I had a small awakening of sorts yesterday. I stumbled across a message board on Motley Fool that is devoted to small cap stocks.A couple posters lamented what sounded like huge declines from the peak (not sure if they meant the peak of their portfolio or the peak of the market). We are talking mid 20's for some of these folks. Yikes.
I have said many times that the combination of new products and time well spent would empower do-it-yourselfers to have a better chance at success.
After reading through this thread I did not draw a favorable conclusion about the knowledge or skill level of the folks posting. The comments were not too specific on whether they all focused on small cap stocks (which was the theme of this particular board), stock picking or whatever.
Small caps, from the top down, is the wrong place to be at the end of the cycle. In the last three months iShares Russell 2000 is down 16%. SPY is down about 10%. The guy who kicked things off on this thread said he is down 26% from his peak (which of course might be different than the market's peak) and says he is currently only 18% invested after his "systematic sales." So down 26% and 72% cash?
Yo, dude, somethings gotta change, like now.
There were also a couple of walking in your footsteps comments too. Cheese O Pete. One thing that I think I glean from these posts is that these people do put in time working at it. I figure anyone who has systems, whatever that means, and takes the time to not only read Motley Fool but also post on a message board is probably putting in a lot of time. Despite my having written for TMF in 2004 I never got the sense that things like risk management or market cycles were a big priority there but things may have changed since then.
So while my empowerment theory may not hold water I still do believe that investing can be as simple or as complex as you want to make it. I am well aware that good bottoms up stock pickers can have success in any environment but in case that is not you and you are not paying some who can do that you might want to try something else.
People seem to like to make investing more complicated than it needs to be. The message board I am referring to and some of the comments left on this site make that apparent. I am not trying to be insulting I am hoping to convey that saving properly is more important than beating the market. Avoiding one or two things (here I mean underweighting) every so often can go a long way to less pain than in the broad market, during the occasional down swings that is. Remember the US stock market has an up year about 3/4 of the time.
I say this a lot but all of the top down stuff I write about regarding sectors, growth versus value, cap size and the like is very elementary and requires no analytical skill whatsoever. Looking for a bunch of small cap stocks to own when history says small cap will lag seems like a colossal up hill struggle and it's even worse for the people trying to just that who don't know when small cap is likely to lag.
Lazy portfolios are right for many people for a reason, they get the job done. Whether they beat the market or not they keep you close which is plenty for, intentional repeat, people who save properly. If you can actively manage your portfolio without blowing up much worse than the market, great, but know whether or not you can and then pick the right strategy for your skill, temperament and time you can spend.
That was a bit of a rant, wasn't it?
The picture is near mile marker 20 0r 21 on Highway 450 on Molokai.
20 comments:
Right on with your rant.
I read this blog most everyday, but as I log off each day I often think to myself, "wow, some of these people must have nothing to do except micromanage their money". Nothing wrong with that, if you have the desire, time and some skill. I lack the desire and skill, which is why I'm a fund-kinda-guy. I do occassionally venture into stocks, made some nice bucks on CAT several months ago; balanced that out by buying AAPL (pre-iphone) @62, watched it go sideways a few months, sold @64, they roll out the iphone, and i watch as it rockets to 200. Oh well.
For me it's about comfort level, which is why i generally raise my cash level when I think the market/economy is getting "shaky", instead of shorts/double-shorts, or some of the other "exotic" (at least to me) things I see written here.
I guess that's my rant. Later.
Roger----2008
Have you talked about the agriculture sector yet?...I'm
new to the site. How would
your compare DBA, JJG, JJA, RJA
DBC and others. Should we wait
for a pull back or jump right in?
thanx
Roger has written a lont on agriculture ETF (I believe he has an article on TheStreet.com comparing several of the funds you mentioned). I would just Google "Roger Nusbaum + DBA".
Btw, when updating my strategy 3 model yesterday I was surprised at the parabolic look of it's chart:
http://tinyurl.com/36sf87
I wouldn't be surprised to see this asset class take a breather soon. Geez, look how far it is from it's 200 day moving average.
Another ag etf is a new Canadian global ag etf....cow.t
The sector has come a long way but FWIW farmers are being offered forward prices for next year's crop for some commodities ie. flax, canola that are record breakers. It is as if some end users are using prices to fight for planting acreage in farmers plans. The boom is a long way from over. Farmers are a funny bunch but if they smell cash flow it usually results in new iron on the farm!
