A few lessons learned

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Sep 16, 2009 2:41 am

Here's just a couple bear market lessons learned this time around.

 
1.  Never second guess an inverted yield curve (3 month/10 year treasury)
2.  Most analysts are wrong.  Most are bullish near the market peak, and turn extremely bearish near the market bottom.
3.  Most investors are wrong.  Most are bullish near the peak, and then turn bearish as if the world will end near the bottom.
4.  When consumer confidence is high, bear market ahead.  When consumer confidence is low, back the truck up.
5.  When the market yields more than a 10-year treasury, buy aggressively.
6.  When spreads hit record highs between high yield and treasuries, buy.
7.  When certain risks have several degrees of separation, watch out (ex: appraisers, loan originators, banks, CDO's).
8.  Odd lot theory.  When the average do-it-yourself investor is buying or selling aggressively a sector or market, do the opposite.
9.  Buy 1-star rated funds.  They will outperform 5-star rated funds the next couple years after a bear market.
10.  Always fire into a declining market, as you can never predict the bottom.  (buy on dips, rotate from short-duration bonds into equities as the market declines, etc)
Sep 16, 2009 7:47 am

Sep 16, 2009 9:09 am

Very nice. 

 
Sometimes it is hard to see the forest from the trees so we all need to back up and look at these "signs".
Sep 16, 2009 9:32 am

Great stuff - the only thing I would question is the "one-star" fund theory.  I think you have to look closer at the fund rather than make a blanket call there.  There are some 1-star funds that are ALWAYS going to be one-star funds.  Although I don't follow the star-rating system at all, I like to glance at them to see how misleading they can be for the average investor.  I have one client that insists on ONLY 5-star funds.  Good grief.  I look at some of the funds and can't believe it.  He also insists on using the Money Mag list of funds.  OK, American AMCAP is on the list.  Seriously?  Who is coming up with these ratings?  AMCAP isn't even the best growth fund at AMERICAN.


One other thing - I have been surprised at how many of my clients got their 401K's out of equities and into fixed accounts VERY early in the meltdown.  I have a few clients that got out at the end of 2007.  Boy I wish I had their foresight .  Unfortunately, they are still out of the market, so they may get back in just in time for the next leg down.
 
Sorry for the tangent.  Your list is great.
Sep 16, 2009 10:20 am

Things like Morningstar are Lipper lost a lot of credibility with me recently when I saw this screen:


http://www.smartmoney.com/fund-quote/?symbol=PVOYX
 
For those of you who don't want to follow that link, it's a Lipper rating that says Putnam Voyager is a 5 "star" fund.  Tells me that there's a lot more to the story than just the current star rating.  BTW, Amcap KILLED Voyager over the last 10 years. 
Sep 16, 2009 11:04 am
rankstocks:

Here's just a couple bear market lessons learned this time around.



1. Never second guess an inverted yield curve (3 month/10 year treasury)

2. Most analysts are wrong. Most are bullish near the market peak, and turn extremely bearish near the market bottom.

3. Most investors are wrong. Most are bullish near the peak, and then turn bearish as if the world will end near the bottom.

4. When consumer confidence is high, bear market ahead. When consumer confidence is low, back the truck up.

5. When the market yields more than a 10-year treasury, buy aggressively.

6. When spreads hit record highs between high yield and treasuries, buy.

7. When certain risks have several degrees of separation, watch out (ex: appraisers, loan originators, banks, CDO's).

8. Odd lot theory. When the average do-it-yourself investor is buying or selling aggressively a sector or market, do the opposite.

9. Buy 1-star rated funds. They will outperform 5-star rated funds the next couple years after a bear market.

10. Always fire into a declining market, as you can never predict the bottom. (buy on dips, rotate from short-duration bonds into equities as the market declines, etc)





Great Post.. I think a better adaptation for #9 would be don't use morningstar or lipper.

Sep 16, 2009 11:05 am
Spaceman Spiff:

Things like Morningstar are Lipper lost a lot of credibility with me recently when I saw this screen:

http://www.smartmoney.com/fund-quote/?symbol=PVOYX



For those of you who don't want to follow that link, it's a Lipper rating that says Putnam Voyager is a 5 "star" fund. Tells me that there's a lot more to the story than just the current star rating. BTW, Amcap KILLED Voyager over the last 10 years.





I compare Morningstar and Lipper, to the rating agencys.. When you have to pay them to rate your bond, just insane. No credibility at all.

Sep 16, 2009 11:22 am

I'd add in, don't allow taxes or "avoiding" commissions to dictate investment decisions.

Sep 16, 2009 12:45 pm
Spaceman Spiff:

Things like Morningstar are Lipper lost a lot of credibility with me recently when I saw this screen:


http://www.smartmoney.com/fund-quote/?symbol=PVOYX
 
For those of you who don't want to follow that link, it's a Lipper rating that says Putnam Voyager is a 5 "star" fund.  Tells me that there's a lot more to the story than just the current star rating.  BTW, Amcap KILLED Voyager over the last 10 years. 





 
I would never buy a fund because it beat Voyager.  It's like buying car because it claims to be better than a Ford Pinto.  Please don't tell me you think AMCAP should be on any "Best Fund" list?
Sep 16, 2009 3:10 pm

I remember when I was at Jones and got to go on my first due diligence trip. It was in Boston visiting good ole Putnam right after the new CEO came in. They had the different teams talking to us....the Voyager team were at the least uninspiring and maybe just dumb. At that point I decided that Putnam was off my "preferred list". Putnam did bring in a ton of young females at a dinner we had at the old South Church, I think it was......

