Betting on a Losing Fund

Question: if it is so difficult to compile a portfolio of winning stocks that most professional advisers cannot consistently outperform the market itself, then is it easier to find a losing fund that happens to become a winner later?  I found myself testing that thesis last week, just to see what happens in the coming years.  Not surprisingly, my projected loser is the Vanguard Precious Metals & Mining Fund.

I invested the minimum into the Fund; expecting it to spend the duration of its time in my portfolio at a significant loss considering, after increases of 75% and 40% increase in 2009 and 2010, respectively, it went down 20% in 2011, 13% in 2012, and another 35% in 2013.  However, I suspect it may be substantially undervalued now, or at least ready for some upward recovery.  Therefore, I made the minimum initial investment and I plan to move any earnings (potentially, including reinvested dividends) into a better fund, letting the investment stay at its minimum or fall where the market takes it.  Effectively, I am betting on a losing fund.  In the best case scenario, I would be wrong about the fund's abysmal future.  In the worst case scenario, I would prove myself correct about the gold market.

Often investing is so backwards from our human nature that reverse psychology may be the best guide, just like putting more money into a falling market (which paid off huge for me in 2009).  Relying on human instincts or applying what has been learned from other experiences to the stock market is not a successful strategy for investing.

Additionally, I put the minimum initial investment into Vanguard Health Care Fund on Wednesday evening, and I am strongly considering Vanguard Small-Cap Value Index Fund in the near future.  All of these moves are inspired from the same fact that, although I believe the markets may set a few more record highs, I expect that the top of the market has been reached for all intents and purposes, so there is nowhere to go but down.  In fact, the market has been down ever since my first move(s) on Wednesday.  It would be beneficial to position my portfolio to hedge against market risk, but unfortunately, where the sharpest market declines will be are difficult to ascertain.  In other words, if I expect to lose a lot of money soon, then shifting unrealized earnings into a losing fund is not a big risk.  After all, I do not expect to have this money a year from now as it is.

The benefits of diversification are easy to understand.  Personally, I think most investors latch onto the concept far too early.  But if all your money were housed in a couple funds, then eventually (regardless how broad the funds are), it would be foolish not to diversify into specialized assets (specifically, sector funds) when the warning signs of a market decline are seen.

Case in point, I ran the numbers on my move this evening, and my new sector funds are down a combined $112 since I moved into them.  However, if I had not pulled the money that day, then I would be down another $60, so clearly I made the right choice!

CNBC: Want better returns? Hire a good-looking CEO

Want better returns? Hire a good-looking CEO
http://www.cnbc.com/id/101292577#!
—By CNBC's Kiran Moodley

Attractive chief executives receive higher total compensation, better returns on their first days on the job and boost stock performance when they appear on television, according to the preliminary findings of a new study.

Joseph Halford and Hung-Chia Hsu, two economists at the University of Wisconsin, released a working paper called "Beauty is wealth: CEO appearance and shareholder value." In the paper, they rated the attractiveness of 677 CEOs from S&P 500 companies based on "facial geometry."

The study wanted to find out whether there was a positive relation between the attractiveness of a company's CEO and a return on investment in that company, something argued by John Graham, R.Campbell and Manju Puri in a 2010 paper from Duke University. These three authors said that good looks made CEOs appear more competent and gave them better negotiating skills, enabling them to extract better deals for shareholders.

When looking at the relationship between CEO attractiveness and stock returns around their first day in the job, Halford and Hsu concluded: "We find that FAI (facial attractiveness index) has a positive and significant impact on stock returns surrounding the first day when the CEO is on the job, indicating that shareholders seem to perceive more attractive CEOs to be more valuable."

Halford and Hsu told CNBC that Marissa Mayer, the president and CEO of Yahoo, was a good example, based on their report. "She scored 8.45 (out of 10) in our facial attractiveness index and is among the top 5 percent (best-looking) in our sample," they wrote. "Yahoo has been doing well since she became the CEO (about 158 percent increase in stock price).

"Of course, we don't mean that all the increase in stock price is from her appearance. We just find that there might be some positive correlation between the two."

The economists conducted a variety of tests, for example, analyzing 1,830 merger and acquisition deals between 1985 and 2012. They discovered that: "The evidence...suggests that more attractive CEOs receive more surpluses for their firms from M&A transactions, a finding consistent with the hypothesis that more attractive CEOs improve shareholder value through superior negotiating prowess."

