Year: 2020

No Brainer Portfolio – Lazy Portfolio

The main feature of this portfolio is the idea that most return is determined by the asset allocation of the portfolio, more than by asset selection.

No Brainer portfolio is one of the “Lazy portfolios”. No Brainer portfolio cover investments proportionately in four asset classes – US bonds, total US stock market, small-cap US stocks, and international stocks. It is very useful for investors with long-term goals. The point is that investors can favor one of the asset classes at different times. By doing so investors could gain nice risk-adjusted returns.

Designed for investors with a long time horizon that will favor each of the classes at various times, the portfolio aims to provide diversified risk-adjusted returns. This motif seeks to replicate Dr. Bernstein’s model by identifying ETFs that would be contained within the “No Brainer” asset class structure.

Dr. William Bernstein believes that asset allocation is more valuable for investors than choosing individual stocks or bonds.

This is the simplest portfolio Dr. Bernstein explains in his famous book “The Intelligent Asset Allocator”. Well, this book is generally suggested not only for the No Brainer portfolio. You can find a lot of extremely valuable info on the diversification and portfolio construction in this book. It is highly recommended among investors.

In this book, Dr. William Bernstein explores historical performance to come at an almost simple to implement a portfolio. He believes this portfolio should perform well in the long-term. No Brainer portfolio consists of four asset classes in the following proportion:

25% Short-term Bonds
25% of International Stocks
25% Small-Cap Stocks
25% Large-Cap Stocks

All you need is a simple, well-diversified portfolio

The Bernstein no-brainer tracks very strictly the “simple is better” rule. This lazy portfolio could be very suitable for any investor who dislikes monitoring the investments every day and has a longer time horizon.

Here are some stats about the total return by using the No Brainer portfolio.

Over the past 10 years, the No Brainer portfolio has had an annual return of about 5%. Not good enough? In fact, it is in line with the S&P 500. This portfolio is a wonderful choice for anyone who doesn’t like high-risk, not-assured returns.

Why the No Brainer portfolio is so special?

Diversification! Yes, Dr. William Bernstein’s No Brainer portfolio is focused on diversification through many asset classes. It covers almost all assets. There is some interesting thing about William Bernstein, according to his own words he is asset class junkie but not only because of this particular portfolio. Dr. Bernstein is the creator of many portfolios.

So, you can imagine how broadly his portfolios display diversification. It is a 360-degree portfolio.

Among others, he created Four Pillars, Cowards Portfolio, Sheltered Sam Portfolio, etc.

For example, his Cowards Portfolio consists off:

10.00% US Large Cap Value
15.00% US Large Cap
10.00% US Small Cap Value
5.00% US Small Cap
5.00% REITs
5.00% Emerging Markets
5.00% Pacific Stocks
5.00% European Stocks
40.00% Short Term Treasuries

What are the advantages?

By applying this kind of portfolio, so-called lazy portfolios, you could minimize taxes by asset location or by adding a specific asset class such as municipal bonds. You could build such a portfolio based on your age and appetite for risk. Also, you can add employees’ stocks.

All this shows the no brainer portfolio as a very helpful model for all of your investments.

The most important, Bernstein’s no brainer portfolio will never face you with the cruel reality. Contrary, it will save you from that since from the very beginning you will know what you can expect in the returns.

Why use the no brainer portfolio?

Investing is hard but by applying some of the lazy portfolios it doesn’t have to be, investing could be easier. How is that? Let’s see!

Here, in the no brainer portfolio, you have ONLY 4 asset classes. That provides you to have a quick overview of your investments. It is simple. Why would you like complexity? It may cost a lot of money and time to watch.

Moreover, this portfolio doesn’t contain any special asset classes. So they are simple to understand. Just 4 asset classes! That’s so easy!

Who is the creator of the No Brainer portfolio?

William Bernstein was born in Philadelphia and educated in California where he earned a Ph.D. in chemistry at Berkeley. Did you know that he did it in just three years? To got the opportunity to work more closely with people, he went back to school and earned M.D. from UC–San Francisco. At that time he was the only neurologist in Coos County.

From 1980 to 1990, Dr. Bernstein treated migraines, Alzheimer’s and Parkinson’s. Ten years living all of these, he was under enormous stress and was forced to cut his working hours. Also, he wanted to pay more attention to his hobby – finances and investing. And Bernstein decided to learn more about it.

The first thing he required was data. Several years later he started to write a book with an interesting premise: people are wrongly trading individual assets instead to buy entire markets.

The book was published on his website Efficient Frontier in 1996.

and in 2001, McGraw-Hill published “The Intelligent Asset Allocator”. His “The Four Pillars of Investing” was published in 2002.

How to create a lazy portfolio

First, keep the cost as low as you can. Define your tolerance for risk and how big returns you want. Find data for historical returns to build a portfolio of index funds. They have to hold a mixture of assets that are able to produce a balance between risk and return. Investigate among different classes value stocks, small-caps, bonds, REITs, micro-caps, everything. You may think you will need a powerful software for this. Actually, a bit of common sense is all that you need. For example, pick 60% stock and 40% bonds. That will work well for investors. The other solution is to choose some low-cost fund that includes stocks and bonds both.

Sounds simple, right?

Bottom line

According to Bernstein, all you need are several skills to be a successful investor. One is understanding the financial implications of numbers since math is what lies behind investing. Also, as an investor, you must have the ability to trade without emotions. In other words: sell when the stock prices are growing, and buy when they are falling. And be independent. You have to have your opinion. Don’t believe in everything that pricey advisers say. Have trust in your basket of assets.

The lazy portfolios offer higher returns. This kind of portfolio has withstood the test of time and will be valuable for many years. And, as final words, don’t let be overwhelmed by too much information. Sometimes, you will make better choices with less info.

22nd January 2020
What is Riskier Bonds or Stocks?

(Updated October 2021)

In some scenarios, bonds are riskier than stocks. The main problem is how to run your investments stable but not cutting the growth stocks have to give.

Do you think the stocks are riskier than bonds? Well, stock prices are more volatile than bonds, that’s the truth. Also, bonds are paying fixed income. What else is on the bond side? Well, not much. Maybe these two is all since bonds could be riskier than stocks. The whole truth is that bonds are very risky for the companies, but at the same time, less risky for investors. Speaking about stocks, they are less risky for the companies but for investors, they can be extremely risky.

So, why do so many people think that bonds are less risky? We have to solve this dilemma: what is riskier, bonds or stocks.

The most and least risky investments

There are so many factors that have an influence on how some investment will perform. Honestly, all investments carry some level of risk. Speaking about bonds, they are under the great influence of inflation while stock investors may not feel it so much. Stocks have some other kind of risks, for example, liquidity risk. Such a problem bond investments don’t have.

Firstly, stocks are the riskiest investments, but they also give excellent potential for high returns. Stocks or equity investments cover stocks and stock mutual funds.

Bonds or Fixed Income Investments cover bonds and bond mutual funds. They’re less risky than stocks but generate lower returns than stocks.

The third-place belongs to cash or certificates of deposit, money market funds, Treasury bills, and similar investments. They are giving lower returns than stocks or bonds but carry a little risk also.

What are stocks and bonds?

