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The Stingy News Quarterly (Q4/2012)
New @ StingyInvestor Focus on the numbers "Simple numerical strategies may well represent a ceiling to returns for most investors. It's something that's well worth considering the next time you screen for stocks." What value is good value for stocks? "Next time you're in the bathtub, consider the dynamics of the rubber duck - an easy-to-submerge toy that quickly pops to the surface when it is released. In much the same way, value investors buy stocks that the market has pushed deep underwater because they expect these firms to turn around and head back to more normal levels." Scary beats safe when it comes to Net Nets "Cheap and safe are two attributes I look for when picking stocks. But seeking safety doesn't always pay. History suggests that a cheap-and-scary approach may be the better way to go - if you have the stomach for it." Is the stock market overpriced? "The market is 29 per cent higher than its average CAPE of 16.5, and 31 per cent higher than its average P/PeakE of 11.3. As a result, despite their differences, it turns out that both methods point to similar levels of overvaluation." Measures of value "The results are clear: You would have done well by buying stocks with low ratios" Sculpting a portfolio by subtraction "Rather than look for stocks at the extremes, I take a different tack. Instead of seeking the best, I endeavour to avoid the worst. It's like sculpting: I start with all the stocks on the Toronto Stock Exchange then slowly whittle down this long list through a series of relatively mild cuts." What would Buffett buy? "Warren Buffett, the Oracle of Omaha, is the world's most successful value investor. Here's how you can follow his strategies to find your own bargain stocks." Low volatility value "Removing the most volatile stocks from the low-P/B portfolio boosted returns by nearly a percentage point annually and reduced volatility by almost two percentage points. As a result, value and low-volatility work well together." Small, illiquid, value "While the return potential of small value stocks is well known, the benefits of low liquidity may be less obvious. That's why I was pleased to read a study on the topic by Roger Ibbotson, and others, in the latest Financial Analysts Journal, which dissects mutual funds." Value in a hot market "To probe what value investors can reasonably expect, it's interesting to look at how value stocks tend to do at various levels of market valuation." Value and dividends "Combining a search for dividends with a nose for value often produces good results. But let's take a look at a few practical issues you might encounter when looking for stocks with this tempting combination of features." Canadian Graham stocks "I'm a big fan of Benjamin Graham's investment techniques and frequently use strategies from the father of value investing to uncover interesting Canadian stocks. With markets looking a bit shaky in recent days, it's an opportune time to focus on Mr. Graham's defensive approach, which I've used profitably for over a decade" Stingy Investor Tip Sheet The Best of Stingy Links Stingy Links: Academia Why college may be free "...there will always be students able and willing to pay for a traditional college experience and for them it will be a worthwhile investment. But for the vast majority, from a financial standpoint that kind of education makes no sense and is fast becoming unnecessary. He believes the higher education revolution is coming soon and will happen fast - perhaps fast enough to keep the next generation from finishing school with debts they may never be able to pay." Stingy Links: Behaviour The bad luck of winning "From one point of view - the point of view of lottery officials - you couldn't ask for more ideal winners than the Hills. Mark works for a meatpacking plant. Cindy is a clerical worker who was laid off in June 2010. When they were introduced to the news media on Friday, their adopted daughter in tow, they talked about how the money might allow them to adopt another child. They said they were going to help various relatives pay for college. They insisted that the money wouldn't change them. The only extravagance they mentioned was a red Camaro that Mark wanted. They made winning the lottery seem downright heartwarming. But it's not. On the contrary, lotteries may well be the single most insidious way that state governments raise money." Stingy Links: Bonds One for the ages "The next bankruptcy cycle, whether in 2 or 3 or 4 years, is going to be one for the ages." Garbage for brains? "Corporate bonds, still carrying all the idiosyncratic risks of single companies, are priced as if they were safer than Treasurys." Last refuge of scoundrels "Governments involved in financial repression (keeping savings rates below the inflation rate) encourage their citizens to do stupid things by reaching for yield. Remember, most people think of yield as a magic chicken that lays eggs on schedule, and never gets sick or dies. Those who truly understand markets know that