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David Snowball's October Commentary Is Now Available
Thanks to all who contribute to this great publication.
David's remarks about valuations and value (actually, the lack thereof) are insightful as usual. Nothing beats having lived through the bear market of the '70s, the tech wreck of 2000, the one day fiasco of '87 and the utter market disaster of '07-'09. Gives you a sense of perspective and realism that simply looking at the charts doesn't convey. Many of today's market participants either weren't around during those episodes or don't remember them.
From Ed - - “There is much to be said in favor of modern journalism. By giving us the opinions of the uneducated, it keeps us in touch with the ignorance of the community.” Oscar Wilde
Yep - Viewing a 30 minute network newscast doesn't shed much light on the critical/relevant stories. It often does however shed light on what the public perceives as important and what the network writers believe will attract the most eyeballs. I think there's some value in knowing that component, especially the first part. Last evening, with all the natural disasters playing out and the glaring friction between the President and his Secretary of State - NBC chose to lead their 6:30 newscast with OJ Simpson's release from prison.
>> ran a valuation screen ... designed to identify “deep value” stocks. The screen looks at earnings yield relative to bonds, dividend yield relative to bonds, total corporate debt. and 10-year price/earnings ratio. Using that test, “in the US not a single stock passes the screen. Not one single solitary stock can be called deep value.”
Is there perhaps a point to be made here about efficient markets / rational-actor judgments in this ever so much wider information age?
"From Ed - - “There is much to be said in favor of modern journalism. By giving us the opinions of the uneducated, it keeps us in touch with the ignorance of the community.” Oscar Wilde.
Amit Wadhwaney is mentioned in David's October commentary in connexion with preferring experience over inexperience. New funds run by older, experienced Managers. The link to his fund doesn't work. But I found this one: (retail shares.) http://www.morningstar.com/funds/XNAS/MOWNX/quote.html
I'd hesitate more than a little, in this case. I fled TAVIX (Third Avenue International Value) in 2008 or 2009, after the fund--- managed by Wadhwaney--- started to tumble downwards. Yes, those were the bad years. But I distinctly recall that TAVIX was underperforming everything else I owned at that time. And I also distinctly recall being very patient, not rushing away from TAVIX just because of a few bad weeks or months.
The performance numbers for this Moerus fund are short-term, of course, since it is new. And those numbers look good right NOW. But why would I want to entrust money (again) with that particular fund manager, now? I'm aware that the Tweedy Browne shop has been in tumult, though perhaps they're back on track, more recently...
You're right. Towle is open to direct purchase, which they say is relatively rare but from welcome investors since those are the folks who are doing something more thoughtful than clicking through a One Source list. Closed through the supermarkets.
On the Nifty 50 indexing issue, we have certainly considered the effects of indexing at our shop. Despite the growing number of smart beta products, over 80% of the AUM of all passive index funds remains invested in cap-weighted products.
Cap-weighted products are by nature momentum-based investments. When momentum is in vogue (such as we saw in the Nifty Fifty era), these products can perform well. But over time, we feel cap-weighting is a terrible way to invest.
We studied the Dow, the S&P 500 and Russell 1000 over time. It turns out that Fama's size effect works well in these larger cap indexes. Over time, there is a size penalty for the biggest companies of the index, and a size premium for the smaller companies of the index.
Bill Ackman wrote in his letter to shareholders in January 2016 that 20 cents of every new dollar invested in the stock market comes via a passive index-tracking fund, and that number grows every year.
Think about this: for every dollar that goes into SPY, 12 cents goes into the largest six stocks of the Dow. For every dollar that goes into XLP, 13 cents goes to Procter & Gamble. Similar story for the other sector ETFs.
Ben Graham wrote that the market is voting machine in the short run, and a weighing machine in the long run. That in the long run, the best businesses attract the most market capital. And that's the way it used to work before ETFs.
Now, the market is hit with a blizzard of crazy votes, and it is throwing the scale off. The largest companies aren't the largest because they are the best. They are the largest BECAUSE they are the largest (and get hit in the face with ETF inflows whether their business fundamentals justify it or not).
We believe actively traded mutual funds are in the best position to take advantage of the opportunities presented by passive indexing.
@PBKCM, it's a very good point but I think you're leaving out a couple of points that I'd love to have your perspective on. First, as long as 20 cents of every new dollar in the stock market goes to passive and 80% of that goes to market cap weighted passive, there's a lot of momentum behind the continued success of market cap indices. Unfortunately, saying active management is positioned to take advantage doesn't help at all with choosing one or more of the thousands of active managers.
When the tide finally changes how high do you think the chances will be for someone to actually pick one or more managers who can beat their benchmark, market cap weighted index? And how many of those will be able to outperform to an extent that gets them out of the hole they're in now?
