March Madness: What Works On Main Street

March Madness: What Works On Main Street

This editorial appeared in Better Investing magazine back in April 2000 in response to a widely-circulated “research paper” that assailed investment club performance. In my opinion, investment clubs unleash stewardship and deliver the potential for better futures to all who come to understand the philosophy and methods.

by Mark Robertson, Senior Contributing Editor, Better Investing

The coming of April showers means that, once again, March Madness has come and gone. March Madness. With each passing year, I find that I enjoy the mighty meetings of high school basketball teams, closely followed by their collegiate counterparts. By the time this magazine reaches your coffee table, there’s a pretty good chance that a number of magical moments will have happened. Gene Hackman and his Hoosiers were just one shining moment. There will be others. The goose bumps are “on ice” just waiting to be experienced. “Do you believe in miracles?”

We’ve acknowledged in past articles that George Nicholson always regarded NAIC and investment clubs as his “Grand Experiment.” Investment clubs are also human. The things that can be discovered are nothing short of miraculous.

Exploring the rewards of investing while stripping away the myth and mystery is something that brings a smile to our faces. Learning to smile together is a gift that we hope to share with as many people as humanly possible.

March Madness. It brings out the best. Unfortunately, it sometimes brings out the worst, too.

The January/February 2000 issue of the Financial Analysts Journal features an article by Brad Barber and Terrance Odean entitled, Too Many Cooks Spoil the Profits. This publication is received by Chartered Financial Analysts. Although fairly few people will ever see this report, we believe that exploring some of the conclusions is worthwhile. If nothing else, Barber and Odean have been regularly appearing in the media. We think they could gain much from a better understanding of investment clubs and strategic long-term investing.

Quoting their conclusion: “Unfortunately, [investment clubs] do not beat the market.”

We have “been here” before and it won’t be the last time. A year ago, a number of publications assailed our Beardstown Ladies. Too many cooks? Most of us rather like cooking with our friends. There is some impressive cookin’ going on. There will come a day that we’ll demonstrate that we not only achieve (in the words of Barber and Odean) “savings, education, friendship and entertainment . . .” but we also achieve very promising performance levels as well. Collectively, NAIC investors achieve high returns. Clearly, this does not happen for every single club or every individual, but we have scores of success stories. We think it’s valid to point to our Top 100, this issue’s main feature, as substantial evidence. With Intel, Lucent Technologies, Home Depot, Cisco Systems, Merck, PepsiCo and Microsoft among the most widely held companies, clearly somelevel of success has been attained by our practitioners.

Nearly 4,500 investment clubs (11.9 percent of registered clubs) responded to our latest Top 100 Survey with complete portfolio summaries and club accounting reports. Barber and Odean assail the “touting” of investment club performance in the media by citing sample bias. Barber and Odean base their findings on 166 investment club account statements from a single discount broker! Not only that, they cite turnover levels of 65 percent (nearly a complete overhaul of the stocks within a club portfolio every year-and-a-half.) Barber and Odean also share that these club accounts were concentrated in high beta, small-cap stocks. These characteristics lead us to a simple question, “Are you sure that you’re assessing NAIC club performance?” That doesn’t sound like what the long-term investors we know about are doing.

Most people are not statisticians, but I think that they can sense that 4,500 data points might be more representative than 166. Particularly when the “166” are “weak.”

The authors dwell on excessive turnover and poor returns due to commission costs. We ran a quick, biased, completely unscientific survey to investigate a hunch. Approximately 50 online investors responded. I think we can assume that these investors are “most likely” to be the most active. We asked them to provide their turnover figure for 1999. The highest turnover rate reported was 40 percent. The lowest, from several respondents, was 0 percent. (No sell transactions for the year.) The average was 8 percent. Unscientific, yes. And admittedly biased. But, in my opinion, closer to the truth about what long-term investors are really doing.

Here’s another aspect that the Barber and Odean study that raises questions. MANY investment clubs use dividend reinvesting. So, I went back and checked. In 1996, our investment club had 64 percent of our assets in DRPs. Our discount brokerage account would have been terribly UNinformative about the true performance of our club.