yield is an allocation of free cash flow, and that many businesses can.t control their free cash flow, so dividends are less than fully certain." Stingy Links: Books Taleb mishandles fragility "Another key to understanding Taleb is that he has a French post-modern tendency to write to impress rather than explain. He provides hundreds of loosely related anecdotes, reminding me of the Talmud quote that 'when a debater's point is not impressive, he brings forth many arguments.'" Stingy Links: Brokers Virtual Brokers becomes ETF leader "I think it is fair to say that Virtual Brokers now offers the most compelling suite of services to ETF investors. I have often discouraged people with small accounts from using ETFs because the trading costs can make them far less efficient than index mutual funds. But with VB, you can now add new money to your portfolio every week or every month at no cost: you'd only pay commissions once or twice a year if it becomes necessary to trim a holding or two while rebalancing." RBC Direct Investing disappoints "It came to our attention recently that earlier this year, RBC's discount brokerage, RBC Direct Investing, ceased to offer funds sponsored by Leith Wheeler, Mawer and Steadyhand. The move was described by RBC as a "business decision," and we assume this reflects the fact that the funds offered by these firms do not pay trailers, and thus RBC does not receive any revenue from their sale. If this is indeed the reason behind the decision, it is not a strong one." Stingy Links: Buffett Charlie talks to Warren and Carol "Warren Buffett and Carol Loomis on the book 'Tap Dancing to Work'" A compilation of Buffett articles "If you have an hour or so and are interested in reading some of Mr. Buffett's works check out the following articles available online. And prepare to be amazed by a guy who has made some astonishingly prescient market calls despite claiming to have no idea where the markets are headed short-term." Buffett on CNBC: Summary "Buffett was on CNBC this morning. Who has time to sit in front of the TV from 7:00 - 9:00 am? Only hardcore Buffett-heads would click through and watch all the videos or read the full transcript. So here are some notes." Stingy Links: Christmas Merry Christmas! "Merry Christmas! Oh, and a "Bah! Humbug!" to all. ;-)" Stingy Links: Debt Taxes, inflation, default "Buffett is uncomfortable with the idea that the Fed can expand its balance sheet indefinitely. He doesn't know why it won't work, but he knows that there are no free lunches, and wonders what might happen as a result." Stingy Links: Dividends You do the math "One of the nice things about dividends is that they're taxed at a lower rate than interest or other income. Most people know that. What they may not know is that, depending on the province, it's possible for an individual with no other sources of income to earn nearly $50,000 in dividends without paying any tax at all." Stingy Links: Economics Deck the halls with macro follies "Each year, our attention turns to the holidays... and to holiday consumer spending! We're told repeatedly that, because consumer spending is 70 percent of measured GDP, such spending is vital to economic growth and job creation. This must mean that savings, the opposite of consumption, is bad for growth. This view of macroeconomics was first popularly asserted by Thomas Malthus in 1820, nearly 200 years ago." Saving economics from the economists "Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship. The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate." Stingy Links: Economy Should we worry about rising interest rates? "But the Fed has only limited power to control interest rates. And sharply higher yields would be far from unusual. For instance, 30-year Treasury bond yields are currently under 3 percent. As recently as last year, they topped 4.5 percent, and in early 2000 they briefly exceeded 6.5 percent. Because of the long maturity, a single percentage point rise in rates would translate into roughly a 20 percent decline in the value of long bonds." Not enough Canadian content "Every one of the ailments we imagine ourselves to be suffering is a reality in the United States: where our incomes are growing, theirs are stagnating; where poverty here is at record lows, there it is at record highs; where inequality in Canada has not grown in recent years, in the United States it has surged." Stingy Links: Fun The guide to trading candy "Everything you need to know to get ahead in candy trading." 