of the early 50s. In fact, the front end of the generation is already several years into retirement.

The Boomers have been the economic engine of this country for over 40 years. As they retire, the borrow and spend less, taking aggregate demand out of the economy.

This isn’t purely academic. It’s been happening in Japan for over 20 years. Japan’s reported unemployment rate, at 2.8%, is even lower than ours. And Japan’s deficit spending and central bank stimulus absolutely dwarf those of America if you adjust for the relative sizes of the two economies. Yet Japan hasn’t had significant, sustained inflation since the early 1990s… when Bill Clinton was still the governor of Arkansas.

At the same time, automation technology and artificial intelligence is already eliminating jobs. Walk into a McDonalds today. You can order at a kiosk and never actually speak to a human employee.

At the higher end, Goldman Sachs reported a year ago that half of its investment banking tasks could viably be automated away.

While there are clearly exceptions in certain high-skilled jobs, the fact is that labor gets replaced by cheap technology as soon as it gets too expensive. It’s hard to imagine sustained inflation in this kind of environment.

Of course, this doesn’t mean that Mr. Market won’t decide to fret about it in the second half and send yields higher again. But I would consider any short-term weakness on higher bond yields to be a buying opportunity.

This leaves the fear of an economic slowdown. Right now, the economic numbers look healthy and there is no immediate sign of recession on the horizon. But unemployment tends to reach its lowest points near the end of the expansion. Furthermore, the Fed is aggressively raising rates, which is flattening the yield curve. A flat or inverted yield curve is a sign of economic distress and usually precedes a recession.

United States Treasury Yield Curve

Does any of this mean a recession is “due” tomorrow? No, of course not. But it does suggest that we are late in the economic cycle, at a point when value sectors and higher-yielding sectors tend to outperform.

So, while I may make a few minor portfolio adjustments in the third quarter, I believe we are very well positioned at the half.

Looking forward to a strong finish to 2018,

Charles Lewis Sizemore, CFA

 

Can You Trust the Social Security Trust Fund?

Did you see this bit of news recently?

The Social Security Administration announced earlier this month that it would have to dip into its trust fund for the first time in 36 years.

With the Baby Boomers retiring in droves, the Social Security system is now paying out more in benefits than it’s taking in as tax revenue.

And if current trends hold, the trust fund will be completely depleted by 2034.

That sounds bad. Really bad.

But it’s actually worse than you think.

Social Security is dipping into a trust fund that doesn’t actually exist. There is no trust fund.

No, it wasn’t stolen in some Ocean’s Eleven-caliber heist. And no, I’m not a conspiracy theorist who believes it was an elaborate plot by our government to lie to us.

But I’m 100% serious when I say the Social Security trust fund doesn’t exist, nor has it ever existed – at least not in the way you or I would understand a “trust fund.”

Let’s start with the basics.

What is the Social Security trust fund?

The Social Security Administration essentially has two accounts at the U.S. Treasury: The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. We’ll call both collectively the “trust fund.”

You and I and every other working American contribute to these funds through our payroll taxes: 6.2% of your paycheck (up to the first $128,400) goes to Social Security, and your employer chips in another 6.2%.

For the past 36 years, tax revenue coming in was greater than benefits going out. The accumulated surplus makes up the trust fund.

That sounds straightforward enough. At its heart, it’s not too different than the way all of us save for retirement.

There’s just one big problem. The surplus cash might go to the trust fund, but it doesn’t stay there. It gets sucked into the current expenses of the U.S. government and replaced with an IOU.

The trust fund’s assets are “invested” in U.S. Treasury bonds, and the cash is used to fund the current expenses of the government.

If you or I buy a U.S. Treasury bond, that debt obligation of the government is an asset to us.

But that’s not exactly what is happening here. Remember, Social Security is the government. So, the government is lending to itself and calling it an asset.

That doesn’t work in the real world.

I can write myself a check for a million dollars, but that doesn’t make me a single penny richer. I’m just shuffling the money from one pocket to another.

So, when I hear that Social Security is having to dip into its trust fund, I roll my eyes.

The so-called trust fund was never more than an accounting trick.

The idea that there was cash set aside for our retirement by the wise mandarins running the government was a convenient fantasy.

