March, Seven Books in Forty-nine Minutes

Transcription

1 March, 2012 Seven Books in Forty-nine Minutes By William Parmenter, Ph.D., editor Phil DeMuth, Ph.D., talked on the topic of Seven Books in Forty-Nine Minutes at the March 17 meeting of the Los Angeles chapter of the AAII at the Skirball Center. DeMuth has written for a variety of financial publications, and is co-author with Ben Stein of seven books on investing. DeMuth runs Conservative Wealth Management LLC, in Los Angeles, which manages money for high networth individuals. The substance of his talk was to review and comment on the seven books he co-authored with Ben Stein, a prominent economist. The seven books and his review follows: 1. Yes You Can Time the Market. If there is no such thing as market timing, then it is always an equally good time to buy stocks. The proposition, on the face of it, is nonsense. Does price mean nothing when you are buying a house, a car or shirts? People who buy low do vastly better than those who do not. This was a book about stock market valuations, covering price, P/E, dividend yield, stocks and bonds, from the period of 1901 to A couple of tips: wait for lows like those experienced in When stock prices are low, increase the percentage of stocks in your portfolio. 2. Yes You Can Become a Successful Income Investor (2004). The book covered how to invest in a low interest-rate environment, and would appeal to retirees, who are looking for a stable income stream. The text discussed high-dividend stocks, REITs, bonds and exotics. It proposed a 40/60 portfolio, composed of: 20 percent high dividend stocks, 20 percent REITs, 30 percent bonds, and 30 percent TIPs. Some 20-year periods pass when total return on investing in the stock market is zero. That prospect for retirees is chilling. The long-term returns may be affected by cycles, and demographics. Retirees are better off in high dividend stocks. 3. Yes, You Can Still Retire Comfortably. DeMuth pointed out, retirees still have to save themselves. Retirees with a 50/50 portfolio have to figure out a safe withdrawal rate. The five years before retirement are the most dangerous, because if there is a big drawdown, you may not be able to make it up before starting distribution. The withdrawal rate increases with age, and should be recalculated every five years. If you do not have enough money to cover your retirement years, you need to consider the strategies of: reallocation, Table of Contents Seven Books in 49 Minutes Phil DeMuth..p.1 Trying to Beat the Market...Janet Brown. p.4 Education Nuggets..Don Gimpel,,,,,,,, p.6 1