21 reasons why you should never date an economist "7. On average they are pretty mean." Stingy Links: Government Zero-Sum doesn't add up "Is life like a pizza, where if some people have too many slices, other people have to eat the pizza box?" Backseat drivers "Yet our private sector is forever being treated as if it were, in fact, part of the public sector. I don't mean the normal laws and regulations to which all of us are properly subject, so far as our actions might cause harm to others. I mean the habit of certain busybodies, in government and out, to dictate how private firms should run their business, just as if the backseat drivers were the owners." Kindly note the impending bankruptcy "You cannot simultaneously enjoy American-sized taxes and European-sized government. One or the other has to go." [Some colourful language.] Heading over the fiscal cliff "Even if the United States slips back into recession in the short-term, the fiscal cliff's economic prescriptions will make it better in the long-run: The Congressional Budget Office estimates that, a decade after going over the edge, debt will be 58% of GDP - which is much better than 100%." Pay giveaway "From coast to coast, states are cutting funding for schools, public safety and the poor as they struggle with fallout left by politicians who made pay-and-pension promises that taxpayers couldn't afford." Manitoba credit union depositors take note "An experienced accountant with more than two decades of experience in government, Mr. Dalgliesh said he had been relegated to the Manitoba Information Technology Branch after trying to blow the whistle on Crocus, a disastrous labour-sponsored investment fund." How to burn $50 billion "Ottawa has increased by $50-billion the amount of residential mortgages that it is willing to guarantee. But this time the Canada Mortgage and Housing Corp., the biggest provider of mortgage default insurance, is not getting any. Instead, the additional backing is going only to private-sector players such as Genworth Canada, who will see their maximum raised to $300-billion from $250-billion." Stingy Links: Hallett Low bond yields reveal stark choices on risk "In the course of attending several client proposals and meetings over the past several weeks, a common thread has emerged. Since bonds are needed to limit total portfolio risk, they also limit potential total returns. And this is causing investors to have to choose whether risk or return is more important." Bond bears' growl is all noise "Without failure, for my entire 18+ year career the overriding expectation has been for interest rates and bond yields to rise from their 'historic lows'. My start was in 1994 - notable since that year stands alongside 1979-80 as the worst bond market in North American history. That year, however, was immediately followed by one the best calendar years on record for North American bonds - comfortably recouping 1994 losses and then some. After all this time, the same 'rates must rise' argument continues to proliferate. It's true that the lower that yields fall, the less they can continue falling. That's a mathematical fact. But that alone doesn't mean that yields are bound to rise. And save for one grim scenario, a rise in bond yields is no death sentence for bonds." Private REITs require careful due diligence "In the early days of income trusts - the late 1990s - portfolio manager Rick Howson used to talk about whether a trust's 'brains' were inside or outside of the 'body'. (He managed Saxon High Income, now known as Saxon Dividend Income, one of Canada's first income trust mutual funds.) Howson preferred trusts where the management 'brains' resided inside of the trust 'body' - in large part for governance reasons. It's no wonder he preferred this structure. A group of companies provide services to the REIT that I reviewed ranging from property due diligence to day-to-day property management and sales (i.e. attracting investors into the fund). There are two problems with this structure. First, each of the companies are completely outside of the REIT structure. Second, each is owned by the REIT's co-founding general partners. While I didn't not delve into this issue further, this structure has potential conflicts all over it. I could not find a single word even mentioning that a ! conflict exists, let alone how the REIT deals with this conflict." Income trust fans have no reason to cry "For many income-oriented investors October 31, 2006 will forever be etched in their brains. That was the day that our Federal Finance Minister lowered the tax boom and ended the tax arbitrage of income trusts. The market reacted by slicing about 17% from market prices of trusts to reflect the tax impact of the announcement. Despite the massive outcry at the time - and since - it's hard to find reasons for trust investors to shed any tears." Stingy Links: Indexing When cheap funds cost too much "Exchange-traded funds have quickly become one of the cheapest and simplest investing tools in the world. They also are the raw material for an increasingly popular but potentially expensive and confusing way to invest." Why do Value Investors like Indexing? "In general, most value investors like indexing. Buffett and many others agree on this. But why? 1) Most value investors that I have known want ordinary people to have an option of doing pretty well, without investing with them, because the minimums are too high - investing in index funds fits that... 2) The second reason is less noble. We like less competition." Stingy Links: Markets The Insourcing Boom "What has happened? Just five years ago, not to mention 10 or 20 years ago, the unchallenged