Market science is a lot like denominational religion – there’s always someone out there to tell you what your inching ears want to hear.
Unfortunately, probably the best advice on the markets is simply that in the long term, active stock picking loses to indexing. But inside that bit of wisdom are other truths that should have younger investors loading up their retirement portfolios with small-cap funds. Small, and small value in particular, always wins.
The rub in retirement investing is that it’s real money, and you’ll really need it someday. You really shouldn’t splash your cash around in whatever flim-flam funds and cutesy companies that spring your fancy. Despite, that, though, I like to have fun with investing (what can I say – I’m not into sports).
So how do I pick my religion? If I had just a little more to invest – and don’t we all think about that – I’d probably go to a broker and split up my cash into a number of the fine indexes offered by Dimensional. (Indexing is broader than the world of Vanguard and the Bogleheads.)
In the absence of quite the stash, and perhaps the confidence in others, to put my future in the hands of a full-time broker, I enjoy the cheap online trading services that have been cropping up ever since I entered college. Unfortunately, there are still plenty of limitations to these sorts of sites. You might have access to the world of funds and most markets, but there are plenty of fees to ding you: small-account fees, transaction fees for no-load funds, account transfer fees, and per-trade fees, to list some of the most common. Add in the limitations imposed by most 401k plans and you may end up like me – a wee little piggy bank carved up into several accounts with names like ING Retirement, E-Trade, T. Rowe Price (which has an inexpensive automatic account builder and a diverse basket of funds), TD Ameritrade and Scottrade.
But from there, a little research at fun sites like MoneyChimp.com – where indexing is praised and dollar-cost averaging is called a myth – and the Motley Fool (if you stop reading columns before the last couple of paragraphs you can avoid the sales pitch) should give you some great investing ideas and strategies. (Chimp also has great calculators, including one based on Warren Buffett’s value-investing style.)
Yahoo Finance has, for my money, the top stock and fund screeners on the Web (while Google’s chart technology is my favorite). Self-directed retirement fund cash in hand, I recently ran a number of funds through just about every one of the above sites to narrow down a buy.
As much “buy low, sell high” advice I read, I just can’t bring myself to ignore past performance. If an asset class has performed poorly for the past five years, and hasn’t outperformed in the long-term either, why should I put money into it (large-cap funds, are you listening?)
Small-cap, international, natural resources and real estate funds all have done well for the past several years and, I believe, still represent some of the best opportunities for long-term capital appreciation. Who doesn’t want to bet on innovation, globalization and scarcity? (If I want to bank on the growing demand for consumer staples, I’ll buy a single stock, like Johnson & Johnson, JNJ.)
Capturing these classes means picking just the right indexes, or scouring for the small percentage of actively managed funds that have a strong track record of beating sector averages (and hoping that you can find a brokerage where you can buy them without cutting into your initial investment).
Scouring through a list of no-transaction-fee funds and a few hot tips, I put the screener to work to search for returns and proven management. That worked up a handful of funds the looked nice at first blush:
Julius Baer International Equity A (BJBIX)
With a year-to-date return of 13 percent and a five-year at 15, well above its relative index, there’s not a lot to dislike about this fund. It’s very volatile, though, up seven years, down five. I compared this fund to Dodge & Cox International Stock (DODFX) and American Funds EuroPacific Gr R4 (REREX), both of which look great but have been out the gate less than five years – too short for my tastes.
Excelsior Value & Restructuring (UMBIX)
I also came across this fine large value fund, with only two down years out of 13. It has a fantastic three-year return of 20 percent, but it’s five year haul is just under 8.
Bridgeway Ultra-Small Company Market (BRSIX)
Bridgeway Funds has a history of closing off funds to new investors to protect existing shareholders, and the managers are encouraged to splash their money in the pool as well. Aside from a recent settlement with the SEC over how its performance fees were calculated, Bridgeway has a solid track record of low fees and stunning performance with its active index and quantitative funds. The company also donates half its profits to charity. The Ultra-small fund, an index of some of America’s tiniest publicly traded companies, has trashed the Russell 2000 over its eight years of existence. It’s up 17 percent annually since inception.
Amana Trust Growth (AMAGX)
This large-cap fund looked fantastic for more than a minute. It’s interesting in the field of socially responsibly funds for adherence to Islamic principles – no porn, no gambling, no alcohol, and no interest. But its blazing three-year return of 23 percent is tempered by much weaker long-term history, buoyed most by a 100 percent return in 1999.
Despite having to pay a small transaction fee for a fund that wasn’t on the discount list for my account, my money went to Bridgeway’s Ultra-small.