To understand what is riskier, bonds or stocks we have to make clear what each of them is. There are two main concepts of how companies can raise money to finance their businesses. One is to issue stocks and the other is to issue the bonds.

Stocks and equity are the same. Both define ownership in a company and can be traded on the stock exchanges. Equity defines ownership of assets after the debt is paid off, so it is a bit broader term. Stock relates to traded equity. Equity also means stocks or shares.

In the stock market tongue, equity and stocks are the same.

Stocks

Stocks will give you an ownership stake in the profits of the business, but without the promise of payment. That’s why stocks are riskier. The companies may decide to pay dividends but nothing else is an obligation. While holding the stocks the value of your investment will vary related to the company’s profit. Stocks are also dependent on investors’ sentiment and confidence. Anyway, stocks are safer for companies since they are a sure way to raise the money needed to maintain business. For investors, stocks are riskier since the companies don’t have any obligation to provide any kind of return. If the company is growing and rising profit, investors will obtain capital gains.

Bonds

Bonds are parts of debt issued by companies and transformed into assets to be able to trade in the market. Bonds give fixed interest rates also called coupons to bondholders. The companies have to pay the interest rate before any dividend to stockholders. Otherwise, the bonds go into default. Also, bonds are conversely related to interest rates, meaning, when rates go up, bond prices drop.

Can you see now? How to answer the question of what is riskier, bonds or stocks? For investors, stocks are a riskier investment, for the companies, the bonds are riskier.

Bonds vs Stocks

The majority of investments can be classified as bond investments or stock investments. In stock investment, you are buying an asset and your profit depends on the performance of that asset. If you buy a y a thousand shares of Tesla, your profit is based upon the stock dividend which Tesla pays (if any) and upon the fluctuation of the value of Tesla shares.

In a bond investment, you actually loan money to a company or a government. With a bond investment, your profit is not related to the performance of the company. If you buy a $2,000 bond from Tesla, for example, and the company earns a record profit, your profit will be the same as if Tesla didn’t make a profit at all. But here is the risk involved with the bond investment. What if the company is unable to pay back the debt? You can lose all your investment.

Stock investment is recognized as a higher risk. But risk makes a profit, therefore you will earn a higher return over the long term.

So, what is riskier, bonds or stocks?

Risks and rewards of stocks investments

Stock investments offer higher risks but greater rewards. A lot of things influence that. An increased sales, for example, or market share, or any improvement or development of the company’s business, literally anything can shift the stock price and skyrocket it. So, investors can earn by selling them or by receiving the dividends.

Any company can succeed or stumble. That’s the reason why nobody should invest in just one company. Do you know the saying: Never put all eggs into one basket? But if you hold stocks from several companies you will ensure high returns over the long term.

But, so many investors couldn’t watch the unfortunate events without selling their stocks at a loss.

Well, if you don’t have a stomach for that just stay away from the market or, which is a better choice, diversify your investment portfolio. Add some bonds-based investments, that will help you when the stock market gets rough. Moreover, a well-diversified portfolio will give you a bumper by providing lower volatility and calm play. So, you will not be forced to sell your investments and feel stress while making decisions.

Bottom line

So, do you have the answer what is riskier, bonds or stocks?
Yes, stock prices fluctuate more than the prices of bonds but that doesn’t necessarily mean more risk for the investor. There are a lot of cases when bonds are riskier than stocks.

For example, over a high inflationary period when inflation is surging quickly, the bond price can be damaged, decreased. The inflation will decrease the value of payments, and the bonds will mature less valuable.

On the contrary, stocks can boost their prices during inflation. The companies could raise prices of their products and increase their profits. That would raise the value of their stock, even higher than the inflation rate.

Can you see how the bonds might be riskier investments than stocks?

During the regular economic conditions, stocks could be much riskier than bonds.

Stock prices could sink sharply. Hold! Don’t sell! Wait for a while, wait for a stock to bounce back in price. And you know what, when the stock prices are falling, there is no better moment to buy them and hold. Just pick a well-established company.

The point is that bonds are not always the safest asset. They can be very risky. In some scenarios, stocks can be a much safer choice.

Savvy investors will buy both to diversify portfolios. Of course, how many of each you will hold isn’t set in stone. You can change it over your lifetime as many times as you want to reach your goals and earn a profit.

21st January 2020
Employees Stock Options are What European Startups Need

In contrast to Silicon Valley, European startup employees are not known for earning millions from the company’s stock.
Stock options policies in Europe are a major barrier to the tech growth and that has to be changed.

Employees stock options are issued by many companies. For example, startups use them to hire talented they need because they cannot afford to pay them more in cash.
The situation is especially difficult in Europe where the policy doesn’t give a chance for companies to issue employees stock options. That causes problems for many companies but for the startups, it is maybe the biggest.

Recently, the campaign Not Optional published a letter where stated:

“Without delay, we call on legislators to fix the patchy, inconsistent and often punitive rules that govern employee ownership — the practice of giving staff options to acquire a slice of the company they’re working for.”

Some European countries started to relax rules on employee stock options. France is one of them, but employees still favor cash.

This country recently exposes a list of changes to rules on employee stock options to meet a request from French startups. Their aim is to compete with US competitors and big companies in recruiting staff.

France is changing a set of rules, for example, the price at which the companies ( including foreign companies) can offer them to employees. The goal is to make France one of the most friendly areas for startups in Europe.

Being competitive

Difficulties in implementation employee stock option rules and availability of capital, are reasons why European have problems to create large tech businesses. That’s the reason for staying behind the US but the EU wants to keep up. There is a strong campaign for changes in employee stock options in Europe now.

According to Not Optional, a campaign is supported by 500 European founders and they are lobbying new stock options policy across the continent.

They recognize employee stock options policy as a major drawback to European tech growth. Due to the problems with the fund-raising, issuing employee stock options can be a great opportunity. Well, recently many countries declared changes, France isn’t the only one.

Ireland changed some of its stock option practices, also, the new Finnish government is examining changes on how stock options are taxed. The German Startups Association has started a campaign to lobby for changes too. As a confirmation that employee stock options are on the Brussels agenda – Thierry Breton, the European Commissioner for Internal Market and Services, discussed stock options in Commission hearings.

Do employees want stock options instead of cash?

Many European tech employees are, however, at best doubtful about stock options, according to Sifted. The employees don’t have positive responses. Maybe it’s surprising how they have a lack of trust but someone has to educate them, to explain the benefits of having the company’s stock. For that to do isn’t enough just yelling that “we are all shareholders of the company”. It isn’t complicated.

So, let’s start.

Understanding employee stock options

Let’s see how the employee stock options work.

Companies give stock options through a contract that provides employees the right to buy a set number of shares of the company stock at a pre-set price.

The right to buy is commonly called exercise, and a pre-set price is the grant price.

There is one important characteristic connected to employee stock options – time, the offers don’t last forever. Employees have a strict period to exercise the stock options before the date of expiration. Also, the employer could require that an employee must exercise the options within a defined period after leaving the company.

The number of options that the company could give to its employees is different from company to company. Also, not all employees will get the same number of stock options. It depends on status, rank, seniority.