2 annuitizing, taking out a reverse mortgage, downsizing, getting help from relatives, and using public assistance. The use of public facilities and resources greatly reduce retirees expenses. People get housing from HUD, and use public senior-citizen centers for subsidized meals, free gyms for workouts, low-cost excursions, free-to-cheap medical diagnosis and care, libraries, television lounges, ping pong, pool, AA and Al-Anon meetings, hobby groups, free stage shows and socializing. Some seniors use the local senior citizens center as their home away from home. 4. Yes, You Can Get a Financial Life. This book brought in Larry Kotlikoff s ESPlanner (a life-time planner). Kotlikoff uses financial planning over the life cycle, taken decade by decade. The book offers rules of thumb for saving and investing. It also has Ben Franklin-like bromides for prudent living. If, big if, people had common sense, they would be thrifty. They would spend down instead of up, looking for generics, no-cost and low-cost equivalents, and stay away from hyped offers. 5. Yes, You Can Supercharge Your Portfolio (2008). This book was issued in fall, 2008, just before Lehman Brothers collapsed. What with the economic decline, the book sold about five copies, and then was relegated to the remainder table. The book s genesis was in a suggestion to write a book about Monte Carlo simulations, so as to avoid risk and manage portfolio volatility. It was found that most retirement portfolios were significantly underdiversified, failing to deliver the most return for the least amount of risk. Using the dividend yield/volatility ratio helps to select a higher yielding and less risky portfolio, using both factors. DeMuth stumbled into a market anomaly when he discovered the value of using low-beta, (low-volatility) stocks as diversifiers. The single most important market anomaly, and the most valuable idea in DeMuth s presentation, is the use of low-beta stocks. They add two percent a year yield to the portfolio. Typically people try to beat the indexes by investing in high-beta (high-volatility) stocks. The problem is that as the market goes down, the high-beta stocks plummet much faster, and that devastates the portfolio s value. In contrast, low-beta stocks (healthcare, consumer staples, etc.) deliver a steadier, more reliable, and greater (by 2 percent) return, over the longer term. 6. The Little Book of Bulletproof Investing.This book was written in aftermath of Los Angeles County Meeting Schedule Westside Computer Group Don Gimpel, (310) dgimpel@roadrunner.com. Veterans of Foreign Wars Memorial Bldg. Culver Blvd. and Overland Avenue, Culver City. The group will meet at 10:30 a.m., Saturday, April 7. Topic: TBA. The UltraFS 11 group will meet at 9 a.m. on the same day. Pasadena Group Will meet at 7 p.m. April 17, at Pasadena Main Library, in the David Wright Auditorium, at 285 E. Walnut St., Pasadena. (Meets third Tuesday of the month, except for August and December.) Topic TBA. Voluntary contribution of $2. Contact, Ivan Wong at (626) , IWong82762@aol.com. Mutual Fund Group Meeting and topic TBA. For more information, contact Gunter Hagen (310) ghagen1@yahoo.com. Meetings are free to the public. Stock Selection Group Norm Langhout, (310) , normlang1@verison.net. Meeting at 7 p.m., April 25, using IBD, CANSLIM stock selection method, at Fairview Library, 2101 Ocean Park Blvd., Santa Monica. The group meets the fourth Wednesday of the month. Los Angeles Chapter, Skirball Center, registration at 8:30 a.m., seminars from 9 a.m. to noon on Sat. April 21. Frank Barbera, of Sierra Investment Management,on Global Trends and Outlook; and Axel Merk, of Merk Funds, on Currencies: Diversification and Downside Risk. Desert (Palm Springs area) Group Usually meets from 10 a.m. to noon, second Saturday of the month at Sunset View Club House, Sun City, Palm Desert. No meetings will be held until October, For more information, contact Patricia Gammino, fastnet@msn.com. or at (760) Option Special Interest Group, meets online on first, third and when applicable, fifth Tuesday of the month at 7:30 p.m., except August and December. Get instructions on how to participate from Robert Morgan at RMWall-AAII@yahoo.com. Currently, April, 2012, it is a small group, providing extensive interaction. 2

3 the financial crisis of 2008, and presents dos and don ts to protect your financial interests. Things that you can do to improve your investing results include: simplify, diversify, invest passively, minimize expenses and taxes, buy and monitor your holdings. The aftermath of the financial crisis showed that investors need to focus more on risks. DeMuth presented sample portfolios, based on the maximum one-year drawdowns between 1929 and His strategy was to overweight low-beta stocks in the S&P The Little Book on Alternative Investments (2011). Alternate investments are defined as those that do not make money the way stocks, bonds and real estate do. Some features of alternative investments are: positive return and low correlation to the market; using hedge fund strategies; and packaging hedge fund strategies in a mutual fund wrapper. The book has a chapter on classifying your investments the alternative way, and another on the discontents on efficient market theory. After that foundation, it gets to the heart of the matter, which is alternative investments. There is one chapter each on collectibles, commodities, and real estate. There are four chapters on hedge funds, including, taking up arbitrage and long-short strategies. Another chapter takes up one-fund solutions, another the packaging of hedge funds as mutual funds, and a final chapter that discusses incorporating alternative strategies into your existing portfolio. Some good advice is tossed in on page 214 when the book counsels, Do not invest in them a lot if you only understand them a little. That point is given marquee status in the more succinct and pointed advisory, Don t invest beyond your headlights. In a blurb for the book, Robert Arnott, chairman of Research Affiliates, pointed out that alternative investments can cut risk, hedge against inflation and boost return. The book is filled with big ideas on how to make these markets and strategies a treasured part of our investing toolkit. To get a sampling of opinion on the book, the editor checked it out on Amazon.com. The retail price of the hardcover book is $19.95, but Amazon sells it new for $10.98, and used for $8.50 (plus shipping), or on Kindle for $8.99. Craig Matteson, of Saline, Mich., in a detailed review in April, 2011, of 12 paragraphs, gave the book five stars, saying, if you are interested in alternative investments, this is a great introduction and guide. His review gives a thorough inventory of the book s contents. On the other hand, Jason (no last name given) in August, 20ll, gave the book only two stars and in a critical review said the book could have been a lot better. His main complaint against the book was that hedge funds are only open to high-net-worth, with highincome, investors, and the average investor gets little help from the book. But he does point out on page 113 that average investors can participate in hedge fund strategies by purchasing fund of funds, which are mutual funds that are pricey, because they charge another layer of funds on top of what the mutual fund charges. DeMuth had a couple copies of the book to pass out to audience members. One he gave to the Pro Forma editor, who offered to review it, which he has done here. In conclusion to his talk, DeMuth drew implications for the individual investor. One, most investors would be better off buying Vanguard and indexing everything. Two, use Monte Carlo simulation to avoid concentrated risks, and to actively manage portfolio volatility. Three, construct a high-dividend (four to six percent), low-volatility portfolio, which will deliver two percent more, long-term return. Four, buy companies whose price appreciation will keep up with inflation from the top 100 dividend payers in the S&P 500. (Companies like Procter and Gamble.) This is something of a Warren Buffett approach. In the question and answer session, 3