Keeping the fantasy alive actually isn’t that hard. If Congress raises payroll taxes, raises the retirement age or finds other stealthy ways to reduce benefits, such as by means testing or tinkering with inflation assumptions, we can rebuild the “trust funds” in a hurry.

For that matter, the U.S. Treasury could create a quadrillion-dollar superbond to prefund the trust fund from now until the end of time, and then promptly lend the money back to itself.

But what difference would it make? It’s all just accounting.

The reality is that the retirement of the Boomers is going to force the government to make some uncomfortable choices.

A current deficit (benefits going out being larger than payroll taxes coming in) means that the money has to come from somewhere else.

That means that taxes go up, other spending goes down or we simply borrow more. None of those options are desirable.

I don’t know about you, but I don’t feel comfortable depending on accounting gimmickry to fund my retirement needs or those of my family.

And, if anything, this just reinforces my belief that you must create your own income streams in order to have the type of retirement you want.

That’s why I started writing Peak Income, my newsletter dedicated this exact idea. Click here to learn more about it.

This article first appeared on Sizemore Insights as Can You Trust the Social Security Trust Fund?

3 Things You Should Always Ask a Financial Adviser

The following first appeared on Kiplinger’s as 3 Things You Should Always Ask a Financial Adviser.

Your choice of financial adviser might be the single most important decision you ever make, short of your spouse or maybe your doctor.

While you might not be putting your life in his or her hands, per se, you’re certainly putting your financial future at risk. A good adviser can help you protect the savings you’ve spent a lifetime building, and – with good planning and maybe a little luck from a healthy stock market – grow it into a proper nest egg.

But how do you choose?

Let’s take a look at some traits you’ll want to look for, as well as three questions you’ll want to ask any prospective candidate.
What you want in a financial adviser

An older adviser with a little gray in their hair might instinctively seem safer, but ideally you don’t want an adviser that will kick the bucket before you do. However, going with a younger adviser introduces greater uncertainty as they will generally have a shorter track record.

Likewise, educational pedigree matters … but not as much as you might think. You can assume that an adviser with an Ivy League degree is highly intelligent and motivated, and those are qualities you want to see. But these same characteristics can make for lousy investment returns if they mean the adviser is overconfident. Investing is a game in which discipline, patience and humility generally matter more than raw brains and ambition.

As Warren Buffett famously said, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.”

Yes, you want your adviser to be smart. But don’t be overly swayed by fancy degrees.

To finish reading the article, please see 3 Things You Should Always Ask a Financial Adviser.

This article first appeared on Sizemore Insights as 3 Things You Should Always Ask a Financial Adviser

Is Value Dead?

Value investing has historically been a winning strategy… but it’s been a rough couple of years.

So… is value dead? Should we all just buy the S&P 500 and be done?

The rumors of value’s death have been greatly exaggerated. Larry Swedroe wrote am excellent piece on the subject this month, Don’t Give Up On the Value Factor, and I’m going to publish a few excerpts below.

As the director of research for Buckingham Strategic Wealth and The BAM Alliance, I’ve been getting lots of questions about whether the value premium still exists. Today I’ll share my thoughts on that issue. I’ll begin by explaining why I have been receiving such inquiries.

Recency bias – the tendency to give too much weight to recent experience and ignore long-term historical evidence – underlies many common investor mistakes. It’s particularly dangerous because it causes investors to buy after periods of strong performance (when valuations are high and expected returns low) and sell after periods of poor performance (when valuations are low and expected returns high).

A great example of the recency problem involves the performance of value stocks (another good example would be the performance of emerging market stocks). Using factor data from Dimensional Fund Advisors (DFA), for the 10 years from 2007 through 2017, the value premium (the annual average difference in returns between value stocks and growth stocks) was -2.3%. Value stocks’ cumulative underperformance for the period was 23%. Results of this sort often lead to selling.

Charles here. Other than perhaps overconfidence, recency bias is probably the most dangerous cognitive bias for the vast majority of investors. Investors look at the recent past and draw the conclusion that this is “normal” and representative of what they should expect going forward. This is why otherwise sane people do crazy things like buy tech stocks in 1998, Florida homes in 2005 or Bitcoin in late 2017.

Investors who know their financial history understand that this type of what we might call “regime change” is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it’s been highly volatile. According to DFA data, the annual standard deviation of the premium, at 12.9%, is 2.6-times the size of the 4.8% annual premium itself (for the period 1927 through 2017).

