Speculator vs Investor…again

I have written about this topic in the past and it is a constant sore subject for me.  Meeting many financial professionals is humorous because of their quickness to discuss how “financially minded” they are and all the “hot stocks” they are kicking ass on.  When I ask the simple question of “Why did you invest in that?” it can tell a lot about whether the person is an investor or a speculator.

You, as an “average” person, can easily find out which financial advisor is right for you by asking the simple question of “why?”  If the answer sounds like b.s., it probably is.  If they can’t explain, in normal terms, why an investment is worth it, it probably isn’t.  I am reminded of Enron and how the CEO and President couldn’t explain how they made money, and looking back, THAT is how everyone should have known it was a fraud.

The same way a CEO should be able to explain how they make money, your financial advisor should be able to easily explain why you are in a specific fund or stock.  If they can’t, run for the hills. After all, you can easily beat the stock market over time by just buying dividend paying stocks in the S&P.  It has been proven time and time again that just buying the dividend paying stocks in the S&P will beat the S&P handily over time (2%+ per year).  Why pay fees to someone who can’t explain basic fundamentals of investing to you when you can just invest on your own and beat the market?

Don’t be afraid to question.  When I get asked questions, it makes me happy that someone is basically asking me to prove I know what I’m talking about…everyone who has knowledge wants to show off their knowledge.  If they don’t have knowledge, they will get defensive and not be able to show you.  That will also be how you know they are a speculator vs an investor.  A speculator is someone who doesn’t have a basis for making decisions and they are basically just throwing darts at a board.  Can they be right at times?  Of course! During any bull market, like the one we are in now, anyone can look brilliant.  But those who follow the trends will lose when the trends fall out of favor, which happens when markets turn and it gets ugly.  Don’t follow that person.  It can be hard, though, when the herd is your buddy at work or your neighbor bragging about their 35% gains last year.

Oh, and the stock market is still vastly overpriced.  Still waiting for my 40-50% bear market. In case anyone forgot.  And if you asked me why I think that, I would have many logical answers.  Because I’m not afraid to have the answers.

Is It Really That Hard To Beat the S&P 500 over time?

Since I started investing almost 20 years ago, the goal I had always read about was beating the S&P 500 over time.  Mutual funds were, a lot of times, compared to that benchmark for performance and it was amazing how it didn’t happen much at all.  When I read books about Graham/Dodd, Buffett’s mentors, they always stated they had the goal of making 2.5% better than the S&P 500, annualized, over time.  It may not sound like much, but if you do the math, if market gains 10% per year for 40 years and you are able to do 12.5% per year over 40 years, you are talking about 2.5 times more money! $1MM, after 40 years, would be $45MM @ 10% per year but $111MM at 12.5% per year and that assumes not adding anymore money.  So it’s quite considerable.  It makes it all the more impressive that Buffett has been able to achieve returns almost 10% more per year than the S&P 500 over a nearly 60 year career.

So how hard is it really?

I recently purchased a Bloomberg machine, which is a great machine that will allow me to pick different stock screeners and then backtest them as far back as 25 years in some cases.  It will then show me the per year returns vs the S&P 500 and it even allows me to select how often I rebalance.  So I decided to take a few swings to see how it would do by using some of the things I have learned in the past about equities that work over the long haul by many value investors….

What was the result?  If you stayed disciplined and followed the same rule, year after year, it actually was not hard at all to beat the S&P 500.  Yes, there were many years in which you didn’t beat the S&P, but over time, you easily beat the S&P and then some. And it didn’t take convoluted and complicated attributes to search for.  (More on that in another post).

So why do so many money managers fail to beat the S&P 500 year after year and over long periods of time?  Well, that’s when human nature comes into play. Money managers chase returns.  They’re almost forced to, which is sad, but it is the business they are in.  Granted, they tend to not do a great job explaining the reason for their investment decisions and they tend to be made because other managers and the market are doing well in certain areas, but the bottom line is, it proves that chasing returns is a sure way, in the long run, to lose.  When you finally get to the party, as has been proven time and time again, you will find that everyone has either left or are on their way out.

Side Note: I have found a very nice screener that over a 22 year period beat the market by over 4.5% per year.  Based on the # of stocks in that screener each year, I was VERY pleased to see the results and I will discuss, in more detail in another post, what I found with this screener.  Unfortunately, I won’t be offering the exact screener because then my work on the Bloomberg machine I paid for will be released and I’m too selfish to give away the things I have spent time looking for.  :-)

I’m Back

There has been a large gap between my most recent posts.  It’s been hard to keep writing the same thing over and over again, and to watch the market continue to go higher. I have not given in and bought into this market, though.  I am still going to keep that patience because the higher this goes without any substantial increase in fundamentals, the more I know that things will revert back and revert back in a strong way.

I recently purchased a Bloomberg machine which allows me to backtest stock strategies over the past 21 years.  That’s annoying, however, considering I would want to backtest going back 40-50 years, to see how my strategies would have faired during secular bull and bear markets.  Now…with that in mind, going back 21 years, the stock market total return has been about 9.5% per year which is actually lower than the 100+ year historical average of 9.9%.

Since September 18th, we have had a nice pull back on the S&P 500 and I love seeing the pundits on TV talking about how this is a great buying opportunity. Of course it is…if you want to ignore all fundamentals and historical valuation metrics that have proven to be accurate.  Market Cap to GDP ratio, which Warren Buffett describes as probably the single most accurate stock market valuation metric at any given time, is at levels that have only been rivaled by late 1999 and early 2000. Based on these metrics, the 10 year outlook on the S&P 500, including dividends, we are near 0% returns, annualized, per year for the next 10 years. That’s awful. Historically, the market should be making 10% per year, so to get to that kind of valuation, the market has to drop in half to get the expected 10% per year annualized return.  It sounds unreasonable?  Ok.  The same thing was said after the mid 1970s cyclical bull market.