Archive for November, 2004

The argument against passive investing

Wednesday, November 24th, 2004

On a message board I frequent, there was recently a question about mutual funds. Which should I invest in? Large cap? Mid cap? Small cap?

I said:

“Index fund investing”

Index funds are the way to go. Actively managed funds (like all those mid-cap growth, large-cap blend funds) do not beat the indexes over time, and are more expensive to invest in. I suggest Vanguard 500 index fund. You may want to supplement that with REITs, metals, and bonds.

Someone disagreed, arguing that we pay to beat the market, not match it, and that TRMCX has done just that since he bought it. And it’s up 10% this year vs. 3% for the S&P (tracked by VFINX). There was a link to the quote for TRMCX titled “A litle research can be a dangerous thing”.

MY reply:

“A little dangerous research”

Take a look at a ten year chart of the Dow, the Nasdaq, the S&P 500, and TRMCX. Of course your fund hasn’t been around ten years, but close (1996).

TRMCX has gotten lucky the past few years. So has just about every other small and mid cap fund. Mid caps won’t always outperform the market (look at the ten year chart).

Now consider cost: over ten years 10,000 in your actively mnagaed fun will cost you $1,120 (0.91% expense ratio). In my VFINX that same investment will cost you $230 (0.18% expense ratio).

Now consider the odds. Can you name one actively mangaed fund that beats the market all the time? TRMCX has been lucky since just before 2001. Prior to that TRMCX underperformed. It was beaten badly by the index from its inception until late 2000. Actively managed funds underperform sometimes, but they always cost more.

I know that sometimes actively managed funds beat the index. But you never know which ones are going to beat the indexes, when, or for how long.

Speculating: LBTT.PK = LBTN.PK

Friday, November 19th, 2004

If you know my strategy, you know I like broad market exposure as cheap as possible through index investing and diversifying through metals and REITs (or other high dividend stocks). I also like to speculate – just a little. It’s more fun to blog about speculative stocks than passive investing.

I recently wrote that I wouldn’t be a buyer of NUS (Nuskin Enterprises). A speculative stock has to have trmendous potential and that potential comes with extermely high risk.

For example, LBTN.PK (formerly LBTT.PK) recently shot up from 18 cents a share to 24 cents a share, 33.3%. Now that’s exciting. But I’ve been scared plenty of times too.

For example there were the declines that led to the 1:150 reverse split on 10-24-2004. But what do you look for in a speculative stock? Not share increases and declines – lots of bad speculative stocks have those.

You have to look at the products, their current position in the market, and the possibility of better market position in the future. For exmaple Lifeline Biotechnologies maain business is in Cancer detection, including breast cancer detection. Lifeline products are just starting to hit the market. If they can do well in this market the company will do quite well and so will the stock.

Now there are many many “if” sentences here. By definition speculative stocks are not safe investments. They are investments with the potential for big returns. Are you willing to take a risk that this potential will never be realized? If you are, find a company with good products that has a chance to find a market niche.

Nuskin stock – NUS

Wednesday, November 17th, 2004

When my wife and I were getting our introduction to Nuskin (my wife’s friend joined recently and was telling us about it – now my wife and I have become independent distributors and if you’re curious about our experiences, you can my network marketing blog), one of the things they said was very important was the stability of the company (If the network marketing company folds then all the hard work you did creating a network has been wasted).

To prove to me that Nuskin was stable they talked about its stock. They said Nuskin stock was a good investment. Let’s take a look:

Nuskin makes skin care, cosmetic, and other personal care products (like toothpaste). Nuskin owns Pharmanex, which makes all-natural dietary supplements and Big Planet, which has technology-related products (like e-security). In 2003, Nuskin and Pharmanex each acounted for over 470 million in sales, while Big Planet made about 38 million in sales. These products are sold through distributors. Nuskin claims to have over 800,000 of them, including about 30,000 executives (active distributors).

