Enterprising Investor Forum

Stock performance after recession Thursday, February 14, 2008

For the final post of this three part series and in light of the current economic climate, we have complied some information on stock performance after recessions.

As you know, the data only shows up to 2002 and small caps continued their incredible run in recent year but again, the data highlights a dramatic over-performance of small caps vs. large caps.

Naturally, this does not mean that this pattern will continue to play out but we still feel that it is interesting to note and to conclude, that despite recent small cap performance, we still feel that we prefer to look for value in the small cap universe, looking for long-term returns.

We hope you found this series of data/graphs of interest!

Large or small / value or growth? Wednesday, February 13, 2008

Today we are showing you some data on stocks, focusing on the value/growth and large/small split.

As we saw yesterday, over the long-term, stocks outperform all asset classes and smaller companies give the best returns. However, is this true for all large cap and small cap stocks?

The Graph only shows data up to 2002 but it is interesting to note that when we add the growth/value variable, value outperforms for both small cap and large caps stock and the performance gap increases exponentially all the way to small cap value.

Tomorrow, in the last part of this series, we will look at how large and small caps perform after recession…

Cash, Bonds, Stocks & Inflation Tuesday, February 12, 2008

Today we will start a three part series with some interesting information on historic asset class returns displayed in graphic format.

The Graph only shows data up to 2002 but you get the picture… stocks outperform. Naturally, one should always have a diversified portfolio and allocate assets according to investor profile (age, risk tolerance, etc…) but it is still amazing to , not only, see the gap between stocks and bonds but also the small gap between Treasury bill and inflation!

As most of you already know, over the long-term, stocks outperform all asset classes and smaller companies give the absolute highest returns.

Tomorrow we will look at small caps vs. large caps in more detail…

Maximising returns Friday, February 8, 2008

Our readers are well aware of what our take is on the financial services industry, we have even written some rants in the past. Basically we continue to suggest that ‘independent perspective can make you a little wealthier’ and that as long as you have a minimum IQ and are willing to invest not only money but time and effort, there is no reason why you shouldn’t be able to make decent returns and possibly even beat the market.

We were re-reading some of the Berkshire shareholder letters and realized that we still hadn’t posted anything about when Buffett talks about how to ‘minimize investment returns’ and his classic story about the Gotrocks and the ballooning of what he calls ‘frictional costs.’

He asks reader to imagine that all American corporations are – and can only be – owned by a single family: the Gotrocks. This family has been accumulating the dividend payout and keeps on re-investing most of it; amassing something like 700 billion USD annually. By the miracle of compounding, they are all increasing their wealth and very happy… Buffett goes on:

“…But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its embers to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on…”

We think you can imagine where the story leads… we really recommend reading it all. It starts on page 18 of the 2005 letter – link.

Buffett concludes with:

“… Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

Enjoy your weekend!