Monday, January 28, 2013

Mutual Fund Final Four

I just thought I would update everyone on a little contest that I received in a piece of marketing material.  A certain mutual fund advertising company has created a final four mutual fund contest.  Just like the NCAA tournament, the field will be seeded with 64 competitors (funds), and after several weeks only one fund, the top performer, will remain.  (Unfortunately, we cannot pick the original 64).  Surely, the "prize" at the end of this for the winning fund is the fame of being the "March Madness" mutual fund winner.

Although certainly not a perfect experiment set up, I am going to fill out the bracket with the following way and see how things turn out in the end.  I will in all circumstances pick the less expensive over the more expensive fund.  The logic behind this is that if a fund manager is very "active" they will incur higher costs, which they will not be able to overcome.  I have no idea what the results will be, but it should be fun in any event.  Check back in a few weeks to see the results.

Monday, January 21, 2013

A Discussion About Gold

This morning we had an interesting discussion about gold in the office.  Gold has been a hot topic for a few years now so this may be a bit after the fact, but good to discuss none the less.

It is often said that gold has intrinsic value versus our "paper" money (and things denominated it in like stocks).  It is somehow implied that these assets will lose their value, but since gold is a hard asset it will retain it's value.  But, what are you buying when you buy stocks?  Is it just a piece of paper, or an electronic entry in some corporate database?  Or is it something more?  We'd argue that it's much more.  When you buy stock you are buying equity, or ownership, in the companies that produce the goods and services that make the world economy run.  And as owners of that, part of the profits come back to us, the owners of those firms.  The value of stock investments are determined by the market's view of how valueable and or profitable it is to own a slice of the world's economic markets.  When the economic outlook is doom and gloom, stock values fall, and when the outlook brightens, markets tend to rise.  Over the course of human history, the long term direction has been up.

In contrast, what do you get when you buy gold.  Well, you get ownership of a physical commmodity, or input (like sand, steel, cotton, oil, or any other commodity).  [Gold is unique in that it has been used for many many years as a form of money, but sea shells have also served that purpose].  Gold does not make a profit, and it's physical uses are limited.  (True, there is demand for gold to produce things like electronics and jewelry obviously).  In the direst of circumstances you can't eat it, drink it, or burn it for heat.  That being said, gold is often sought after in turbulent economic times as it's viewed as a safe haven.  Gold certainly has had a run in the past few years, but as long term investors it's important to take the long view.  It is not uncommon for commodities to have wild fluctuations in price.  Does anyone remember oil prices in the late 2000s?

The link below is a good comparision between stocks, bonds, and gold.
http://www.investorsfriend.com/asset_performance.htm

There have certainly been stretches of time when gold outperformed, just like there have been periods when bonds have done better than stocks. But if you take the long view there is a compelling case for stocks.  The only other fault I have with this article is that their only comparision to gold for stocks is "large company stocks". This is a very narrow look at stocks.  A truly diversified stock portfolio would have returned much more, and held stocks in the US, abroad, and of all sizes.  A further thing to note is that as a commodity gold can be just as, if not more, volatile than stocks.  We were just checking yahoo finance today, and an investment in GLD is down about 8%  from it's high in 2011, while stock investments in many categories are up double digits.

Thursday, January 3, 2013

2012 Year in Review

Hello Everyone.  Well 2013 is finally here.  It may be a good opportunity for you as an investor to evaluate where you are, where you have been, and where you want to go in the future.

Despite all of the negativity in the air at the beginning of the year, 2012 for the most part was a good year for the markets.  You may be realizing this as you open your 4th quarter statements.  But if you are like most investors, as long as you see the positive returns, you are content to file the statement away and move on to other issues competing for your attention.  This brings me to an important concept in investing called benchmarking. 

I received an anonymous email a few weeks ago asking what I thought a 40lk should have returned this year.  Immediately I knew this was a case where the investor had no idea what returns they should expect, given the funds they owned.  This is truely a sad sceneario, as you can imagine this person, if they have an advisor, has no way to hold the advisor accountable.  Imagine buying a car, and having a breakdown only 3000 miles after purchase.  Most drivers know that that is unacceptable, but if you didn't have a standard of comparison, how would you know?  Imagine how many lemons you would buy and be completely blissful about it if you did not know the standard of quality for cars sold by dealers?

In short, every fund in the fund universe has a "benchmark".  This benchmark is used as a standard of comparison.  It is generally believed that a fund should perform similiar to it's benchmark (or sometimes called an index).  For example, many US large cap stock funds have the S&P 500 as their index or benchmark.  The S&P 500 tracks the performance of 500 of the largest US firms in various industries.  It is generally thought to be a good composite representation of the market for US large stocks.  Mutual funds that trade and own these stocks should perform up to the benchmark, but unfortunately that is not the case routinely.  That my friends is a topic for another blog post.  If you are interested in what your funds' benchmarks are, a great website to visit is morningstar.com.

Jeremy Burri
Veritas Financial