10 lesson about investment

8/8/2019 10 Lesson About Investment

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INVESTING TO BEAT THEMARKET

Simon Benninga

Faculty of ManagementTel-Aviv University


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Dvar Tora

Jethrothe first managementconsultant

Also an investment consultant?

The Tora and speculationLending and Heter Iska


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May a Jew invest in stocks?


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10 LESSONS ABOUTINVESTMENTS

1. Risk and return are related. Thelarger the risks, the larger the(expected) returns.


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Risk and returnU.S. Stocks


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2. Past performance is a poorindication of future performance


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3. Market timing is mostly futile(and costly ... see #8)


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4. There is some persistence in stockmarket returns, but it may be difficult toexploit.


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5. There are no magic formulas and its hard topredict


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6. Dont believe most of the investmentnonsense you hear.

Over any particular time period, half of allinvestments outperform the average.Typically, out-performers have wonderfulafter-the-fact explanations for why thishappened. Over the same period of time,

half of all investments underperform theaverage, and under-performers have goodreasons why this happened.


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http://www.pa-investors.com/annual.html


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"Last year, it turned out good. We were down 2 percent, but the S&P wasdown nearly 12 percent, and Nasdaq finished down 20 (percent). So we

outperformed the market," he said. Bateman said that a number of analystscontribute to the company's annual stock list, utilizing what he referred to asa top-down approach.

Essentially, Bateman analyzes each sector's performance in various stages of

a business cycle. Given the prevailing stage of the current cycle, the analystslook to which sector has a high-probability of outperforming the market.

"Basically, our model does a number ofregression studies looking at wherewe are in the current cycle and what industries have done the best."

"We focus on those sectors that look the most attractive and identify thecompanies that are the most attractive in those sectors."

As way of example, Bateman said that hotels historically have performed

well during the existing phase of a business cycle. In fact, the probability ofthe hotel sector outperforming the S&P 500 exceeds 50 percent in eachquarter this year.From there, it was a matter of selecting which hotel stock would be the bestpick for the year, and Huntington analysts determined that to be Marriott

International.


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7. Most investment advice is worthless.


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8. Fees are important: 1% per yearover 10 years = 13%


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9. Relate investment decisions to: a. Your investment horizon: The

longer it is, the more risk you should be

willing to take.

b. Your risk-tolerance.

c. The costs of managing yourportfolio.


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10. Its very hard to beat the market.Investment in index funds (passivemanagement) is preferable to managed

funds


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THE STREET.COM

By Beverly GoodmanSenior Writer08/12/2002Indexing has suffered quite a backlash of late. From pundits proclaiming that"we're in a stock picker's market now" to columnists decrying the active

management of the S&P 500 , hitching your portfolio to an index seems likefolly.Actually, thinking you can consistently beat the market -- bear or bull -- iswhere the real folly lies.In the first five months of 2002, the average actively managed fund

underperformedthe relevant Standard & Poor's index in seven of the nineMorningstar categories -- and one of the remaining two essentially tied theindex. That's from a just-released study by veteran Vanguard Index fundmanager Gus Sauter. (See charts below.)

The study also looked at five-year performance ending May 31, 2002. In thatcase, indexing roundly trounced eight of the nine categories.


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Study after study has shown that indexfunds outperform 75% of activelymanaged funds over virtually any timeperiod.

But halfof the remaining funds (or 12.5%) thatoutperform their relevant benchmark do sojust as a matter of chance, according toresearch done by finance professor and chair

of the Richard H. Driehaus Center inBehavioral Finance at Chicago's DePaulUniversity, Werner De Bondt.

Those numbers are even more compelling since

they don't include the thousands of failedfunds that have either folded or merged overthe years.


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Fees, Taxes and Spreads, Oh My!

When active management does beat the benchmark, it usuallydoes so only slightly.

Equity index funds lost 21.94% in the past 12 months, while

actively managed equity funds just barely edged that out, losing21.74%. Index funds returned 0.66% in the past five years, and9.8% in the past 10.

Actively managed funds, meanwhile, returned 0.65% and 8.8%

in the same period, respectively, according to Morningstar.

For starters, the average equity index fund has an expense ratioof 0.79% -- and exchange traded funds, or ETFs, are roughly

half that (although you will have to pay a trading fee on whenpurchasing).

The average actively managed equity fund has an expense ratioof 1.49%, according to Morningstar.


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Expense ratios aren't the only aspect of active

management that will eat into returns,though. The average turnover of activelymanaged equity funds is 118%.

All that buying and selling means more internal

transaction costs, greater bid/ask spreads andmore capital gains generated (which, ofcourse, means more taxes that you getslammed with -- whether or not the fund even

makes money).By contrast, index funds generally have a

turnover of next to nil; buying and sellingoccurs only when the index changes.

Small wonder the average actively managedfund lags the market by 2%.


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CAN YOU BEAT THE MARKET?

NO(well, probably not )


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The lot is cast into the lap, but the

decision is the Lords alone.

Better a dry morsel in peace than ahouse full of feasting with strife.

Proverbs 16:33, 17:1

Dvar Torah


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Thank you!

For a copy, write me:

[email protected]

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