Making Some Bets

Well, I decided to make some bets today. I am putting new capital to work in several mutual funds including: RRPIX, MINDX, EUROX, and JARFX.

This will leave my current allocation of funds not invested at my employer as follows:
FNMIX - 3.9%
MAKOX - 11.4%
MINDX - 12.2%
EUROX - 12.2%
RRPIX - 19.6%
JARFX - 20.3%
CASH - 20.4%

The rational for the new buys is as follows:

RRPIX -- this is a 125% inverse of the 30 yr. treasury bond fund. I think inflation will tick up here over the next year or so to between 4-6% and expectations that the fed will raise rates will increase. People will sell 30 yr. treasuries as a result.

MINDX -- I like India long-term. The 20% sell-off this year represents a good opportunity to start investing in that view.

EUROX -- I also like Eastern Europe long-term. Russia still cheap given the move in oil. This fund has big bets in Russia for now. I hope the managers will allocate to other Eastern European countries as Russia gets more expensive.

JARFX -- I like this divesified international fund. Driven by a team of stock pickers, this fund keeps sector weightings that match the index. It has consistently generated alpha since its launch in 2005.

CASH -- I am keeping plenty of ammo in case there is another flight to quality (as I think there likely will be) so I can add to all of these purchases.

In case you are wondering why I buy mutual funds and not individual securities (since I pick equities professionally for a living) the reason is simple: The trading restrictions at many investment firms are very stringent (including mine). If I have a good individual idea I am obligated to put it in my fund for investors. Because I don't pull the trigger on any of the individual mutual fund holdings (the fund's manager does), I am allowed to trade the funds freely under our compliance policy. I do generally eat a fair amount of my own cooking (i.e. allocate the majority of my liquid capital to the fund I work at) because I think it aligns my incentives with our investors'.

Learn Something From Bear Stearns!

Well, it was a crazy week on Wall Street this week. However, the biggest lesson of the week came on Monday when Bear Stearns was bought by JPMorgan (at the urging of the Fed) for $2 per share. Bear Stearns employees owned nearly 30% of the company's stock. While I am all for being a team player, you should keep as few assets invested in your employer as possible purely for diversification purposes. All your income depends on your employer, why would you want any more of your savings to depend on your employer than you have to according to company policy? The people at Enron learned the hard way. The people at Bear Stearns learned the hard way. It's a terrible thing that happend to all those people, but some good can come of it. If you own a bunch of your company's stock in your 401k or profit sharing plan are allowed to sell some of it and put it into something else do it. Not tomorrow. Not a week from now. Not a month from now. Diversify today! You never know what may lie ahead for your company. Bear Stearns thought they were fine just a couple of weeks ago.

The Stock Market is Getting Crushed! Should I Sell Stocks in My Brokerage Account or 401K?

Well, we are definitely having a correction. If the U.S. equity markets follow the Europeans they will be down 15% for the year tomorrow or 20% from the peak of the market in October. Many readers may be wondering what they should do with their stocks given the big correction? The answer is it depends on your time horizon.


For those with a long time horizon (10 years or more) and that should be most of you, you should generally ride this out and stick to your plan. Below you can see the inflation adjusted returns for stocks vs. bonds since WWII from this article in the FPA Journal.

As you can see, on an inflation adjusted basis stocks have far outperformed bonds since World War II. I particularly like this table because it only goes through 2003, before the market recovered from the tech bust. The bottom-line here is that as long as you have a long-term time horizon you should do better owning stocks than bonds. That suggests that you should not bail out of all your stocks just because the market takes a dive. Instead you should view it as an opportunity to buy more because good companies are now on sale. Remember to maintain your international exposure as well, these stocks will be the most volatile in market swoons, but they should also have the more growth than US equities over the long term. Emerging markets stocks should be particularly volatile, but should also have the best long-term growth characterization.

If you plan to retire in less than 10 years, you should have at least 30-40% of your portfolio in bonds or cash. If you do not I would advise immediately raising enough cash to survive for your first 5-7 years of retirement and then ride out the rest of your equity exposure with a long-term view.

The bottom-line is: don't panic. Most recessions last 12-24 months or so. Stocks have historically represented a great long-term investment and they should continue to do so in the future. The worst thing you can do is panic and lose confidence in your investment plan. Stick out the tough times and even invest more in stocks that go "on sale" if you can afford to and you will be rewarded over the long-term.

Please note that the above is merely the opinion of the author. Please consult your financial professional about your specific circumstances.

A Word of Advice on Chinese Mutual Funds/ETFs: Sell Some.

I generally avoid investing advice on this blog since I get paid to worry about those kind of decisions full time and it would be a conflict of interest with my employer to discuss individual equities here. However, I am going to make some comments on China today. What appears to be going on in their local A Share market is a classic market bubble. There are many Chinese investing for the first time and they do not know the risks associated with it, hence they are bidding prices ever higher. As far as they are concerned stock prices only go up. Also, there is no short selling in the Chinese A Share market so it seems like it is easier for inefficiency to creep into the system. Sure China is one of the fastest growing economies in the world, but that doesn't mean it should carry a P/E of greater than 70 as a market.

The hard thing about bubbles is predicting their end. I don't think anyone is particularly good at doing this. However, what you can do is choose not to participate once things get too frothy. Indeed if you have some China mutual funds (US investors can't own the stocks directly) or ETFs that are hold a significant amount of A shares it might be time to cash out some of those gains. I'd recommend selling down enough so that after taxes you have recouped all of your original investment. If you want to speculate a little longer with some of your remaining gains, that's your prerogative because calling a bubble's end is hard to do and they always seem to go on a little longer than anyone expects. While things economically are looking great for China at least through the Olympics in summer 2008, how long their market can continue to sprint depends on how long people are willing to pay any price for stocks. Rest assured that at some point there will be a big pullback (we indeed may be starting to see it now) and it will spook people and remind them that risk is associated with reward and then the Chinese market will come down just like technology shares did in 2000 and more recently like home building shares have done over the last couple of years. Those that have protected their principal will be glad and those who continued to speculate (or worse, put a boatload more money in because their returns had been so good) as the bubble intensified will lose a big part of their investment.

I'm not alone in this sentiment. Even Warren Buffett said people should be cautious with China.

Tired of Paper Annual Reports and Proxies? Go Online.

If you are like me, you are tired of having your mailbox filled up during the beginning of the year with proxies and very thick annual reports. Save your mailbox and save the companies you invest in some money by signing up for your proxies online. To do this, first call your broker and see if they can do it for you. If they can't then go to the websites of the companies you own directly and sign up for online proxy voting. Here are links to the sign-up (or investor relations contact if I couldn't find an electronic delivery sign-up) page for the twenty most widely held U.S. stocks just to save you some time:

ALU
BAC
C
CMCSA
CSCO
CVX
DIS
GE
IAR
INTC
IBM
JPM
JNJ
MSFT
PFE
PG
T
TWX
VZ
XOM