As a newbie investor, I’ve developed three basic strategies in the year or so that I’ve been following the markets. One strategy involves playing it safe, clipping financial news articles and buying well-researched stocks with strong dividends and relatively stable share prices. The second is driven more by greed and generally involves simply picking up mutual funds with market-beating results over the past five years. The third strategy is much more altruistic. It involves screening stocks for corporate philosophies that embrace principles of sustainability and environmentalism – a strategy I call “enviroinvesting.”
To be fair to myself, I might say that my personal portfolio represents the first two methods of diversification due the fact I don’t really have the investing cash to risk on a philosophy. And in fact the year-to-date results of my “50/50 safe and greedy” IRA are handily doubling the performance of the S&P 500, even after last week’s post-rate hike sell off. But perhaps that sell off, the worst since a similar scare in the first week of March, means it’s time to examine the returns of the kind of investment style I started EnviroInvestors.com to preach.
The site began in December last year as a practical response to Jared Diamond’s apocalyptic social history, “Collapse,” and its warning that ecological devastation will basically make moot all those gains from “emerging markets” stock funds if developing nations and world superpowers don’t turn to more sustainable economic practices. My idea was to join the grassroots shareholder movement to persuade companies that sustainability-focused business practices make good sense on more than a feel-good level. I started out writing about sustainability indexes, environmental awards, and companies like Interface floorcoverings, which has a stated goal of becoming the world leader in sustainable home interior products by 2020.
Considering that self-interest may be a stronger driver than altruism for most investors, I began last month to think I simply needed to go after the next hot stock – the next Berkshire if you will – like everybody else. Then I went back and looked at the results of the pro-environment companies I’d wrote about in the high of my sustainability vision quest.
What I found surprised me.
Most of the companies I’d screened for the Enviroinvestors philosophy – through awards and corporate press releases – have actually done very well. Maybe even better than my 50/50 portfolio.
Let’s take a look:
l The first company I wrote about back in December was Whirlpool (WHR), as the appliance-maker joined the Dow Jones Sustainability World Index. Whirlpool went on to buy Maytag, and its stock is up nearly 6 percent.
l Two days later, I called Novelis (NVL) a “Strong buy for the sustainability-focused investor.” The aluminum recycler is up 33 percent since then.
l I then wrote about buying into Lloyds TSB (LYG) on a tip and after reading its environmental platform. The bank is up 11.8 percent.
l No big news for Interface (IFSIA), but I thought Enviroinvestors.com owed them some play as a leader in a visionary business model that must put them out on a limb sometimes with Wall Street. Maybe I should stop being such a doubting Thomas: Interface is up 45 percent since that post and traded much higher through April.
l Running low on news ending out 2005, I ran analyst John Dorfman’s 2006 picks through the enviroinvestors screen, and liked Devon Energy (DVN) and Schnitzer Steel (SCHN). This year, Devon’s down 4 percent, Schnitzer’s up 26 percent.
l In my first post of 2006, I praised Potlatch (PCH) for a biofuels initiative, but called its $50 price too high for its earnings. The forest-products company is down 31 percent since then.
The site soon joined PETA in talking up Safeway (SWY), which has since dropped 2 percent. Maybe that makes it a better buy – like two of the other companies I adore as a retailer were back then in January. Starbucks (SBUX), up 14 percent; E-Trade (ET) up 12 (good for investors, maybe not for folks like me who don’t get free checks anymore). I recommended shopping at Target (TGT) over Wal-Mart (WMT), and touted Whole Foods’ (WFMI) reusable green bags. Wal-Mart is up 3.5 percent, Target dropped the same, and Whole Foods has had a roller-coaster ride down 5 percent.
Warner Brothers (TWX) helped make “Syriana” carbon neutral, but its stock hasn’t moved much. American companies added to a top 100 sustainability list released at the World Economic Forum in Davos have been a mixed bag. Intel (INTC) is down despite a dividend scheme, and Johnson & Johnson (JNJ) flat, but UPS (UPS) and Bank of America (BAC) are up, 8 and 10 percent.
I pumped Arcadis’ (ARCAF) principles and financials: it’s up nearly 50 percent since late January.
So what have I learned from reviewing the first couple months of my little-followed, pro-environment, investing philosophy? Well, since three of my strongest recommendations – Novelis, Interface and Arcadis – are up 33, 45 and 49 percent in just a few months, maybe altruism does pay.