4 DeMuth mentioned that listeners could check out the multi-strategy, mutual fund Natixis ASG Diversifying Strategies (ticker symbol, DSFAX), saying it mimics a hedge fund strategy. It has a 5.75 percent load, an expense ratio of 1.7 percent, and a minimum investment of $5,000. DSFAX year-to-date is plus 1.74 percent, and over the last year lost 7.28 percent. It is a new fund and unrated by Morningstar. Since September, 2011 when it sold at $11.15, it has declined in regular stair steps to its end of March, 2012 close at $9.50. Give it a pass. He pointed out that your portfolio should change as a function of the amount of money that is in it. Gold has been talked up in the marketplace. But to put it into perspective, all the gold in the world would make a cube fifty-sevenfoot square. He said he had no particular opinion about either Apple or Altria. Investors who want to contact DeMuth at Conservative Wealth Management LLC, in Los Angeles, can do so through his website at The home page at the site carries the blurb, Rescuing high-net-worth investors from the financial services industry one millionaire at a time In addition the homepage is covered with animated covers of Stein s and DeMuth s books, which are links such that if you click on them reviews, quotes and blurbs from the books come up. For those interested in learning more, take the challenge and click. Is It Worth Trying to Beat the Market? By William Parmenter, Ph.D., editor Janet Brown talked on the topic of Is It Worth Trying to Beat the Market? How to Make Sound Choices in Today s Volatile Markets at the March 17 meeting of the Los Angeles chapter of the AAII at the Skirball Center. Brown is the president of San Franciscobased FundX Investment Group, started in 1969, and the editor of NoLoad Fund*X, founded in Trouble making money in the market, using the traditional investment paradigm, was the focus of Brown s opening remarks. Bonds outperformed stocks over the last ten years. Some $165 billion went out of stock funds in Under these circumstances, how can one make money in the market? Stocks? low returns over the last decade. Cash? zero return and loss due to inflation. Bonds? historic low rates. The investor has two choices. One is to track an index (You will never outperform it). And, two, beat an index. (You might not succeed.) The average return in rolling 20-year periods is: stocks, 12.3 percent; bonds, 6.6 percent; cash, 4.7 percent; and inflation, 4.1 percent. A study of 306 equity mutual funds showed that their return ranged from 3 percent to 12 percent from 1989 to The Vanguard 500 fund during that time returned an average of 7.9 percent. Sector leadership rotation during that time period was as follows: value, from 1989 to 1994; small cap value, from 2000 to 2002; international from 2002 to 2007; everything dropped in 2008; midcap from 2009 to The bulk of expense ratios range from.5 to 1.5 percent. There is no correlation between expense and performance. The funds with the very lowest expenses were in the middle of the pack in performance. Star managers, like Peter Lynch, Bill Miller, Jack Bogle and John Rogers shone brilliantly, illuminating the heavens for their fifteen minutes of fame, and, then faltered and faded. Regarding relative performance: longterm outperformance always includes underperformance. 4

