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June 15, 2006

Jeremy Siegel loves fundamentally weighted index funds

In yesterday's Wall Street Journal, Wharton prof Jeremy Seigel touted "fundamentally weighted" index funds and ETFs. For those interested in indexing, the efficient market hypothesis, stock fundamentals, and related topics, the entire article is worth a look, so by all means, fish a copy of the WSJ out of somebody's recycling or go have a look at the online edition if you subscribe electronically.

Siegel's interest in publishing this article is more than merely academic: he consults for Wisdom Tree Investments which is on the cusp of releasing some investment products that involve fundamental indexing. Though companies such as iShares, Vanguard, and Powershares have beaten Wisdom Tree out of the blocks with ETFs based on dividend indices, the diversity of Wisdom Tree's offerings should assist that company in differentiating its line. Russell Bailyn has more details on his blog, the look of which should spur me to finally do some design work on this page.

From Siegel's article:

Furthermore, dividend-weighted indexes had better risk and return characteristics than capitalization weighted indexes in each industrial sector and each country that I analyzed. Dividend-weighted indexes even outperformed "value cuts" of the popular capitalization-weighted indexes such as the Russell Value and Barra-S&P Value that attempt to choose those stocks whose prices are low relative to fundamentals.

With the advent of fundamental indexes, we're at the brink of a huge paradigm shift. The chinks in the armor of the efficient market hypothesis have grown too large to be ignored. No longer can advisers claim that capitalization-weighted indexes afford investors the best risk and return tradeoff. The noisy market hypothesis, which makes the simple yet convincing claim that the prices of securities often change in ways that are unrelated to fundamentals, is a much better description of reality and offers a simple explanation for why value-based investing beats the market.

If you are a fan of indexing, as I and so many other investors are, you are no longer trapped in capitalization weighted indexes which overweight overvalued stocks and underweight undervalued stocks. Devotees of value investing who are searching for a simple, low-cost indexed portfolio in which to hold their stocks need wait no longer. Fundamentally weighted indexes are the next wave of investing.

Posted by The Unknown at 8:16 AM |

June 14, 2006

Behavioral foible of the day: Loss Aversion

Institutional Investor reports on a new study by Dalbar showing loss aversion to be the culprit in losing a lot of money for small investors:

An aversion to losing money leads mutual fund investors to make decisions that cost them about 77% of their potential gains, according to a new study by Dalbar. The Quantitative Analysis of Investor Behavior study found that, had investors held on to their investment in the Standard & Poor's 500 stock index for 20 years, they would have seen their portfolio grow by 11.9% annually. But in analyzing fund-flow data from the Investment Company Institute, it appears the average investor saw gains of only about 3.9% a year. “Improving investors’ actual returns depends more on correcting behaviors than on the performance of the fund,” according to the study. In other words, investors’ lack of discipline in their investment approach and fear of losing money results in costly mistakes. The report suggests that financial planners and advisers could better guide their clients into making better decisions.

Posted by The Unknown at 1:36 PM |

June 13, 2006

Norway thinks corporations shouldn't be scumbags.

Aftenposten reports that the Norwegian Government Pension Fund has washed its hands of Wal-Mart and Freeport McMoRan :

[Finance Minister] Halvorsen's office cited "serious" and "systematic violations of human rights and labour rights" as its reason for pulling out of its Wal-Mart investments.

Another decision to dump shares in Freeport McMoRan was based on "serious environmental damage" incurred by the company.

Halvorsen was quoted in a government statement as saying that the exclusions "reflect our refusal to contribute to serious, systematic or gross violations of ethical norms in these areas through our investments in the Government Pension Fund - Global."

Posted by The Unknown at 3:12 PM |

June 12, 2006

Fear's Here, Dear.

The S&P 500 went the last inch toward losing all of its gains for 2006 today. Core inflation is spooking the Fed, and the Fed members are spooking investors. With the Producer Price Index coming out tomorrow morning, and the Consumer Price Index hitting on Wednesday, a lot of traders seem to be running for the exits.

Large-cap U.S. stocks are trading below 15 times 2006 operating earnings. This is the cheapest stocks have been in years. Meanwhile, US bonds are still looking pricey. It may be about time for that portfolio rebalancing act.

Posted by The Unknown at 2:01 PM |

June 8, 2006

Flushing the Chumps

Charles Biderman of Trimtabs is telling anybody who'll listen that a lot of individual investors, now rushing toward the exits of the US stock market, may be making a big mistake:

Charles Biderman, chief executive of TrimTabs Investment Research, argues that the real answers lie in mutual-fund flows and in whether companies are spending money to buy their own stock or that of other companies as part of a merger.

He noted that at the market peak in early 2000, individual investors piled into equity funds but that companies were net sellers of stock.

By contrast, at the bottom of the last bear market from June 2002 to February 2003, individuals pulled $100 billion out, while companies were net buyers by $30 billion.

"Typically, individual investors are always wrong," Biderman said, "and ever since the mid-1990s, for every year when companies were net buyers of their own shares, the market has gone up."

Right now, Biderman notes, companies are again net buyers. He calculated that 135 companies announced last month a total of $63 billion in stock buybacks and $40 billion more in stock purchases as part of takeovers.

Posted by The Unknown at 3:18 PM |

June 7, 2006

Bloody Murder

Lots of wailing and gnashing of teeth these days over the grind-down in the US stock market, but nobody notes that year-to-date the S&P 500 is still up, albeit a measly 1.47%, including dividend reinvestment.

Year-over-year, the S&P is up a slightly more respectable 3.04%, again with dividends reinvested. Far short of Siegel's Constant, mind you, but nothing to justify all of the recent whining.

Short-term the market is being pressured by many concerns, of course, including interest rates, commodity prices, and the war of idiocy between Washington and Tehran, but long-term the valuation picture looks pretty, with the S&P trading below its historical average Price-to-Earnings ratios.

We do have an interesting return to volatility, but we do not have anything for an actual stock investor to be crying about. Call me old-fashioned, but I still prefer to buy assets when they're cheaper.

Posted by The Unknown at 3:08 PM |