In the latest edition of the Sound Investing podcast, published by FundAdvice.com, Paul Merriman, Tom Cock and Don McDonald share their insights into why bear markets don't matter, the myth that bear markets are rare and how a 2nd grader in the US is beating 95% of professional portfolio managers.
One warning, the radio show is 52 minutes in length and will suck up 23MB of download.
If these constraints are not a problem, I recommend you take a look at the latest podcast - Sound Investing - August 1, 2008
For those who have limited time and/or limited download capability the following is a brief summary of the more relevant material that was covered:
Bear Markets & Market Timing
The presenters comment that when all the news headlines go totally negative then it is probably time to buy. They also commented on the famous 1981 headline "Death of Equities" which was followed by a boom period in equity markets. In conclusion they stated that nobody knows where markets are going and trying to time markets is futile.
2nd Grader beats the professional portfolio managers
The hosts interviewed young Kevin (now in grade 5 at school) about how he has structured an investment portfolio that has beaten more than 95% of professional portfolio managers. Kevin replied that he bases his decisions on 2 rules of investing gleamed from his father:
1) Don't put all your eggs in one basket
2) Don't play a loser's game
Kevin's portfolio is made up of 3 Vanguard fund (whole of market index funds) one of which is a Vanguard bond fund making up 10% of the portfolio. Kevin commented that he likes Vanguard index funds because he can hold the whole world of investments.
Kevin was asked what he does during a tumultuous investment climate like now with Kevin replying that he buys more units when shares are down.
The hosts also interviewed Kevin's father, a certified financial planner, who is writing a book "How a 2nd grader beat Wall Street". He commented that his own portfolio was not as strong as Kevin's because of tax legacies from previous investments and his inability to control his emotions when it comes to investing. Three key lessons he has learnt from his son is that he :
1) Stops looking at the market and worrying about it.
2) Doesn't sell when emotions may be saying otherwise
3) Doesn't go to cocktail parties (or BBQs) and listen to others talking about their "hot stock picks"
(I think we can all learn a lot from young Kevin!!)
Back to the Basics - Market Timing Systems
Market timing systems do not consistently work. Even if a system does seem to allow you to beat the market, soon more and more investors will use the system so much that it will fall apart.
Much better to invest in the whole economy and wait it out. Over time economies will steadily grow.
Wall Street Analyst Ratings
Tom and Don commented on the recent decision by Merrill Lynch (in the US) to require that at least 20% of companies be under a sell recommendation. The day before the change 13% were sells while the day after 30% of companies were given sell ratings. It goes to show another reason why analyst ratings can't be trusted when such an arbitrary rule is put in place.
Myths and Realities - Bear Markets
A Bear market (officially a 20% fall in the value of a market) happen about every 5 years. There have been 10 since 1960. (in the US) The average bear market is a 30% fall. Unfortunately they are not easily picked. One example showing this is looking at whether poor earnings predict a bear market. Intuitivelty this would seem to make sense. As company earnings fall you would think bear markets would result. Historically it seems this has not been the case. Bear markets often start in times of good news and end in the face of bad news.
The conclusion - get out of the guessing game!!