Furthermore, the paper looked into CEO television appearances—which they restricted to those shown on CNBC.com between 2008 and 2012—and whether there was any correlation between the appearance of an attractive CEO and stock returns. Halford and Hsu concluded that shareholders responded positively to viewing more attractive CEOs on television.

Does this mean that Halford and Hsu would suggest that companies hire stunning CEOs to ensure a more profitable existence?

"Our results do not suggest that, when searching for CEOs, firms should only look at appearance without considering other abilities," they wrote in an email to CNBC. "On the other hand, for firms that rely more on the negotiation and visibility aspects, maybe they should place more weight on appearance when searching for CEOs."

This is not the first time the interaction between beauty and business has been investigated.

In 1994, University of Texas economist Daniel Hamermesh coined the term "pulchrinomics," or the economic study of beauty. He wrote about the topic in the American Economic Review, commenting on a study conducted by himself and his colleague, Jeff Biddle, where interviewers in the 1970s had had ranked the attractiveness of U.S. and Canadian workers, as well as noted their earnings. More attractive workers were found to earn a 5 percent premium over those of average appearance.

"Wages of people with below-average looks are lower than those of average-looking workers; and there is a premium in wages for good-looking people that is slightly smaller than this penalty," the report noted.

Commenting on Halford and Hsu's report, Robert Williams, principal and director at recruitment firm Asia Media Search, said first impressions were important.

"A commanding presence will add credibility either consciously or subconsciously, rightly or wrongly," he told CNBC via email. "My guess would be that Wall Street, like Washington, will always put stock in good looks as a measure of ability.

"I wonder if in today's instant media world, whether Abraham Lincoln, with his acne scarred face, lanky body and high pitched voice, would ever have been elected, or FDR for that matter. Would the television media focus just on his wheelchair?"

He concluded: "As a recruiter, I feel the focus should be a candidate's abilities and accomplishments, not the smile. But human nature is what it is."

CNNFN: Fundamental index funds: Great players, wrong game

Fundamental index funds: Great players, wrong game
http://money.cnn.com/2013/12/01/investing/fundamental-index-funds.moneymag/index.html?iid=H_M_News
By Paul J. Lim

Several years ago a group of investing heavyweights, led by Robert Arnott of Research Affiliates and Jeremy Siegel of WisdomTree, claimed to have built a better index fund.

Ever since, these "fundamental indexers" have waged a public debate with Vanguard founder Jack Bogle and other passive-investing purists over what an index fund is.

That argument distracts from the true advantages of fundamental index funds. Like traditional indexes, fundamental indexing calls for owning most of the stocks in the market, instead of picking individual issues. But rather than holding shares in proportion to a company's total market value, the new funds weight them based on attributes such as earnings, dividends, or valuations.

As a result, their portfolios tilt toward value stocks, or shares that are cheap relative to profits or assets.

"And all the evidence we have seen is that there is a value premium" -- that is, an extra return for value stocks -- says Paul Kaplan of the fund research group Morningstar.

They also skew to smaller stocks, which likewise outperform over long periods. (Says who? Eugene Fama, for one; he just won the Nobel in economics.)

Purists cry foul. "Anytime you depart from the market, you're an active manager," says Bogle.

Here's the thing, though: Even if you think this is another form of active stock picking, it turns out fundamental funds may be the best possible way to do that. Arnott now argues that "we're more of a threat to active management than to cap-weighted indexing, because investors are more likely to be deeply disappointed with their active managers."

For example, PowerShares FTSE RAFI U.S. 1000 ETF, which tracks Arnott's strategy, gained an annualized 18.7% over five years, beating the S&P 500 and 91% of all active large-cap funds. Similarly, WisdomTree Earnings 500 and WisdomTree SmallCap Earnings beat more than 60% and 90% of their respective active peers.

How? In addition to their tilts, these funds enjoy a cost edge. WisdomTree Earnings 500 charges 0.28% of assets, a percentage point less than the average active fund. It also trades infrequently, cutting transaction costs.

So if you want to dabble in active funds for a shot at out-performance, consider using a fundamental fund instead.

A portfolio half in an S&P 500 indexer and half in an average active large-cap fund would have returned 15% annualized over the past five years. Had that active stake been in the PowerShares fund, you'd have earned about two points better a year. That's a fundamentally sound result.

Send a letter to the editor about this story to money_letters@moneymail.com.


MY OPINION: Jack Bogle has described Index funds as providing the average investors with “their fair share” of the American economy.  In essence, it’s protection against greed.  Bogle has waged war against greed, as evident in his book Enough.  I am not surprised that he would dismiss these funds from his design of "index funds."