Tag Archives: performance

Strongest Market Sectors Since 1933: Smoking Wins, Steel Rusts Away

Summary A new review sorts the performance of 30 sectors over the past 82 years. So-called ‘sin stocks’ such as tobacco and beer run away with the best returns. Cyclical sectors and basic materials tended to fare poorest. The article specifically considers the implications of these data for DG investors. Philosophical Economics, one of my must-read financial blogs, recently put up a fascinating post showing the returns of the US market by industry with dividends reinvested since 1933. If you’re wondering about the methodology used to create the results, check the linked post, it’s too complicated to explain here briefly. The winning sectors showed a truly shocking degree of outperformance. The #2 performing sector, beer turned $1,000 in 1933 into $26 million today! By contrast, the worst sector, steel, turned that same $1,000 into just $57,000 today. $57,000 isn’t bad, but over an 82 year investment period, it certainly isn’t great. $57,000 pales in comparison to $26 million for sure. Here’s some key takeaways for dividend growth investors. The Worst Investment Sin? Socially Responsible Investing For long-term investors, the message is clear, you need to own the so-called sin stocks. Hold your nose and donate profits to charity if you must, but these stocks can’t be passed up if you want market-beating performance. The top 3 sectors over the past 82 years were cigarettes at 8.34% real annualized return, beer at 7.51%, and oil at 6.84%. Investors in “ethical” funds that avoid these sectors are virtually guaranteeing drastic underperformance. I heard recently, and I’d love to attribute it but I can’t remember the source, that socially responsible investing suffers from two primary flaws. That is, by choosing not to invest in these sorts of companies, you’re actually rewarding both the sinful investors and giving the sinful companies an easier ride. Stock prices, on a day to day basis are set by supply and demand. If you convince a large portion of the investing public not to back an alcohol, tobacco, or oil company, for example, you lower that company’s share price. Since the share price is artificially lowered due to lessened demand, shares will return higher than otherwise anticipated returns. Companies that regularly buy-back shares perform particularly well if their shares remain artifically depressed for long periods of time. Thus ‘sinful’ investors, along with the ‘sinful’ managers of these companies see their investments become more profitable thanks to the socially conscious investor. Management in particular earns fat performance bonuses for their superior stock returns. In short, you’re depriving yourself of investing profits so people that aren’t as morally upstanding as you can earn more money. What good does that accomplish? Perhaps more problematically, by not owning companies, you lose the ability to influence them. If you own an oil company and its operations destroy a water supply and poison the local population you and other ethical investors can raise hell and force them to change their ways. If only morally oblivious people own oil companies, there will be no reaction and the company can continue in its unethical behaviors. Mining companies, for example, engage in ethically questionable behavior and only rarely get called on it because their shareholder bases don’t tend to complain about bad practices. By contrast, a Nike (NYSE: NKE ) for example, if it tries to mistreat its employees hears no end of it from upset shareholders. Finally, it should be noted that most of the sin stocks don’t need fresh capital frequently, if ever. How often does Altria (NYSE: MO ) or Diageo (NYSE: DEO ) need to offer new stock to the market? By not buying their shares, you aren’t even depriving the company of capital – you’re only depressing the after-market value of shares already issued. To actually harm these companies, you’d have to be able to block them from getting the capital necessary to expand their operations. Not buying the shares of companies that generate sufficient free cash flow to buy small nations; you aren’t really going to set them back too much. Other Top Performing Sectors Of The Past 82 Years The #4 returning sector, electrical equipment (6.61%) is a bit surprising, at least to me. For people thinking about Emerson Electric (NYSE: EMR ), it’s an encouraging result. I’d guess this segment of the market is probably significantly underweighted in most of our DGI portfolios. Mainstays of many folks DGI portfolios, #5 food and #6 healthcare come in nicely, though they trail the sin stocks dramatically. While necessary for life, these products simply don’t have the addictive function that drives the returns of the very top performing stocks. Still, they’re key sectors we should all own in large quantities. The 7th top performing sector, paper and business supplies is a real head-scratcher. And returns have been very steady over the past 8 decades, it’s not like this one got a fast start and trailed off recently. I’m not sure how to incorporate this into my DGI portfolio. Ideas anyone? Next up, retail at #8 isn’t too surprising. Though for