As further evidence, the value premium has been negative in 37% of years since 1926. Even over five- and 10-year periods, it has been negative 22% and 14% of the time, respectively. Thus, periods of underperformance, such as the one we’ve seen recently, should not come as any surprise. Rather, they should be anticipated, because periods of underperformance occur in every risky asset class and factor. The only thing we don’t know is when they will pop up.

 

 

Well said.

After a period like the past ten years, it’s easy to draw the conclusion that value is dead. But investors drew the same conclusion in 1999… and they were dead wrong.

As a case in point, see Julian Robertson’s last letter to investors.

 

 

This article first appeared on Sizemore Insights as Is Value Dead?

Today on Straight Talk Money: All About Warren Buffett

I joined Peggy Tuck this morning on Straight Talk Money. Given that Berkshire Hathaway just had its annual meeting, we have Buffett on the brain. We discuss the Warren Buffett’s career and a few things you might not know about the Oracle.

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Part 2:

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This article first appeared on Sizemore Insights as Today on Straight Talk Money: All About Warren Buffett

Keeping Perspective: Julian Robertson’s Last Letter to Investors

Growth stocks — and specifically large-cap tech stocks led by the FAANGs — have utterly crushed value stocks of late. It’s been the dominant theme of the past five years. Even the first quarter of 2018, which saw Facebook engulfed in a privacy scandal, saw growth outperform value.

SectorBenchmarkQtr. Return
Large-Cap GrowthS&P 500 Growth1.58%
Large-Cap StocksS&P 500-1.22%
InternationalMSCI EAFE Index-2.19%
UtilitiesS&P 500 Utilities-3.30%
Large-Cap ValueS&P 500 Value-4.16%
Real Estate Investment TrustsS&P U.S. REIT Index-9.16%
Master Limited PartnershipsAlerian MLP Index-11.22

Value stocks in general underperformed, and the cheapest of the cheap — master limited partnerships — got utterly obliterated.

So, is value investing dead?

Before you start digging its grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.

Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.

The following is the Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:

In May of 1980, Thorpe McKenzie and I started the Tiger funds with total capital of $8.8 million. Eighteen years later, the $8.8 million had grown to $21 billion, an increase of over 259,000 percent. Our compound rate of return to partners during this period after all fees was 31.7 percent. No one had a better record.

Since August of 1998, the Tiger funds have stumbled badly and Tiger investors have voted strongly with their pocketbooks, understandably so. During that period, Tiger investors withdrew some $7.7 billion of funds. The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all. And there is no real indication that a quick end is in sight.

And what do I mean by, “there is no quick end in sight?” What is “end” the end of? “End” is the end of the bear market in value stocks. It is the recognition that equities with cash-on-cash returns of 15 to 25 percent, regardless of their short-term market performance, are great investments. “End” in this case means a beginning by investors overall to put aside momentum and potential short-term gain in highly speculative stocks to take the more assured, yet still historically high returns available in out-of-favor equities.

There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.

“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.

The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short-term performance in the current environment is to buy these stocks. That makes the process self-perpetuating until the pyramid eventually collapses under its own excess. [Charles here. Sound familiar? Fear of trailing the benchmark has led managers to pile into the FAANGs.]

I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.

The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds. We have already largely liquefied the portfolio and plan to return assets as outlined in the attached plan.

No one wishes more than I that I had taken this course earlier. Regardless, it has been an enjoyable and rewarding 20 years. The triumphs have by no means been totally diminished by the recent setbacks. Since inception, an investment in Tiger has grown 85-fold net of fees; more than three time the average of the S&P 500 and five-and-a-half times that of the Morgan Stanley Capital International World Index. The best part by far has been the opportunity to work closely with a unique cadre of co-workers and investors.

For every minute of it, the good times and the bad, the victories and the defeats, I speak for myself and a multitude of Tiger’s past and present who thank you from the bottom of our hearts.

Charles here. The more things change, the more they stay the same. Value will have its day in the sun again, and that day is likely here with the FAANGs finally starting to break down.

Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Consider the outperformance of value over growth in the years between the tech bust and the Great Recession:

 

So, don’t abandon value investing just yet. If history is any guide, it’s set to leave growth in the dust.

 

 

This article first appeared on Sizemore Insights as Keeping Perspective: Julian Robertson’s Last Letter to Investors