That Wealth Advisor-guy

Bear Markets Data Laid Bare
October 10, 2007, 2:03 pm
Filed under: Bear Markets

We have had somewhere between 26 Bear Markets since 1899 for a total of 34 years with an average decline of 32%. 

A Bear Market is a significant price decline composed of two or more Bear Legs.  We have had as many as eight Bear Legs, but often have had only 3 to 4, and by definition 2 is the minimum.  Bear Markets may occur because of economic changes in expected profits, inflation, monetary policy, yield curves or spreads, recessions, or wars, i.e., either less expected return or more risk. 

According to the DJIA, the average length of these 26 Bear Markets is 16 months, with a range of 2 months to 56 months; the range of the % declines is 14% to 90%, with a mean of 32%; the 508 point decline (22.6%) on 10/19/87 was the largest single-day decline.  The Dow last peaked at 11,723 on 01/14/00. After its largest sustained increase, from 1991 through 1999, the last Bear Market initially fell to 8,236 following 9/11/01, and 10 months later closed at 7,702 on 7/23/02. The current Bull Market has continued for over 5 years.  

Bear Market warning signs: high stock prices, trading volume, commodity prices, interest rates, industrial production, inventories and confidence, tight credit, low bond prices, labor shortages.




Manager Performance is Mean Reverting.
October 10, 2007, 1:41 pm
Filed under: Investing

Did you know that if you invested your monies in the best performing money mangers based on trailing Three Year returns, that there’s an 85% chance these same funds will under-perform the next three yers while taking higher risks?

In other words, if you invested in one star Morningstar funds, you’d stand a damn good chance of out-performing the 5 stars 85% of the time.  Good things get less good over time, and bad things get better.  There is no scientific or statistical evidence for the persistence of performance.

The Right Brain vs Left Brain
October 9, 2007, 3:32 pm
Filed under: Behavior

Here’s an interesting test.   If you see her spinning clockwise, you are more right-brained.


uses logic
detail oriented
facts rule
words and language
present and past
math and science
can comprehend
order/pattern perception
knows object name
reality based
forms strategies
uses feeling
“big picture” oriented
imagination rules
symbols and images
present and future
philosophy & religion
can “get it” (i.e. meaning)
spatial perception
knows object function
fantasy based
presents possibilities
risk taking

Which way do you spin? 

“The harder I work, the luckier I get.”
October 9, 2007, 1:21 pm
Filed under: Behavior, Investing, The Punctuation Problem

That quote’s been attributed to Samuel Goldwyn, Thomas Jefferson and Benjamin Franklin, respectively.  Whoever said it could have just as easily been speaking about investing.  The harder you work, the more money you can save up and place into investments, the luckier you’ll be with your performance. 

JUST SO LONG AS YOU DON’T DO ANYTHING NUTTY.  By that, I mean, that you allow that Wealth Advisor-guy to do what he’s paid to do and that’s keep your money growing.

The average actively -managed mutual fund returns approximately 11%, give or take, per year.  The average mutual fund investor garners (depending on whose numbers you trust, check Dalbar’s)  4% per year.  Whaaaaaaaaa?!?  How is that possible, you ask?

Behavior.  Most investors underperform dramatically because of what I like to call The Punctuation Problem.  Where they should be seeing ellipses, they see exclamation points.

Example: How about the:

August Credit Crisis Meltdown!  Run for your lives!  Sell the bonds!  Sell the kids!    Fly to safety – whatever that is! 

So now you’re sitting in cash, waiting for “the market” to “settle down.”  And you’ve lost 1100 points on the Dow.  


When Warren Buffett and Peter Lynch and other investment luminaries say you can’t call the market successfully in the short term, you should listen.  Buffett’s Berkshire shares lost over $6 BILLION DOLLARS between January 17 and August 31st, 1998! That’s right, in 45 days, he watched his net worth slip by $6,200,000,000! 

 Alas, as the consummate investor, he didn’t sell. 

Alliance Bernstein put together a great piece that discusses the school of thought known as behavioral finance.  The guys that came up with it won a Nobel Prize, so maybe there’s something to it.

Insights from Behavioral Finance