the DG investor be careful, these names tend to come and go. I don’t like Target (NYSE: TGT ) and seems I’m one of the view that likes even Wal-Mart (NYSE: WMT ) anymore. Next up is a classic picks and shovels example. Transportation vehicles (ships, aircraft, railcars) came in at 9th, while transportation (the operation of said vehicles) was 26th, among the worst five industries. It’s frequently better to supply the tools to run a business rather than to be the actual operator, and transportation is one of those categories. Boeing (NYSE: BA ) is a great business. The airlines? Not so much. Rounding out the top 10 would be chemicals, an indispensable though under-the-radar segment of the modern economy. Middle of the Pack Sectors Coming up in the middle third are quite a few of the DGI mainstays. Doing less well than you might expect, for example, would be consumer goods which come in at only #14. Utilities (#15), and Telecom (#17) rank in the middle of the 30 sector pack, showing you’re giving up a good deal of total return for that high yield. If I’d had to guess, I would have thought telecom would beat utilities though, I’m honestly impressed that utilities came in the dead middle of the 30 sector spread despite being very low growth names. Restaurants and hotels came in 12th, but that almost comes with an asterisk, as a great deal of the performance came from 2005 onward. This sector has lagged for long periods of time – between 1992 and 2005 for example, you lost half your money in this sector and that includes reinvested dividends. Compared to the steady gains most of these top sectors made over the decades, this one stands out as a real dud despite the reasonable overall ranking. Financials came in at 16th, but they were in the top 6 until 2008, when the US financial system rudely decided to self-immolate. The lesson I’d take from this is that financials are a must-own sector, but you should avoid the wild west gamblers’ market that is large US banks. The US weighs in poorly, with the world’s 49th soundest banking system. The lesson here seems clear: Buy sound banks in foreign countries that don’t lever their balance sheet to massive degrees and bet heavily on opaque instruments. The Worst Sectors: Tread Carefully The worst sectors tend to either involve basic materials or be highly cyclical. And that makes sense, to compound money effectively over an eight decade span, you need to avoid wiping out your equity too frequently, as these sectors are prone to do. The very worst sectors were steel and textiles, both of which were effectively terminated by foreign competition. Offshoring and globalization essentially destroyed these industries inside the US’ borders. As DG investors, we must be aware of changing global trends that threaten to not just destroy an individual company but potentially a whole industry. #25 Printing and Publishing is another one that has suffered greatly with recent changes to the entire industry’s dynamic. A dividend investor buying a newspaper stock like Gannett (NYSE: GCI ) 15 years ago would likely never have imagined what would happen in the coming years. Mining at #21 and coal at #23 also fair poorly being cyclical industries. Autos and trucks at #22 also came in with weak results. I’m always amazed at the number of DGIs that own stocks like General Motors (NYSE: GM ) that I wouldn’t buy in a million years. But we all have our weaknesses, I own Barrick (NYSE: ABX ) in the equally pitiable mining sector. My personal lowest-ranked holding comes in the 27th ranked sector of the 30, construction. I’m frankly shocked, given just how much stuff the world has built over the last 80 years how badly this segment has done. I know construction is hyper-cyclical, but businesses like Caterpillar (NYSE: CAT ), which I own, seem to be strong and have a decent moat. Takeaways For me, I only have a few companies in the bottom performing sectors, namely Caterpillar and Barrick mentioned above. From the top 5, I lack electrical equipment and smoking. I want to buy a tobacco stock but I haven’t seen any near what I’d judge to be a fair value, unlike in alcohol, where a stock like Diageo screams “buy me” every time I look at its long-term fundamentals. And for electrical equipment, I’d never viewed this to be a must-own sort of asset. Consider me interested now. My top weighted sector is financials which only scored 16th. Though noted above, this was a top 6 segment until 2008, and the financials I own all grew earnings and raised dividends during the 2008-09 stretch. Since I avoid US financials, I think I get a pass here – banking is still a must-own area. For investors heavily overweighted in popular sectors outside the top 10, say, consumer goods, telecoms, and utilities, think about some potential reallocation. Those segments are all very popular with DGIs, and with good reason, they offer nice yields and defensive stock performance. However, moving more of your money into higher performing areas such as tobacco, oil, liquor, and food might boost your returns without taking more risk. Here’s the full 30 in a table and the link again if you want to see the original post where you can see charts of each industry over the decades.