How do they work

For example, you got a new job at a new firm. Besides your salary, you will receive stock options, as part of the payments. Let’s say you will receive stock options for 10.000 shares of your new company’s stock. You and the company are both obliged to sign the contract that describes the terms of the stock options.

There will define the grant date. That is the date your options are available for you to buy. This means your stock options begin to vest. But you will not get all of your stock options immediately when you start working for a company. The options vest gradually. That period is known as the vesting period and it can last several years, for example. So, let’s say the vesting period is 5 years. This means it will take 5 years before you have the right to buy all 10.000 shares. But you’ll have access to some of your stock options before those 5 years are up. 1/5 of your options will likely vest each year over that 5-year vesting period. So, after 3 years of employment, for example, you will have the right to exercise 6.000 options.

But your contract may contain one important part – a milestone. The clause that you have to stay for at least one year with the company to have a chance to get any of your stock options. When you reach the first milestone you will receive your first 1/5 of your stock options. After that, it is possible to get every month some amount of them, usually, they are the same. For example, the rest of the 8.000 shares you’ll obtain in 48 parts each month.

But if you leave the company before reaching the milestone for the first year, you won’t get any options.

How to exercise

After your stock options vest once, you can exercise them. What does it mean? You can buy them. Until you do that, the options don’t have any value. The price of your stock options is part of the contract mentioned above. That is a so-called strike price or grant price or exercise price. This price never depends on how the company is doing. It will always stay the same.

For example, after your 5-years vesting period, you have 10.000 stock options with a strike price of $2. If you want to exercise (buy) all of your options you’ll have to pay $20.000. When you buy all your stock options you are the owner and you can do with them whatever you want. You can sell them, keep them (only if you think the price will go up) but remember, you have to pay fees, taxes, and commissions when you are buying or selling the options.

There are some ways to exercise your stock options without spending cash. For example, you can make a buy-and-sell action. To do this, you’ll buy your options and quickly sell them through a brokerage. Another strategy is the exercise-and-sell-to-cover transaction.

Practically, you have to sell enough shares to cover your buying of all shares and keep the rest. But be aware, your stock options have an expiration date. So, read the contract carefully. Usually, options expire 10 years from the grant date. After that date, they are useless if you don’t exercise them.

Bottom line

It is good to exercise options when the price is lower than the same stock on the market. For example, your stock options’ strike price is $2 but the same stock is traded at $4 on the market. Just sell them and make a profit. It is obvious, if you have some clue or expectation that your company’s stock price will grow, you can hold them as long as you want and sell them at the most favorable moment. It isn’t forbidden to sell them on the market.

But you should wait if the price of your company’s stock is lower than your exercise price. In such a case, don’t exercise them because you might lose your money. Just wait for the price to increase before exercising.

20th January 2020
CAPE Ratio Or The Shiller PE Ratio

The CAPE ratio has some predictive ability so you can create your investment strategy based on the CAPE.

The CAPE ratio is a variety of the P/E ratio. Just like the P/E ratio, the CAPE ratio shows whether a stock price is undervalued, overvalued, or fairly valued.

But, the CAPE ratio permits the evaluation of a company’s profitability during various periods of an economic cycle. The CAPE ratio also analyses economic fluctuations, both the economy’s expansion and recession. Basically, the CAPE ratio is a tool analysts use to measure how ‘cheap’ or ‘expensive’ the stock market is. We can know that only if we compare its P/E ratio with historical values over the last 10 years, that is common. And if the P/E ratio of the market is lower than it’s 10-years average we can say the market is undervalued. Hence, if the 10-years average is higher, the market is overvalued.

This metric to estimate if the stock market is overvalued or undervalued was developed by Robert Shiller, an American Nobel Prize Laureate in economics. It became very popular during the Dotcom Bubble. At that time Shiller perfectly pointed out that equities were extremely overvalued. That’s why this metric is also called Shiller PE.

How to calculate the CAPE ratio?

It is possible if you divide the current market price by the 10-year average of inflation-adjusted earnings per share.

CAPE RATIO = PRICE / AVERAGE EARNINGS ADJUSTED FOR INFLATION

That’s a big bite, so lets this formula to make a bit simpler.

Let’s say, some farmer is selling apples for $20 each. WOW! This guy may make a fortune. But who will pay $20 for just one apple? Is it golden? Everyone would think the price is insane. But let’s take a look at historical data for the last 10 years. For example, we found one single apple has been selling at $40 over the past 10 years. This would change your opinion and we suddenly believe the price of $20 isn’t high, it is contrary, very cheap. Something different we would believe if we found the apple average price was $2 over the last 10 years. Who would buy now?

So, we estimated what was the average apple price in 10 years to have a comprehensive idea of how much apple costs.

Let’s this example apply to the stock market which has a historical price called a P/E.

P/E is when the price per share is divided by the earnings per share each year. If the farmer mentioned above started a company and makes $2 a share and the stock market values each share of the company at $10, what would the P/E ratio be? The P/E would be 5.

Let’s use CAPE

If the CAPE ratio is extremely high, which means that we have a company with a higher stock price than the company’s earnings show. So we would easily conclude that the stock of such a company is overvalued. Of course, we can expect that the market will ultimately correct the stock price by shifting it down to its fair value.

How the CAPE Ratio Works

A good position for following the CAPE ratio is to estimate the basic P/E ratio as first. It is a generally-accepted metric, but Shiller noticed a restriction in it.

Well, a company’s earnings can be reasonably volatile from year to year particularly during top and not so good years in a business cycle. To have accurate info about some company we have to minimize the effect of the short-term business cycle on the valuation. That was the problem that Shiller noticed. Instead of looking at just one year, he created the ratio that takes into consideration the average earnings over the past 10 years. This provides comparing valuations over a longer period of time.

One disadvantage of the popular P/E ratio is that it is related to the past 12-months earnings only. But what if something temporary happens during that period? For instance, a big store-chain has to close some of them for restoring them. That would reduce the earning for sure but the company finished what was planned and made progress in earnings. But you didn’t buy a share of that company just because you made your decision based only on one metric – P/E ratio. And you missed the profit. By using the CAPE ratio you would be able to make a better choice.

Ability of Forecasting

The CAPE ratio showed its importance in recognizing possible bubbles and market crashes. It was determined that the historical average of the ratio for the S&P 500 Index was inside 15 and 16. The maximum levels of the ratio passed 30. The record-high levels occurred several times. The first was in 1929 before the Wall Street crash that flagged the Great Depression. The second occurred in the late 1990s and announced the Dotcom Crash. Also, we had signals before the 2007-2008 Financial Crisis.

Speaking about investors and investments, there is held to be a relationship between the CAPE ratio and future earnings. Shiller noticed that lower ratios give higher returns for investors over time.

Nevertheless, there are critiques regarding the use of the CAPE ratio in predicting earnings. The main problem is that the CAPE ratio does not calculate the moves in accounting reporting rules. For example, what if changes in the calculation of earnings under the GAAP appear? That could change the ratio and present a pessimistic sense of future earnings.

Bottom line

The CAPE isn’t the only metric you should use when investing but of course, it is one of.