Barber and Odean include another rehash of the Beardstown Brouhaha of 1999 as “evidence” of poor performance. It bears repeating. Investment clubs, including our Beardstown Ladies, are human. A mistake was made. But, for the record, the Beardstown Ladies achieved a 15.3 percent annualized return for the 14 years ended in 1997. (This was part of the Price Waterhouse audit.) The annualized return for the S&P 500 for this same 14-year period was 16.9 percent.

If the ladies are guilty of under performance, consider this: In his book, Common Sense on Mutual Funds, John Bogle Sr. documents that only 14.1 percent of “growth and value” mutual funds beat the Wilshire 5000 (16.0 percent returns for the total market) for the 14 years ending in 1997. While committing their “crime,” our Beardstown Ladies “defeated” 5-out-of-6 mutual funds.

March Madness, indeed.

Is the point that the ladies would have been better off stuffing their recipes and cold cash into the corners of their mattresses? I certainly hope not, because if that’s the case, these two educators are not only failing to educate — they’re DE-educating.

A number of us recently gathered online to discuss James O’Shaughnessy’s book, What Works on Wall Street. What works on MAIN Street?

Patience. Discipline. Discovering the best companies, at the best prices, with our friends. Too many cooks? Not even close! It’s the best type of cooking capitalism has to offer.

Celebrating Heroes & Decades

Stocks to Study (5/23/2014)

On The Shoulders Of Giants

This past weekend, we (Ken Kavula, Hugh McManus and Mark Robertson) spent some time with over 200 long-term investors in Chicago at the 63rd Annual Convention for the National Association of Investors (NAIC). If you’ve been around here for a while, you know that we often pay tribute to the likes of Messrs. Nicholson, Graham, Babson, Schloss, O’Hara, Janke, Seger and place/phenomenon called Beardstown here on these pages. We’ll do that again here.

But first, a quick reminder about the screening results at the top of the page. This weekly screen was inspired by Irina Clements. In fact, we call it our Irina screen. Every week we present the companies in the current update batch. We do fundamental updates on 1/13th of the companies at Manifest Investing every week using the same cycle as one of our trusted resources, the Value Line Investment Survey. Warren and Peter (we’re on a first name basis with them) both regard Value Line as a veritable and trusted resource. We do too.

  • Irina asked us to collect the top ranked study candidates … and allow us to compare the opinions of Value Line, Morningstar (another formidable and trusted resource) and Standard & Poor’s side-by-side. So we do that. We list our aggregate results next to the three of them. Keep in mind that every company report and equity analysis is as if we put a whole bunch of rhinos in a padded room, including the analysts who collectively form the analyst consensus estimates, and locked the door. They continuously are completing stock selection guide-centered stock studies and continuously generating the results as prices change (daily) and fundamentals (growth, profitability and projected P/E ratios) blow in the wind. We feed them occasionally because we know better than to frustrate or disappoint a Wall Street rhino.
  • The column on the left provides the ranking within the MANIFEST 40, our listing and tracking portfolio of the forty most widely-followed companies by Manifest Investing subscribers. This week, Intuitive Surgical (#37) and ResMed (#29) are among our community favorites. Teaser: During the current refreshing of the website, Kurt Kowitz will make this listing continuously available on the home page.
  • It may not seem like there’s any order or sequence — but there is. We combine the return forecast (projected annual return) with quality to come up with MANIFEST Rank. The companies on this list are ranked, top to bottom, using this combination characteristic.
  • The Value Line entry is the Value Line low total return forecast (VLLTR) for the companies. We believe — based on extensive research — that the VLLTR is a great second opinion and this figure should resemble the results of a considered stock study. (Note: The reason this figure may be different from the one on the company page is that we correct for the change in price and time horizon.)
  • The figures for Morningstar and S&P are based on their current fair value estimates. A low price (but probably not too low) price-to-fair value ratio suggests potential attractiveness from a return perspective.

