Sunday, April 02, 2006

A bit of investment nonsense from the NY Times...

This guy from the Guardian got it right:

1 Play with the wind at your back. I mentioned once "Old Partridge", a character in Reminiscences of a Stock Operator, Edwin Lefèvre's account of the career of Jesse Livermore, who at the height of his success in the 1920s was among the richest men in America. Old Partridge deflects every entreaty to discuss a particular price or share with the same reply: either "it's a bull market, you know" or "it's a bear market".

In other words, the real money lies in calling the direction of the general market. In my case, I was obliged to abandon plans to go short on many stocks (or bet that the price would fall). I was losing money that way. It was a bull market.

And how to determine bull and bear markets? I offer the view of a chartist chum who was honest about the supposed art of reading graphs. "If you can't see it from six feet away, it's not a trend," he would say.

2 Let winners run. The first stock the portfolio bought last September was the mining group Anglo American. The price was about £14.50. I would not have believed at the time that it would hit £22 by February. I caught most of the rise simply by resisting the temptation to play safe and get out. A couple of Anglos can pay for a lot of mistakes elsewhere.

3 Cut losers. It's very old, and very good, advice. If you set your maximum loss on any one position at 2% of your capital, you've got at least 50 bets. You'll be in the game for a while.

4 Don't cut losers too early. The rider to the above. My "ones that got away" file bulged: I was shaken out of P&O and the Pru by falls of 5% or so and both stormed away afterwards. Stopping losses at 10% would have been better.

And the other stuff he said, too; but these 4 are relevant in light of the pronouncement in today's NY Times:

Consider that the average European stock fund has soared more than 14 percent a year, annualized, over the last five years. During this same stretch, funds that invest in domestic blue-chip growth stocks have returned less than 2 percent a year.

Some strategists say that if more than half of the world's total stock market capitalization resides in companies based outside the United States, about half of your equity portfolio should be held in foreign shares. That argument has certainly gained traction in light of the recent successes overseas...

New research by S.& P. would seem to indicate that keeping around 25 percent of your equity exposure in foreign securities would be optimal.

Having some foreign exposure clearly helps diversify a portfolio. From 1970 to 2005, a portfolio invested entirely in domestic stocks had a standard deviation — a popular measure of volatility — of 16.8 percent, according to S.& P. By comparison, a portfolio that was 75 percent invested in domestic stocks and 25 percent in foreign shares had a standard deviation of 16.4 percent, implying a slightly less bumpy ride.

But beyond a 25 percent international allocation, the more foreign stock you own, the more volatile your portfolio becomes — without generating much in additional returns...

Of course, investors may sometimes choose to slightly overweight or underweight foreign stocks, as opportunities arise. John Thompson Jr., portfolio manager at Ibbotson Associates in Chicago, says he thinks that an aggressive investor should feel comfortable putting as much as 30 percent of total equity exposure overseas.

But it's also important, Mr. Thompson said, not to deviate too much from your long-term asset allocation strategy.

That is especially true if you plan to hold emerging-market shares. Investors should probably keep their emerging-market exposure from growing beyond 5 percent of their total portfolio, he said. After all, the whole point of having a long-term asset allocation strategy is to reduce your portfolio's risk.

The conflation of foreign mature economies with emerging economies, and the blissful ignorance of what the speculator said above all is cause for consternation. The Republicans have trashed the US economy; and going against a "trend" dating back to 1971 - which included the 1980-2000 bull market in the US- is kind of fallacious.

Emerging markets emerge. Economies mature. Other economies decline. The idea that somebody could have crunched the numbers in say, Argentina, in the late 90s and come to different conclusions other than "get that money the hell out of the country" is ridiculous, as ridiculous as thinking that somehow the US equity situation is unique to the world. Why should that be? It only is if there is the assumption that the rest of the world has faith in US equities that it might be unique.

But it might be becoming unique in a bad way. And that's why one would be crazy to follow the "conventional wisdom" here.

Let's see some reform of the fundamentals of the US economy first.

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