1. There is no such thing as “short-term investing.”

2. Valuation still matters.

3. Asset allocation is a diversification strategy that works.

4. There’s no opportunity for return without some risk.

5. Most dollars flow into high-performing investments after the performance has occurred.

6. A well-balanced portfolio should be diversified among the major asset classes:  cash, fixed income, large and small companies, growth and value, and domestic and international.

7. Years of high returns can be completely reversed by one bad year.

8. Traditional rules of investing are still true.

9. Raw information is not knowledge.

10. Market timing doesn’t work.

To read Marshall Loeb’s original article in MarketWatch, including commentary on each axiom, please click here.

Weston Wellington

Bill Miller is one of the most closely watched money managers in the industry, so it was big news when he announced his decision last week to step down as portfolio manager of Legg Mason Capital Management Value Trust (LMVTX) early next year. His departure also adds an intriguing chapter to the long-running debate regarding the value of active stock selection.

Miller’s most frequently cited accomplishment is the fifteen-year period from 1991 through 2005, during which Value Trust outperformed the S&P 500 each calendar year, the only US equity fund manager to have ever done so. His success attracted a wide and enthusiastic following: Morningstar named him Portfolio Manager of the Decade in 1999, Barron’s included him in its All-Century Investment Team that same year, and a Fortune profile in 2006 described him as “one of the greatest investors of our time.” A former US Army intelligence officer and philosophy student, his formidable intellect covered a wide range of interests, and he believed that conventional investment analysis could be enhanced with insights drawn from literature, logic, biology, neurology, physics, and other fields not obviously related to finance. His expressed desire to “think about thinking” suggested an unusual ability to assess information differently from other market participants and arrive at a more profitable conclusion.

Miller’s bold and concentrated investment style would never be confused with a “closet index” approach. Big bets on Fannie Mae, Dell, and America Online, for example, were rewarded with handsome gains (as much as fifty times original cost in the case of Fannie Mae). Unfortunately, similar bets in recent years revealed the dangers of a concentrated strategy as heavy losses in stocks such as Bear Stearns and Eastman Kodak penalized results. For the five-year period ending December 31, 2010, LMVTX finished last among 1,187 US large cap equity funds tracked by Morningstar. Considering the enormous variation in outcomes among these carefully researched ideas, Miller’s overall investment record presents an interesting puzzle: How can we disentangle the contribution of good luck or bad luck, of skill or lack of skill?

Over the May 1982–October 2011 period, annualized return was 11.28% for the S&P 500 Index and 11.76% for the Russell 1000 Value Index. Value Trust slightly outperformed the S&P and underperformed the Russell index by over 0.40% per year. A three-factor regression analysis over the same period shows the fund underperformed its benchmark by 0.08% per month.

Do these results offer conclusive evidence of the failure of active management? Not necessarily. The fund’s expenses are above average at over 1.75% and provide a stiff headwind for any stock picker to overcome. Gross of fees, the fund’s performance over and above its benchmark goes from –0.08% to 0.07% per month. This swing from negative to positive raises an interesting point that Ken French speaks to at every Dimensional conference. There are almost certainly some mistakes in market prices and almost certainly some skillful managers who can exploit them. But who is likely to get the benefit of this knowledge—the investor with his capital or the clever money manager? If stock-picking talent is the scarce resource, economic theory suggests the lion’s share of benefits will accrue to the provider of the scarce resource—just what we see in this instance.

To cloud the discussion even further, both of these results, positive and negative, flunk the test for statistical significance; in neither case can they be attributed to anything more than chance. So even with twenty-nine years of data, we cannot find conclusive evidence of manager skill—or lack thereof. This is the inconvenient truth that every investor must confront: The time required to distinguish luck from skill is usually measured in decades, and often far exceeds the span of an entire investment career.

Miller is well aware of the challenge of distinguishing luck from skill and has conspicuously declined to boast about his results, even when they were unusually fruitful. He has acknowledged that topping the S&P 500 each year for fifteen years was an accident of the calendar and that using other twelve-month periods produced a less headline-worthy result.

