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What Greece And China Teach Us About Investing

By Andy Rachleff It’s been a crazy couple of weeks for the investing world. China’s stock market – after one of the biggest run-ups of any market in history – has suffered a 40% collapse in just a few weeks. Greece has teetered on the brink of default, and still may or may not exit the euro. The U.S. has drawn up a major new deal with Iran, oil is down sharply, and Indian stocks are rallying like mad. What should an investor do? In a word: Nothing. If there’s anything that the day-by-day machinations of the market teach us, it is that slow and steady wins the race. The Incredible Mean-Reverting Nature of Stock Returns Investors have long known that staying the course is one of the most important things to do. Some of the best research on this topic comes from the so-called “Wizard of Wharton” – University of Pennsylvania professor Jeremy Siegel. In his New York Times bestselling book, ” Stocks for the Long Run ,” Siegel looked at the performance of equities from 1802 through 1997, the year the book was first published. His findings were astonishing: Despite the day-to-day volatility that we all feel, the actual long-run returns of stocks are remarkably consistent. Here’s how Siegel summarized his findings: ” Despite extraordinary changes in the economic, social, and political environment over the past two centuries, stocks have yielded between 6.6 and 7.2 percent per year after inflation in all major subperiods. The wiggles on the stock return line represent the bull and bear markets that equities have suffered throughout history. The long-term perspective radically changes one’s view of the risk of stocks. The short-term fluctuations in market, which loom so large to investors, have little to do with the long-term accumulation of wealth. ” His last line bears repeating: ” The short-term fluctuations in market, which loom so large to investors, have little to do with the long-term accumulation of wealth. ” Siegel found that almost no matter what period you looked at, stocks delivered about 7% after inflation. The Civil War, World War I, World War II, even the Great Depression (marked by the second black vertical line) were hiccups compared to the overall trend. The pattern repeats in other countries, including those that have experienced catastrophic collapses. World War II, for example, sheared 90% off the value of German equities… but German stocks completely rebounded by 1958, rising 30% per year, on average, from 1948 to 1960. They went on from there to new highs. Averaged out over the long haul, their return is a consistent 6.6% real return… a figure that continues through this day. The same is true for Japan, the UK, and all other markets that Siegel has studied; in the short run, volatility, but in the long run, profits. Can’t We Just Side-Step the Disaster Spots? Of course, the best possible outcome would be to steer clear of pullbacks, selling when markets are about to collapse and buying when they start to recover. This is the marketing pitch used by virtually every active manager in the world, and it is intuitively compelling. “Greece has been a disaster for years,” you can’t help but think. “Surely, if I had been paying attention, I would have sold and avoided its recent fall.” “China’s stock market was clearly a bubble,” you ponder. “The economy is slowing; reforms are stagnating; any idiot would have sold out before things got bad!” Unfortunately, the data shows that even highly-paid professionals are bad at sidestepping these pullbacks, and everyday investors are worse. As mentioned repeatedly on this blog, every piece of significant data shows that the vast majority of active mutual fund managers underperform the market over any meaningful period of time. Despite all their highly-paid analysts and fancy data services, they can’t beat a broad-based index. But the dirty little secret is, as bad as professional money managers are at beating the market, retail investors – on average – do worse. In a major study published in February 2015 , Morningstar looked at the difference between the average return of mutual funds and the actual returns that investors enjoyed. The data is brutal: While the average U.S. equity mutual fund returned 8.18% for the decade ending December 31, 2013, the average dollar invested in U.S. equity funds returned just 6.52%. For international equity funds, the situation was worse: an 8.77% return for the average fund, but a 5.76% return for investors. (click to enlarge) John Reckenthaler, the vice president of research at Morningstar, explained what was happening in Barron’s last year. “The problem,” the magazine wrote, summarizing his comments, “is that investors tend to get in and out of an asset class at the wrong time.” In other words, we tend to buy high and sell low. The problem is worse in the more volatile asset classes, ostensibly because we’re more likely to panic. (It’s not just Morningstar. DALBAR conducts an annual study that looks at the same effect over rolling twenty-year periods. Its last finding shows that investors underperformed the market by 4.2% per year over the past twenty years.) Don’t Buy What They’re Selling The reason we don’t hear much about the power of long-term investing – and the truth about the futility of trading – is that long-term investing is boring and it’s cheap. The financial media thrives by encouraging you to panic, and large parts of the financial industry make money only when you act. Big moves sell newspapers, and high trading activity means commissions for online brokers. The only people who don’t profit from that activity are investors themselves, because as it turns out, we can’t predict the future. Even as we finalize this post, Greece is possibly stabilizing, Chinese stocks have evened out and the crisis-du-jour involves gold. Did you see that coming? Do you know what comes next? It’s hard to stare down a significant market correction and stick to your plan. When the US government shut down in September 2013 during the budget showdown, we saw a large number of clients refrain from continuing to add deposits. They paid handsomely for missing out on the rebound. If you invest regularly, harvest your losses and rebalance your portfolio, you’ll end up benefiting from market corrections in multiple ways. It won’t be easy. But over the long haul, it will really pay off. For more on this topic please read: Stay the Course, Even While You’re Down There’s No Need to Fear Stock Market Corrections Invest Despite Volatility Disclosure Nothing in this article should be construed as a tax advice, solicitation or offer, or recommendation, to buy or sell any security. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information. The analysis uses information from third-party sources, which Wealthfront believes to be, however Wealthfront does not guarantee the accuracy of the information. There is a potential for loss as well as gain. Actual investors on Wealthfront may experience different results from the results shown. Andy is Wealthfront’s co-founder and its first CEO. He is now serving as Chairman of Wealthfront’s board and company Ambassador. A co-founder and former General Partner of venture capital firm Benchmark Capital, Andy is on the faculty of the Stanford Graduate School of Business, where he teaches a variety of courses on technology entrepreneurship. He also serves on the Board of Trustees of the University of Pennsylvania and is the Vice Chairman of their endowment investment committee. Andy earned his BS from the University of Pennsylvania and his M.B.A. from Stanford Graduate School of Business.