5 Star managers and star stocks perform analogously to star managers and star players in basketball. They outperform for a while and then fade. Teams rejuvenate by rotating into new managers and new players. Investors need to do that too, by rotating into new and more promising investments. All of this was introduction to Brown s point. Rotate. Jump from winner to winner. Get out of losing positions and into winning positions. Do not get too emotionally attached to your investment positions. When they start to fade, jump onto a faster moving investment. Digital technology at every investors fingertips, via the internet and the computer, make it possible track investment positions on a daily basis, via monitoring numbers and charts. When buy and sell costs are down to $6 to $9 a pop, and you can do it yourself, via internet, why not do it yourself? Brokerage quality research is available on the internet, too, so what is the value of the old paradigm? No need to have a 60 percent stock and 40 percent bond, or some variant thereof, portfolio, anymore. That is a dead investment model yesteryear s paradigm. Nevertheless, brokerage houses are still promoting it. The conveniences of the new, and of rotating at will, are a big challenge to the static allocation model. Yet, brokerage houses and their retail sales forces are stumbling into the future looking into a rearview mirror. Are they going to be the last to know that their investment model is obsolete? Brown s variation of the rotation model is what she calls upgrading. It is based on: 1) ranking by 1-, 3-, 6-, and 12-month returns. 2) buy the top 15 funds, 3) re-rank monthly, 4) sell funds that drop out of the top 30 percent, 5) buy the current top performers. What is the periodicity of buy and sell decisions? Monthly. What is ranked? Various sectors of mutual funds: small cap, large cap, growth, value, international, domestic, all world, emerging markets and total return. During the last couple of years there has been a lot of back and forth in the market, so Brown said her upgrading system has not outperformed. That does not mean her concept is flawed; the concept is spot on. The problem Brown experienced can be summarized by saying she is holding onto winning positions, after they turn into losing positions, for too long. She needs better tactics to sell, so she preserves her gains. That is difficult when market dynamics are such that gaining positions go up slower than losing positions go down. Slow up, fast down so you need a hair trigger on the sell decision that does not embroil you in needless churn. That is a tough and tall order. Another problem mutual fund mangers face is that when everything is going down, their fund goes down, too. If they did the sensible thing and went to cash, what point would investors have in being in a fund? Well, none, investors would be better off keeping their money in their checking account. Brown holds that the old, fixedallocation over time portfolio is outmoded. A rotation diversification allocation strategy outperforms it. A rotation strategy stops having a significant portion of the portfolio tied up in underperforming assets, and aims at keeping you in what is outperforming. As for bonds, Brown talked about a flexible income strategy. Bonds rotate with interest rates. No one bond fund provide high returns over an economic cycle. The need is to select the current leader, and then rotate off it when it fades. Concerning other tactics, such as the use of stop-losses, moving averages and market timing, Brown tested them and found them wanting. For investors interested in the ticker symbol of her mutual fund, it is TACTX, the FundX Tactical Upgrader Fund. Brown can be reached at The following websites were given out for reference: to reach her 5

