last week’s final score: index funds 1, active management 0

After one of the craziest rides anyone can remember, with the Dow dropping over 1000 points in a session for the first time and everybody learning the definition of “Rule 48,” stocks ended up pretty much where they began last week. Incredibly, the Dow, S&P and Nasdaq were actually up modestly by Friday’s close. Besides Xanax manufacturers, there were two clear winners in all of the sound and fury signifying not very much: the market’s croupiers—the brokers and Wall Street traders who collect commissions on stocks, bonds, and other financial products—and Mr. John Clifton Bogle.

As a Princeton graduate student in the 1970s, Bogle invented the index fund. Today almost 1/3rd of all mutual fund assets are invested in index funds and Bogle’s Vanguard Group is the nation’s largest money management firm as measured by assets under management. Study after academic study shows that the S&P 500 has produced a 9 percent annual return since World War II, while the average actively-managed mutual fund has delivered about 7.5 percent (after deducting the 1.5 percent average “expense ratio”). The typical retail investor lags far behind, earning closer to 5 percent a year. Weeks like this past one are a big reason why.

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a few things to consider before you go bargain hunting

Warren Buffett famously advised investors to “be greedy when others are fearful.” With stocks all over the world getting clubbed in recent days, there is no shortage of fear out there. The question is: will all that negative sentiment become another “wall of worry” that the markets climb to new highs? I can’t say for sure. No one can. I will say that during yesterday’s gruesome selloff, I spent more time adding to my fund’s short book than searching out potential buys. That’s because, even with the Dow and S&P suffering their worst weekly declines in four years, I still see wildly, even stupidly overvalued companies everywhere I look.

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the oil crash isn’t the only thing killing energy companies

A few months ago I traveled to Houston and wrote about the increasingly upbeat mood I encountered at the energy companies I visited there. I came away from that trip thinking that well-managed service and exploration firms might be attractive investments. Many had declined 40-60 percent in response to oil’s decline from $104 last summer to the low-$40s by late fall. As oil prices rose past $60 this spring, I suspected these stocks could eventually rally.

So much for that idea.

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lone star gems

Last week was no picnic for stocks. With oil prices continuing to implode and a rate hike looking more and more imminent, you’d think a Texas-based homebuilder would have dropped along with the rest of the market. Instead, LGI Homes (LGIH) rocketed from $19 to an all-time high above $24 after it demolished earnings expectations.

As they say in sports, that’s why you play the game.

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tesla, fitbit, and what happens when wall street forgets a fad is a fad

As I highlight in the introduction of my book Dead Companies Walking, retired New York money manager David Rocker once wrote that there are three types of shorts:  fads, frauds and failures. I generally focus on the latter of the three by seeking out and shorting troubled companies that could soon go broke. Shorting fads, on the other hand, is tricky. Timing is everything, and predicting exactly when a fad fizzles out is almost impossible. Remember “Pogs,” those weird little toy discs that kids briefly went nuts for a while back? It seems unbelievable in retrospect, but two Pog-related companies came public during that mania. Both went bankrupt soon after the craze subsided, but if you’d shorted either of them beforehand, you would have needed some serious intestinal fortitude to stay in the position.

The trickiest fad businesses to short are the ones that grow so popular in such a short time, even seasoned investors become convinced they will turn evergreen. This is particularly true for products that are popular among financial workers and the broader investor class. After all, if the folks buying, selling and analyzing stocks love a company’s products, they’re more likely to overestimate its value and its longevity. As I write in my book, an analyst at a prestigious brokerage once swore to me that there would soon be ten times as many rollerbladers as bicyclists. Before I hung up the phone and shorted the stock of the second largest inline-skate maker at the time, she happily informed me that she and many of her colleagues were avid rollerbladers.

The two biggest “stealth fad” stocks in today’s market could very well be Fitbit (FIT) and Tesla (TSLA). Neither is likely to go the way of Pogs or rollerblades, at least anytime soon. But, like rollerblades, they’ve both benefited from their excessive popularity among the very people buying and analyzing their stocks.

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the five best ways to waste your money

I’m always amazed—and a little horrified—at how poorly my industry treats its customers. Unlike many service professions, the licensing requirements for financial advisors are minimal, and far too many so-called “wealth managers” manage their own wealth first by promoting what John Bogle calls “salesmanship over stewardship.” Like real estate agents or used car salesmen, they push big ticket, financially destructive products with sizable embedded commissions.

