Third Quarter 2010

  • ”[T]he starting yield is very important to future returns. And it is currently low. (Buttonwood's blog, The Economist, September 13 2010) TC: This is the lesson of the day, week and month. What's he saying?

Long term “80 percent of your total return is generated by the price you pay for the investment plus growth in the underlying cash flow” James Montier p.155 The Little Book of Behavioural Investing

  • THE INERTIA BENCHMARK : Mutual funds do not, but should, compare their returns to the inertia benchmark: what performance would have been achieved if the portfolio manager had done nothing. In his gem of a book, James Montier has a chapter (thirteen) called 'The perils of ADHD Investing': attention deficit hyper-activity disorder. The average holding period on the NYSE is six months today. In the 1950s and 1960s it was seven or eight years. Montier puts it this way on page 155 of The Little Book of Behavioural Investing: “At a one-year time horizon, the vast majority of your total return comes from changes in valuation - which are effectively random fluctuations in price. However, at the five-year time horizon, 80 percent of your total return is generated by the price you pay for the investment plus growth in the underlying cash flow.” TC: You noticed the last few word, eh, “growth in the underlying cash flow”. That is why we do what we do. We hold dividend growing common stocks for their cash flow.
  • Ten Year P/E Ratio: I've completed my little project of computing the ten year P/E ratios for all the dividend-paying stocks we follow. The data will be in the August 2010 Connolly Report (Look under report summaries on my front page). At 25, the most expensive are Fortis and Metro. If you purchase expensive stocks, your future return will be lower. Now we have one more value screen (besides yield, yield difference, dividend record, payout ratio and Graham value)
  • Foreign stocks - I've added a paragraph on global investing under Diversification on the Investment Topics page.

Beat the benchmark - Money managers are happy when they beat their benchmarks¹. Some even put a half-page ad in the Report on Business. Such was the case for Manulife Investments on July 7 2010. Their Global Opportunities Class fund substantially beat their benchmark¹, the MSCI World Index. They are proud. The headline in their advertisement said: “It will help take your portfolio to new heights”. Below the headline was the data. The three-year rate return for the Global Opportunities Class was negative. Actually, so was the two-year data. New heights? But they beat their benchmark¹. And this Global Opportunities fund received a Morning Star 5-star rating for being in the top 10% of funds in the category. I wonder if the people who were sold the fund are happy. The inception date of this fund was April 2007. Did these professional money managers not see the crisis coming? The Connolly Report headline in February 2007, just before this fund started, was: “Liquidity, Froth and Low Yield: Be Cautious. The market peaked, according to Value Line, in July 2007 with a yield of 1.6% and a p/e of 19.7 (the p/e was 10.3 in March 2009) ♣ The lesson: do not buy when stocks are expensive. If you do, future returns will be lower. Learn to control your behaviour *, to be patient. Do not hold professional money managers in high esteem either: most of them do not beat the market. These global numbers do not incline one to diversify internationally, either. Do they? I don't. One reason: Canadian dividend income is just about tax free, unless you are really wealthy.

* The Little Book of Behavioural Investing (2010) by James Montier is excellent¹. It will help you to control your behaviour and help you become a better investor. Chapter 5, 'The Folly of Forecasting, for example, outlines five ways you can invest without forecasting. I'll detail them in the August 2010 Connolly Report. ¹ Actually, James Montier's big book ( 706 pages) Behavioural Investing - A practitioner's guide to applying behavioural finance (Wiley, 2007) is great too, but it costs some $100 more.

  • In Chapter 11 of The Little book of Behavioural Investing, James Montier talks about professional money managers and why they “fear underperforming that index above all else (aka career risk)” Hence, the professionals cannot do the right thing. They must index. Absolute returns are not part of their equation. The returns of Manulife's mutual fund mentioned just above, speak to this. Professional money managers seem happy with negative returns. I'm not. I'm after income from my investments.

¹ In his July 10th 2010 Economist column, Buttonwood, taking about indices, put it this way: “Fund managers started to focus on 'tracking error' rather than buying the best stocks. The definition of risk changed from losing money to underperforming the benchmark.”

third_quarter_2010.txt · Last modified: 2010/09/17 06:24 by tom
Recent changes RSS feed Creative Commons License Donate Driven by DokuWiki