2015 Q3 Value Performance Update And How I Value Markets

Summary Proof that you shouldn’t follow “smart money”, as it’s herd mentality. A list of my 2015 Q3 value strategy performances. A look at how I value the market to know whether it’s expensive. The final quarter. The home stretch. If you took advantage of the small market correction, great job, because the market has “recovered” about 6% already. The last thing you should do is take advice from what you hear on TV or the radio, because that’s where the peak of herd mentality exists. The talking heads don’t provide any deep insight or outside views, as it’s their job to provide simple outer-layer analysis that any average Joe can understand. You actually come out smarter if you ignore everything they say. Here’s a look at what I mean. This is the performance of the top 20 stocks held by hedge funds, according to novus.com . (click to enlarge) How does this look in a chart? (click to enlarge) Not impressive. Especially when people running these funds are supposed to be Ivy League top 0.1% brains. It’s quite easy to avoid these “top 20” names. Ignore news and headlines. Ignore popular stocks. Ignore complicated stocks you don’t understand. Investing doesn’t have to be complicated. Most of the investments above have complicated stories. If you’re looking for a simple business and investment thesis to understand, don’t look at hedge fund holdings. This is GREAT news for people like us. After all, the advantage that small investors and fund managers have is that we don’t have to play by their rules. It’s perfectly within the rules to resist the steady drumbeat of calls to activity. So, how does it look on the value side? Value Investment Strategy Performances 2015 Q3 YTD Even though on I’m on the value side, it’s not easy. It’s not supposed to be easy. Anyone who finds it easy is stupid. – Charlie Munger At the end of each quarter, I take some time to see what’s working and what isn’t working with a list of predefined value stock screens I follow. Here’s how it looks at the end of Q3. These are YTD performances. A lot can happen in one quarter, as you can see in the following image. The tables are organized so that the best-performing screen is at the top of each quarter. (click to enlarge) Don’t Blindly Follow High-Performance Screeners Last quarter, I mentioned how you should ignore the NCAV (Net Current Asset Value) and NNWC (Net Net Working Capital) performances this year. On paper, the results are mind-blowing, given the conditions this year, but in reality, it’s not so great and shows how difficult net net investing can be in a bull market. What do I mean? NCAV and NNWC produced only 8 and 12 stocks in the results respectively. They both include VLTC, which has done this. The problem is that at the beginning of the year, you wouldn’t have been able to purchase enough of it in your real-world portfolio due to low liquidity. It’s only after a spike that volume increases as traders and momentum seekers join the party. Plus, holding only 8 or 12 net nets in a bull market is not a strategy I want to employ. The 2015 NNWC stocks look like this: Thanks to one stock, the NNWC stock performance is up 30%. You may say that it’s the outcome that’s important, but I call this one more luck than skill. Why Bother Tracking Net Nets Or Underperforming Screeners? So why do I bother tracking this or other underperforming screens? The easy answer is to say that that one year doesn’t signal long-term performance, and then show you this table of results. (click to enlarge) (Source: Old School Value Stock Screener Performances ) But the better answer is that it’s a very simple and effective way for me to track how expensive the market is. I don’t refer to market P/E or Market-to-GDP, as it only looks at the entire market. I’m only interested in finding pockets in the market that provide value – mainly on the value investing side – and this is how I try to track and find those pockets of opportunity. Here are some more observations. When Mr. Market falls, it doesn’t care who you are. In fact, Mr. Market will take quality, growth and value all down with him. Risk management should be at the top of your list day in and day out. Boring value stocks fall less hard, but also don’t rise as quickly. Net Nets Are Awesome Indicators Let me revisit another reason why I like net nets. Using the number of net nets available as an indicator is a great way to expand Graham’s “net net” concept into a market valuation idea. In 2013, I made the claim that Ben Graham was a