There’s often a divergence of opinion from stock-to-stock and this week is no exception. Take a look at those ranked high by one agency versus the outlook from the others. This week, there’s a HUGE difference in perspective between Morningstar and S&P on Intuitive Surgical (ISRG).

73 Years of Heroes In The Making

It was every bit a phenomenon. From the cornfields of Illinois came a group of formidable investors who became known as the Beardstown Ladies. Formed in the aftermath of an investing small group first championed by the Business and Professional Women Association, Betty Sinnock and her colleagues transcended brokers who wouldn’t return an investment-related phone call from a WOMAN. Fast forward nearly 30 years and we can literally point to thousands of clubs and likely millions of investors who have been inspired to discover long-term investing. They were nudged by the likes of Doris Edwards (a persistent school teacher who gives me another book to read nearly every time I see her) and Maxine Edwards and now, a new generation of Beardstown.

Betty Sinnock accepted the Nicholson lifetime achievement award on behalf of Beardstown and the legions they’ve inspired over the decades. Promises kept. Indeed.

For more, here’s my report, Thanksgiving 2010 – Of Heroes & Harvests from a fairly recent trip to attend one of their club meetings — which are still often open to the public. Did I mention they have a section in a museum dedicated to their exploits and adventures?

Speaking of Beardstown, it’s one of the communities on Route 66. Last year, we took a spin down Route 66 stopping at places like Springfield (IL), St. Louis and Oklahoma City. One of the beaming faces at the end of the road in Oklahoma City, home of the Heart of Oklahoma chapter for NAIC was Irene Jondahl. Irene has been serving investors, building programs, assisting her colleagues and inspiring the seekers in their quest to discover successful long-term investing. Irene was honored with one of the awards for excellence in volunteerism. Irene is a blessing and a gift to all of us.

A few miles to the east in Cincinnati, there’s a team of volunteers in southern Ohio nestled in a hotbed of interest (and success) in building programs and PORTFOLIOS. It’s a machine. And reliable machines are often held together by the best fasteners, glue and duct tape. In this case, the Oki-Tri State has benefited from a lineage of leaders, and Linda Miller has been there nudging them along for over 25 years. Linda Miller accepted this year’s lifetime achievement award for excellence in volunteer leadership. The award is named for Ken “Mr. NAIC” Janke. I’m sure Ken is smiling about Linda’s exploits and achievements.

Last but far from least, we come to Ralph Seger. Ralph passed away during May 2014 and will always be remembered for his contributions to Better Investing, decades of stock selection and for the Repair Shop in the publication for years. His friends knew him as Captain Blunt. Because he was. He was a grumpy old man — probably since the age of 10. But with a heart of gold. When I joined the NAIC team back in the 1990s, Ralph welcomed me with open arms and helped me learn long-term investing up, close and personal. We shared literally hundreds of breakfasts, lunches and dinners. I will treasure them all.

It had been a couple of years since we last had lunch. I regret that. But I don’t regret the group dinner we attended at his retirement residence with his friends the Dankos and Sobols and our spouses.

When I learned of his passing, I did a [Search] for “Seger” on Manifest Investing. Ralph made a solitary post on our Forum back in July 2008. You can check out the sage and timely and timeless comment that he made here. Bottom line? Ralph was duly concerned — with a duly amount of grumpy wisdom about conditions in the banking industry. We can now look back and appreciate that within a few months, he nailed it. Ralph was featured in a Better Investing cover story, highlighting his frequent sage advice … and a lifetime of generosity to a community of long-term investors. Thanks, Ralph — we couldn’t be doing this now and going forward — without you.

Companies of Interest: Value Line

Materially Stronger: Winnebago (WGO), Tata Motors (TTM), Nuvasive (NUVA)

Materially Weaker: Geospace Tech (GEOS), Mindray Medical (MR), Volcano (VOLC), Invacare (IVC), Mettler-Toledo (MTD)

Market Barometer

The average Value Line low total return forecast is now 4.2%, up from 4.1% last week.