ObdurateSay what? For those who think we haven’t been erudite or scholarly enough in these quarterly reports, we hope your mind will now be changed. For non-English majors, the word “obdurate” means pig headed, inflexible, rigid, unyielding. Not the stuff that makes for a good marriage. You might be hard pressed to find an instance where being obdurate is good. However, in the investment world, you should really hope that your investment vehicles are all very obdurate. If they don’t have this quality, there is no way to maximize the diversification of asset classes in your portfolio.Most of our clients realize that we use very distinct asset class vehicles to build our portfolios. That is because each vehicle must represent a particular size and style and geographical location within the equity universe. Why? Because during most segments of a market cycle, each asset class performs somewhat differently in terms of risk, re...

Same Old, Same OldThere always seems to be some type of unpleasant revelation lurking on Wall Street. It hides in the darkness until its discovery causes surprise. The huge trading loss by J.P. Morgan Chase is in that category. It seemed to take everyone, including most JPMC officials, by surprise. The blatant overvaluation of Facebook's IPO was another type of surprise, especially if you were a retail investor who was "lucky" enough to get in on that "deal." But perhaps the most baffling Wall Street discoveries aren't really surprises, because they are based on circumstances that are fully known, and have been for a long time. Yet these unfortunate lessons seem to continuously repeat themselves, year after year, market cycle after market cycle.Already in 2012, three studies point to some basic investor mistakes that we have been discussing with prospective clients since our company was formed. The first has to do with choosing an advisor. In a recent paper ...

Breaking A Bad HabitSmoking. Talking with your mouth full. Forgetting to put the seat down. All bad habits. Some will kill you; others will simply make you unpopular. But bad habits in investing are the worst, because they are guaranteed to make you poorer!One of the most insidious of these habits is known as Recency Bias. It occurs whenever we use our more recent experiences as a basis for expecting a future event. It happens all the time with the stock market. People often forget about market cycles when they invest. Here is an example. The NASDAQ index had these annual returns from 1992 until 1999:In the first quarter of 2000, investors purchased more shares of NASDAQ Index mutual funds than any previous quarter in history. Can you guess what happened next? Here are the following three years' returns for the NASDAQ Index:Why in the world would investors gobble up shares of a volatile index that had gone up (almost) nine years in a row and finally spiked to a record setting 85.6%...

The Little Engine That Couldn'tThere’s a 100 year-old heartwarming story about a little engine that persevered by repeating “I think I can, I think I can,” until it was finally able to pull a line of railroad cars up a mountain. Small, but mighty. In the investment world, we have our own diminutive hero, known as the Small Cap asset class. You probably remember hearing that this asset class has superior long term performance compared to the behemoth blue chip engine that is the Large Cap benchmark – the S&P 500 Index.You might also think that the best overall performing stocks within the Small Cap asset class are the tiny, hard working growth companies – the ones that chug along and grow and grow until they finally reach a new, larger size asset class at the top of the Wall Street mountain. But that’s where these two comparisons appear to derail.We have been a long time proponent of Dimensional Fund Advisors (DFA) asset class m...

"Lieutenant Dan got me invested in some kind of fruit company. So then Igot a call from him, saying we don't have to worry about money no more.And I said, 'that's good. One less thing.' "-- Forrest GumpOne Less Thing. Or Was It?That’s the $64,000 question, because we don’t actually know what Forrest has done with his Apple stock since the bus picked up his son at the end of the movie. Investors who have watched Apple’s advance over the past couple of years probably think that it was a “no brainer” hold for Mr. Gump. After all, the stock has advanced 400% in the last 18 months. If Forrest still held it, it would be worth over 100 times what it was worth during the decade he bought it.The problem, of course, is that he would have to be crazy to have held it this long. Why? Because during his holding period, the stock price was lower in 2003 than it was in 1987. That’s 16 years of dead money - zero or negative return on investm...

