Countdown Test

00days 00hours 00minutes 00seconds 2020-12-25 12:00 AM     00days 00hours 00minutes 00seconds 2020-10-25 12:00…

When Warren Buffett said last week that the Dow Jones Industrial Average would hit 1 million by 2117, no one criticized him for the pick. No one even suggested it was outrageous, although the index currently stands near record highs at roughly 22,500.

Buffett himself said as much, acknowledging that he hadn’t made “a ridiculous forecast at all, if you do the math on it.” And while 1 million on the Dow is 4,500 percent above current levels, the math says that the benchmark need only return an average of 3.87 percent annualized over the next century to make the Oracle of Omaha look like, well, an oracle.

Buffett’s call to bet on America for the rest of our lifetimes didn’t take a lot of nerve, nor is it likely to truly inform a generation of investors.

But a different stock market call – more specific and unusual – made 20-plus years ago to a group of journalists has been informing investors ever since, and Buffett’s more-generic market call is a good reason to re-examine the unique forecast of the late Bill Berger and how it is progressing.

Berger, the founder of the now-defunct Berger Funds, was something of a mutual-fund celebrity when he came to Boston in 1995 to speak at the first-ever personal finance conference held by the Society of American Business Editors and Writers. The kindly white-haired man with the beard and the rosy cheeks of Santa Claus regularly graced magazine advertisements, touting his funds and their solid track record.

The stock market hadn’t yet caught Internet fever when Berger came out and said the Dow would hit 116,200 by 2040. Berger wasn’t expecting the market to take off; he had simply been in the investment business for 45 years and had seen the Dow go from below 200 to just over 4,300.

Berger expected the Dow’s future, mathematically, to reflect its past, which meant that the next 45 years would carry the benchmark from where it stood on the day of the speech to 116,200. The 70-something Berger – whose firm was merged out of existence a few years later after his death – wryly suggested that if he was proved wrong, people should visit him in the 2040s to discuss it.

Berger was talking more about predictions and prognostications than the market. In one of the most memorable speeches I have ever sat through, he cited what he called “the two rules of forecasting.”

  • Rule 1: For each forecast, there is an equal and opposite forecast.
  • Rule 2: Both of them are wrong.

Every time I have written about Berger’s forecast – which I seem to do every few years – the 116,200 number is greeted with some measure of ridicule and incredulity. Where no one is critical of Buffett because he’s the savviest investor of our time, anyone else looking that big and that far forward is subject to maximum skepticism.

And yet, Berger is pretty much on target.

On the surface, that’s hard to believe because we are halfway into Berger’s 45-year time frame and we’re not close to half-way there on the Dow. The benchmark is up roughly 400 percent thus far, however, and if it averages a gain somewhere in the 7 to 7.2 percent range for two-plus decades, it should the 116,200 mark almost exactly on Berger’s time frame.

Berger couldn’t have foreseen the events that have shaped the market since his prediction, including two devastating bear markets and the longest bull run of our lifetimes; Buffett didn’t even try to predict anything other than that the Dow could reach seven figures.

Beyond the folly of forecasting, what both shared was a message about the power of the market and the strength of America.

What Berger said in 1995 holds true today: “There’s not an investor who has been alive for the last 60 years or more who hasn’t seen the market rise over their lifetimes.” That period included a chunk of the Great Depression.

“So I don’t know exactly where the market is going over the next five or six decades,” Berger said, “but I know it will be up.”

Ultimately, what investors should take from both of these prognostications is the folly of basing your actions on the countless forecasts that can take your eye off of the big picture.

No one is truly investing long on the market because of Berger’s old call or Buffett’s new one. They are investing with the idea that a core of great companies or the domestic stock market is going to deliver reasonable returns over a lifetime, with setbacks and downturns proving temporary along the way.

At a time when it is easy to find messages about how the bull market can’t continue without a correction or how a crash is coming, a reminder that core, long-term holdings should have market exposure that lasts a lifetime is worth listening to, even if it comes cloaked in a message of just how high the Dow will be someday.

Berger and Buffett are both right, though only time will tell just how accurate they are. The Dow will hit 116,200 within the next three decades and 1 million within a century.

Still, the only thing investors should count on is that the journey from here to those lofty heights will be bumpy, nerve-wracking and filled with times that test an investor’s resolve.

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   Chuck Jaffe is editor at RagingBull.com; he a nationally syndicated financial columnist and the host  of “MoneyLife with Chuck Jaffe” (moneylifeshow.com). He is a long-term investor and does no short-term trading of stocks, options or ETFs. You can reach him at chuck@ragingbull.com.