Second, I wonder a lot why the discussion tends to be dominated by active and passive with the assumption that passive means market cap weighted. If we start with an assumption that you're right, that market cap weighting is distorting the weighing machine but the scale will eventually win, why should we expect active managers to do better than other forms of passive, like equal weighting or factor based? I know other forms of passive are subject to the same argument as market cap weighting, but if one day everyone gives up on market cap passive and decides to put their money in dividend weighted passive, they might outperform 95% of active managers for the next 15 years.
Just for the record, I have always been and still am almost entirely invested in actively managed funds over passive. I just struggle sometimes with the idea that we're all trying to predict the future, almost no one has been able to do that in a reliable way but everyone who engages in these discussions wants us to believe that its a logical exercise and they have the best logic.
There are over 28,000 mutual funds. Roughly 10,000 if you disregard share classes. Trying to pick which ones will outperform is mind-numbingly difficult. Compare stocks, where approximately 1700 stocks comprise 95% of the market cap in the US. Websites like this one are vital for mutual fund investors to separate the wheat from the chaff.
In terms of indexes, let's not forget that the S&P 500 et al are not passive. They are actively managed indexes whose constituents change frequently over time. I don't know what the performance would be for the orginial 500 S&P stocks to date, but it would be far, far worse than what history currently shows.
The hardest thing for active managers to do is to beat their benchmark (after fees) during an uptrend. In my opinion, the managers with the best chance to do so are quant funds. The potential for substantial outperformance from active managers comes in sideways/down markets. I became PM at my shop on 1/31/16. We got long a couple of weeks later and my partner and I haven't had to face a sideways/down market since (although there were a couple of scares). We are busy trying to "win the peace."
@David; "On the Nifty 50 indexing issue, we have certainly considered the effects of indexing at our shop." For those of us who are unwashed like me, who or what is PBKCM ? A. Fund Company Executive ? B. Fund Manager ? C. Fund Analyst ? D. Back Office Worker ? E. Janitor ?: Custodian ? (Being politically correct) F. Joe, The Pizza Delivery Guy ?
White Sox played great in 2005. Jermaine Dye & friends were awesome. I believe they had the best record in the AL that year.
That Astros team won 89 games, finished 11 back of St Louis, and clawed their way to the World Series as a wild card. No one around here expected them to get that far.
It was Biggio and Bagwell's last hurrah. As great as they were, they rarely produced in the postseason. In nine postseason series together, Biggio hit .234. Bagwell .226. Went 5 for 26 combined against the Sox. Sad face.
Okay, since we're off topic anyway, I'll add that my dad took me to my first MLB game - the first Colt .45 game, in '62, an offensive show against the Cubs. The one mental picture left is Al Spangler's triple to the corner in right in the bottom of the first that drove in the first run in franchise history.
@Crash: what's this about tumult at Tweedy, Browne? Would you say more?
My apologies. I'm sincerely sorry. I flipped it in my head. What I had in mind was THIRD AVENUE. Feel free to delete any reference I made to Tweedy Browne in this thread. MOWNX fund manager Amit Wadhwaney was at THIRD AVENUE. THAT'S the fund shop that went through a bunch of stuff, after Marty Whitman retired.
[[original post edited to change the references to TAVIX. Hope that works. David]]
Comments
David's remarks about valuations and value (actually, the lack thereof) are insightful as usual. Nothing beats having lived through the bear market of the '70s, the tech wreck of 2000, the one day fiasco of '87 and the utter market disaster of '07-'09. Gives you a sense of perspective and realism that simply looking at the charts doesn't convey. Many of today's market participants either weren't around during those episodes or don't remember them.
From Ed - - “There is much to be said in favor of modern journalism. By giving us the opinions of the uneducated, it keeps us in touch with the ignorance of the community.” Oscar Wilde
Yep - Viewing a 30 minute network newscast doesn't shed much light on the critical/relevant stories. It often does however shed light on what the public perceives as important and what the network writers believe will attract the most eyeballs. I think there's some value in knowing that component, especially the first part. Last evening, with all the natural disasters playing out and the glaring friction between the President and his Secretary of State - NBC chose to lead their 6:30 newscast with OJ Simpson's release from prison.
Is there perhaps a point to be made here about efficient markets / rational-actor judgments in this ever so much wider information age?
Boy, is THAT ever true.
http://www.morningstar.com/funds/XNAS/MOWNX/quote.html
I'd hesitate more than a little, in this case. I fled TAVIX (Third Avenue International Value) in 2008 or 2009, after the fund--- managed by Wadhwaney--- started to tumble downwards. Yes, those were the bad years. But I distinctly recall that TAVIX was underperforming everything else I owned at that time. And I also distinctly recall being very patient, not rushing away from TAVIX just because of a few bad weeks or months.
The performance numbers for this Moerus fund are short-term, of course, since it is new. And those numbers look good right NOW. But why would I want to entrust money (again) with that particular fund manager, now? I'm aware that the Tweedy Browne shop has been in tumult, though perhaps they're back on track, more recently...