Fools will always find a way to lose their money, Roger. Don't get too worried about the Motley Foold kids, they're barely above the Google/Yahoo discussion forum participants in terms of market education.
I wish I could mail each of these people a free copy of "Random Walk Down Wall Street" and "Intelligent Investor" - we might see a lot fewer people lose money in the stock market then. Perhaps some benign charity should be set up for the education and enlightenment of day traders?
i mentioned MON a couple of times and that I sold about 1/4 of it recently.
DBA, JJA, RJA all popped big on the friday reports. I have had DBA personally and for one or two clients (should have been more, dang) and it has done great.
I don't have a great answer for you. Time wise I'd say there is a lot more to go but the next 20%, directionally, would just be a guess.
COW.T sounds familiar, does it represent cattle like the iShares ETN?
jag i wish you were wrong.
Anon 9:14
MOO is another possibility and maybe PHO for a water play. I own DBC, MOO and might get some PHO before spring. But a caution on DBC is warranted which has a large position in oil. In a recession that holding could suffer as the price of oil declines. Both DBA and DBC pay some kind of dividend, MOO does not I believe. I don't know if I like COW because of the cost to feed cattle.
You might like to listen to Don Coxe who is currently bullish on commodities looking forward, especially agriculture.
http://events.startcast.com/events/199/B0003/
With countless prognosticators sucking the air out of the investment room. I believe I have a "can't miss" market senario for the world based upon the experts I have read and heard the past week.
The market will go straight up from here.
The market will rise after this mild correction.
The market will rise after this large correction.
The market will rise in a choppy and labored fashion.
The market will trend upward from here through a large part of the year and then downward for the rest of the year.
The market will head straight down in a crash.
The market will rally a bit from here and then fall.
The market will have a big rally from here and then fall.
The market will trend downward in a choppy fashion.
The market will trend downward for a part of the year and then upward for the rest of the year.
The market will trade in a narrow range from here with no basic upward trend upward or downward.
Thnaks, experts!
here's a bit of salient text from coxe's latest:
Based on what you've just said, you've given us a couple of great trades in the recent past: the agricultural
stocks and the futures, also the short financial sector. But based on what you've just said, right now would you
continue or would you put on a new trade to short the financial sectors and would you buy into the agricultural
commodities via the future products.
DC: The answer to both of them - depending on your risk tolerance and exactly how your overall portfolio is -
is yes. Yes, because any time you can short on certainty and take a bet on what is the new - as we're seeing
with Angelo Mozilo and Countrywide here - it's the new re-statement of the capitalist ethics of Adam Smith
and now it's a call to arms which is "a" for audacity, "r" for rapacity and "m" for mendacity and this is spread
right across so many of these leading institutions.
So any time you get a chance that you get to short audacity, rapacity and mendacity and acquire real food
assets where there's still an imprecise understanding out there and I can tell you that because of all the
interviews I've been doing lately with people and very sophisticated investors even saying, "Look, Don, there's
been grain rallies before. Why is this so much different?" and of course it's because this is the first time in
recorded history where we have really good documentation of what the carryovers of grains are around the
world. That's done from the satellite system of the USDA and in relation to consumption we have the lowest
carryovers on record.
So when you can buy something that is as transparent as food at a time that you know there's a shortage of it
and if anything like the legislation currently on the books in Washington and in the EU for converting more
corn and soy beans into ethanol or biodiesels goes forward then what you've got is a shortage situation that's
going to last for years and years and years. So going long shortages and going short mendacity sounds to me
like a pretty good trade.
------
so, from this, i gather that he'd be a buyer of dba even at these seemingly high levels.
My unprofessional opinion is that the volume traded
of any of these new ETF's is important re:volatility.
I learned that the hard way via DBB. I did buy
DBA a month ago, and I believe that it is the only one
of these new Ag ETF's other than MOO which has
decent volume, that I am aware of. Perhaps Roger might correct me.
Coxe's opinion about the ag bull continuing a long
run seems to make sense to me.
On another topic, are any of you moving significant
amounts into bond funds, and if so, which and why.
Thanks, and what beautiful bucolia, Roger.
Scoot
My unprofessional opinion is that the volume traded
of any of these new ETF's is important re:volatility.
I learned that the hard way via DBB. I did buy
DBA a month ago, and I believe that it is the only one
of these new Ag ETF's other than MOO which has
decent volume, that I am aware of. Perhaps Roger might correct me.
Coxe's opinion about the ag bull continuing a long
run seems to make sense to me.