closet market timer, and drew up the following chart and table. Even without a table or chart like this, it’s obvious when the market is cheap. But it’s also most scary, which is why you need a table or chart like this where the facts smack you in the face. I haven’t updated this table in a while, but 2014 and 2015 are similar to the 2011 levels. Summing Up Investing is hard. “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger Ignore herd mentality. Ignore what the top funds are holding. Don’t play by the same rules as the big boys. Make use of your advantage, like buying smaller stocks, illiquid stocks, out-of-favor stuff. Net nets are awesome indicators. Recommended Reading

Defensive Expectations

Any fund can do very well, attract a lot of assets, then do poorly and lose the assets. For many years, I have been writing about the idea that diversifiers often do not trade like the stock market and so can offer a zigzag effect to equity holdings. A fund that can make narrow bets on a specific outcome with a large percentage of assets lends itself to being very right or very wrong. By Roger Nusbaum, AdvisorShares ETF Strategist Last week there was an article in the WSJ noting the performance struggles of one of the larger liquid alternative mutual funds. I am not going to link to the article or name the fund because any fund can do very well, attract a lot of assets, then do poorly and lose the assets – which is the arc of this fund’s story. Instead, I want to focus on avoiding that sort of loop or at least recognizing the potential for that sort of loop, so that no one is surprised if/when it happens. For many years, I have been writing about the idea that diversifiers, as I have previously called them, often do not trade like the stock market and so can offer a zigzag effect to equity holdings that can matter during periods like now. There is no guarantee of this of course, but just as was the case with the previous bear market, some diversifiers will deliver and some will not. The fund featured in the above-mentioned article had problems that included a large bet on China that went poorly and was a drag on returns. One of the fund’s objectives is lower volatility than the broad market, yet based on stale holdings reported on Google Finance, three of its top-ten holdings totaling about 13% were in China. The fund did very well for a time early in the current decade, tracking the equity market closely, but started to trail off still moving higher in 2013 and then starting to go negative in early 2014 and has been in a downtrend for the majority of the time since then. Obviously, if Chinese equities had rocketed higher, then some or maybe all of the downturn could have been offset. This places an important emphasis to not just glance at the holdings but actually understand the pros and cons of any larger exposures. Are there a lot of longer-dated bonds in your liquid alternative? If so, are you concerned about rising rates, or can the fund change that exposure? What about commodity exposures or foreign currency? None of these are bad but they need to be understood and followed closely. Additionally, it is crucial to spend time understanding what the fund can and cannot do to change exposures and the process behind portfolio changes. A fund that can make narrow bets on a specific outcome with a large percentage of assets lends itself to being very right or very wrong. Very wrong in a bull market for everything else is probably not a big deal, but during a decline like this, then it is unfortunate. Gold has taken a beating from a sentiment standpoint for how poorly it has performed for the last few years. Throughout, I noted that it was doing exactly what investors should hope; looking nothing like the equity market, which created the reasonable expectation of not looking like equities in a downturn and that is how it has played out over the last month, as the S&P 500 is down mid-single digits and gold is up mid-single digits. It is not a perfect, negative correlation but has helped. The bigger context with a post like this has always been to try to soften the blow of a large decline, not completely miss it (completely missing it would be more about luck than strategy). I continue to be a believer in this approach, as a little bit can go a long way to reduce the extent to which the portfolio trades in line with the broad market. 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. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com . AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.