It’s mostly used to the S&P 500, but can be applied to any stock index. The advantage is that it is one of several valuation metrics that can help you. It is important to find the current relationship between the price you pay for stock and future earnings. If the CAPE is high, and other measures are high, it is a good idea to cut your stock exposure. Also, you can invest in something cheaper.

A savvy investor should always compare the price that pays and the value that gets. Regularly, all investors want to buy a company when its stock is trading at a low P/E ratio. That will give them a better profit.

But that could be the problem too. When a recession, the stock will fall. At the same time, the company’s earnings will fall, and that can quickly raise the P/E ratio. But it is temporary. The consequence is that we are receiving a false signal that the market is expensive. And what we are doing? We don’t buy the stock when certainly it’s the best time to buy it. And here is the point where the CAPE ratio is fully useful.

It shows a more realistic relationship between current prices and earnings based on 10-years average adjusted for inflation over the latest business cycle.

When you are choosing which assets to sell, CAPE can be a great support. If you see that CAPE shows the S&P 500 is undervalued, sell bonds. And when CAPE shows the S&P 500 is overvalued, sell those holdings first.

19th January 2020
Lazy Portfolio – How to Make Wealth With Minimum Engagement

A lazy portfolio is a diversified portfolio that allows you to grow your wealth without stress or a lot of work.
There is no active trading, no monitoring your stocks every day, and no paying to handle your money.

Let’s make clear what’s a lazy portfolio? In short, the lazy portfolio is passively managed, low-cost, diversified and tracks an index.

Actually, a lazy portfolio is a simple set-it-&-forget-it strategy. It requires a minimum of maintenance so we can easily say it is a passive investing strategy. Due to its nature, it is suitable for long-term investors. In essence, it is a buy&hold strategy that working very well for investors that feel fears when they have to make investing decisions. Even more, this strategy provides investors to avoid greed, maybe the most dangerous feeling in the stock market.

The lazy portfolio isn’t only for lazy investors, this has to be clear. It is for investors who want to avoid high risks while investing. We will introduce some of the best lazy portfolios that could provide above-average returns with below-average risks.

How to recognize the best lazy portfolio?

Actually, it is yours, the one that you maintenance. Each investor has its own style of managing, a different approach, so the way of investing is absolutely individual. But the goal is the same – to outperform the market and generate the highest-as-possible returns.

In most cases, a lazy portfolio can do that. Even Warren Buffett believes in a lazy portfolio, you can ask him. Also, many other successful investors built a lazy portfolio instead of fancy strategies.

But in most cases, a lazy portfolio will not give you to time the market, or to beat it. Also, it will never give you a chance to pick individual stocks but, at the same time, it is low-cost and loaded with fewer fees.

A selection that makes money

Index funds are a good choice as being less volatile. Well, you will not earn your money fast but you could stay in the market for a long time, over 10 years, for example. And you’ll make a profit.

Index investing is essential for laziness. Trust us. You don’t need to actively manage ETFs. What you have to do is to choose among several different recipes but generally, they come into three categories:

Two-fund portfolios
Three-fund portfolios
Four-fund portfolios

Two-fund portfolio

A two-fund portfolio is suitable for investors who want an easy asset allocation portfolio. The two-fund portfolio is built of one fixed-income fund and one equity index fund. You will find your selections depending on the asset class and asset type.

It easy to create a two-fund portfolio.

There are almost 2,000 ETFs out there and you can pick any of them.

First, decide which assets you need. Stocks and bonds are of the core asset classes and your lazy two-fund portfolio will need them. Stocks perform well when the economy is good. But, bonds will protect your portfolio from market uncertainty. Of course, you don’t need to hold stocks and bonds, you can choose something else, as we said.

If you are a very lazy investor your two-fund portfolio could be consists of 60% of total world stock index fund or ETF and 40% of US diversified bond index fund or ETF, for example.

Three-fund portfolio

A three-fund portfolio is composed of only three assets. They are usually low-cost index funds. It requires very little maintenance on your part and that’s why it is another example of a lazy portfolio.

It is a pure 60/40 rule. This one recommends investing in international index funds and stock market index funds. For example, according to Taylor Larimore, an advocate of holding investing simple, all you need is to handle with three mutual funds. That will require an hour per year managing your money, he said. You may diversify your three-fund portfolio on 40% of bonds, 42% of stocks and 18% global stocks. According to some experts, it is the best proportion.

Four-fund portfolio

The best example of this kind of lazy portfolios maybe is Dr. Bernstein’s “No-Brainer” lazy portfolio.

Dr. William Bernstein wrote “The Intelligent Asset Allocator” and “The Birth of Plenty”. He has promoted the capability of the index fund over individual stocks and bonds.

One portfolio that he proposed in “The Intelligent Asset Allocator” is named the “No-Brainer” portfolio. It is composed of 4 equal funds: 25% bonds, 25% global stocks, 25% US stocks and 25% small-cap US stocks. No-brainer indeed.

But this portfolio will give you a chance to diversify the risk over time.

If you are smart, you can be lazy

You will show you are a really clever investor if you set up all of your buying to be automatic. For that, you will need SIP – a systematic investment plan. Mutual fund or brokerage could help you with this. In this way, you will lessen the risks of market fluctuations. Moreover, this will provide you invest a fixed sum in a mutual fund plan at regular periods. For example, you can invest $500 in a mutual fund each month. It is a helpful tool.

Manage no-load funds

As we said, a no-brainer is really good. If you use no-load funds for your lazy portfolio you will avoid sales charges, so-called loads. Well, to make this clear. You are dealing with mutual funds and it is quite possible to do all the necessary things related to your portfolio and investments, yourself. So, why should you pay any additional fees? The point is to keep your cost low to boost your returns, right?

Rebalance your lazy portfolio

Re-balancing a lazy portfolio is simply turning the current investment allocations back to the initial investment allocations. So, you will need to buy or sell shares to bring back the allocation percentages into the initial balance.

Re-balancing is important maintenance and you should do it periodically, for example, once per year. Well, there is always a possibility with, for example with mutual funds, to set up automatic rebalancing.

Advantages of a lazy portfolio

Lazy investing could be the best way to invest. First of all, it is simple Holding just a few funds makes things easier. Further, it is low-cost investing since you don’t need to pay any fees for trading, managers, etc. If you build a lazy portfolio you just have to buy some cheap assets and voila. But the most important feature is the diversification. You can hold thousands of stocks and bonds with just several investments.

Disadvantages of a lazy portfolio

It isn’t easy to find some disadvantages, but there are some things to consider before starting.

One of them is tax-loss harvesting. if investing with 2 or 3 funds, you might miss out on some tax-loss harvesting possibilities. The other problem is the lack of customization. You can’t customize a lazy portfolio like you can with others. But that is the point, to keep it simple. Simplicity is the amazing part of it.

17th January 2020
7Twelve Portfolio – Craig Israelsen Strategy

The Israelsen 7Twelve is intended to protect the portfolio against losses. The portfolio has 7 different asset classes and 12 different funds. Each fund has the same weight of 8.3% or 1/12 of the overall portfolio.

7Twelve, a multi-asset balanced portfolio, is developed by Craig Israelsen, Ph.D. in 2008, today he is a principal at Target Date Analytics. As a difference from a traditional two-asset 60/40 balanced fund, the 7Twelve strategy covers various asset classes in an investment portfolio. The purpose is to improve performance and reduce risk. This represents a totally new school of a balanced portfolio.

