Archive for the 'Gurus' Category

Too Many Choices (or why I am ready to give up)

Published
by
Dave
2 years, 9 months ago
in Advisors/Brokers, Bill Miller, ETFs and My Portfolio
. 9 Comments

If you have read my last post you will know by now that I am set to start my new portfolio at Clearsight. I have been debating what to choose for my US equity component, and whether or not to go with my advisor’s recommendation of CI Value Trust (satellite fund of Legg Mason Value Trust). I said in my last post that am not interested in investing in Bill Miller’s Value Trust fund but that I said I would rather go with the Rydex S&P 500 Equal Weight Index ETF (RSP) instead. I have now come to the realization that RSP is very similar to the S&P 400 Midcap Index which is also available as an ETF (MDY). It is very highly correlated and comparing the performance of these two ETFs makes this obvious. There is also a small advantage to getting MDY over RSP in that “the higher volume on MDY is an advantage for that fund, as is the typically tighter bid/ask spread” but this is probably splitting hairs. Comparing either of these two funds to Bill Miller’s Value Trust is probably not a fair comparison, just as comparing S&P 500 (huge-cap) to S&P 500 Equal Weight (semi-large to large-cap) is not exactly a fair comparison as they are in different classes and will of course perform differently. I found yet another index choice today, the S&P 500 Value Index (IVE). It has beaten the S&P 500 index but it has not been able to catch Bill Miller’s Value Trust. Sounds like a great alternative to the S&P 500 index though as it screens out some stocks which aren’t a good value.

At this point I began to get frustrated with the number of choices out there. RSP, SPY, MDY, IVE, and that is only a few of the ETFs available. Then there are the actively managed mutual funds, LMVTX being only one of many, and of course there are the index mutual funds of which there are probably one for every index just like the ETFs I mentioned above. Sometimes I feel like I know exactly what I want, other times I can not makes heads or tails of it with all the choices and knowing there are even more choices out there that I have not examined is daunting. It is frustrating for some someone like me, skilled in the maths and sciences and now software, that there is not some exact deterministic way of determining the ideal choice.

When I left TD, one of the main reasons was because I did not have a proper selection process for what I would buy for my RRSPs. Usually I would scan the performance (usually the longest term possible, 10-years or since inception if available) and choose funds that looked like they had done well in the past. This was flawed because crappy funds can have a few stellar years and good funds can have a few bad years. Or sometimes I would look for funds that did well in the past, but might have just come off a bad year (hoping to catch the fund on the up-swing). This method was also flawed. The second reason I left TD was that I did not want to be a DIYer anymore. I felt like an amateur/hack trying to do a professional’s job, and I was not succeeding. Not only that but I did not have enough time to spend on this. You may think that writing and researching articles for this blog takes time, and yes is does (and I have learned a lot about investing by writing this blog), but it cannot compare to the amount of time financial advisors and their superiors have spent day in and day out trying to answer these same questions. It is after all their full-time job. My financial advisor says that he does not pick stocks. He leaves that to the professionals, such as Ross Healy or Bill Miller. He does not have time to research stocks for his clients. By the same token, I should leave the management of my portfolio to my advisor because I do not have time to do it myself.

This does not mean that I should leave everything up to my advisor. Much like my advisor will monitor the actions of Ross Healy and Bill Miller I should also vet all actions my advisor recommends for my portfolio. Right now I think I am ready to give up and let him decide what is best. I would like to have a say in the asset allocation and I really want to have 25% bonds and the rest balanced between Canadian, US, and International. But as for what is inside those categories I really do not have the time to examine his choices of holdings for me in microscopic detail. It has already taken far too much of my time. The portfolio that my advisor is recommending is already much better than my old TD portfolio for many reasons, and if going with an advisor helps keep my hands off my portfolio and helps me keep this allocation over the long term, then it will surely achieve much better performance in the long run than I was getting with TD as a DIYer.

No time to read over this rant, it’s too long. Grammar mistakes be damned!

Popularity: 18% [?]

Must-Read Annual Reports

Published
by
Dave
2 years, 10 months ago
in Gurus, Mutual Funds and Warren Buffett
. 0 Comments

Warren Buffett’s annual reports are famous. But there are many other value investors whose reports are must-reads. One of those is Martin Whitman:

Savvy value investors shouldn’t stop with Warren Buffett’s letter. Another renowned value investor’s reports are also well worth reading.

Martin Whitman provides his interesting take on value investing every three months in the Third Avenue Value Fund’s (TAVF) quarterly report. Whitman founded the U.S.-based Third Avenue Value Fund and is the author of Value Investing: A Balanced Approach (ISBN: 0471398101), which is one of the more insightful books on value investing.