Author: Chuck Jaffe

There are nearly 2,000 exchange-traded funds now in the United States, but more than half of the money that rushed into ETFs in August went into just 10 of them.

That means that the big 10 sucked up about $16 billion in inflows during August, while the rest of the industry – the other 1,900 issues combined — drew roughly $15 billion.

It raises a legitimate question among ETF and fund investors as to whether they want to follow the herd into these giants, or take a different path.

To be sure, there is no one right answer, but if more than half of the money going into ETFs is rushing to 10 funds, it’s clear that a majority of investors should at least consider the question.

Long before the advent of ETFs, size mattered in the fund business. Issues like Fidelity Magellan (FMAGX) and Growth Fund of America (AGTHX) became household names and magazine cover subjects. Their size alone was an endorsement, seen by novice investors venturing into funds as a sign of safety.

Over time, the list of the largest funds started to show the progress of index funds, as the Vanguard Index 500 (VFINX), usurped all active managers by the late 1990s to become the largest single fund in the industry.

Where traditional giant active funds had the attraction of a successful manager, index funds promised to deliver the returns of a specific asset class; as investors moved from wanting to give a manager the power to move money around to instead controlling how their assets were allocated, indexing took off, particularly with the advent of exchange-traded funds. ETFs trade like stocks – minute-by-minute, rather than at the end of the trading day like a traditional fund – making them the ideal control choice for investors looking to take charge of their portfolio.

There’s no denying that size matters in all types of funds, but how it matters depends on the situation. An active manager with a strategy that can’t handle huge money flows wants to close the fund to stay small; by comparison, a new ETF that can’t attract critical mass – generally considered to be between $25 million and $50 million – may be in jeopardy of closing, as new issues often fold if they can’t amass sufficient assets to be profitable.

The 10 ETFs that took half of fund flows in August don’t have that worry; the question with them is whether they are too big.

The 10 ETFs that took 51.3 percent of August inflows were: the SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard FTSE Developed Markets ETF (VEA), PowerShares QQQ Trust (QQQ), iShares Russell 2000 ETF (IWM), iShares Core U.S. Bond Aggregate ETF (AGG); SPDR Dow Jones Industrial Average ETF Trust (DIA), Industrials Select Sector SPDR (XLI), SPDR Gold Trust (GLD), and the ProShares Short VIX Short-Term Futures ETF (SVXY).

In this group, size begets size; they get bigger because they are big, not because they somehow are better or better-constructed. They are high-volume, broad-based, low cost and easy-to-hedge, which keeps them front-and-center with traders.

All of that demand results in some of the tightest bid/ask spreads in the industry. That means better pricing, which is important to institutional money managers who trade so much that pennies per transaction add up to real money.

For the average individual investor planning to buy-and-hold an ETF, however, the minute differences in execution don’t amount to much on small positions held for a long time.

Thus, it’s more important to find ETFs that truly meet their needs, and that they understand enough so that they will stick with their allocation plans even when the market is working against them.

Thus, while the SPDR S&P 500 ETF represents the index, an investor might decide they’d rather own just the growth or value stocks in the index, or that they would prefer to spread their money to the stocks evenly ( rather than based on market capitalization), or that they would prefer to focus on companies on the index that consistently raise dividends and more. Likewise, an investor might want to get away from the QQQ Trust because the index is nearly two-thirds invested in technology stocks.

In short, it’s better to own a fund because you want your money exposed to what it does, than because it’s big and famous.

Mark Salzinger of the No-Load Fund Investor noted that the Big 10 mostly have been good performers of late, “thereby [attracting] a lot of attention. In other words, they are momentum investments that could be expensive and ripe for reversion to the mean or a big correction, both because the recent operating performance of their holdings attracts new competition and because investors have bid up their valuations.”

It’s easy to go with what you know – and what everyone else seems to be buying — but personalizing your asset allocation isn’t easy. It’s better to do some research and look for the mix of funds that serves your needs and give you the courage to hang on when the market turns than to buy what’s popular now.

Max Chen of ETFTrends.com noted that small traders gravitate toward the Big 10 “due to a herd mentality where they see that a lot of money is going into these ETFs, and they feel safer knowing that they can’t go wrong with the investments, or at least suffer with everyone else if the markets turn.”

ETF investors should do their own research to decide which funds fit their profile, rather than following the herd.

Where the industry is investing in ETFs is interesting; where your money belongs – based on your personal needs and objectives – is important.