Commentators have said that Miller has “lost his touch” or that his investment style is no longer suitable in the current market environment. These arguments strike us as the last refuge for those who find the idea of market equilibrium so unpalatable that they search for any explanation of his change in fortune other than the most plausible one—prices are fair enough that even the smartest students of the market cannot consistently identify mispriced securities.

Where does this leave investors seeking the best strategy to grow their savings?

When asked by a New York Times reporter in 1999 to sum up his legacy, Miller replied, “As William James would say, we can’t really draw any final conclusions about anything.” Twelve years later, this observation seems more useful than ever. And investors would be wise to treat even the most impressive claims of financial success with a healthy degree of skepticism.
________________________________________
REFERENCES
Andy Serwer, “Will the Streak Be Unbroken,” Fortune, November 27, 2006.
Edward Wyatt, “To Beat the Market, Hire a Philosopher,” New York Times, January 10, 1999.
Tom Sullivan, “It’s Miller Time,” Barron’s, October 12, 2009.
Diana B. Henriques, “Legg Mason Luminary Shifts Role,” New York Times, November 18, 2011.
Standard & Poor’s
Morningstar Inc.

Three finance professors recently completed a detailed study of institutional investment managers who invest for public and private retirement plans, endowments, foundations, and unions.  Their results indicate that as a group these managers also provide little evidence of skill or performance persistence.

This is a significant finding because some have argued that mutual fund managers have a marketing handicap—they have to compete with other managers in a public marketplace where everyone’s returns are open knowledge, and they may have to take extra risks in order to distinguish themselves from the crowd.  Institutional money managers usually answer to sophisticated investment committees who have long-term views of the markets and may tend to pressure the managers less to make sudden moves.

In a paper slated for publication in The Journal of Finance, Jeffrey A. Busse and Amit Goyal of Emory University and Sunil Wahal of Arizona State University looked at 4,617 institutional investment funds run by 1,448 management firms over the period from 1991 through 2008.

“Before fees, we find little evidence of superior performance, either in aggregate or on average,” they said in the paper, titled “Performance and Persistence in Institutional Investment Management.”  They said that once a manager’s style of investing and evidence of stock momentum are factored out, it appears managers offer no extra performance.

“One logical conclusion might be that plan sponsors should engage in entirely passive asset management,” the authors wrote.

The biggest financial foe you face over a lengthy retirement is not temporary stock market volatility; it is long-term erosion of the purchasing power of your income.  Consider the cost of a postage stamp 40 years ago. In the summer of 1972, first class mail cost just 8 cents. Today it costs 44 cents, an annualized increase of over 4 percent per year.

Today it’s impossible to put your money into just about any fixed-income instrument (except risky high yield bonds) with a rate anywhere near 4 percent.  In fact, a 30-year rally in bond prices has reduced yields on short-term bonds to nearly zero.  Meanwhile, consumer inflation is anything but zero. The current inflation rate, as measured by the Consumer Price Index, stands at 3.6 percent.  Although bonds kept up with inflation over the last 40 years, at current prices it is hard to believe they can over the next 40.  As interest rates increase, bond values decline.

The stock market, however, has done a much better job of keeping up. Over the last 40 years the Standard & Poor’s 500 Index has returned about 10 percent per year, despite dozens of small to large temporary declines in value.  The stock market also allows long-term investors to keep more of what they have earned. Interest on bonds and bank deposits are taxed at a taxpayer’s highest current regular rate.  Long-term capital gains on stocks, however, receive favorable tax treatment. The current rate is only 15 percent.

Remember to place the emphasis on the right objective:  retirees need to preserve their purchasing power with a gradually increasing income.  Avoiding temporary market declines in one’s portfolio should not be the primary objective.  Focusing on the latter can be counterproductive to the former.

“It is an honor to be included in the Top Wealth Managers ranking,” said Jentner Wealth Management’s president, Bruce Jentner. “This continued recognition is an acknowledgement of the Jentner Proactive Investment Strategy™.”

AdvisorOne is the leading online destination for independent advisors, wealth managers and financial planners and is an online resource for investment news and market analysis. Annually for the past 11 years, they’ve gathered data and completed a comprehensive analysis of fee-only investment advisors registered with the Securities and Exchange Commission.

To hear my thoughts on how to invest prudently despite the downgrade in the U.S. credit rating, listen to my recent, two-and-a-half-minute interview on 640 AM WHLO.