The number 7 describes the number of asset classes proposed to add to your portfolio. The number 12 (twelve) outlines the number of separated mutual funds that fully represents the 7 asset classes in your portfolio.

The roots

Craig Israelsen was a teaching family finance at Brigham Young University. One day he got an interesting question: What should be in a diversified portfolio? Even if he thought how the question is interesting, Israelsen didn’t have the right answer at that very moment. The subject was so provocative that Israelsen developed a unique formula for portfolio diversification. It was 2008.

which has been catching on with financial planners. The name 7Twelve Portfolio came from Israelsen himself.

The reason is simple. His new portfolio consists of 12 equal parts of mutual funds pulled from seven fund types: real estate, natural resources, U.S. equity, non-U.S. equity, U.S. bonds, non-U.S. bonds, and cash. But it was the first version based on historical data to 1970. Later, as the markets changed, he added U.S. midcap, emerging markets, natural resources, inflation-protected bonds, and non-U.S. bond funds.

7Twelve strategy

Each mutual fund in the 7Twelve strategy is equally weighted and represents 1/12th of the portfolio. This allocation is managed by adjusting the portfolio back to equal parts monthly, quarterly or annually.

7Twelve model is the “core” of an investment portfolio. Any investor may add individualized assets around the core. But one thing is obvious, using 7Twelve can improve the efficiency and the portfolio performance for the investor because it is a strategic model and doesn’t rely on tactical moves or changes.

Investing by using 7Twelve strategy

There are some statistical data that support the idea of how Israelsen’s portfolio model is better than traditional. For example, if we observe the Vanguard Balanced Index fund (consists of 60% U.S. stocks and 40% U.S. bonds) from 1999 to the end of 2014, we will find that it had an average annual compound return of 5.7%. In the same period, the 7Twelve portfolio would return 7.6%, as Israelsen calculated it. The result showed that the 7Twelve portfolio had smaller losses in bad years, and that is the point of a well-diversified portfolio, right?

Some experts argued with Israelson, claiming that he made 7Twelve by back-testing which allocations have had the best performances in the recent past. If yes, why and how would he equally weight assets? In such a case, the returns would be different.

The value of 7Twelve is its simplicity. Actually, it can be easily adjusted for each investor individually.

The advantages

7Twelve portfolio gives a wide diversification because all known asset classes are covered. So, you can get excellent diversification across many asset classes. Simplicity is a great part. It is so easy to follow 12 funds or ETFs, equal-weighted. Moreover, this model is one of the rare that includes mid-cap stocks. Maybe the most useful part is a great opportunity for rebalancing monthly, quarterly or annually. That possibility is giving reduced risk and increased returns.

Rebalancing the 7Twelve Portfolio

Rebalancing is an important part of the 7Twelve plan. It is very simple. All you have to do is bringing each of the 12 funds in your particular 7Twelve model back to their given allocation (1/12 or 8.33% in the core 7Twelve model).

For example, if you had some funds that performed better in the, let’s say the prior quarter, just deposit more into the funds that were underperformed in the same quarter. In this way, you are rebalancing the account of all funds in your portfolio. That is how you have to manage your portfolio, without emotions.

Let’s say your investment 7Twelve portfolio is $10.000 worth. If you don’t re-balance it, you will lose 13 bps over 20 years. That is empirical evidence. In money, it is almost $920.

The full info you can find HERE

It is a strategic portfolio. All you have to do is to set the percentages and rebalance them when they get out of balance. And you can stay relaxed until some market events ask for you to rebalance. Generally, a good idea. Just view this portfolio graphically.

Bottom line

Every single investor would admit that diversified investing is a great and ultimate thing for everyone in the market. But the reality shows that the ordinary investor hasn’t too much experience in building a diversified investment portfolio. Most investors are holding a portfolio of several mutual funds. That isn’t diversification. 7Twelve provides investors the possibility to build a diversified, multi-asset portfolio.

In many articles and books, Craig Israelsen explained how simple it is to maintain a strong portfolio with a plan. And it is. Moreover, it provides investors to reduce risks of investing.

The deeply diversified portfolio avoids losses efficiently, decreasing the usual deviation of return, and frequency of losses. A well-diversified non-correlated portfolio provides a good return and low volatility.

What people don’t like about 7Twelve? Firstly, some think there are too many commodities.

Secondly, some stated that this strategy is boring. Investors who like to check their portfolios every hour a diversified portfolio could be. The same comes to investors that like to detail-manage their investment. But no one says this is an unreasonable portfolio. Contrary. Literally, you can find plenty of good portfolios and this is one of them. The main problem is that only a small number of investors have been using this portfolio for a long time despite the fact it is created more than 10 years ago.

The most important thing is to choose one and stick with it, through the highs and deeps.

16th January 2020
Microcap Stocks – Recognize The Risks And Get The Rewards

The main difference between a microcap stock and other stocks is the amount of reliable publicly-available data about the company but potential growth can be great in the long run.

The microcap stocks can be riskier, sometimes significantly than other assets. A lot of them are traded over the counter. They are not in the investors’ focus so, due to the lower demand, the prices of microcap stocks are cheaper. Since they are OTC traded they do not have to match the listing standards created to protect investors. Microcap stocks are relatively anonymous and whoever wants to invest in them has to follow very closely.

Microcap stocks are viewed as risky investments for a reason. They often belong to the corpus of new companies in the beginning stage, so it can be difficult to gauge how successful they can be in the market. Firstly due to the fact they don’t have historical data for investors to examine. Moreover, this lack of data may increase the risk of fraud.

But the favorite Wall Street maxim is: “The higher the risk, the greater the reward.”

That is true, especially for the microcap stocks. Because these companies are small and their stock prices are low, they can be a great potential for growth and great returns.

The risks of investing in microcap stocks

Investing in microcap stocks is connected to numerous difficulties. Finding some to research is the last in the list of many challenges. First of all, there is a lack of historical data and you have to be prepared for more hands-on methods and additional work. For large and midcap stocks you can find a lot of valuable data, even for the smallcap stocks. Well, investing in microcap stocks requires deeper digging. But if you do your homework well you can expect a handsome reward.

The additional risks come with a lack of liquidity.

How to deal with it when buying the stock?

Let’s examine the following situation.

For microcap stocks, the price is low, the volume is small. So, when most of the sellers sold their microcap holdings, liquidity will dry up. So, the interest of buyers becomes smaller. But this is the right time to buy them.

Management of microcap companies often meets tremendous challenges in bringing liquidity to the company’s stock.
Generally, microcap stocks have a liquidity problem.

And everyone in the company would like trading volumes to increase. The question is how to reach the investors and increase liquidity. Maybe the main problem for those companies is that Wall Street isn’t interested in them. Let’s be honest. Microcap companies are under their radar.
This could be one of the reasons why most investors don’t invest in microcap stocks. Well, when you invest in stocks with high liquidity you expect they are highly efficient. Your transactions will be executed in seconds and your returns will be at best average.

That’s the problem, where is the possibility?