logic of the global economy was that you couldn't manufacture much besides a fast-food hamburger in the United States. Now the CEO of America's leading industrial manufacturing company says it's not Appliance Park that's obsolete - it's offshoring that is. Why does it suddenly make irresistible business sense to build not just dishwashers in Appliance Park, but dishwasher racks as well?" Save more, work longer "AQR Capital co-founder on the fiscal cliff and why he sees challenging times ahead for the U.S. economy." The illiquidity premium "This paper examines the illiquidity premium in stock markets in 45 countries. The premium is the excess return on high-illiquidity stocks minus low-illiquidity stocks across volatility portfolios, after controlling for volatility. The average monthly premium is 0.95% (0.44%) for equally-weighted (value-weighted) portfolio return. After controlling for six common global and regional risk factors, the monthly alpha is 1.04% (0.54%). The premium is much higher for emerging markets than it is for developed ones and it is lower in countries with better disclosure and legal\governance rules. We document significant comovement of country illiquidity premium with both the global and regional average illiquidity premiums." The real deal "Perhaps none of this would matter if the bad news was already reflected in share prices. The biggest bull markets have started when shares looked cheap. But on two crucial measures - the cyclically adjusted price-earnings ratio (as calculated by Robert Shiller of Yale University) and the dividend yield - the American stockmarket looks more expensive than the historic average. Some people may think that low real rates will ignite an equity bull market. But history does not suggest that will be the case." Fitting factors into the formula "For this issue's Morningstar Conversation, we talk with two quant-investing legends. Cliff Asness, co-founder of AQR Capital Management, and Robert Arnott, chairman of Research Affiliates - to gain insights on where academic theory is being practically applied in the marketplace." Low risk stocks outperform "The fact that low risk stocks have higher expected returns is a remarkable anomaly in the field of finance. It is remarkable because it is persistent - existing now and as far back in time as we can see. It is also remarkable because it is comprehensive. We shall show here that it extends to all equity markets in the world. And finally, it is remarkable because it contradicts the very core of finance: that risk bearing can be expected to produce a reward." The Halloween Indicator "We use all available stock market indices for all 108 stock markets and for all time periods to study the 'Halloween indicator' or 'Sell-in-May' effect. In total 55,425 monthly observations over 319 years show winter returns - November through April - are 4.52% (t-value 9.69) higher than summer returns. The effect is increasing in strength: The average difference between November-April and May-October returns is 6.25% over the past 50 years. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons. The data allows us to address a number of (methodological) issues that have been raised with respect to the effect." Merton vs. Low Vol "Low volatility investing is becoming more popular, but the question is perhaps it could be better captured via a more inclusive metric of volatility. The Merton model of default popularized by Moody's KMV is basically a function of two inputs: volatility and leverage. If this model is correct, then a probability of firm failure is better captured than mere volatility alone, and perhaps it also captures the true, fundamental volatility that is driving the low vol effect." Multiclass shares suffer "In the past decade, the number of U.S. companies with controlled share structures has climbed higher, but a new study found their investors sometimes suffer from it." An old friend: the stock market's Shiller P/E "It's been a long-time since we've discussed this, but since it's actually the source of some current controversy, now seems like a good time to re-examine the valuation of the entire U.S. stock market, and particularly the relevance and meaning of the Shiller P/E, a measure we have favored in the past." Stingy Links: Montier The flaws of finance "The problems inherent in VaR are further amplified by the use of short runs of data to estimate the inputs. This creates an even more pro-cyclical element, adding to the problems of VaR. If the immediate past is a period of tranquillity, then the future is held to be the same. If a risky asset, let's say a CDO, happens to have been less volatile than U.S. treasuries over the last couple of years, the model says (with a straight face) that the CDO is less risky than treasuries!" Capital preservation and financial repression "Essentially, Bernanke's first commandment to investors goes something like this: Go forth and speculate. I don't care what you do as long as you do something irresponsible." Stingy Links: Real Estate Shaky foundations "When Dennis Gilmore gathered financial