David
On the Nifty 50 indexing issue, we have certainly considered the effects of indexing at our shop. Despite the growing number of smart beta products, over 80% of the AUM of all passive index funds remains invested in cap-weighted products.
Cap-weighted products are by nature momentum-based investments. When momentum is in vogue (such as we saw in the Nifty Fifty era), these products can perform well. But over time, we feel cap-weighting is a terrible way to invest.
We studied the Dow, the S&P 500 and Russell 1000 over time. It turns out that Fama's size effect works well in these larger cap indexes. Over time, there is a size penalty for the biggest companies of the index, and a size premium for the smaller companies of the index.
Bill Ackman wrote in his letter to shareholders in January 2016 that 20 cents of every new dollar invested in the stock market comes via a passive index-tracking fund, and that number grows every year.
Think about this: for every dollar that goes into SPY, 12 cents goes into the largest six stocks of the Dow. For every dollar that goes into XLP, 13 cents goes to Procter & Gamble. Similar story for the other sector ETFs.
Ben Graham wrote that the market is voting machine in the short run, and a weighing machine in the long run. That in the long run, the best businesses attract the most market capital. And that's the way it used to work before ETFs.
Now, the market is hit with a blizzard of crazy votes, and it is throwing the scale off. The largest companies aren't the largest because they are the best. They are the largest BECAUSE they are the largest (and get hit in the face with ETF inflows whether their business fundamentals justify it or not).
We believe actively traded mutual funds are in the best position to take advantage of the opportunities presented by passive indexing.
Keep up the good work, David.
Mark Hulbert wrote an article in May (marketwatch.com/story/why-way-fewer-actively-managed-funds-beat-the-sp-than-we-thought-2017-04-24) based on S&P research suggesting the chances of picking an active manager who can beat their benchmark was 5% over the last 15 years. In the best category, global equity, there was a 17% chance.
When the tide finally changes how high do you think the chances will be for someone to actually pick one or more managers who can beat their benchmark, market cap weighted index? And how many of those will be able to outperform to an extent that gets them out of the hole they're in now?
Second, I wonder a lot why the discussion tends to be dominated by active and passive with the assumption that passive means market cap weighted. If we start with an assumption that you're right, that market cap weighting is distorting the weighing machine but the scale will eventually win, why should we expect active managers to do better than other forms of passive, like equal weighting or factor based? I know other forms of passive are subject to the same argument as market cap weighting, but if one day everyone gives up on market cap passive and decides to put their money in dividend weighted passive, they might outperform 95% of active managers for the next 15 years.
Just for the record, I have always been and still am almost entirely invested in actively managed funds over passive. I just struggle sometimes with the idea that we're all trying to predict the future, almost no one has been able to do that in a reliable way but everyone who engages in these discussions wants us to believe that its a logical exercise and they have the best logic.
There are over 28,000 mutual funds. Roughly 10,000 if you disregard share classes. Trying to pick which ones will outperform is mind-numbingly difficult. Compare stocks, where approximately 1700 stocks comprise 95% of the market cap in the US. Websites like this one are vital for mutual fund investors to separate the wheat from the chaff.
In terms of indexes, let's not forget that the S&P 500 et al are not passive. They are actively managed indexes whose constituents change frequently over time. I don't know what the performance would be for the orginial 500 S&P stocks to date, but it would be far, far worse than what history currently shows.
The hardest thing for active managers to do is to beat their benchmark (after fees) during an uptrend. In my opinion, the managers with the best chance to do so are quant funds. The potential for substantial outperformance from active managers comes in sideways/down markets. I became PM at my shop on 1/31/16. We got long a couple of weeks later and my partner and I haven't had to face a sideways/down market since (although there were a couple of scares). We are busy trying to "win the peace."
But we're preparing for war.
A. Fund Company Executive ?
B. Fund Manager ?
C. Fund Analyst ?
D. Back Office Worker ?
E. Janitor ?: Custodian ? (Being politically correct)
F. Joe, The Pizza Delivery Guy ?
Sorry for getting back to you so late. Busy morning then went to the Astros game!
I'm CIO of a Houston RIA. My partner and I manage a mutual fund.
Regards,
Ted
White Sox played great in 2005. Jermaine Dye & friends were awesome. I believe they had the best record in the AL that year.
That Astros team won 89 games, finished 11 back of St Louis, and clawed their way to the World Series as a wild card. No one around here expected them to get that far.
It was Biggio and Bagwell's last hurrah. As great as they were, they rarely produced in the postseason. In nine postseason series together, Biggio hit .234. Bagwell .226. Went 5 for 26 combined against the Sox. Sad face.
A shot of Al on his '63 Topps b-ball card ...
[[original post edited to change the references to TAVIX. Hope that works. David]]