Martin Whitman’s quarterly reports (from 1995 to 2004) can be found on the Third Avenue Fund’s web site. Whitman is a deep value investor and often buys distressed debt at deep discounts. For instance, last quarter he started investing in scandal-plagued Parmalat. Whitman said, “Parmalat, a massive fraud, is an Italian-based worldwide company essentially selling dairy products. The fund established a toehold position based on the view that Parmalat seems reorganizable because it is likely that many of its businesses are well entrenched and profitable.” If you think that such situations can’t have a suitable margin of safety, or result in a profit, then you should take a look at the Third Avenue Value Fund’s track record. According to Morningstar.com, the Third Avenue Value Fund beat the S&P500 by over 2% annually during the last ten years and it did so with below-average risk. Mind you, Whitman would likely have more than a few things to say about Morningstar.com’s definition of risk.

In Canada we also have our own value investing guru who writes excellent reports, Irwin A. Michael, manager of ABC funds. He provides monthly commentary, ABC Perspectives, and several other features available through the ABC Funds client page. Not to mention his excellent Value Investigator site.

Popularity: 13% [?]

Martin Whitman

Published
by
Dave
2 years, 10 months ago
in Gurus and Mutual Funds
. 4 Comments

In yesterday’s post I mentioned an article which mentioned some funds that have not beaten Bill Miller’s Value Trust fund on an annual basis, but have done better if one looks at a 15-year time frame. One of those funds is Martin Whitman’s Third Avenue Value Fund. Apparently his fund had a 16.49% annualized return in the last 15 years and “did so with less than two-thirds of the volatility of Legg Mason Value Trust” while Bill Miller’s had a 16.44% annualized return. Whitman’s fund is heavy in financials and producer manufacturing whereas Bill Miller (supposedly a value investor) likes risky stocks like Google, Amazon, and eBay. His top two sectors are consumer discretionaries and information technology. I’m not going to second-guess Bill Miller’s stock picks as he clearly does well, but I think I would much more comfortable with Whitman’s fund than Miller’s. Surprisingly Whitman’s fund has an MER of only 1.12%.

Here’s an interesting interview with Whitman from July 1999: “The Public Be Damned - Martin Whitman of Third Avenue Value Fund.” It’s a good read. People were taking money out of his fund en masse, forcing him to sell off stocks rather than buy:

the 74-year-old Whitman is not comforted much these days by knowing he’s done better than many of his peers. Investors were taking money out of Third Avenue Value at a rate of about $55 million a month, and if this keeps up into fall, the fund could shrink to half its former size. That leaves Whitman always deciding what to sell rather than what to buy. “As for dealing with the public,” he says with undisguised relish, “you may quote me: Screw ‘em.”

That was in 1999. So how well would investors have done had they stayed with Whitman from 1999 to 2006? Take a look at this chart, going back to mid-1996. Third Avenue Value fund is shown in blue. It starts in mid-1999 below the S&P500 (in green) but would have ended up above the S&P500 by 2003. Investors who sold Third Avenue Value fund in 2000-2001 and bought the Nasdaq (shown in black) instead would be even sorrier.

Unfortunately his fund is only available to people in the US. The only Canadian company I found using Third Avenue for their sub-advisor is AIC Global Focused Fund. It is a new fund and it’s performance isn’t yet posted. Not managed strictly by Whitman, but Third Avenue “adheres to a disciplined value investment approach.” This fund doesn’t seem to match any of the funds on Third Avenue’s website.

Popularity: 6% [?]

Beating Bill Miller

Published
by
Dave
2 years, 10 months ago
in Bill Miller and Mutual Funds
. 1 Comment

Ever since my advisor recommended Bill Miller’s Value Trust fund I’ve been following him closely. An article, “Beating Bill Miller” caught my eye. The article raises the interesting point, that while he has beaten the S&P 500 every year for the past 15 years, there are other funds that, while maybe losing to the S&P500 in any given year, have beaten his fund over the same time period:

We congratulate Miller on his fine performance, but we’d be remiss if we did not point out that while he has indeed outperformed the S&P 500 Index since the first Gulf War, there are funds (22 of them, in fact) that have outperformed Legg Mason Value Trust over the same time period, according to Morningstar.

Even though these funds may not have beaten the benchmark in each and every year, they have produced returns higher than the 16.44% annualized posted by Miller over the same time period (net of fees and reflecting reinvestment of all distributions).

Miller himself tries to play-down the emphasis on beating the market on a yearly basis and tries to remind investors to think longer term:

In a letter this week to shareholders, Miller said that investors buying into LMVTX because of its 15-year run of benchmark-beating may be setting themselves up for disappointment. “Our goal is to construct portfolios that have the potential to outperform the market over an investment time horizon of three to five years without assuming undue risk,” writes Miller. “If we achieve that goal, we believe we will be doing our job, whether we beat the market each and every year or not.”