GREK: A Deal Is Near, But The Game Is Not Over Yet

Summary A deal between Greece and its creditors is near, but the Greek parliament must accept austerity measures by Wednesday. Greek banks need liquidity but the ECB won’t provide it to them if the parliament doesn’t pass the measures. Bank shares represent 25% of GREK’s portfolio and they may push its share price significantly upwards as well as downwards. GREK has a lot of upside potential after the new deal is closed, but investors should monitor steps of Greek government closely, as the Greek politicians are highly unreliable. As I wrote back in March , the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) has a significant upside potential, after the current situation is resolved. A lot of things have changed, but the situation hasn’t been resolved yet. GREK lost half of its value over the last 12 months, but the decline has slowed down significantly over the last couple of months. The $9 line wasn’t breached and the recent developments indicate that it maybe won’t be retested anytime soon. But the Greek debt saga hasn’t ended yet and the current optimism may turn into a huge sell off as soon as on Wednesday. Do we have a deal? Although the deal between Greece and its creditors is close, the game is still not over. After 17 hours of negotiations, there is an agreement that Greece will not have to leave the eurozone and that it will get another €86 billion, but the Greek parliament must approve austerity measures by Wednesday. The Greeks have to reform their VAT system, reduce pensions and make some immediate budget cuts. Greece will also create a trust fund that will manage state assets worth approximately €50 billion. The fund should be based in Greece but it will be managed by an external agency. The assets held by the fund should be privatized and the proceeds should be used primarily for debt repayments. It is expected that shares of Greek banks will represent a big part of the assets, as the Greek government will buy new shares of the banks in order to refinance them. The shares will be transferred to the fund subsequently. All of the measures must be accepted by the Greek parliament by Wednesday. And it is not sure whether all of the proposals will really pass, as there is a lot of Greek politicians who are against the austerity measures. Tsipras will need votes of the opposition, as he can’t rely on support of his own party. The Wednesday deadline is important also for the cash-strapped Greek banks. They desperately need liquidity from the ECB but it is expected that the ECB won’t provide them any liquidity if the austerity measures are not accepted by the parliament on Wednesday. If the measures pass on Wednesday, the GREK share price should start to realize its upside potential. Although there is a significant danger that there will be some complications. In this case the EU will probably postpone the deadline by a couple of days (the EU is really great in postponing deadlines and Greece is really great in missing deadlines) in order to enable another voting, but the reaction of investors may be very nervous. A breakage of the $9 level isn’t excluded. GREK composition and growth prospects The table below shows complete holdings of GREK, as of July 10. The biggest holding is Coca-Cola HBC ( OTC:CCHBF ) that represents almost 21% of GREK’s portfolio. A strong position has also Hellenic Telecommunications Organization ( OTC:HLTOY ). Both of the companies should be relatively stable. The problem is that GREK also holds a lot of bank shares. Source: own processing, using data of globalxfunds.com The National Bank of Greece (NYSE: NBG ), Alpha Bank ( OTC:ALBKY ), Eurobank Ergasias ( OTC:EGFEY ) and Piraeus Bank ( OTC:BPIRY ) represent almost 25% of GREK’s portfolio. These shares may lead the rally if the austerity measures are accepted and the ECB provides liquidity to Greek banks. On the other hand if there are some complications, shares of banks will be most probably the biggest losers. Conclusion I still believe that GREK has a significant upside potential, in the longer term. After the austerity measures are accepted, we can expect a relief rally. But the investors should be careful, as the Greek politicians have shown that they are highly unreliable. They had agreed to make some economic reforms in the past, but they violated their promises only a couple of months later. Even if the Greek parliament accepts the current proposals, there is no warranty that the Greek government will play by the rules. In this case, GREK shareholders should be prepared to liquidate their positions as soon as possible, to avoid losses similar to those recorded by GREK over the last 12 months. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