To download the above audio recording directly, please click here.

Bruce has served the Great Trail Council, Boy Scouts of America as three-time chairman of the Friends of Scouting Council, Council Endowment Committee member, Council Funding Committee member and Council Steering Committee member. In addition to building a successful wealth management firm in Akron and being named one of the country’s top 250 financial planners by Worth Magazine, Bruce values giving back to the community and mentoring the next generation of leaders. He currently serves on the board of directors of the Greater Akron Chamber, is a member of the Akron Chamber’s Small Business Advisory Council and is part of the Executive Committee for Mercy Economic Development International Corporation. Bruce was also the past president of the Northeast Ohio Financial Planning Association and a past member of the Ohio Governor’s Small Business Advisory Council.

Bruce joins past recipients of the 2011 William C. Zekan Award, including Emil Voelz, retired Chairman/CEO of Great Northern Savings; George “Mike” Lewis, retired CEO/President of Akron Porcelain and Plastics; Terry Haines, retired Chairman, CEO/President of A. Schulman Inc.; and William Considine, CEO/President of Akron Children’s Hospital.

The Boy Scouts of America seek to prepare young people for life’s many challenges by instilling the values of the Boy Scout Oath and Law. Their programs build character and train young people in the responsibilities of participating citizenship. The Great Trail Council of Akron, Ohio reinforces traditional family values through Boy Scout programs that foster creativity, promote family unity and inspire and motivate scouts to develop skills that will provide the foundation needed to become productive citizens.

For more information, please visit www.jentner.com or call 1-866-JENTNER.

Listen to this short, two-and-a-half-minute recording of my recent interview on 640 AM WHLO to find out.

To download the above audio recording directly, please click here.

In response, Bruce provided this summary on the state of the economy.

“The Fed said that they are sticking with plans to end the purchase of $600 billion of U.S. Treasuries on June 30. They admitted the economy is recovering more slowly than previously expected.

Although the Fed is less comfortable with the economic outlook, it has little leeway to take new steps to fix it. Interest rates are already at historic lows. Government debt is already at historic highs. Inflation is beginning to move higher. U.S. corporate tax rates are already among the highest in the world.

Additionally, unemployment is once again creeping higher, and personal incomes are relatively flat. Employed workers are not particularly interested in seeing increased personal tax rates.

Mr. Bernanke shows little appetite for another quantitative easing program. Some investors worry that this could hurt financial markets.

Opinions range from catastrophic market declines to little impact on the long term trend of the markets. In our opinion, it is difficult to predict.”

And so, what does Jentner Wealth Management recommend be done during these times for a prudent investment strategy?

“We recommend broad diversification in both equity and fixed income markets, using asset class mutual funds and exchange traded funds. Your investment allocation should represent your tolerance for risk, based on long-term historic trends of various asset classes.

By investing in broadly diversified funds that represent the global markets of stocks, bonds and cash, the long-term investor has the opportunity to hold the course and obtain a successful investment experience without attempting to predict the future.”

He summarized what should be done by saying:

“Do not attempt to time the markets. Even professionals cannot reliably do this. Avoid seeking the elusive safe haven. There is too much risk if you select the wrong ‘safe haven.’

Use diversification to help you avoid emotional reactions to daily market news. Rarely does responding to daily news headlines result in a successful investment experience.

Finally, only invest your long-term money. Money you need in the short-term should not be invested. This should be kept in safe cash-type instruments.”

For more advice and financial insight, tune to WHLO 640 on Mondays from 8-8:15 a.m. to hear Bruce.

If you can’t rely on these programs for retirement, what can you do? Martin A. Weisberg, JD, CFP® and vice president of Jentner Wealth Management, recommends working with a trusted advisor to build a globally diversified investment portfolio you can rely upon in retirement, a portfolio that does not include Social Security as its backbone. “Your advisor needs to be realistic when estimating your retirement needs, creating an investment structure that is steady over time. Many investors get caught up in today’s hot stocks, but you instead need to focus on continual, long-term growth.”

To discuss your financial forecast or to create a proactive investing plan to preserve your future, contact Jentner Wealth Management at 866-JENTNER or www.jentner.com.