October 2016

Pick Good Funds

Pick Good Funds

The Wall Street Journal and the financial community have been abuzz about passive investing.  I wrote about settling for average and outrunning a bear via active management previously.  The newest argument for choosing active management over passive is that investors should choose ‘good’ managers, not average or bad managers. Why didn’t anyone think of that before?  Choosing a good manager sounds like common sense, but really this is an attempted rebuttal of the fact that benchmarks outperform 70-80% of actively managed funds.  Capital Group (parent company of American Funds) even published a scorecard in a sort of homage to S&P’s SPIVA report that touts the performance of ‘good’ funds.  Tim Armour, chairman of Capital Group, asks why an investor would buy Blockbuster stock in the early 2000s when they could have bought Netflix – the assumption being that a good manager would have bought Netflix while an index would have been forced…


Passive Investing

Active Versus Passive in a Down Market

The Wall Street Journal has been publishing articles about passive investing recently.  Many of these articles look like they are pro-passive, but are written by active management shops looking to damn passive with faint praise.  My last post addressed the ‘settle for average returns’ fallacy.  The second argument I often see in support of active management is that it outperforms in down markets. I’m not sold on the data behind this assertion, but let’s assume it’s true and active managers outperform during down markets.  Maybe they aren’t completely invested and hold cash or maybe they just pick the stocks that don’t go down as much.  Whatever the secret, CONGRATULATIONS!  YOU BEAT THE MARKET DURING DOWNTURNS!!! Now you just need to know when the next downturn starts and ends so you can go active at the right time.  That’s where the argument starts to break down.  It’s difficult/impossible to predict what…


Why Settle for Average?

With the recent flood of Wall Street Journal articles about passive investing, now is a good time to review the space.  Money is pouring into firms like Vanguard and iShares, the leaders in the indexing revolution.  Investors are seeing that despite perennial declarations of a “stock-picker’s market”, active managers consistently trail their benchmarks and charge large fees for the privilege of doing so.   You’ll see below that I am an advocate of passive investing, but only when it’s done correctly.  There are plenty of opportunities to use passive incorrectly or to get ripped off by a non-fiduciary product seller. What is passive?  A passive investment is just a rules-based strategy.  Technically, there should be a corresponding index.  For example, if the rule is to weight the investment based on the number of vowels in the company’s name, there should be a high-vowel index that the strategy would use as a…


Eight Years Ago

Eight years ago, we were in the midst of financial crisis.  Warren Buffett penned an op-ed in the New York Times encouraging investors to “Buy American, I Am”.  So did you buy American?  Too many investors were scrambling to do the opposite. On the front page of the New York Times from that day is a big picture of Joe the Plumber and a chart of oil prices shooting up to $140/barrel and then down to $70.  Inside, economist Paul Krugman lambasted the Federal Reserve and predicted a nasty, brutish, and long economic slump.  Who in their right mind would buy stocks in that environment? The S&P 500 fell another 30%, hitting bottom on March 9th, 2009.  Had Warren Buffett lost his touch?  No.  Since October 17, 2008, the S&P 500 has gained over 150% (over 13%, annualized).  The S&P 500 is up over 250% (over 18%, annualized) since the…


Harvard’s Endowment

Fairway’s third quarter commentary has been published.  Keeping up with the Joneses has distracted Harvard’s endowment from its true mission.  Here is some background on what happened: First, the actual endowment report.  Harvard lost 2% over the last year, driven into the ground by what I call conspicuous sophistication. The Harvard Crimson leads the charge on reporting the results here. There is a pile-on by the WSJ (some good reporting here), NYT, and CNBC among others. Then the students weigh in via the school newspaper.  If there’s one constant Harvard’s endowment can count on, it’s that the students will be vocal critics no matter what.  The horror of their $36 billion endowment lagging peers “is unacceptable”.  When the endowment was blowing the doors off of its peers, students felt that management was getting paid too much.  Now that performance is lagging, students are re-thinking this – maybe it makes sense…