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   Chuck Jaffe is editor at RagingBull.com; he a nationally syndicated financial columnist and the host  of “MoneyLife with Chuck Jaffe” (moneylifeshow.com). He is a long-term investor and does no short-term trading of stocks, options or ETFs. You can reach him at chuck@ragingbull.com.

Author: Chuck Jaffe

Until recently, I would have told you that only thing in common between long-term mutual fund investors and short-term stock traders is that both are trying to make money.

Today, I’m telling classic buy-and-hold fund investors that they could learn a lot from stock jockeys.

I certainly have in the three months since I became editor at RagingBull.com, a site where veteran traders write about their day- and swing-trading strategies. In taking the job, I helped to develop the site’s ethics policy for journalists, the procedures that ensure that the site avoid conflicts of interest. Effectively, they make it impossible for me, personally, to pursue any short-term market action, to follow or profit from the moves recommended by the site’s trading experts, whose commentaries I edit.

See Raging Bull’s announcement of Jaffe’s appointment

While I can’t trade myself, it has been impossible to work so closely with traders and not pick up an appreciation for how they do their jobs. What I was surprised to learn was how many tactics traders use that long-term investors could profit from.

Mind you, I’m not advocating that average mutual fund investors start trading their mutual funds or making moves at a regular pace. Countless studies show that fund investors who over-trade their accounts wind up lagging the markets and the average funds; fund investors are better off buying-and-holding a slowly-evolving asset allocation – the way they do in a target-date or life-cycle fund – than trying to trade their way to bigger profits.

But they will be better buyers and consumers of funds if they apply the tenets of small, individual traders to their process.

Here are five things that long-term buy-and-holders should learn from short-term traders:

Trade the plan. Good traders plan their trades, and then trade their plans. They don’t let the market dictate moves, they don’t let winners run past where they have the right balance between risk and reward, they take appropriate profits or losses, and they offset aggression with patience, getting in only when the price, conditions and time are right.

Traditional fund investors have an ideal holding period of forever, and they review their performance and portfolio infrequently, so that if a fund’s performance drifts or fades, they don’t make moves until real problems fester.

Buying and selling funds based on their ability to deliver to expectations is a way to make sure that the entire portfolio remains solid.

Use the right tool for the job. Traders look for the right way to make the most from each trade, whether that means buying stock, using options,  juicing the situation with a leveraged exchange-traded fund or whatever improves their chances for success.

Too many fund investors live by generalities, buying new funds in order to diversify their portfolio without giving it much more thought than “I don’t own something like this.”

They wind up with a collection of funds, rather than a portfolio where each investment has a purpose.

If a fund can’t improve your portfolio – if it doesn’t have a specific role to play – it probably makes more sense to wait until there is a real, solid reason to add something new to your holdings.

Quantify risk and reward. Savvy traders look for situations where the odds of success are in their favor, where the potential upside is much bigger than the probable decline if they make a mistake.

Fund investors set expectations by looking at past performance, figuring that positive results are likely repeat and maybe eyeing a fund’s worst year as the “bad as it gets” result they might see in a downturn.

Instead, fund investors should have specific expectations for every type of fund they buy, an acceptable range of performance. They should know what to expect from an asset class, and where – relative to the category average – they expect returns to fall. Settling for a laggard that falls short of the assets and/or the average fund has long-lasting consequences that are much bigger than most people recognize.

Keep emotion out of it. Traders set limit orders and follow plans because it removes emotion from the process. They’re not buying a “favorite,” they’re using a tool; the minute it’s not useful or there is something better suited for the job, they move on.

Fund investors let emotion rule the day; they let winners run, find it hard to rebalance back to their plan, and rely as much on hope as on hard data. Too often, emotion breeds inertia; it’s why investors hang onto funds (“It was good to me once”) or fall for charismatic managers (“He looked so good on tv”) rather than letting numbers dictate the next move.

Be willing to accept and move on from mistakes. Traders know they can’t win them all; they know what they are willing to lose if their investment thesis is wrong, and they get out — accepting a minimal loss – when the market works against them.

Fund investors hang on, hoping to get back to break even, and then typically sticking around when it happens as if it was an achievement. This is why there’s at least $1 trillion in overall fund assets held by mediocre performers and laggards; there’s never a good reason to hold a bad fund.

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   Chuck Jaffe is editor at RagingBull.com; he a nationally syndicated financial columnist and the host  of “MoneyLife with Chuck Jaffe” (moneylifeshow.com). He is a long-term investor and does no short-term trading of stocks, options or ETFs. You can reach him at chuck@ragingbull.com.

Author: Chuck Jaffe