analysts and investors on a conference call last summer, the head of California-based First American Financial Corp. had some troubling news. It was what he referred to bluntly as 'the situation' up in Canada. The Los Angeles-area insurance company was losing tens of millions of dollars due to hidden problems in the Canadian housing market, and there were no assurances that the bleeding was going to stop." Housing affordability crisis "For just the second time in the past century, the country's housing market is pushing the limits of affordability, according to key statistical measures, shutting many potential buyers out of the market, and making it harder for those who have already taken the plunge to pay off their mortgages." Stingy Links: Science Half of the facts you know are probably wrong "The field of scientometrics - the science of measuring and analyzing science - took off in 1947 when mathematician Derek J. de Solla Price was asked to store a complete set of the Philosophical Transactions of the Royal Society temporarily in his house. He stacked them in order and he noticed that the height of the stacks fit an exponential curve. Price started to analyze all sorts of other kinds of scientific data and concluded in 1960 that scientific knowledge had been growing steadily at a rate of 4.7 percent annually since the 17th century. The upshot was that scientific data was doubling every 15 years." Stingy Links: Stocks Acquisitions: Winners and Losers "The winner in public company acquisitions is easy to spot and it is the target company stockholders, who gain about 18% over the 41 days. On average, bidding company stockholders have little to show in terms of price gains - the stock price for acquiring firms drops about 2% during the announcement period and about 55% of all acquiring firms see their stock prices go down. Note that while the percentage price drop is small (relative to the price increase for the target firm), acquiring firms are typically much larger than target firms and the absolute value that is lost by acquiring firm stockholders from acquisitions can be staggering. A study of 12,023 acquisitions by large market cap firms from 1980 to 2001 estimated that their stockholders lost $218 billion in market value because of these acquisitions. While this number was inflated by some especially bad deals done between 1998 and 2000, they illustrate the potential for massive value losses from acquisitions and the ! reality that one big, bad deal can undo decades of careful value creation in a company." Stingy Links: Taxes The long arm of Uncle Sam "New U.S. laws targeting overseas tax cheats have not only left a million Canadians facing the potential of financial ruin, but have put local credit unions in an impossible bind." G rard Depardieu, the heroic exile "Over 45 years, Depardieu said, he had paid 145 million euros in tax, and to this day employs 80 people. Last year he paid taxes amounting to 85 per cent of his income. 'I am neither worthy of pity nor admirable, but I shall not be called 'pathetic',' he concluded, saying that he was sending back his French passport." How Apple avoids paying billions in taxes "Thanks to a complex network of offshore accounts and cleverly named subsidiaries, Apple, the world's most valuable company, paid just $713 million on its $36.8 billion in foreign earnings last quarter. That amounts to a rate of just 1.9 percent, a figure that makes Mitt Romney's 14.1 percent effective tax rate look downright generous. And believe it or not, Apple actually reduced its foreign tax rate by nearly 25 percent as the company's market cap soared to new heights this year. According to the Associated Press, it was 2.5 percent at this time in 2011. Did Apple get a tax cut? Nah, it just got better at avoiding the IRS." Income malaise complicates tax talks "If the two parties fail to come to a deal by Jan. 1, taxes on the average middle-income family would rise about $2,000 over the next year. That would follow a 12-year period in which median inflation-adjusted income dropped 8.9 percent, from $54,932 in 1999 to $50,054 in 2011." Sponging boomers "The IMF estimates that fixing America's fiscal imbalance would require a 35% cut in all transfer payments and a 35% rise in all taxes - too big a pill for a creaky political system to swallow." Stingy Links: Value Investing Ryan Morris, activist value investor "When an activist investor like Carl Icahn tries to take over a household brand, it plays out on CNBC. Most shareholder struggles occur when little-known investment funds try to take over little-known companies like InfuSystem. Of the more than two dozen activist battles in 2012, most involved companies with a market value under $50 million." Simple but not easy "Tobias Carlisle makes the case for quantitative value." Stingy Links: World Hey, small spender "This slowdown is partly owing to lower prices for Canada's resource exports, weak demand for its goods from Europe and a strong currency. But home-grown factors have also played a part." | ||||
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