The Big Picture For The Week Of March 1, 2009

No video this week we are out of town. Sometimes I get emails from Motley Fool that promote articles on their site. I actually read one of the articles; it was called Why You Should Sell. The title hooked me in. In the first part of the article they cite a study that concluded that people hold onto stocks that they no longer think are good buys. They call this Realization utility. The article then goes on to say you should always sell when you have a better place to put your money — and today, a host of superior companies are on sale. There is something to this but from where I sit the article is woefully incomplete and strikes me as reactive not proactive. If you believe in top down portfolio construction then you believe the stock chosen is the least important part of the process (not unimportant but less important than defense or not followed by selection of sector, country, size, style, volatility, yield). In top down most stocks included in the portfolio offer several attributes, for example a large telecom stock from an emerging market that adds volatility. If a stock like that fits in then you would seek out what you think is the best way to capture this. Maybe you did this exercise three years ago and came up with Telefonica de Argentina (TAR). Then maybe after a couple of years you decided that Argentina was not a good place to stay but you felt from the top down that you wanted to capture some emerging market exposure through the telecom sector so...

The Big Picture For The Week Of March 1, 2009

No video this week we are out of town. Sometimes I get emails from Motley Fool that promote articles on their site. I actually read one of the articles; it was called Why You Should Sell. The title hooked me in. In the first part of the article they cite a study that concluded that people hold onto stocks that they no longer think are good buys. They call this Realization utility. The article then goes on to say you should always sell when you have a better place to put your money — and today, a host of superior companies are on sale. There is something to this but from where I sit the article is woefully incomplete and strikes me as reactive not proactive. If you believe in top down portfolio construction then you believe the stock chosen is the least important part of the process (not unimportant but less important than defense or not followed by selection of sector, country, size, style, volatility, yield). In top down most stocks included in the portfolio offer several attributes, for example a large telecom stock from an emerging market that adds volatility. If a stock like that fits in then you would seek out what you think is the best way to capture this. Maybe you did this exercise three years ago and came up with Telefonica de Argentina (TAR). Then maybe after a couple of years you decided that Argentina was not a good place to stay but you felt from the top down that you wanted to capture some emerging market exposure through the telecom sector so...

“The Science Seemed So Solid”

On the plane yesterday we watched Madagascar 2 and there was a point in the movie where King Julian lamented that “the science seemed so solid” after a sacrifice into the volcano did not work as expected. On a related note Professor Jeremy Siegel wrote an opinion piece in the Wall Street Journal making a case for calculating earnings for the S&P 500 by market cap as opposed to allowing the largest company losing $1 to have the same impact on the earnings as a $1 loss when it comes from the smallest company in the index. By his reckoning in 2008 the S&P 500 would have earned $71.10 which he says is 80% above the earnings number calculated by the S&P’s method. Felix Salmon and Paul Kedrosky each jumped on this as not making sense. Felix called it astonishing and Paul said the professor was a “little nutty.” I don’t think there is anything wrong with the exploration–throw it on the wall and it might stick but I don’t see where this one does stick. That Jones Apparel should have less impact on SPX earnings than Exxon Mobil could make some sense but it seems that the index’ earnings would not feel the full effect of AIG going from $180 billion down to $1.4 billion or Fannie Mae dropping from $65 billion down to half a bil, not even close. If Siegal is somehow right then I suspect if they went back and refigured everthang what needed refigurin’ then the current 9.4 P/E for the index that he calculated would not be anywhere near as cheap as he...

"The Science Seemed So Solid"

On the plane yesterday we watched Madagascar 2 and there was a point in the movie where King Julian lamented that “the science seemed so solid” after a sacrifice into the volcano did not work as expected. On a related note Professor Jeremy Siegel wrote an opinion piece in the Wall Street Journal making a case for calculating earnings for the S&P 500 by market cap as opposed to allowing the largest company losing $1 to have the same impact on the earnings as a $1 loss when it comes from the smallest company in the index. By his reckoning in 2008 the S&P 500 would have earned $71.10 which he says is 80% above the earnings number calculated by the S&P’s method. Felix Salmon and Paul Kedrosky each jumped on this as not making sense. Felix called it astonishing and Paul said the professor was a “little nutty.” I don’t think there is anything wrong with the exploration–throw it on the wall and it might stick but I don’t see where this one does stick. That Jones Apparel should have less impact on SPX earnings than Exxon Mobil could make some sense but it seems that the index’ earnings would not feel the full effect of AIG going from $180 billion down to $1.4 billion or Fannie Mae dropping from $65 billion down to half a bil, not even close. If Siegal is somehow right then I suspect if they went back and refigured everthang what needed refigurin’ then the current 9.4 P/E for the index that he calculated would not be anywhere near as cheap as he...