2010: A truth odyssey — The quest for investment truthsArticle added by Ron Surz on January 18, 2011
Joined: November 01, 2010
Ranked: #383 (225 pts)
Editor’s note: This is an executive summary of “2010: A Truth Odyssey — The Quest for Investment Truths.” To read the entire article, Odyssey of Investment Truths_Print.pdf.
Stock markets in 2010
- The total market (5000 stocks) returned 18 percent. The S&P500 lagged with a 15 percent return.
- Smaller companies were in favor, returning more than 20 percent, while large companies returned “only” 13 percent.
- Materials and consumer discretionary companies performed best, earning 35 percent and 30 percent respectively. Health care and consumer staples lagged with 6 percent and 9 percent returns.
Lessons from 2008 that are still waiting to be learned
- The total market (20,000 stocks) earned 17.5 percent, more than doubling the EAFE (900 stocks) index’s 8.2 percent return.
- Small-to-mid (Smid) value was in favor, earning 30 percent, while large companies returned 12 percent.
- Latin America and emerging markets led with 40 percent and 28 percent returns, respectively, while Europe-ex-UK lagged with a 5 percent return.
The 85-year history of the U.S. stock and bond markets
- The Madoff Mess showed us that most due diligence is a big fat fake-out, including due diligence on traditional long-only managers. I provide a few tests to determine if we are getting the real thing from our due diligence researchers. Not much has changed since Madoff.
- Portfolio structure could be improved upon. In particular, core-satellite investing would be much better with a centric core, that is neither value nor growth, rather than a blend core that combines value and growth.
- The average 2010 Target Date Fund (TDF) lost 25 percent in 2008, demonstrating that fiduciaries should take back control by setting investment objectives, but they have not. So far, fiduciaries have abdicated this responsibility to fund companies, with the predictable outcome that TDFs are built for profit rather than the best interests of the participants.
- T-bills paid far less than inflation in 2010, earning 0.12 percent in a 1.21 percent inflationary environment. We paid the government to use their mattress.
- Bonds were more “efficient,” delivering more returns per unit of risk, than stocks in the first 42 years, but they have been about as efficient in the most recent 43 years. The Sharpe ratio for bonds is 0.60 versus 0.38 for stocks in the first 42 years, but the Sharpe ratio for both is about the same in the more recent 43 years.
- The past decade has been the worst for stocks across the past eight consecutive 10-year periods.
- Average inflation in the past 43 years has been about three times that of the previous 42 years.
- Long term high grade bonds fared very well in 2010.
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