Great Book

By on September 15, 2006

Originally published in May 1998:

Stocks have gotten way ahead of the fundamentals (earnings, dividends, book value, you name it). Right now the only reason they’re going up is because they’ve been going up. How’s that for market efficiency? Longer term investors have good reason to be bullish, but right here and now the outlook is very negative on the short to intermediate term….at some point before the end of the year we are likely to see a 15 to 20 percent decline in the major indexes. It will probably originate from a concern over weakening profits and a realization that most investors are maximally exposed to stocks, given their risk tolerance. Eventually, the 401k money flood will stop the decline from turning into a 1974 style debacle, but buying stocks at this point is not likely a very good bet.

Great Book

I recently read Investment Gurus: A Road Map to Wealth from the World’s Best Money Managers (New York Institute of Finance), by Peter Tanous. This is one of the most informative and interesting books on investing I’ve ever read. In the book Mr. Tanous interviews a number of investment professionals who have compiled incredible records over extended periods of time. To balance the opinions raised, he also interviews several academics who contend the markets are efficient and the most predictable road to investment success is through the use of low cost index funds.

One of the interviewees makes a compelling argument that to beat the market averages an investor has to do substantial digging to gain any advantage. However, the cost of the digging negates the higher returns obtained. It was also pointed out by several of the academics that studies show no correlation between past and future performance. In other words, of those who had exceptional returns in the past, the chance of them doing better than the average portfolio manager in the future is only 50/50. It should be noted that high (expense ratios) cost funds have a tendency to perform poorly no matter what timeframe you look at.

An interesting side note: The manager of the Brandywine fund was one of the professionals interviewed because his long-term record was exceptional prior to the publishing of the book. If you check the performance of the Brandywine fund recently it has only been an average performer trailing the S&P 500 substantially over the past year. The return over the last 12 months is only about 1/2 that of the S&P 500. Maybe the market is efficient after all.

One of the active managers with an exceptional record, Laura Sloate, mentioned a couple of stocks during the interview which she felt were bargains and would rise. One was Marvel Entertainment. Ms. Sloate didn’t feel it could go much lower than its price then of around $10 a share. Last time I looked Marvel was trading at less than $1 per share. Maybe she did just happen to get lucky in the past. But perhaps she has a good sell discipline which allowed her to get out of the stock before the big fall.

One of the academic interviewees, Rex Sinquefield, made a interesting quip. He called stock market newsletters “investment pornography,” due to their dubious worth. I must say I have to agree with him. Most investment newsletters aren’t worth the paper they’re printed on, so your chances of finding a good one aren’t very good.

All in all, I came away reinforced in my belief that individual investors should have the majority of their funds earmarked into index funds, preferably on a dollar cost averaging basis. The markets are not perfectly efficient, however, they are efficient enough to make market timing or day trading a difficult endeavor. If you feel compelled to “play” the market, do it with money you can afford to do without and keep track of your returns, or lack thereof. This way you’ll discover the futility in trading your way to riches and not suffer as much in the process.

Editors Note: From time to time books will be reviewed and a list of recommended reading material will follow the newsletter features. Links will be provided to where you can read more reviews and purchase the books if you like.

Portfolio Updates

Carnival Corp. (NYSE: CCL; 67 5/16) recently purchased the five-ship Cunard Cruise line which includes the old Queen Elizabeth 2. Cunard has been losing money up until very recently. CCL plans on merging Cunard with its Seabourn cruise subsidiary. The deal will give CCL a greater foothold in the luxury end of the market where it isn’t represented too well. The aging populations of the U.S. and Europe make this move a very timely one. CCL is currently capable of carrying approximately 41,500 passengers. The Cunard ships will add capacity for 3,400 more. The consolidation of Cunard with Seabourn will create enhanced efficiencies through economies of scale and probably yield CCL a very good return on their $500 million investment. This deal still requires approval by U.S. antitrust authorities, but hopefully it will go through since it will likely provide additional growth of revenues and earnings to an already wildly successful operation.

A favorable write-up about International Game Technology (NYSE: IGT; 27 3/16) can be found at

Recommended Allocations

Aggressive portfolios: 60% equities, 40% cash.

Conservative portfolios: 40% equities, 60% cash.

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