Microcap stocks are companies whose market value is usually between $50 million to $300 million. If you are looking for additional long-term investment they could be the right choice. Even if you are building your wealth by investing in large-cap stocks microcap stocks could provide you a good mix in your portfolios.

Microcap stocks are less followed but offer benefits. They offer higher returns over the long run. Microcap stocks have the high-returning quality combined with greater alpha potential.

Let’s say, small companies tend to outperform large companies over the long-term. For example, in the past several decades, from the 1970s, they have outperformed large-cap stocks by more than 1% annually. Speaking about higher alpha, you must know that less investor attention leads to greater chances to recognize quality, growing companies before they have been identified by the market.

Microcap stocks can have powerful roles in asset allocation.

They offer many of the benefits such as access to early-stage, high-growth companies. Moreover, they do that with higher liquidity and transparency than private equity, for instance. Also, microcaps don’t have a problem with valuations and a lack of deal flow.

Furthermore, a microcap can be a complete strategy that fills out the rest of an investor’s equity allocation.

In comparison with larger companies, microcap stocks have a better spot when it comes to growth. Hey, you are investing in microcap stocks because of a chance to get in the market before a company bounces and skyrockets. The only way to go with them is up. We suppose you will pick a successful company, though. When the company you invested in growing, you will profit.

Diversification is important because it provides to spread out the risk. A diversified portfolio will give you some protection from market volatility. Never miss out on the chance to invest in different kinds of assets. By investing in microcap stocks, you can create balance in your investment portfolio.

Benefits of microcap stocks investing

If you are seeking market outperformance you will have it by investing in microcap stocks.

First of all, they may give unlimited growth potential. Well, some of the famous companies, started as microcaps. And, honestly, that is the pure beauty of investing. Finding a small company and watch how it is growing over time. That is the privilege. Your stocks were almost worthless when you bought them but look at them now! You were smart enough to recognize the potential. Great! Small companies have more space to grow. Find the one like this and you will have great returns.

Further, follow the example of Warren Buffett. As a young investor (everyone knows this story) he was buying by the market undervalued stocks. If you are familiar with the efficient market hypothesis, you may think that stocks are fairly valued by the market. Well, they are, theoretically.

But this is not the case in micro-cap investing. Because micro-cap companies are almost unknown and generally below the radar of big investors, you can buy them at a discount. What do you think about this advantage against other investors?

The additional advantage appears here with investing in microcap stocks. Micro-cap companies are very often (when they are successful) acquisition targets. The truth is, the majority of small companies never become corporations because some big sharks bought them. For investors, it is a jackpot.

On the other hand, micro-cap companies are really focused on their long-term outlooks. Their businesses are efficient and sustainable with great growth potential. This feature can serve as a winning acquisition target.

Bottom line

The downside of holding microcap stocks is their selling.

Selling a microcap stock can make you feel like you are doing something illegal. You can meet discrimination and refusals and sometimes it’s so hard for holders to find a buyer.
Microcap stocks, sometimes called penny stocks, trade below $1 per share or in the best scenario up to $5. Their market cap is less than $100 million. But, if you really want to start investing and enter the stock market but don’t have a lot of money, microcap stocks are a great opportunity.
As you can see, microcap stocks offer the potential for a notable upside. It can be a fuel for charging your portfolio. But before you jump in microcap investing, it is important to realize the risks of microcap stock investing.

For the first time, they should be a smaller part of your portfolio due to the risks and volatility.

15th January 2020
La Roche Caught Lying

La Roche defrauded U.S. federal and state governments for $1.5 billion. The company was lying that its influenza drug Tamiflu was effective at preventing potential pandemics.

Drug company La Roche (OTCMKTS: RHHBY) cheated U.S. federal and state governments out of $1.5 billion. The company was falsifying clinical studies and incorrectly declaring that its influenza medicine Tamiflu was effective at suppressing potential pandemics. That is stated in recently unsealed court documents.

The lawsuit alleges the La Roche company by publishing misleading articles incorrectly affirming that Tamiflu can reduce complications, mortality, and transmission of influenza, mislead the public and regulators. The problem is that the company used those articles for aggressive marketing. Its goal was to assure the US federal and state governments that Tamiflu is efficient for pandemic use.

Governments spent around $1.5 billion to stockpile Tamiflu

According to the complaint, governments spent around $1.5 billion to stock with Tamiflu in good faith to Roche’s claims. But Hoffmann-La Roche caught lying about Tamiflu.

The lawsuit comes under the False Claims Act. According to this Act, individuals can bring claims on behalf of the government. It is stated in the lawsuit that the reimbursement is seeking in the name of taxpayers whose funds were spent on buying Tamiflu. The governments bought tens of millions of units of Tamiflu for the Strategic National Stockpile and spent, from 2005 $1,5 billion for that.

Possible penalties

Roche could pay judgment bellow $4.5 billion but this one, the False Claims Act requires payment of triple damages, and civil penalties are added.
The whistleblower is Dr. Thomas Jefferson, a doctor and public health researcher in the global Cochrane Collaboration research network.
He has researched inhibitors and among them, Tamiflu also. He works in this field over the past twenty years. When he started to examine Tamiflu’s efficacy in 2009 he demanded from the company to release the underlying clinical study data. Dr. Thomas Jefferson got data four years after. It was 2013 when he realized that Tamiflu’s effectiveness didn’t fit Roche’s statements about the use in an influenza pandemic, the lawsuit states.

To make this more unbelievable, as early as 2000 the Food and Drug Administration (FDA) analyzed Roche’s data about clinical trials of Tamiflu and warned the company that data showed different effectiveness than Roche claimed. Moreover, the FDA found that Tamiflu gives a small benefit of reducing the duration of flu symptoms but the drug isn’t able to prevent transmission nor infection. Hence, the FDA also warned Roche that its statement was misleading.

The lawsuit declares that Roche was aware that Tamiflu is an inefficient drug for resisting influenza pandemics. Yet, Roche marketed this medicine to fill Roche’s account at taxpayers’ expense.

Hoffmann-La Roche caught lying a long time ago

This drug was originally produced as an answer to seasonal influenza. But the competition was great and Roche wasn’t satisfied with the revenue the drug generated. So, they started to promote Tamiflu as neuraminidase inhibitors, which are intended to prevent clinically relevant influenza virus strains from spreading inside the body. But the data was false.

Almost six years ago The Guardian reported about how Tamiflu is efficient. At that time, the Cochrane Collaboration, a not-for-profit consortium of 14,000 academics and researchers who periodically examine the medical literature to assess the safety and effectiveness of various treatments. obtained all data despite Roche’s willingness to withhold the results of its clinical trials.

By having the data, the Cochrane Collaboration has found that Tamiflu has little or no impact on problems of flu infection, for example, it couldn’t prevent pneumonia.

In December 2009, the British medical journal (BMJ wrote about an investigation that proved that Tamiflu couldn’t prevent serious complications or death in people that have the flu. At that time, the British medical journal suggested that Roche, the Swiss company that produces and sells Tamiflu, has misled governments and doctors.

Roche has claimed that its medicine decreases hospital admissions by 61% in patients who were healthy before they got the flu. It has also claimed that Tamiflu reduces complications like bronchitis, pneumonia, and sinusitis by 67%, and lower respiratory tract infections requiring antibiotics by 55%. All lies.

