Stock Gurus’ Performance this Year

Guru Focus is yet another website that I monitor.  It shows portfolio holdings and recent actions by world’s most known and respected investors, such as Warren Buffett and George Soros.  The scoreboard section of the site shows gurus’ actual performance for various time intervals.  So how did they fare this year?

Out of 60 managers tracked by the site, all lost money this year.  Only five of them were able to contain their losses to under 30%.  Thirteen gurus lost more than 50% this year; that performance is worse compared to overall market.  Nevertheless, all portfolios for which data was available substantially outperformed the indices over 5 and 10 year periods.

Clearly, all of us stand humbled by the force of the market wipeout this year.  There were no safe havens.  While suggestions to take a long-term view may sound hollow at the moment, that is nevertheless what we have to do.  Severe drops in valuations happened before and will happen again.  But as the guru scoreboard indicates, investors with a consistent long-term strategy come out on top.

This is going to be my last post of the year.  My best wishes for the New Year and a prosperous 2009!

TED Spread Shrinking

TED spread is the difference in interest rates between interbank loans (LIBOR) and U.S. treasury bills. It is a common measure of availability of credit, or fear in credit markets; you can also think of it as a gauge of risk of lending to banks vs. low or near-zero risk U.S. treasury obligations.  Most of us probably haven’t even heard of this term, but became painfully aware of it as the credit meltdown unfolded.

TED spread spent most of the last decade in the range between 0 and 1%; but during the height of the crisis in October-November, it shot to nearly 5%, as the chart on the left indicates.

But since then, it has declined steadily to  1-2% range.  While the spread is still relatively high, that is an encouraging sign that credit markets are returning to normal.  You can monitor current TED spread at Bloomberg site here.

42 Rules for Sensible Investing

My new book, 42 Rules for Sensible Investing, is now available from Amazon.com!

Hedge Fund Liquidations

Hedge funds redemptions and liquidations contribute significantly to current market declines. According to a recent article from CNN.money, hedge fund failures are up 70% compared to a year ago; 7% of them are now gone.  The problems in the industry are threefold.

First, similarly to mutual funds, hedge funds are flooded with redemption requests from panicked investors and are forced to sell their holdings to generate cash.  Second, many hedge funds are highly leveraged, and severe drops in the market cause margin calls, forcing even more selling to meet margin requirements.  And finally, hedge funds sometimes have so-called “high watermark provision”, which means that they can’t charge performance fees unless the fund’s net asset value exceeds its previous peak value.  With little prospects of attaining previous highs anytime soon, many fund managers opt to close down completely, and therefore have to sell all of their holdings, and quickly.

The last two problems are unique to hedge funds — hence the problems with these particular investment vehicles are so severe.  The end of the deleveraging process in the hedge funds industry will help to stabilize the market, and many quality companies that have been oversold due to the reasons stated above will bounce back.

The Lost Decade

This year shapes out to be one of the worst years in stock market history.  For the last 10 years, the market declined(!) by about 15%, also nearly matching the worst 10 year period around the Great Depression.  That’s our Lost Decade.  With statistics like this, it is hard to continue viewing stock market as a wealth generation vehicle.  This article from Charles Schwab presents some historical perspectives on secular market moves, and argues that significant rebounds follow wipeouts such as the one we are now experiencing. While no one can call the bottom and more down moves are certainly possible, the foundation for the next bull market is being created right now.

Market Volatility Chart

Here’s a chart of market volatility for the last year as shown on American Exchange website.  It has come down considerably from its tremendous spike in October-November, but it is still higher than normal.  A decline in volatility to reasonable levels is essential for a sustainable market recovery.

Year 2000 in Reverse

The situation on the stock market today reminds me somewhat of 1999-2000, in reverse.  Back then, everybody knew that stocks were overvalued, but many people were coming up with very convincing arguments that in the “new economy” triple-digit PE ratios are sustainable and justifiable.  Remember that book entitled “Dow 36,000″?  It was claimed that it was different that time.  As we all learned, it wasn’t.

Now, everybody knows that stocks are undervalued. I am seeing a number of articles that explain that these low valuations are here to stay.  The reasons given are deleveraging, higher taxes, and more government regulation of securities markets. The arguments are compelling, but so were those of “Dow 36,000″ author.  Will it be different this time? I don’t think so. During the last century this market endured the Great Depression, two world wars, cold war, and oil embargo, and still managed to rise nearly 200-fold. I don’t have the exact timeframe, but the valuations will revert to their historical norms.