George Morgan's Blog, page 9
January 30, 2014
On The Mend
The U.S. economy finished the year 2013 with its best six month performance in a decade. Third quarter GDP growth number was 3.2%, which was down slightly from the 4.0% growth figure for the third quarter. Overall, our GDP grew a respectable 2.7% for the year 2013. Where do we go from here? The pundits say that uncertainty about the future is holding business back and keeping the unemployment rate high. While it is true that Obama care and other intrusive government activities may not be posi...
January 29, 2014
Computer Games
There is an article in yesterday’s Wall Street Journal which provides insight into how today’s electronic markets really operate. The subject of the article is Reg NMS which stands for National Market System. I am going to quote a portion of the article to insure my description is accurate. “Computerized firms called high frequency traders try to pick up clues about what the big players are doing through techniques such as repeatedly placing and instantly canceling thousands of stock orders t...
January 28, 2014
The World According To Jack
Pick up any university textbook on investing and it will tell you that approximately 90% of all of the movement in an individual stock can be attributed to changes in the broader market. Equity research companies such as Standard & Poor’s and Value Line provide their subscribers with a data point called beta. Beta is a correlation coefficient between the stock being reported on and the market, which in most cases is the S&P 500. Take a look at dozen or so stocks from the S&P 500 a...
January 27, 2014
Academics View On Stock Analysts
I have been reviewing several college textbooks and I think it would benefit the investing public to know what the next generation of investors is being taught. Here is what one academic has to say about security analysts. “Security analysts are under great pressure to avoid the word sell when writing stock recommendations. They are under pressure from their employers who are seeking underwriting contracts from the same companies the analysts are following. During the past five years only 6%...
January 25, 2014
Professionals Make Mistakes Too!
This week’s edition of the “Intelligent Investor” is about issues a finance professor faced when he purchased shares of an individual stock. For many years the professor in question only invested in index funds. Then one day, for reasons unknown, he bought shares on the electric car company Tesla at $38.00 a share. Within three months the stock doubled and the professor was unsure what to do next. If he sold, the price of stock could possible double again. If he held on to it could poss...
January 24, 2014
Stock Picking
People who buy individual stocks and brokers who recommend individual stocks usually rely on the buy/sell recommendation of an analyst. Almost all stock analysts use a forecasting methodology that academics call fundamental analysis. The foundation of fundamental analysis is to use various data points to predict the future earnings of the company being analyzed. Once the future earnings have been derived, a multiple of the earnings per share is used to determine an appropriate price to pay pe...
January 23, 2014
The Origin Of Mutual Funds
The mutual fund industry was born in 1924 when a Boston an unnamed stockbroker started the Massachusetts Investment Trust. MIT truly was a mutual fund because it was a nonprofit entity run by a board of directors that answered to the fund’s investors. Fund managers were paid a small percentage of the assets under management, not a fee based on performance. Since the trust was owned by its investors, any money over and above the cost of running the business was returned to them. Today’s mutual...
January 21, 2014
Beauty Contest
I came across a story about John Maynard Keynes that invoked memories of my early days as a stockbroker. We researched companies hoping to discover valuable information about them before the rest of the world did. The theory went that our research would uncover a little known company that we thought was about to triple it’s business and then we would buy the stock. Months later, when the rest of the world discovered our secret, they would buy it and stock and the price would soar. At first I...
More Is Worse
Investors, novice and professional alike, often believe that diversifying into several mutual funds helps them overcome the underperformance of most managed mutual funds. The Saturday Wall Street Journal article on fund managers I quoted yesterday had some insight into multiple mutual fund portfolios. Several studies were cited that found that increasing the number of active managers actually lowers the chances of a portfolio beating index funds. The studies demonstrated that the underp...
January 20, 2014
You Read It In The WSJ
The secret is out . In last Saturday’s Wall Street Journal there was an article that came right out and said it; “Overtime, passive index mutual funds will outperform the actively managed mutual funds.” The article goes on to quote Russ Wermers, a finance professor at the Robert H Smith School of Business at the University of Maryland; “It’s hard to find an active managers to consistently give good performance.” The article then provides a list of criteria for people who want to find a superio...
