The Long Term Investor

And to follow up somewhat on the above.

Underperforming Your Own Assets

https://ritholtz.com/2023/07/underperforming-your-own-assets/

(BOLD is my opinion OR what I consider important content)





"Over the weekend, I noticed someone was wrong on the internet.

Anthony Pompliano is a crypto fan who has amassed a huge (1.6 million) following on Twitter. As the Tweet (X?) above shows, he made a newbie error looking at the performance of the S&P500: He left out dividends, thereby omitting most of the returns.

I replied1 to the tweet, politely pointing out that my colleague Ben Carlson had previously explained that “since 1928, equity market returns including dividends are 70% higher than just equity price returns alone.”

Indeed, dividends are a major reason why you hold equities long-term. “The total return is around 35x higher than the price return alone.” 2

But here is where things get interesting. Pomp points out that:

“I am, however, arguing that the total return percentage traditionally quoted is not what people actually achieve in their brokerage account because of taxes. Also, given you have to turn DRIP on in most brokerage accounts, I wonder what percentage of investors reinvest as well (have looked but can’t seem to find this number anywhere).”

I have addressed Tax Alpha before (see this and this); and obviously, the same situation (or worse) exists for other asset classes, including crypto.

But Pomp indirectly raised a very different issue: Why do people underperform their own assets? He was essentially referring to the entire field of behavioral finance.

BeFin explains why people underperform their own holdings.

In order to obtain returns that mirror your own holdings over an extended period of time, you have to 1) own them for the entire period; 2) originally made your purchase during normal periods of price, e.g., not chasing the new hotness upwards and buying near all-time highs; and 3) not sell prematurely, or trade or otherwise interfere with the power of compounding.

It’s “Simple, But Hard” — simple in the abstract, but difficult to execute in the real world. Most of us lack the understanding, discipline, and skill to do this effectively. Carl Richards termed this the Behavior Gap, and that descriptor sums the challenges up perfectly.

If you are more of a visual person, then consider the two charts below, via JPM’s Quarterly Guide to the Markets. They show just how much the average investor’s lack of discipline costs them in terms of returns. That underperformance between asset class returns and investor returns is the behavior gap.

Over 10 years, (2012-2021) the SPX generated 16.6% annual returns, but the average investor only gained 8.7% per year. Over that period, the typical investor garnered about half of what the markets generated:





Where things really went off the rails were the 20-year returns,w which included most of the dot com implosion, and all of the Great Financial Crisis. Over that volatile era, the SPX returned 9.5% annually while investors garnered about 3.6% per year — barely a third of the index.





The longer the holding period, the greater the impact of compounding error. This is the cost fo the behavior gap.

Asset classes, be they traditional stocks and bonds, or newer holdings like crypto all have the same defect: They are held, for better or worse, by humans…"

MY COMMENT

Here is the key in long term investing:

"In order to obtain returns that mirror your own holdings over an extended period of time, you have to 1) own them for the entire period; 2) originally made your purchase during normal periods of price, e.g., not chasing the new hotness upwards and buying near all-time highs; and 3) not sell prematurely, or trade or otherwise interfere with the power of compounding."

This is partly why just looking at stock performance like AMZN above is not a totally valid evaluation.

In addition......I dont have to see HUGE annual stock price gains to hold onto a stock......I want to see steady growth. I would like to see a stock gain average of at least 10% per year long term average. Add in dividends and compounding on top of that and it is all good.

 

I saw data on my area regarding the housing market yesterday. Prices are steady and firm.....perhaps even making a slight move UP. More importantly.....time on the market is now ONLY about 28 days.......down from about 45 days previously. AMAZINGLY about 25% of all sales are for.....ALL CASH.

There is lots of money out there in the economy.

 

Of course......Microsoft is down by about 3.08% today. This is the DUMB money accepting the media line on earnings and the cloud data. I will take 26% growth in a business segment all day long. It is also short term traders playing the market psychology and news coverage.

I prefer to see the earnings for what they are........"highest quarterly sales ever"........and.......the "strongest financial quarter ever".

 

It is FED day so the markets will be totally distorted today till about 2:00 when the FED announces the obvious......another rate hike of 0.25%.

This is 100% anticipated and no one will really care. There is a little bit of interest whether this will be the last hike for the year. I think that is the obvious best course of action.....wait and see for the next 5 months. BUT....after all it is the FED......and they have a poor track record of common sense.

 

The market start today.

Stocks open lower with Fed decision, tech earnings in focus

https://finance.yahoo.com/news/stoc...-focus-stock-market-news-today-133633046.html

(BOLD is my opinion OR what I consider important content)

"Stocks opened lower Wednesday in the countdown to the Federal Reserve's interest-rate decision, as investors weighed earnings reports from Microsoft (MSFT) and Alphabet (GOOGL).

The tech-heavy Nasdaq Composite (^IXIC) was down about 0.4%, while the Dow Jones Industrial Average (^DJI) dropped just below the flatline. The S&P 500 (^GSPC) fell around 0.2% as more second-quarter earnings reports rolled in.

The Fed is overwhelmingly expected to hike interest rates in its statement Wednesday, but Chair Jerome Powell's comments will still be closely watched for any hints of what lies ahead for policy.

Next up on the Big Tech earnings docket is Meta (META), expected to report after trading ends. In focus is what the Facebook parent will say about its artificial intelligence efforts, given hopes for the tech helped drive a rally in stocks.

Microsoft and Alphabet's AI updates came under close scrutiny, and both topped estimates in their after-hours reports. But the stocks are headed in opposite directions early Wednesday, with the Google owner on the rise."

MY COMMENT

That pretty much sums up the open and probably the entire day.