While The Athens Exchange Is Closed, The Greece ETF Show Goes On

Investors can still trade Greece through an ETF while Athens Stock Exchange was closed. GREK showing larger discount to net asset value. Investors should understand risks of ETFs that track international markets. Exchange traded funds try to reflect the performance of an underlying market. However, there are times when an ETF may diverge from the net asset value, especially with international markets. For example, the Global X FTSE Greece 20 ETF (NYSEArca: GREK ) is was trading at a 10.4% discount to its NAV on Monday, according to Morningstar data. GREK plunged 8.9% Monday on over four times its average daily volume after Greece rejected austerity measures demanded by international creditors in a referendum vote over the weekend. The Greece ETF has been swinging in volatile trading over the past week . ETFs, more or less, consistently reflect the movement of their net asset value, or combined value of all securities in an ETF’s portfolio divided by the number of ETF shares outstanding, as market makers or authorized participants create or redeem ETF shares by buying or selling baskets of underlying securities for ETFs. Since ETFs trade like any other stock on an exchange, the ETF’s price can fluctuate throughout the day. ETFs typically update their underlying trading value, calculating the approximate NAV every 15 seconds throughout the trading day. In domestic equity ETFs, the NAV works as intended. The NAV provides a fair value of the ETF, which basically means the fund is trading in line with its underlying assets with little or no tracking error. This also allows investors to get a better view of whether or not they are over or underpaying an ETF. When the ETF’s price is lower than the NAV , the ETF is said to be at a “discount” – the ETF is valued less than the fund’s overall holdings. If the ETF’s price is above the NAV, the ETF is said to trade at a “premium” – the ETF is trading higher than what the underlying holdings are worth. However, the NAV gets cloudier when looking into other markets. For instance, international markets are not open in the same time zone as U.S. markets, but foreign stock and bond ETFs are still trading on U.S. exchanges. Since the NAV is taken based on the last price at which it was traded, the NAV may not move during normal hours. Consequently, the NAV for international ETFs, along with most commodity and fixed-income funds, may represent a stale number as these markets don’t necessarily trade during normal U.S. market hours. In the case of Greece, the Athens Stock Exchange has been closed for at least a week, following the June 28 decision by the Systemic Stability Council for a week-long closure of the country’s banks and local stock market, according to ekathimerini . The Greek bourse remains closed Monday. Consequently, the traded value of GREK has deviated considerably from its NAV – the ETF is currently trading at a much lower value to its constituents due to the underlying market closure. The last time something similar occurred was during the so-called Arab Spring of 2011 when Egyptian markets were shut down for two months, but U.S. investors were still able to trade shares of the Market Vectors Egypt Index ETF (NYSEArca: EGPT ) . Nevertheless, GREK ETF investors may still get a general sense of where the ETF is going through indirect means. For instance, Coca-Cola HBC, which makes up 21.4% of GREK, dipped 3.9% over the past week while the National Bank of Greece (NYSE: NBG ), which makes up 9.5% of GREK, saw the value of its American Depository Receipts pare recent gains to fall flat for the week. Max Chen contributed to this article . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.