Nuskin is also committed to entering the mainland China market and has (as of June 30, 2004) 9,874 employees, 5,586 of whom are employed full-time sales representatives in Mainland China.

So that’s the context, how about the stock? The PEG is an OK 1.46. Combine that with the 8 cent quarterly dividend (1.49% yield) and you’ve got a stock that I’m not thrilled about but am willing to look into further.

Their third quarter earnings showed strong growth in China (73%) but the overall growth forecast is more tame: the company forecast 2005 revenue growth of 5 percent to 7 percent, and earnings-per-share growth of 10 percent to 15 percent.

While I’m convinced the company is stable, I’m don’t see any reason to specualte with Nuskin stock. I’m sticking with my index investing, my REITs, and my metals. Plus a few speculative stocks, but these all have (in my opinion) more growth potential than Nuskin.

You can reqest investor information here:

Screening for REITs

Sunday, November 14th, 2004

A recent comment on I like REITs asked:

Do you have any REITS that are at a good entry point now? Also where and how can I get information on where to do a screen for REITS?

I use Yahoo stock screener. For example screening for companies in any industry (You never know when a high dividend non-REIT will show up) with at least 500 million market cap and 9% dividend with a maximum PE of 15 and max PEG of 1.5 returns some interesting results: ACAS, IMH, NEW, and TSP. Readers of this blog will know that I’m invested in IMH. Sure enough the other results are not all REITs but may be worth investigating.

Finding value stocks

Wednesday, November 10th, 2004

Here’s an interesting interview with David Fondrie from The Heartland Select Value Fund (HRSVX ), a concentrated portfolio of deep value stocks. The deep value concept and their stock screening method is explained as:

We follow a deep-value strategy of investing in companies that are undervalued relative to their intrinsic worth. The stocks typically are attractively priced relative to their earnings, cash flows, and book values. While we don’t have absolute quantitative parameters, we generally screen for companies with market caps of at least $500 million, stock prices of less than two times book value, and 12-month forward price-earnings ratios of below 20.

Before we invest, we identify a catalyst for each stock, like a new product or a new management team. We buy stocks that are starting to turn around or suffering depressed valuations due to short-term problems.

This seems reasonable but the problem is in identifying the catalyst. For example Fondrie describes a mistake with an investment in AVX. The fund managers predicted increasing sales but sales declined two quarters in a row. These things happen to professional fund managers as well as to individual investors. Typically the results are more significant for the individual investor that for the fund manager, which is why I suggest passive investing (though I do supplement with high dividend (particulary REITs) and precious metal stocks.

US presidential election affecting Korean stock market

Monday, November 1st, 2004

I wrote previously about Bush, Kerry, and stocks. The election will not only affect US equities; there are fears and mixed signals concerning the US presidential race in Korea. Cho Hying-Kwon writes that the best thing for the markets would be to move on with either candidate. He cites that stocks generally rise after elections but that a recount similar to Florida 2000 would weigh markets down. A clear winner would help reduce oil prices but negatively both candidates are “expected to keep the dollar weak and strengthen trade pressures on Korea.”

Of course a weaker dollar means a stronger won and that means less competitively priced exports. America is Korea’s second most important trading partner. Since Korea’s economic growth is dependent on exports as domestic demand is weak, and China’s recent rate hike probably means that exports will slow to Korea’s #1 trading partner, Korean exports becoming less competitive in America could mean trouble.

While some analysts think that South Korea’s stock market is becoming more resilient, I did read in today’s Korea Times (but I can’t find the article online) that analysts are expecting stock prices to retreat, possibly testing important barriers around 720 which would be a substantial decline. Another interesting twist is that local investors are said to be more skeptical than foreign investors.

All in all, I’m glad that I’m not in the Korean stock market at the moment. These seem like risky times with many analysts predicting that the indexes will decline. The potential rewards are unlikely to be worth the risk as Korean economic growth is slowing. In the long term, I expect the Korean stock market to do quite well but I expect a better entry point than we have now with the KOSPI index around 835.