On another topic, are any of you moving significant
amounts into bond funds, and if so, which and why.
Thanks, and what beautiful bucolia, Roger.
Scoot
Roger, you have mentioned things that happen in standard market cycles several times now. I was not a business student so I don't know what happens in a normal market cycle. You mentioned financials going down at the start of a recession.
I was not a business student and am not familiar with the standard texts to know what happens in a normal business cycle. Can you let me know what happens or point out an appropriate text where one can learn such things?
Anon 3:40.
I believe Coxe's take is that he believes the Fed will continue to lower rates and increase the money supply too. The first to stimulate the economy and Wall Street and the later to help banks with liquidity. And we all know what that does with inflation and thus commodities. It's an election year and Washington wants a short term bandaid not major surgery.
Even if they lower the rate soon once and hold that rate, nothing should happen to hurt commodities IMHO. There will be a rough ride, but prices will continue to rise until they decide to raise rates. A recession will hurt steel & oil but people still have to eat and the population isn't going down.
Coxe is bullish on agriculture, and I am too until the Fed sends a signal that they will start to battle inflation. I will hold until the spring and see what happens. ADM may be a good buy under $40.
I also thought that oil was priced too high after Labor Day when that sector usually takes it's winter siesta. But prices continued to rise even in the face of a down market and recession based on too much cash chasing too little oil and of course speculation. It's still the same thing with food. I may get out if I see GLD start to get crushed. Not a simple correction, but a down trend.
Of course the Fed claims they are "keeping an eye on inflation". Ya, like a child on the beach watched this:
http://tinyurl.com/2zpbte
I was not a business student and am not familiar with the standard texts to know what happens in a normal business cycle. Can you let me know what happens or point out an appropriate text where one can learn such things?
You should definitely read Style Investing by Richard Bernstein.
IMO, this is an excellent book which is probably one of the most underrated, unknown, underread books out there on equity portfolio management.
He covers growth, value, large-caps, small-caps, beta, high-quality, low-quality all in the context of the economic and market cycles and the "why" certain segments outperform at certain times.
As for bond funds: I've had a big defensive position in TIPS which has done very well in the last few months, but the spreads have gotten wide enough that TIPS are looking quite expensive, and I'm starting to move a fraction of that into corporate debt... esp. high yield. High yield hasn't looked attractive to me for the recent past, but now it's yielding 6.5%, 300 basis points over treasuries, it looks like a good bet, even with recession risk.
Roger,
Where do you see the Dow ending the year and what areas do you see doing well this year?? Any ETF's you love for 2008??
Thanks!!
Jag.
What do you think of FFRHX?
COW.T is just the symbol for the new Claymore Global AG ETF...when you look at its holdings, it doesn't seem to have much to do with cows per se. Its top ten holdings include Deere, PCS, Monsanto, Kubota, Mosaic...
Coxe is very bullish on foods...
"Forget oil, the new global crisis is food
“A new crisis is emerging, a global food catastrophe that will reach further and be more crippling than anything the world has ever seen. The credit crunch and the reverberations of soaring oil prices around the world will pale in comparison to what is about to transpire, Donald Coxe, global portfolio strategist at BMO Financial Group said …
“‘It’s not a matter of if, but when,’ he warned investors. ‘It’s going to hit this year hard.’
“Mr. Coxe said the sharp rise in raw food prices in the past year will intensify in the next few years amid increased demand for meat and dairy products from the growing middle classes of countries such as China and India as well as heavy demand from the biofuels industry.
“’The greatest challenge to the world is not US$100 oil; it’s getting enough food so that the new middle class can eat the way our middle class does, and that means we’ve got to expand food output dramatically,’ he said.”
Source: Alia McMullen, Financial Post, January
jacks: the long-term chart for FFRHX looks absolutely scary - deceptively stable, and then whoomp! Yikes! Looks like they were hit by something black-swannish.
Since high-yield is an obviously risky investment, I'd rather see a much more honest and volatile record in the short term, because at least then I won't be facing a nasty surprise all of a sudden. I'm in FAHYX myself - the manager of that fund, Soviero, has an excellent long-term record, even though he had a mediocre 2007 - but not nearly as bad as FFRHX. He's something of a proven performer, and I'm sure he'll do fine when we get past the current fear about credit risk (I expect the current spreads are sufficient to compensate for default risk in a mild recession).
Thanks Jag for the tip. I know FFRHX is in junk bonds and I exited the fund when it started to slide from it's former NAV at $9.95.
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