 

You know a few days ago I put up an article complaining that the earnings reports so far are about a 75% BEAT. The article was complaining that about 80% would be normal.

First I dont believe that 80% figure...I believe that 75% is more typical and an outstanding number. AND.......yesterday I saw an updated figure that the earnings beats this time around are now up to..........79%. YEP.....basically 80%.

Poor experts and media....they just cant win. These guys remind me of the TRIX RABBIT....he could never get the cereal because.....TRIX are for kids.

 

Speaking of real property.

Home prices rose for 4th straight month in May
Home prices rise again in May despite higher mortgage rates

https://www.foxbusiness.com/economy/home-prices-rose-fourth-straight-month-may

(BOLD is my opinion OR what I consider important content)

"Home prices rose for the fourth consecutive month in May even as buyers continued to confront steep mortgage rates.

Prices increased 1.2% nationally in the period from April to May on a non-seasonally adjusted basis, the S&P CoreLogic Case-Shiller index showed Tuesday. On an annual basis, prices are down just 1% from their peak in June 2022, according to the index.

"The rally in U.S. home prices continued in May 2023," said Craig Lazzara, managing director at S&P DJI, in a release. "Home prices in the U.S. began to fall after June 2022, and May’s data bolster the case that the final month of the decline was January 2023… The breadth and strength of May’s report are consistent with an optimistic view of future months."

The 10-city composite, which encompasses Los Angeles, Miami and New York, fell 1% annually, compared with a 1.1% increase in April. The 20-city composite, which also tracks housing prices in Dallas and Seattle, fell 1.7% in May, unchanged from the previous month.

There was a major discrepancy in the price gains in the 20 cities: Chicago saw a 4.6% annual gain, making it the best-performing city for the first time. Cleveland, meanwhile, posted a 3.9% gain, followed by New York with a gain of 3.5%.

On the other end of the spectrum, cities on the West Coast posted some of the biggest declines. Seattle prices plummeted 11.3%, edging out San Francisco with its 11% decline.

"Regional differences continue to be striking," Lazarra said. "This month’s league table shows the revenge of the Rust Belt, as Chicago, Cleveland, and New York were the top performers. If this seems like an unusual occurrence to you, it seems that way to me too."

The Case-Shiller index reports with a two-month delay, meaning it may not capture the latest ongoings in the market.

The interest-rate-sensitive housing market entered a deep freeze last year in the wake of the Federal Reserve's aggressive interest-rate hike campaign.

However, as buyers have adjusted to higher mortgage rates and grappled with limited inventory, the housing market has shown early signs of stirring back to life.

Rates on the popular 30-year fixed mortgage are currently hovering around 6.78%, according to Freddie Mac, well above the 5.51% rate recorded one year ago and the pre-pandemic average of 3.9%.

A separate report released last week showed the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, rose one point to 56, the highest reading since June 2022.

Sentiment has been steadily rising as a worsening inventory shortage buoys consumer demand for new homes.

"The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers," said Alicia Huey, NAHB chair and a homebuilder from Alabama.

MY COMMENT

Obviously.....West Coast cities....Seattle, Portland, San Francisco are struggling with people fleeing the conditions in the cities. This is NOT a real estate market condition situation but a social/governance situation.

Buyers are still in the hot seat.....as inventory is low and rates on home loans are high.

I believe that in most parts of the country the mortgage loan rate cited in this article for a 30 year loan......with ZERO points..... is LOW.

 

A word about NVDA.

PLEASE.....the fact that I have added some shares lately is NOT a message to others to do the same. Everyone is in a different situation. The last thing ANYONE should be doing is buying a stock based on some random person on an internet massage board doing so.

NOTE: The stock is down today and as I said.......earnings will be very dangerous due to overwhelming expectations. There is no guarantee of short to medium term gains.

 

Today is one of those days when a market pause is reasonable. The markets have a lot of upcoming news today that will need to be evaluated after the close.

I am doing about the same as the averages so far today. I have four stocks UP.....GOOGL, HD, AAPL, and COST. The other five are down at this moment. Of course my low performers today are......MSFT (-3.99%) and NVDA (-1.03%).

 

I agree on MSFT Smokie.

I have seen a number of articles over the past couple of days talking about concern that MSFT is not showing much ability or proof of being able to monetize AI. From what I have seen they have a more legit AI operation than many of the other companies that are BS'ing about AI. You have to love the financial media.

Where and how do they come up with this BALONEY.

This sort of stuff is why I often think that the financial media is being FED this GARBAGE by.......professional..... short sellers and day traders trying to manipulate the markets for their short term gain.

 

You sold AMZN and 80% of TSLA?

Did you put it all in NVDA?

 

OK....the FED did as expected and hiked by 0.25%. Nothing more to say since.....I dont care and neither does anyone else.

 

NOT a bad day today......considering that we are one day past two of the most significant earnings in the entire market, MSFT and GOOGL.....the FED today......and META later today.

Good to get all this stuff behind us in just a few days without any major damage to the markets. We will get AMZN and APPL out of the way next week.

I ended the day......slightly in the red. Five stocks UP and four DOWN. MSFT pushed me into the red with a.....DUMB..... loss of 3.76% today. Other losing stocks for me today were.....NVDA, HON, and AMZN. My winners today....GOOGL, HD, NKE, COST, and APPL.

I got beat by a MASSIVE......0.01%......by the SP500 today. Basically a FLAT day for me today. I will take it.

 

I will......take another shot at it tomorrow. We should have some of this CHAFF out of the way by than.

 

If you care about META....here you go.

Meta reports 11% jump in revenue and issues optimistic guidance for third quarter

https://www.cnbc.com/2023/07/26/meta-to-report-second-quarter-earnings-after-the-bell.html