Still unrevealed

Who can answer the question of why governments all over the world have invested $3 billion in one year, according to the investment bank, JP Morgan, from the emergence of H1N1 in spring 2008 to the end of 2009, for a drug that is not efficient.

Tamiflu’s luck began in 2003, after the SARS outbreak and the emergence of bird flu. And governments started to pile up the drug in a fear of pandemic.

Roche Holding AG Stock (ROG.SW), (OTCMKTS: RHHBY)

Despite the mentioned scandal with Tamiflu and lawsuits, Roche Holding AG stock seems to be a good long-term investment. RHHBY (ROG.SW) could be a profitable investment option if you are looking for stocks with good returns.

The stock traded at a bit above $41 on January 14 this year. Experts anticipate that RHHBY could go above $73 in the next five years. But the whole pharma sector isn’t in such a good position right now. Especially, European pharmaceuticals.
The interesting thing, Bank of America anticipates European stocks to rise this year. But with the exception of the pharmaceutical sector.
The pharma stocks, related to the broad market, move in the opposite course to U.S. bond yields. So if yields rise (the Bank of America expects it will) then the pharmaceutical sector should be damaged. But also, there are some other problems for this sector too. It is its sensitivity to the dollar. It is normal because 40% of the sector’s sales come from the U.S. With the reduction in trade tensions between the US and China, it is expected for the US dollar to weaken.

If we put all of this together, the European drug sector could underperform the broader index by 13% over six months. Maybe some influence could have a reducing drug price. But we will not bet on it. It’s better to put it on a political field not financial.

Bottom line

The analysts have issued 12-month target prices for Roche Holding Ltd. Genussscheine’s shares. Their forecasts are from CHF 225 to CHF 375. On average, they anticipate Roche share price to reach CHF 318.17 in the next year.

Twelve Wall Street analysts have issued “buy,” “hold,” and “sell” ratings for Roche Holding Ltd. in the last year. Currently, there are 2 sell ratings, 2 hold ratings and 8 buy ratings for this stock. So, a consensus recommendation is “Buy.” After the last lawsuit that alleges the Hoffmann-La Roche company was incorrectly affirming that Tamiflu can reduce complications and death in people with flu, everything is possible. The company can be punished by investors and they may start hard selling. That will decrease the stock price. Since things work that way in the market, some other investors will see the opportunity to buy more at a lower price.

14th January 2020
Risks Of Investing In The Stock Market And Strategies to Avoid Them

Investing in stocks is a risky game. On some of them, you can have full or partial control.

Risks of Investing in the stock market is a necessary part of investing. If investors want great returns, it is necessary to take great risks. However, the greater risks will not guarantee you will have greater returns. So, additional risks will not always bring you huge returns. But if you are long-term-type investors, you must understand that there will be some periods of underperformance in the investments. And you have to be prepared for that and not panic. If you cannot handle your emotions while investing you are likely to have a smaller chance in the stock market. Taking a risk means to have a higher tolerance for risk. Well, if you are not comfortable with it, you will probably make lower returns. But one thing is in your favor – you will never make great losses.

Anyway, you must understand that there is a necessary trade-off between investment and risk. Greater returns are linked with risks of price changes.

So, it is crucial to decide what is your risk tolerance and you have to do so before you enter the stock market.

What do you want: to protect your initial capital or you are ready for a wild ride with all the ups and downs in the stock market to reach higher returns?
If you can take a low or zero portion of the risk, be prepared that your returns will also be very low. On the other hand, if some investment generates huge returns, think twice is there some high risk you cannot accept.

High-risk investments require to hold a position for a long time, not less than 5 years. Do you have a stomach for that? Why the time matter?

As an investor, you must have the capacity to hold it longer to give shorter-term issues time to fix themselves. But remember, higher levels of risks will not always result in high returns.

There are special risks which investors should be aware of.

What are the risks of investing in the stock market?

We will point on some of them. The risk can be a capital loss. Let’s say you picked up some stock of the company with suddenly poor performing and the market recognizes it as negative. The consequence is that stock price could drop, a lot under the price you paid for them. The stock may even end up worthless. Zero! In such a case, the company’s stock will not trade. Moreover, the company may be delisted.

Further, there is always volatility risk. Stocks are volatile assets, their price may shift significantly in price in a short time. And, also, there is an exceptional market risk influenced by external factors. In such circumstances, the whole market could decline and the stock prices will be affected too. Also, not the whole market has to decline but the sector could. For example, a specific sector may experience downturns. Well, while some will catch the losses but at the same time, such periods are a great chance to buy stocks at a lower price. You see, the stock market is a zero-sum game. You can profit only when some others lose.

Also, the risks of investing in the stock market could come from the nature of the stock. To be honest, the stock price is extremely sensitive to bad news or investors’ sentiment toward some companies. For example, the company issued a poor earnings report or published management changes. The investors may disagree with that and could start selling the stocks.

Very specific risks of investing in the stock market may appear if you try to sell or buy stocks at the wrong time. You must have the right entry but more important, you must have a great exit. The last is the hardest part of the stock market but doesn’t have to be. Check HERE.

As we said, these are just a few risks you can meet while investing in the stock market. The crucial part is to understand what kind of risks you may have with your investments and how you can handle them.

Strategies to avoid risks of investing

Frankly, it’s impossible to entirely avoid risks. What you as an investor can do is put them under control. Actually, you can control your exposure to risks to the agreeable level. The risk you can handle and want to take. For that to do you have to know exactly what are you investing in and identify the possible issues all of these before entering the market and buying a stock. When you identify the risks involved you’ll be able to handle them.

How to manage the risks?

Firstly, define your investment goals, risk tolerance, and limitations, and plan according to what you found. Invest only in a sector that carries a lower risk than you are prepared to take. Go below your possibilities when it comes to risks.

The other solution is a diversified investment portfolio. It will give you good support. Your investment portfolio must contain several different assets. Spread your investments on bonds, utilities, mutual funds, cash, along with the stocks. Never put your whole capital into one single investment.

Combine them, long-term investment, short-term, but be careful about changes in your fundamental investment.

Also, a good decision could be to add derivatives to your portfolio. You can use them as a hedge against the risk. For example, the stock price is dropping, instead of selling them you can avoid losses by shorting futures. Of course, you have to choose futures of underlying assets that match your holdings. The hard part here is the value of futures compared to your stock portfolio. Exchange-traded futures have standard sizes of the contract. Hence, sometimes they will not give you a perfect hedge and you can over-hedge or under-hedge your stocks.

The other stock market risk management possibilities

You can also adopt a maximum portfolio drawdown rule. What does it mean? You have to set limits to the size of the drop in your portfolio value you can allow. In other words, determine how much of your portfolio you can bear to lose. This will decrease your personal ability to make emotional changes at the wrong time.

Keep your focus on stock price, and the value of an investment. Of course, plan ahead. The valuation is actually the heart of long term risk. Smart investors may have the advantage of volatility if they use tactical asset allocation. Follow their example. That will give you a chance to buy more assets when the prices are low but also, to hold fewer stocks when the prices are expensive.