 
That was appreciated by all.
Sep 16, 2009 3:37 pm
B24:
Spaceman Spiff:

Things like Morningstar are Lipper lost a lot of credibility with me recently when I saw this screen:


http://www.smartmoney.com/fund-quote/?symbol=PVOYX
 
For those of you who don't want to follow that link, it's a Lipper rating that says Putnam Voyager is a 5 "star" fund.  Tells me that there's a lot more to the story than just the current star rating.  BTW, Amcap KILLED Voyager over the last 10 years. 





 
I would never buy a fund because it beat Voyager.  It's like buying car because it claims to be better than a Ford Pinto.  Please don't tell me you think AMCAP should be on any "Best Fund" list?
 
We work at Jones...shouldn't every American Fund be on our 'Best Fund' list?
Sep 16, 2009 4:17 pm

Heck no.  I'm not a fan of Amcap.  It shouldn't be on any "Best Fund" list.  Unless it's a "Best of the Middle of the Pack" list.  CIB, yes.  Europacific, yes.  Fundamental Investors, maybe.  New Perspective, yes.  The rest, maybe not so much.  Kind of makes me think that I should start talking to my American Funds clients about a better way to skin the cat.  

Sep 16, 2009 4:49 pm
SometimesNowhere:
B24:
Spaceman Spiff:

Things like Morningstar are Lipper lost a lot of credibility with me recently when I saw this screen:


http://www.smartmoney.com/fund-quote/?symbol=PVOYX
 
For those of you who don't want to follow that link, it's a Lipper rating that says Putnam Voyager is a 5 "star" fund.  Tells me that there's a lot more to the story than just the current star rating.  BTW, Amcap KILLED Voyager over the last 10 years. 





 
I would never buy a fund because it beat Voyager.  It's like buying car because it claims to be better than a Ford Pinto.  Please don't tell me you think AMCAP should be on any "Best Fund" list?
 
We work at Jones...shouldn't every American Fund be on our 'Best Fund' list?
 
Hope you're kidding.
Sep 16, 2009 5:52 pm

Funny Spiff, I had a client come in with a list of the best funds of 2009 from the newspaper listing Voyager as one of the tops...he said "why aren't we buying that"...I arbitrarily picked out 3 or 4 funds that I use and looked at the 5 and 10 year numbers and compared them to Voyager and then he understood!  It did kill ytd though! 

Sep 16, 2009 8:19 pm

No doubt.  Something has changed over there with that fund, that's for sure.  It's actually a top decile fund 1,3,5 years.  It even hits the top quartile @ 10 years.  That's what happens when it has bookend 50%+ years on it's 10 year number.  That's one that you should save for the next time some goober comes in with one of those magazines. 

 
Wonder where it will be when 1999 falls off the chart and it's back to 1 year of outperformance and 9 years of suck?
Sep 16, 2009 9:16 pm

It's a classic hyper-growth fund. Does amazing in up markets, but magnifies losses in down markets. Buy it at the bottom, sell it after massive growth.

Sep 17, 2009 8:28 am
rankstocks:

Here's just a couple bear market lessons learned this time around.

 
1.  Never second guess an inverted yield curve (3 month/10 year treasury)
2.  Most analysts are wrong.  Most are bullish near the market peak, and turn extremely bearish near the market bottom.
3.  Most investors are wrong.  Most are bullish near the peak, and then turn bearish as if the world will end near the bottom.
4.  When consumer confidence is high, bear market ahead.  When consumer confidence is low, back the truck up.
5.  When the market yields more than a 10-year treasury, buy aggressively.
6.  When spreads hit record highs between high yield and treasuries, buy.
7.  When certain risks have several degrees of separation, watch out (ex: appraisers, loan originators, banks, CDO's).
8.  Odd lot theory.  When the average do-it-yourself investor is buying or selling aggressively a sector or market, do the opposite.
9.  Buy 1-star rated funds.  They will outperform 5-star rated funds the next couple years after a bear market.
10.  Always fire into a declining market, as you can never predict the bottom.  (buy on dips, rotate from short-duration bonds into equities as the market declines, etc)


This whole post could have been summed up by saying "Be a contrarian".  That's all you needed to say.

Or, quote Warren, "Be fearful when others are greedy and greedy when others are fearful."

Sep 17, 2009 10:03 am
B24:
SometimesNowhere:
B24:
Spaceman Spiff:

Things like Morningstar are Lipper lost a lot of credibility with me recently when I saw this screen:


http://www.smartmoney.com/fund-quote/?symbol=PVOYX
 
For those of you who don't want to follow that link, it's a Lipper rating that says Putnam Voyager is a 5 "star" fund.  Tells me that there's a lot more to the story than just the current star rating.  BTW, Amcap KILLED Voyager over the last 10 years. 





 
I would never buy a fund because it beat Voyager.  It's like buying car because it claims to be better than a Ford Pinto.  Please don't tell me you think AMCAP should be on any "Best Fund" list?
 
We work at Jones...shouldn't every American Fund be on our 'Best Fund' list?
 
Hope you're kidding.
 
Definitely kidding. Sarcasm sometimes doesn't translate well in forum posts.
 
I haven't sold an American fund in a year.
Sep 17, 2009 11:02 am

I thought so, but as you said, sometimes it's hard to tell.

Sep 18, 2009 2:29 am

Several of my points are contrarian in nature, that is definitely true.  There needs to be several more studies on Behavioral Finance, as several of my points focus on emotion and behavior.

 
Point 9 was more of a statement than anything else.  Many funds that hold up well in bear markets don't position their portfolio's for a recovery.  The same goes for high rated funds in bull markets.  Many managers don't position themselves for some downside protection when a bear market hits.  Therefore, 1-star funds often outperform when bear markets turn to bull or when bull markets turn bear.  That's generally why I like managers that tend to do well over longer periods of time that manage with consistency, and why several 2 and 3 star funds are worth owning.