In the next couple articles I’ll go over a few of the article’s suggestions for other value-oriented funds which have beaten the S&P500 and Bill Miller’s Value Trust in the past.

Popularity: 12% [?]

Bad Timing

Published
by
Dave
2 years, 10 months ago
in Benjamin Graham, Costs, Investing and Psychology
. 1 Comment

Here’s an article I found a long time ago, entitled “When Index Funds Go Bad [registration required: may I suggest Bugmenot.com?].” It has been sitting in a draft post for a long time and just today my last post inspired me to publish it. The title doesn’t accurately describe what the article is about. What she talks about applies to all investments, not just stocks. Here’s the main thesis:

Indeed, investors of all stripes are notorious for their poor timing: They often purchase investments after periods of strong performance and sell them belatedly after periods of weak performance. Those timing decisions thus have a major–and negative–impact on the returns shareholders actually pocket.

She then looks at “dollar-weighted returns to gain a better understanding of how investors have really fared, because dollar-weighted returns account for cash flows in and out of a fund.” The results, in my opinion, are quite staggering:

The results indicated that, as with most active funds, investors’ timing decisions were costly when it came to index funds. The dollar-weighted returns for virtually all large-cap index funds were worse than their official returns for the trailing 10-year period through the end of the third quarter 2005. As the table below shows, poor timing cost Vanguard 500 shareholders 2.7 percentage points of returns per year over the past decade. That’s not chump change.

There is a chart given which gives the dollar-weighted returns and the official returns for many index funds. Over a 10-year period the gap between the two returns ranges from -0.8% to -6.18%. The whole article is excellent and I highly recommend reading it. I will just provide the last paragraph as I think it sums things up pretty well:

Clearly, index investors aren’t immune from the behavioral biases that can produce bad results from good funds. Although many of indexing’s most vocal proponents (Burton Malkiel and Jack Bogle, for example) also preach the importance of disciplined, long-term investing, it appears that many investors didn’t heed that advice. True, investors were challenged by one of the most precipitous bubbles in stock market history, and I take some comfort from the fact that asset flows into index funds have smoothed out over the past few years. But many still have a propensity to pile into the hottest funds at just the wrong time. Witness the recent strong inflows many energy funds have experienced this year. I mistakenly assumed that index funds were less likely to invite such behavior, but this study proved me wrong. I still think index funds provide investors a great way to get low-cost, no-fuss exposure to the stock market, but they are good investments only if shareholders use them wisely and maintain the long-term orientation that’s necessary to benefit from all they have to offer.

Investors are always being told to pay attention to MERs. To look at low-cost ETFs as an alternative to index mutual funds or actively-managed mutual funds. Some people take this to the extreme, recommending ETFs (with MERs of around 0.25-0.5%) instead of index mutual funds (with MERs of around 0.5-1%). To save a few percent on your annual return? As this study shows, a much more important factor affecting your portfolio’s performance has to do with keeping your head. This is something that is easier said than done. As Benjamin Graham said on page 8 of The Intelligent Investor,

We shall say quite a bit about the psychology of investors. For indeed, the investor’s chief problem–and even his worst enemy–is likely to be himself.

This is what investing intelligently is all about. This kind of intelligence, explains Graham, “is a trait more of the character than of the brain.”

Popularity: 18% [?]

Bill Miller Beats S&P 500 for 15th Consecutive Year

Published
by
Dave
2 years, 10 months ago
in Bill Miller and Mutual Funds
. 3 Comments

This is somewhat old news, but still newsworthy: Bill Miller’s Legg Mason Value Trust Fund has beaten the S&P500 for the 15th consecutive year. Canadian investors can invest in this fund through the CI Value Trust fund.

It is interesting that in the past two and a half years, he hasn’t been able to beat the S&P 500 Equal-Weight Index (^SPXEW) (as tracked by the Rydex Equal-Weight S&P 500 ETF (RSP)). This plot goes back a bit further. You can see that Legg Mason Value Trust has only beaten the S&P 500 Equal-Weight Index (^SPXEW) in the last 6 months. In 2005, 2004, and the portion of 2003 (the index’s year of inception), ^SPXEW has beaten Bill Miller’s Fund.

Popularity: 9% [?]

Jason Zweig Articles on Benjamin Graham

Published
by
Dave
2 years, 11 months ago
in Benjamin Graham
. 0 Comments

Found a link to a bunch of articles about Benjamin Graham, as told by Jason Zweig, author of the commentary in the latest edition of the Intelligently Investor.

Popularity: 11% [?]

Bill Miller’s Winning Streak

Published
by
Dave
2 years, 11 months ago
in Bill Miller and Mutual Funds
. 0 Comments

With just over a week to go in 2005, Bill Miller’s Value Trust fund looks set to beat the S&P for the 15th consecutive year.