Historical data shows stocks purchased while valuations are low, provide higher returns in the long run. Contrary, buying while valuation is expensive, generates the returns below average.

Bottom line

Risks of investing are part of being in the stock market. Sometimes, you will need to take bigger risks to reach your goals.
Learn the risks of investing in the stock market and do your homework. Make choices that will help you meet your investing plans.
Examine the risk of your investments from time to time. You have to know they still satisfy your risk tolerance.
Once some phrase appeared, we’ll paraphrase it: Be willing for the best, but act like the worst is coming soon.
You must be able to shift fast if suddenly something wrong appears. And, never give up!

13th January 2020
Value Investing Is Coming Back

Value stocks have underperformed since the beginning of 2007. But Goldman Sachs and Morgan Stanley claim that they have great potential.

Value investing is coming back according to data from the last autumn. This granddaddy of all investment types was set up in the first half of the 20th century and it is still actual.

For example last year, value investing has gotten fired by a typical value sector, energy. Last September made value investors satisfied, as returns of winners among cheap stocks outperformed big companies by a wide margin. The value-stock rally was exciting, unexpected, and fabulous. The past 10 years weren’t good for value investing. Actually, the value stocks were underperformed the growth stocks. They had weaker performances than it was the case with growth stocks. Moreover, some fund managers didn’t want to invest in utilities. What a great mistake! Utilities are the value stocks backbone. Their explanation was the value stocks are too expensive. Really? The fact is that utilities had a great performance last year and those managers suffered in a loss.

Why value investing is still a good opportunity?

Historically, they beat Grand Depression, played well during recessions, and inflation periods. Moreover, growth stocks have not become more profitable. So, the value stocks should finally be better. The reason is simple. They are unfairly cheaper. And that’s the point of value investing – finding under-appreciated stocks trading at low prices.

The stock market analysts found that stocks traded with low P/E and P/B ratios can easily beat the wider market. This opinion is supported by the facts.

A historical outlook

At the time of the financial crisis in August 2007, the S&P 500 index has returned 175%. The total return of value stocks in the US market was 120%. The return of growth stocks was fantastic 235%. Let’s go in the past more. Almost 20 years ago, value investors were devastated. For example, in 1999 and 2000 were so bad years for the value investing that some value investors had to step out of the market and retired.

But let’s stay for a while in 2007 and analyze growth investing deeper. What did happen?

That growth-strategy outperformance ended with the fall of the dot-com bubble. Value stocks came out of favor after the 2007 Global Financial crisis. On the other hand, growth stocks are performing remarkably well. Value stocks became unfairly cheap. You can notice that investors are expecting this global trend to continue since the global economic growth is slow. So, value stocks are trading at a discount compared to its more expensive growth peers.

But, is this discount a reason to invest in value stocks? It looks like that because value investing builds up. Slow economic growth caused value stocks to continue to produce stable free-cash flows. Yes, their businesses have slowed, but not damaged. At the same time, some of the growth stocks become extremely expensive. Moreover, the risk of failure in growth stock investing during slow economic conditions has grown.

Value Investing continues to make the headlines and not only in the US but also in Europe. We all can witness an increased number of headlines and publications, most recently, on the coming death of value investing. But now, something has changed.

Value investing is not dead

Timing the market seems to be difficult for investors. The intraday volatility grew over the last year, therefore, investors prefer not to bet as it will hurt long term goals. But this situation is beneficial for value. The value stocks start to outperform.

That will be a major market change. Value stocks’ years-long downtrend begins to turn. For some, it may seem a bit strange because investors in more cases neglect bargains. Everyone is trying to catch the major winners, famous companies, expensive stocks. They prefer to overpay some stock because of excitement. Oh, how wrong they are! But as we said, value stock investing is coming back.

Firstly, value stocks are cheap.

Value investing is the main principle for equity managers. There is long-term potency to buying cheap stocks over expensive growth stocks. Value investing was attractive over the entire history. Why shouldn’t it continue?
No one could say value investing is dead.

Goldman Sachs predicts a new life for value investing

Value investing has been decayed after years of underperformance. But Goldman Sachs says there’s still great growth possibilities in this classic factor strategy. And here are some reasons behind.

Value stocks will come back in favor very soon.

David Kostin, Goldman’s chief U.S. equity strategist explained that during the last 9 years the difference in valuation of expensive and cheap stocks was wider than ever.

Kostin said: “A wide distribution of price-to-earnings multiples has historically presaged strong value returns. However, a rotation into value stocks would require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing.”

The renaissance is coming

Value investing has gone out of favor particularly because the economic expansion gets stretched longer. Value brands continue to falter due to modest GDP.

But this course could start to change for value stocks. In the US an easier monetary policy from the Federal Reserve could increase growth expectations. Also, a rate cut could support the economy additionally. Bankers announced that possibility. Also, we already saw signs of resilience in US value stocks last September. Analysts predict that value stocks could finally enjoy a rebirth in 2020. Value investing means buying stocks that are trading below their value in the hopes of notable profit when the company comes into favor.

By default, value stocks have underperformed since the financial crisis. The investors have shifted into more energetic growth stocks, for example into technology. But last autumn, growth stocks were trading at high valuations and they became too expensive. In the same period, value stocks have shown important strength.

From October last year, the Russell 3000 Value index has dropped 2.4%, and the Russell 3000 Growth index has experienced a worrying 7.1% reversal.

Yes, growth stocks had a bounce, and outperformed value stocks. But there is some rule pointed by Morgan Stanley’s analysts. The markets are in the process of a regime change. That means the investors’ willingness to buy growth stocks will decrease as interest rates rise.

Goldman’s High Sharpe ratio

For investors assured on value stocks comeback, Goldman has selected value stocks with “a quality overlay.” Do you understand what does it mean?

These stocks could easily generate three times bigger returns than the average S&P 500 company with similar volatility. It is Goldman’s Sharpe ratio basket composed of 50 S&P 500 stocks with the highest ratios. This ratio measures a stock’s performance related to its volatility.

Goldman named the stocks with the highest earnings-related upside to consensus target prices. That are Qualcomm, Western Digital, Marathon Petroleum, Halliburton, Facebook, and Salesforce.

Bottom line

Many of the world’s most successful investors hold value stocks. They are buying cheap value stocks and benefit as the companies manage to work better.

For this to work, the stock has to stay cheap, so the company spends money on tremendous dividends and buybacks. The other option is the company be re-valued at a more relevant valuation, meaning more expensive. That is happening when the market recognizes the previous mistake in valuation.

For example, take a look at Altria (MO).

When the evidence about how toxic smoking is, appears to the public and more and more people stopped to smoke, investors had a feeling that cigarette producers will have a problem, the stock valuation was low. Well, something different happened to the company. The fundamentals remained strong. These stocks had good returns and still have.

How is this possible?

The stocks had higher dividend yields and investors reinvesting their dividends. Very good play. Tobacco companies also reinvested. They were buying back their cheap stocks and increased their earnings-per-share and dividend-per-share.

Smart investors know that value stocks can outperform most other factors. Some of the cheapest stocks in the market today are banks, oil companies, and so on. Keep it in mind.

So is value investing coming back? Do we really need to think better what the definition of value is?

12th January 2020