But as incompetent and flat out dishonest as folks in my business can be, John and Jane Q. Public are often their own worst enemies. Through greed, gullibility, or gross negligence, people routinely blow large sums of their hard-earned savings. These five mistakes are, by far, the best ways to torch your net worth:

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once bitten: will the “FANGs” keep feasting?

Jim Cramer has been talking up what he calls the “FANG” stocks again: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG). Cramer has touted these stocks for several years now, and for good reason. They’ve far outpaced the market in that time. Throw in a second world-beating “A” stock, Apple (AAPL), and the five companies are worth a staggering $1.8 trillion in combined market capitalization, or roughly 17 percent of the NASDAQ composite and 9 percent of the S&P 500.

There’s no doubt about it: if you haven’t been in these stocks over the last few years, it’s been damn near impossible to beat the indexes. (And God help anyone who dared to short them.) But, past results aside, will the FANG stocks continue to bite off big gains in the future? Investors certainly seem to think so. Facebook’s early struggles as a public company seem like ancient history. Last week, Google added almost $60 billion in market cap in a single day and Netflix popped ten percent on strong user growth. As for Amazon, it just keeps heading higher and higher, profits be damned.

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today’s tech boom is missing something: technology

I’ve been buying and shorting tech stocks since floppy disks were floppy. In all that time, I’ve always been amazed at the steep premium investors are willing to pay for anything even remotely tied to the sector. In the 1990s, all you had to do to command a massive valuation was slap a “.com” onto your name. That is not an exaggeration. In 1998, I shorted a company called 7th Level that was two weeks away from running out of cash. It changed its name to 7th Level.com and its stock jumped from $2 to the mid-teens in a single day. These days, private companies in the tech space–so-called “unicorns”–are all the rage. Few, if any of these billion dollar babies have earned a cent. Commonsense says most of them never will. And yet, VC firms and other private backers are perfectly willing to throw more cash at them in round after round of financing.

Investors justify these lofty valuations with fanciful TAM guesstimates and accelerating revenue projections. This is nothing new. It’s the same wishful thinking that drives all manias, tech or otherwise. But what seems different to me about the current tech boom is just how un-technological most of the players are. Uber lets you hail someone else’s car, AirBnB lets you sleep in someone else’s bed, and Snapchat lets teenagers erase naughty messages before their parents see them. It’s hard to see any significant technological moats around those ideas.

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bailout fever is still raging

I do not short debt. But, on paper at least, shorting the sovereign debt of poorly managed European nations not named Greece sure seems like a great investment right about now. Aside from the negligible cost of the coupon, the downside to shorting the bonds of places like Portugal, Spain, and Italy seems to be almost nil. We’re talking about heavily indebted countries with aging populations and staggering unemployment, and yet, thanks largely to QE measures, their bond yields are shockingly low. This is clearly an unsustainable situation. QE will have to end eventually and if EU leaders finally develop a backbone, yields might return to double-digit levels more quickly.

Geez. I’m almost talking myself into this idea. Then again, it’s impossible to predict when (or if) the global pandemic of bailout fever will finally end.

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a twitter buyout? don’t hold your breath

We’re in the middle of a buyout frenzy for the ages. Every day brings news of another mega deal, either real or imagined. On Sunday, Cigna rebuffed Anthem’s $47 billion offer. This failure-to-merge is a rare exception. Many large and established companies have successfully gobbled up other large and established companies in recent weeks, especially in the tech space. In March, NXP Semiconductor bought Austin-based Freescale for almost $12 billion. Singapore’s Avago paid a whopping $37 billion for Broadcom a few months later, and Intel recently completed its $16.7 billion acquisition of Altera.

This merger mania is partly a product of record low interest rates around the globe. Profitable, cash rich firms can sell bonds with vanishingly low interest rates, making major acquisitions relatively easy (and cheap) to finance. Furthermore, the US tax code encourages firms to borrow money, as interest costs are treated as a deductible business expense. Add it all up and it’s little wonder that every company out there is starting to seem like a viable takeover candidate.

But let’s not get carried away.

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