Certainly, Mr. Miller’s 14-year winning streak is impressive, especially in the context of professional fund management, an industry in which the average fund manager typically underperforms broad market indices like the S&P 500. Mutual fund screeners (e.g., Yahoo’s, which takes data from Morningstar) show about 11,000 stock funds. Noting that 11,000 sits between 2-to-the-13th power (8,182) and 2-to-the-14th power (16,384), we should expect by pure probability alone to find about one fund manager in 11,000 who has a winning streak of 13 or 14 years (similar to performing 11,000 trials of 13 or 14 coin tosses and finding one streak of all heads). From this perspective, Mr. Miller’s performance is still exceptional (just as a string of all heads is exceptional), but we should not be surprised to find an exceptional performer among the many thousands of mutual fund managers out there. In other words, while Mr. Miller does appear to have a “golden touch,” he is not necessarily a living incarnation of King Midas.

Popularity: 11% [?]

John B. Sanfilippo & Son, Inc.

Published
by
Dave
2 years, 11 months ago
in Irwin Michael and Stocks
. 1 Comment

The Canadian Capitalist had a link to this an article at moneysense.ca by Irwin A. Michael called “The Nutty Investor”. The article starts of,

Most investors want stocks that are exciting, glamorous, novel. I tend to find that the best buys lie in the opposite direction, among the overlooked and ignored sectors of the market - which is why I am now happily investing in nuts.

This moneysense.ca article was timely for me, as I just noticed John B. Sanfilippo being discussing on Mr. Michael’s “Value Favourites” page at his valueinvestigator.com site a few weeks ago. It is his newest addition to the value favourites page (which is why I read it) and he talks about it here. There, he really fleshes out the reasoning why ABC Funds bought JBSS (they own 5% of JBSS):

. . . Today, with its shares trading at $13.75, JBSS appears to be a bargain. The stock is trading at a 27% discount to its book value of $18.42 and at approximately eight times next year’s estimated earnings of $1.65 per share. Book value is likely understated given that JBSS owns quite a bit of real estate, most of which was purchased in the 1980s and early 1990s. The company is planning to consolidate its operations by building a new larger central facility. Given the expected short payback of the project, the cost savings could be materially accretive to earnings in a couple of years. As far as tree costs are concerned, management expects prices to fall as newly planted crops are harvested in the coming years. Finally, given the company’s low stock price, the costs and time required complying with Sarbanes Oxley, and the favourable prospects for the company, the Sanfilippo family could take the company private. If it did, we feel it would be worth considerably more than what the stock is trading for in the market.

Like Graham, Irwin tries to find stocks that are trading for significantly less than their book value, or what a private owner of the business would be willing to pay. The Sarbanes Oxley Act is something you will hear about often these days. You can read more about it here.

Popularity: 9% [?]

Investors May Let Emotions Drive Decisions

Published
by
Dave
2 years, 12 months ago
in Benjamin Graham, Investing and Psychology
. 2 Comments

I found this excellent article, “Investors May Let Emotions Drive Decisions” on The Mess That Greenspan Made.

Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process. However, researchers have uncovered a surprisingly large amount of evidence that this is frequently not the case,” Tilson wrote in a paper called “Psychology & Behavioral Finance.”

One problem: We’re too emotional. A study published in “Psychological Science” co-authored by professors at Stanford University, Carnegie Mellon University and University of Iowa pitted people with normal brains against people whose limbic systems, the brain’s emotional center, were impaired.

The paper asks whether a neural systems dysfunction that curbs emotion can lead, in some circumstances, to more advantageous decisions. The answer, in terms of investing, was yes.

In the study, people were given $20 in play money and could invest it $1 at at time. Winning or losing was decided by a coin toss, the winners would win $2.50, more than tripling their initial investment. The losers would lose the dollar they invested. The odds were clearly in the investors favour. Yet the people with normal brains became more conservative after losing. The people with impaired limbic systems did not.

“Medical study confirms brain impairment HELPS improve investment returns,” Ajay Singh Kapur, chief global equity strategist at Citigroup, wrote in a summary of the study.

He uses the study as an argument for fighting instinct and getting into the market when investment sentiment is most negative and exiting when investor sentiment is high.

Benjamin Graham talks a lot about NOT thinking too hard when it comes to investing (unless you make it your full-time job like him) and keeping a simple, conservative approach: “It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits.” As well, there is the quote I gave at the bottom of this article.

This is one of the key aspects of the Intelligent Investor, “harnessing your emotions.” In the commentary for the Introduction, Jason Zweig writes:

What exactly does Graham mean by an “intelligent” investor? Back in the first edition of this book, Graham defines the term–and he makes it clear that this kind of intelligence has nothing to do with IQ or SAT scores. It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself.”

Popularity: 14% [?]

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