6 money management firm that she has been associated with since 1969; the no-load mutual funds that use an upgrading strategy; and for noload mutual funds that have been around since On the Upgraderfunds website eight mutual funds are offered with the following ticker symbols: FUNDX, HOTFX, RELAX, INCMX, REMIX, UNBOX, TACTX, TOTLX Yahoo Finance lists the performance for the FundX Tactical Upgrader fund (TACTX) as 4.83 percent for one year, and 8.83 percent for three years. Its best three-year return is 4.83 percent. Its year-to-date return is 2.82 percent. Its Morning Star rating is three star. Also from Yahoo Finance, the FundX Upgrader ( FUNDX) has performed as follows: 1- year: -3.25%, 3-year: 18.47%, 5-year: -1.27%, and 10-year: 5.12%. The same source lists the returns for FundX Aggressive Upgrader, (HOTFX) as follows: 1-year: -3.26%, 3-year: 18.22%, 5-year: -0.94%, and 10-year: N.A. If interested, use Yahoo Finance, clicking on the performance link, to check out the performance of the other three funds. In the question and answer period, Brown said the holding period for mutual funds is 90 days, as they do not want investors to bounce around too much. The maximum fee is one percent. There is no easy way to switch between or combine her equity mutual fund and the bond fund. For those who want to bypass the retail offerings and invest on their own, making their own choices, she said she did not know of any free ranking services. Free ranking services are crucial for the self-directed investor, as they allow the investor to move in and out of positions at will Some ranking services are IBD; and Stock Track, which costs $150 per year. For ETFs, look at ishares, Power Shares, and Google the search word ETFs. Education Nuggets By William Parmenter Ph.D., editor Dr. Don Gimpel talked about how graphs can be spun to show the information favorable to the graph-makers point of view during his five minutes of investor education at the March 17 meeting of the Los Angeles Chapter of the AAII at the Skirball Center. Gimpel noted that 62 years ago when he took a university physics course, he heard the brag that one could make a graph show whatever one wanted. He used as a case in point a graph presented by the Ariel Fund, depicting the growth of a $10,000 investment over 26 years, compared to various benchmarks. Gimpel s shrewd analysis featured the following comments: 1. You cannot compare today with 25 years ago, so the graph should have a semilogrithmic vertical axis. 2. Data points are four years apart. The data points were carefully picked, so as to avoid showing big draw-downs, for example in 2003 and In fact, the fund had a 53 percent drawdown, but you cannot find it on the graph. 3. The indexes used for benchmarks may or may not be relevant to the fund s investment universe. 4. The colors picked for display favor the fund and not the benchmark that beat it, the Russell 2500 index of small and midcap stocks. What can one do to protect themselves from such graphical deception? Go to Yahoo Finance, and in the lefthand rail column, click on Basic Tech Analysis chart. Now you are looking at a chart, whose accuracy and completeness is its sales point. Its data points are logged daily. It can be shown in 3- and 6- month, 1-, 2- and 5-year intervals. You can put up 5-, 10-, 20-, 50-, 100- and 200-day moving averages. You have nine indicators (such as MACD) that you can use. And, there are four overlays (such as Bollinger 6

7 Bands) that can be put on the chart. As long as Gimpel is thinking about charts he might consider chart elucidation as an investor education topic for his Westside Computer User SIG group. The chart indicators and overlays are a mystery to the average investor and need to be explained. Orange County AAII Announcements The AAII Orange County Chapter will present: "Thriving in Volatile Markets" Discussed by: Wade Slome, CFA, CFP President and Founder, Sidoxia Capital Management LLC Wade Slome will discuss unique investment themes and stock ideas to generate income and growth for your portfolio. He will cover how the Greek and the European financial crises will impact your investments and how structurally high debt levels and deficits impact our financial markets. The audience will discover where to invest, given the Fed s zero interest rate policy and record low bond yields and will find out what the 2012 presidential election means for stocks. Attend This Meeting and Learn... About unique stock investment ideas to generate income and growth How the European financial crisis will impact your investments Where to invest, given the Fed s zero interest rate policy Meeting Details: Date: Saturday, April 14, 2012 Time: 8:30 a.m. Registration/Social 9:00 10:30 a.m. Program 10:30 11:00 a.m. Q&A Location: Balearic Community Center 1975 Balearic Dr. Costa Mesa, CA Payment: At the Door, Everyone, $5/person For more information about the Orange County chapter of AAII and their meetings, go to: http// Note to Pro Forma Contributors: Please have your copy ed to the editor by the fifth of the month. Letters and comments are welcome. If you want to an article about the financial system you will have a chance to appear in print and inform Pro Forma readers. Book reviews are welcome. them to the editor at wparmenter@yahoo.com or call (562)

8 Pro Forma Pro Forma Editor Pro Forma Editor, Emeritus William Parmenter Orvis Adams SIG GROUP CHAIRMEN IBD Meet-up/ AAII CANSLIM Mutual Fund Group Options Group Pasadena Group Palm Springs Group San Fernando Valley Group Westside Computer Group Norman Langhout Gunter Hagen Robert Morgan Ivan Wong Patti Gammino Evan Press Don Gimpel Pro Forma is offered free of charge exclusively via and is also available for downloading from the Los Angeles Chapter web site at: The American Association of Individual Investors is an independent nonprofit corporation formed for the purpose of assisting individuals in becoming effective managers of their own assets through programs of education, information and research. Pro Forma is published for advising members of the groups' activities and for sharing information. All material compiled without verification of accuracy to a specific task or computer system. All material provided in the newsletter is for educational and illustrative purposes only. Comments are the views of their author and no other person or organization. Investing is an inherently risky business. Investors may loose their entire investment or more. Past performance is not a guide to future return. 8