Silver, more affordable than gold, more alluring than copper or zinc, is on an undeniable tear. After a recent run that’s seen the spot market for silver soar from a low of $6.74 per ounce to $12.03 at yesterday’s close, everyday investors have to be wondering if the precious metal is near the end of its luster. After all, the smart investors got into silver long before it began hitting new 20-year highs.
The current silver spike began in earnest last year as Barclay’s Global Capital moved to petition the Securities and Exchange Commission for the first electronically traded silver fund, or EFT. The move came quick on the heels of the successful launch of the first two gold EFTs on the AMEX, Barclay’s iShares COMEX Gold Trust (IAU) and World Gold Trust’s streetTRACKS Gold Shares (GLD), both of which hold huge sums of gold in vaults (see the StreetTracks hoard above right) and peg shares to 1/10 oz. spot prices. Barclay’s silver EFT, expected to win approval later this year, will reportedly sell shares representing about 10 oz. of silver. With initial interest strong and EFTs representing the primary commodity vehicle for the everyday investor, Barclay’s is seen buying up enough bullion to crimp the global silver market – hence the run-up.
Silver is trading at double the range of $4 to $6 its sat at since 1980 when the billionaire Hunt brothers pushed spot prices to $50 an ounce and brought on a spectacular crash.
Room to grow
Despite its volatility and recent gains, though, I’m inclined to support silver in both the near and long term.
The metal’s current trading value is far below its pre-crash historic price ratio of 15 to 20 ounces of silver to one ounce of gold. At today’s prices, it takes 50 ounces of silver to buy one ounce of gold, a valuation that has little connection to the relative scarcity of the popular metals.
As a caveat, careful investors should mind what happens when too much pressure comes to bear on the metals markets: pushback from central banks inflation fears and increased exploitation activity that can drive down prices. The looming EFT, however, isn’t the only thing going for silver. Foreign investors are increasingly stocking up on metals, and China is seen leveraging more bullion to diversify its foreign debt. That could mean sluggish days for U.S. treasuries and a long, sustained run for silver and other precious metals.
Additionally, the jewelry market will continue to be a major silver buyer, keeping demand strong regardless of increased production.
I’m favoring silver over the more pricey gold, platinum and palladium for a number of reasons. Besides its attractive ratio at today’s prices, I also like that it is still priced attractively for the small investor (although shares in the EFT may end up costing more than gold shares). Doomsday investors like to point out that an ounce of silver, especially in one of its official currency forms such as the U.S. eagle, could easily function as currency in the face of global currency meltdown. Just don’t let all that silver under your mattress ruin your sleep.
Getting in on the action
With Barclay’s pending silver EFT poised to bring everyday investors into the silver-buying fold with the big boys, what can you do now to get in before the gains level off? Though it is not quite as easy as just clicking a few buttons on your online brokerage account, there are plenty of do-it-yourself ways to buy silver today without paying large commissions.
Physical silver is generally sold in denominations of one, 10 and 100 ounces and can be purchased from any large online coin dealer (and probably the one down the street in some fashion) and on eBay. The most attractive silver coins include the one-ounce U.S. eagles and Chinese pandas, which trade at modest markups from spot. You can also purchase signature coins and bars manufactures by large mines. In the bar form, common mints include Englehard and Sunshine. In the 10 oz. weight, the most attractive bar is from the Wall Street Mint and features the pre-9/11 New York skyline. Expect to pay about 5 percent above spot for generic bullion unless you’re buying a large quantity of silver.
An even simpler pre-EFT option is shares in the Central Fund of Canada, a gold and silver trust that trades on the AMEX under the symbol CEF. The Central Fund is currently trading below $10 a share and at a premium of about 10 percent above its assets’ spot value. The fund holds 619,591 ounces of gold and nearly 31 million ounces of silver.
On the tax-favored front, the American Church Trust, for a modest opening cost and annual management fee, has IRS approval to sell silver bullion for IRA investors. The boldest everyday investor might also want to sink a few hundred dollars into a speculative mining stock or a larger sum into a few of the more established mines (but that’s another column).
With gold and silver taking off and more investors moving to these age-old hard assets, it’s a real challenge to find mining stocks or metals that meet minimum standards of environmental responsibility. Here’s an article on a pilot project for certified “Green Gold.” Jewelers are in the forefront of commercial support for environmentally sound mining practices; bullion investors should join the push. …
Green building is one of the most exciting trends in building sustainabile economies. Cities such as San Francisco have already put forth ordinances promoting LEED standards and the new federal building there is a green office tower. … Celilo Group Media has a new green real estate guide available free (pdf) here. …