Greg Newton has a great article up at his site about the flaws with Morningstar's attempt to apply its star rating system to ETFs. The article was also covered on ETF Investor and on the WSJ's Market Beat page.
I have picked on Morningstar here and on RealMoney.com more times than I can remember. Greg's take seems to be similar to mine, it is very close to worthless.
The big issue, as I see it (and Greg touches on this) is that the ratings are based on past performance. Morningstar has a lot of CFAs in its stable. Weaving together a reasonable forward looking analysis on a country, cap size or style is not that difficult to do. Clearly any effort to do this across the board would yield some conclusions that are correct and some that are wrong. If they are right more often than they are wrong they would be adding value.
A while back I wrote a piece for RealMoney about Sweden possibly getting ready to have a run of outperformance. The forward looking analysis applied was quite simple. Higher GDP growth is expected (which is good for the economy) and the Riksbank (the Swedish central bank) was just starting a tightening cycle (good for the currency).
So far this turned out to be correct. EWD has outperformed SPY buy about ten percentage points and the dollar is down a couple of krona cents vs. the Swedish currency. I pay attention to Sweden on a regular basis, which is how I was in touch with the idea. I can guarantee that at some point the same circumstance will present itself for some other country and that trade will work too.
The point here is that forward looking analysis can does not have to be difficult. A firm like Morningstar could easily do some simple things like this and actually provide some useful insight.
To be clear about one thing, the circumstances that lead me to the Sweden idea simply put the odds in favor of the trade working. When I see something like in the future, I will probably write about it but the trade may not work. If you can put odds in your favor more often than not you will probably do well but results are never guaranteed.
Wikinvest Wire
4 comments:
roger i enjoy reading your daily thoughts about investing and retiring. i have a quesion: are there any gold or silver backed currencies or are all of the world's currencies fiat paper only currencies? second what do you think of swiss annuties as a safe have to park retirement money and as an asset protection ploy? thirdly have you ever read "fiat money inflation in france" by andrew dickson white? if so do you not see parallel events in our countries currencie management? george best- grbest@cox.net--scottsdale az
i am not aware of any currency backed by gold or silver but I have never explored it to know for sure. I'm sorry I have never thought about Swiss annuities nor I have read anything by Mr. White.
Here's an article I found interesting about fiat currency vs money and gold:
http://www.financialsense.com/fsu/editorials/schiff/2006/0324.html
DaveB, good stuff, thanks for the link
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