Wednesday marked the fortieth birthday of the most investor-friendly idea in stock market history: the index fund. Forty years ago Vanguard introduced the first fund that merely tracked the S&P 500. It has appreciated 6,334 percent since inception, trailing the S&P by a mere .14 percent annually, all of which was the ‘expense ratio’ charged investors. Few, if any other funds have matched or exceeded this annual return.
Today roughly $5 trillion is invested in index funds. Vanguard is the largest index manager, with over $3 trillion in assets under management (AUM). Other money managers now offer index products alongside their traditional, actively managed funds.
Study after academic study shows that index funds outperform most actively managed funds. The reason is simple. Fees. The average expense ratio for actively managed stock funds is around 1.5 percent. It is somewhat less for fixed income funds. As Vanguard founder John Bogle has convincingly shown, a fund with a 1.5 percent annual fee (and the same pre-fee annual return) will produce a much smaller total return over a multi-year period than a fund with a .14 percent annual fee.
Investors have taken notice. According to the Wall Street Journal, they have invested $409 billion in passive index funds in the last year and pulled $310 billion out of actively managed funds over the same period. Roughly 20 percent of all money in stock funds is now indexed, up from zero 40 years ago.
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Two of the roughest, most failure-prone sectors in the stock market have always been—and probably always will be—restaurants and retail. Competition is brutal in both spaces, margins are usually slender, and bankruptcy always seems to be one poor management decision away.
I’ve written about the slow-motion train wreck of the traditional retail sector fairly regularly over the last couple of years, and with several large operators like Nordstrom’s and Kohl’s posting surprisingly decent earnings lately, I thought it might be a good time to check back again. Could brick-and-mortar retail be on the brink a comeback?
One of my favorite investing quotes comes from the legendary 1968 book The Money Game by George Goodman, aka Adam Smith: “If you do not know who you are, Wall Street is an expensive place to find out.”
I put this line at the beginning of my book because I’ve seen its wisdom proved again and again in my thirty-plus year career. As ironic as it sounds, the folks who start out in the investment business just to make money usually make less of it. The ones who do so because they’re inspired to learn as much as they can tend to make more. Of course, there’s nothing wrong with wanting to make money. We’re all trying to do that—the more the better. But if investing doesn’t fuel your intellectual curiosity, you’re probably not going to make as much money as you hope, and there’s a good chance you’ll go broke.
Successful stockpicking is all about identifying profitable inefficiencies in consensus expectations for a given company or industry—and as much as I hate to say it, the mind-numbing spate of violence we have been living through this year probably makes the gun business one of the most undervalued sectors in the market today.
Wall Street has always been captivated by controversial companies, controversial leaders, and controversial mergers. Tesla’s shocking offer to buy SolarCity on Tuesday featured all three, so it was no surprise that the deal instantly seemed like a bigger story than the presidential race, gun control, ISIS, and Brexit. It even managed to make the last controversial company that dominated headlines, Valeant Pharma, seem like an afterthought.
A few people have written in asking my opinion of the deal. The short answer is, I believe investors are well advised to avoid both stocks like the plague. As separate entities, these companies are wildly overvalued story stocks with a good chance of going broke. Together, they will form one wildly overvalued story stock with a good chance of going broke.
Earnings, as the old Wall Street adage goes, are “the mother’s milk of stock prices.” But not all earnings are the same. More and more companies believe they can hoodwink investors into accepting the myth that non-GAAP earnings are a better measure of corporate progress than numbers produced by generally accepted accounting principles. In 2016’s first quarter, 19 of the 30 Dow companies reported both GAAP and non-GAAP earnings.
In theory, filing non-GAAP numbers can give a clearer picture of a company’s health by excluding expenses managements consider (or hope) to be nonrecurring, such as charges for divestitures, acquisitions, and foreign currency adjustments. In practice, non-GAAP figures increasingly allow managements to present wildly distorted pictures of their firms’ financial health by omitting the most troublesome aspects of their balance sheets. Valeant is all over the news now for doing just that. But the biggest and, mystifyingly, least talked about expense omitted in non-GAAP numbers is stock based compensation.
Believe it or not, mobile home stocks used to be good places to park your money. Twenty years ago, the so-called “manufactured housing” industry was widely followed by Wall Street analysts, and public companies like Clayton Homes, Champion Homes, and Palm Harbor Homes were all rated strong buys.
Then the roof caved in.
First, the easy credit of the early-2000s housing bubble allowed many first time buyers to choose “site built” homes instead mobile homes. That was followed by the 2008 crisis, when financing for all types of homes, mobile or otherwise, evaporated. Now, US mobile home production hovers around 70,000 units, down from a peak of 350,000 units in the late-1990s.
But a few companies have managed to weather the storm. The top three builders now command a combined 72 percent of the market. Berkshire Hathaway owns the largest of them, Clayton Homes, which accounts for 45 percent of all US mobile home production. The third largest company, Champion, is privately held. Aside from tiny Skyline Corp (SKY), that leaves only one publicly traded option for most stock investors: the second place company by market share, Phoenix-based Cavco Industries (CVCO).
I’m traveling this week, so I’m not able to write a new blog post, but I thought I would share the video of the presentation J. Carlo Cannell and I made at last year’s Stansberry Conference in Las Vegas. (Email subscribers can find the video on Youtube by clicking here.) I’m scheduled to present at the conference again this September. You can register here if you’d like to attend.
As last year’s holiday season was kicking off, I cautioned investors for the second year in a row to beware of the traditional retail sector. Since then, things have gone from bad to worse. This earnings season has been an unmitigated disaster, with one retailer after another turning in disappointing reports. Gap, Nordstrom, Macy’s, JC Penney, Kohls, and others have all dropped precipitously.
Some contrarian investors who buy out of favor stocks in out of favor industries have started calling a bottom for these companies, positing that the recent selloff provides an attractive entry price for long term investors.
Last February, I wrote a thought exercise of sorts for CNBC.com weighing the stocks of the number one and two companies by market cap at the time, Apple and Exxon.
Apple, as you may recall, had just turned in one of the greatest quarters in history, annihilating estimates with record smashing iPhone sales. Its stock had shot up to $128/share, and just about everyone expected it to climb higher. Pundits were breathlessly debating how soon Apple would become the world’s first trillion-dollar company. Exxon’s stock, by contrast, was $88/share and not many people were touting it as a buy. Oil prices had crashed to $50/barrel, from over $100 less than a year earlier, and a recovery was seen as unlikely.
Despite these factors, I wrote that if I could buy only one stock between the two and hold it for the long term, Exxon was a better choice than Apple. A quarter later, as both companies prepared to release earnings again, I reiterated my preference for the energy giant.