George Morgan's Blog, page 24

The BIG Risk

Zweig’s interpretation of shallow risk involves general market gyrations. His definition of deep risk is one that involves a permanent loss of capital with no hope of recovery. This form of risk comes from four forces; inflation, deflation, confiscation and devastation. Another way of expressing the last two causes is that they result in the total bankruptcy of a company. When you invest in a small number of individual stocks, this outcome has a reasonable probability of occurring. However, i...

The Risk Is Up to You

Jason Zweig’s Saturday column addressed the subject of risk. It was one of the most important and insightful pieces I have read in a long time. As an academic, I teach about risk and I must confess that as a group we do a poor job of both understanding and explaining it. Zweig’s article separates risk into two distinct types; shallow risk and deep risk. Ben Graham called shallow risk quotation risk and said it was as inevitable as weather. Quotation risk means that the price established by th...

More Shocking Numbers

As I stated earlier, John Bogle believes that about 75% of all of ETF shares are held by institutions and are thus actively traded. In partial support of this, he points out that in 2012; the total trading volume in ETF’s on American exchanges was in excess of $18 trillion. Yes, the dollar amount of ETF’s traded exceeds our National Debt. Using this and some additional statistics, Bogle has come to the conclusion that of the 25% of ETS that are held by individuals, 2/3 of these investors have...

Shocking Numbers

Early advertisements for the SPDR ETF’s expressed its marketing proposition in a very straightforward manner; “Now you can trade the S&P 500 index all day long in real time.” It has lived up to its promises because has become the most traded stock in the world. Average trading volume for the SPDR is in range of 220 million shares, which in 2012 amounted to 6 trillion shares changing hands in just twelve months. Its total assets are in the $100 million range so that volume amounts to...

ETF's Go Astray

For the first decade of their existence ETF’s were true index investments. The SPDR was followed by a variety of ETF’s that mirrored the Dow, the NASDAQ and several of the Wilshire indexes. But, pretty soon Wall Street began to turn out hundreds of exotic ETF’s indexes to attract more speculative dollars. Today there are indexes that follow consumer durables in India, the healthcare industry in Emerging Markets and esoteric commodities such as timber and aluminum. To put it bluntly, Wall Stre...

ETFs, A Brief History

In January of 1993 State Street, an investment company, introduced the first ETF and based it upon the S&P 500. The ETF was given the title Standard & Poor’s Depository Receipt and traded under the acronym SPDR. During the remainder of the nineties, interest in SPDR’s, and a few other ETFs that followed, was limited mainly limited to institutional investors. Institutional investors found ETFs a convenient way to participated in the market without encoring high transaction costs. Today...

Forget Liquidity

If, four years ago, you had asked me if I preferred index mutual funds or ETS as the investment vehicle of choice for a 401(k), I were snapped back quickly, ETFs. However, from my current perspective after three years as an academic, my response would be just as quickly, mutual funds. Why the change in heart? As a stockbroker, the greater liquidity of ETFs appealed to me, but, it appealed to me for all the wrong reasons. As a broker managing portfolios for clients, the ability to simply make...

No Peeking

One of the greatest pieces of advice that Jack Bogle, the founding father of the index fund, has given to investors is, “No peeking.” He has only made that statement during times of great turmoil and emotional stress in the market. He is telling investors to not open their 401(k) statement because they might be tempted to do the wrong thing at exactly the wrong time. During the subprime crisis of 2007 to 2009 I had a client with a million dollar plus account.  Every day of the media hamm...

Wall Street Cranks Up Their Marketing Machine

Under the new financial regulatory environment, brokers are seeing a slowdown in the income stream that mutual funds used to provide. In an effort to develop new sources of revenue they are turning to an investment product that was popular in the eighties and nineties, the Unit Investment Trust. UITs are a cross between a ETFs and mutual funds. Several things make them unique. First of all, they can only be purchased through a broker who is compensated for the transaction. Secondly, unlike mu...

A 401(k) Criminal Act

Recently, I was approached by a lady I know, who shall remain anonymous. She asked me if I would mind looking over here 401(k) and giving her some direction with the investment selection. She works for any large institution and I am guessing that she is a little bit past middle age. I looked at her statement, which had a modest sum of money in 12 different mutual funds. She asked me if I recognize any of them; I did not. Her employer like many others relies on a very large mutual fund company...