Morningstar Ratings: A Study in Self FlagellationWe have nothing against Morningstar, the ubiquitous mutual fund research service. In fact, it’s an American success story. In 1982, its owner started the company with an $80,000 initial investment. The company is now worth $3.1 billion. It’s not that Morningstar doesn’t provide some helpful information; in fact its databases contain hundreds of data points for virtually every mutual fund. But upon further review of its mutual fund Star Ratings, Morningstar’s value may be suspect.The real problem occurs when mutual fund investors use Morningstar’s “Star Ratings” as a reason for purchasing or selling a fund. And unfortunately, these Star Ratings are perhaps the most used aspect of Morningstar’s information for the average investor. One would think that their Star Ratings would have some predictive value. In other words, buying a 5 Star Fund (highest rating) should get you better results than ...

They Put The Goo In “Market Guru”If you are getting the impression that we are not too impressed with market prognosticators, you would be correct. We continually remind you of this fact because of our belief that market forecasters inflict meaningful damage to investors’ performance results. For example, as was pointed out in a blog entry* on The New York Times website earlier this year, three different “famous” market gurus have come out with three really, really different forecasts.* NYT.com – 1/12/11 Bucks blog: The Danger of Stock Market Forecasts by Carl RichardsRobert Prechter, a devotee of the Elliot Wave Theory, made some very accurate calls two or three decades ago. In July 2010, when the Dow Jones Industrial Average was 9,600, he predicted that over the next 5 or 6 years the Dow would plunge below 1000. Nine months later the Dow is over 12,300, which is a lot closer to its all time high than it is 1,000.Robert Shiller of Yale has put his S...

The Sky Seldom Falls"I've been through some terrible things in my life, some of which actually happened."- Mark Twain"How much pain they have cost us, the evils which have never happened."- Thomas Jefferson"But what torments of grief you endured from the evil which never arrived."- Ralph Waldo EmersonAs the three smart guys above say in varying shades of tasteful English, we tend to worry about a bunch of stuff that never actually happens. Y2K, Bird Flu, and Killer Bees would probably fit in this category. We may laugh about them now, but I assure you that the first time you heard about them, there were probably no chuckles. In fact, most likely just the opposite reaction occurred. The human psyche will often travel to the farthest, and often scariest, realms when trying to figure out how to prepare for a potentially negative event. That's just how most of us are built.Unfortunately, that's often not the best way to behave in the investment wor...

The View From The Bottom Of The PondPerceptions often differ depending on your vantage point. When we watch a duck in water, it typically appears to be gently gliding along, barely making a ripple on the surface. But that calm, serene assessment would change greatly if you were lying on your back on the bottom of the pond. In that case, you would see the rapid, almost frantic pace of webbed feet churning beneath the reflective water's surface. Simply put, there's a lot going on under there that most of us don't see from our perspective.Asset class investing isn't much different. Some view this type of investing as akin to watching paint dry. No excitement. No trading. Occasional rebalancing. Where is the dramatic, frenetic pace that many expect, especially after watching talking heads advising buys, sells, holds, run for your lives, etc.? Actually, there is indeed a lot going on, even when you own a seemingly inert asset class mutual fund. As an example, let's take ...

A Fool and His Money Are Soon Parted (Hers Too)We're not quietly intimating that investors who buy stocks based on research reports are foolish. Rather, we are emphatically shouting it from the rooftops. You may remember that after the high tech stock craze of the late 1990's, and their subsequent huge crash in the early 2000's, the SEC handed out some huge fines and reached settlement with ten Wall Street firms. These firms agreed that they would separate their investment banking business from their research departments.Why the separation? The SEC noticed that when a public company hired a Wall Street firm to raise capital, that firm's research department just happened to overwhelmingly recommend that their retail customers buy that stock. It gets worse. Evidence then came to light that a certain firm's research staff actually made in-house jokes about how poor the buy-rated company's financials really were. This finally got the SEC into gear. That's when W...