Once again I'm electing to postpone my annual forecast for the economy and capital markets due to a more pressing issue - the need to debunk the slick variable annuity sales pitches making the rounds. Annuity salesmen from insurance companies such as The Hartford, Prudential and Mass Mutual, and stock brokers from the likes of E. D. Jones, Wachovia, and Morgan Keegan (Regions Financial) are preying on peoples' fear of running out of money before they die to sell them variable annuities. Variable annuities are expensive, restrictive, and usually poorly performing investment vehicles that were designed to shelter high-income earners from paying more taxes than absolutely necessary; they've morphed into guaranteed income investments for the elderly. However, they are wildly inappropriate for most individuals who are simply looking to ensure a certain level of income in retirement. At least one retired couple has learned to just say NO to variable annuities after getting a complete explanation of what these expensive insurance contracts actually could and couldn't do for them. The husband related how the E.D Jones broker was "pushy" when told that the insurance contract was about to be cancelled (during the free look period); clearly Mr. Broker didn't like the idea of losing his big, fat commission. Fortunately, the husband and wife had had a change of heart once they'd read the prospectus (which they finally received) and realized how much they were paying and how little they were actually getting once the boilerplate was boiled down to reality.
Nevertheless, the retired couple's basic problem still remains - how to earn a sufficient return on their savings to meet their retirement needs? (in a perpetually low interest rate environment that continues to punish savers and reward borrowers - thank you for nothing Federal Reserve!). Fortunately there is an answer that is far less expensive and far less restrictive than the Variable Annuity. It's called a diversified stock and bond portfolio!
A properly constructed, diversified portfolio will contain assets (stocks, commodities, real estate) that hedge against inflation in order to preserve purchasing power over the long run. The portfolio will also contain sufficient fixed income assets to generate a minimum level of current income to meet current liabilities. The wonderful thing about bonds is that they throw off a well defined stream of cash that can be used to meet liabilities as they come due! You don't even have to take credit risk if you stick with Treasuries and investment grade corporates and municipals. It is relatively easy for a qualified investment advisor (as opposed to a broker-dealer representative aka fee-based advisor) to construct a diversified bond portfolio that will yield 4% or so without taking any meaningful credit risk. As well, it is fairly easy currently to build a diversified portfolio of blue chip, dividend paying stocks with an average yield of 3.5%. The 4% rule tells us that a 60/40 stock/bond portfolio will last a minimum of 30 years, which gives us a starting point, at least, for positioning a portfolio for the decumulation phase of an investor's life cycle. The math: a bond portfolio yielding 4% and comprising 40% of the overall portfolio yields 1.6% to the investor, while a stock portfolio yielding 3.5% and comprising 60% of the overall portfolio yields 2.1% to the investor. Total yield of the 60/40 stock/bond portfolio is 3.7%.
Let's take a $1,000,000 portfolio as a case study to see what kind of current income we could generate while still positioning ourselves for a 30 year retirement. We would allocate $400,000 to bonds and currently could construct a portfolio of investment grade corporates and municipals that would give us an average yield of at least 4% with a duration of between 5 and 10 years. Interest produced would run at least $16,000 per year. We would allocate $600,000 to a diversified portfolio of blue chip stocks and could currently easily get a 3.5% average dividend yield, which would throw off at least an additional $21,000 in dividends. Total income generated by the entire $1,000,000 portfolio is at least $37,000, or approximately 3.7% per annum (almost meeting our 4% rule). Careful stock selection focusing on high-quality companies with well-covered dividends will provide an additional benefit in that the dividend income will rise over time as the companies raise dividends. Companies like Proctor and Gamble, Johnson and Johnson, Coke, and Microsoft can provide an annual and growing annuity unencumbered by the strait jacket restrictions placed on Variable Annuities sold by insurance companies.
And there you have it: a portfolio of stocks and bonds becomes that low-cost variable annuity that can provide a payout of (in this example) 3.7% per annum without touching principal - something you aren't allowed to do anyway in most variable annuities for between 5 and 10 years if you wish to qualify for the minimum income guarantee. The portfolio's overall yield will rise over time as the dividend paying stocks in the stock portion raise dividends regularly. Additionally, the 3% plus per year in average variable annuity expenses stays in your pocket rather than going to the insurance company. And finally, should your situation change and you need access to your money because of an unforeseen emergency... well, you have access without having to pay any of the penalties or forgo any of the guarantees.
One last thought:
Individuals with a shorter time horizon (less than 30 years) could construct portfolios with a greater allocation to bonds and reduced allocation to stocks, thus increasing the overall portfolio yield. Likewise, investors with excess wealth can reduce their allocation to stocks, if they wish to reduce variability in cash flows, since purchasing power risk isn't as much of a concern. After all, someone with $5 million of assets and a time horizon of only 15 years is likely to be able to survive on a 3% draw ($150,000) or even a 2% draw ($100,000) to meet everyday basic needs.
Our retired couple made a good call cancelling the annuity contract. They were looking at paying an up front commission of 3.5% and better than 3% annually in costs for a contract that was unlikely to benefit their income needs in any meaningful way. Now they need to construct a properly diversified stock and bond portfolio that will throw off sufficient income to meet their everyday needs while still protecting them from the long-term risk of inflation. By saying no to high-cost, restrictive and poorly-performing variable annuities and YES to low cost, flexible, diversified portfolios of blue chip stocks and bonds, our retired couple will get an acceptable level of income and still retain control of their assets!
Tuesday, November 24, 2009
Friday, November 13, 2009
The New Variable Annuities
I had planned on updating our macroeconomic view and laying out a likely course for the stock market over the next year, but have decided to put that blog on hold for a week in order to write once again about variable annuities. The catalyst for my change of mind? A seeming rash of variable annuity sales to folks who have no need for the expensive, restrictive, and even punitive insurance contracts (yes they are heavily regulated insurance contracts). The insurance sales representatives and the insurance companies themselves have stepped up their game and are preying on peoples' fear of running out of money before they die like never before. The seemingly too-good-to-be-true contracts are exactly that - too good to be true. Yet like the snake-oil salesmen of yesteryear, the variable annuity peddlers of today promise that these almost impossible to understand insurance products are the panacea for all that ails you.
Are you worried that you might end up in a long-term care facility? No problem! Your variable annuity will double the amount of your money you are allowed to take out if you do (if you pay extra for the privilege). Worried that you will run out of money before you die? No problem! Your handy dandy variable annuity will guarantee you a monthly payout for life (if you pay extra). Worried about dying early with your annuity investment under water? No problem! Your variable annuity will reimburse your beneficiary your original investment (if you pay extra and - in many cases - aren't 75 or older). Of course all of these guarantees come with a heavy price - most variable annuities will charge you more than 3% each and every year that you own the contract, although the fees are difficult to tease out of the offering documents and most people are blissfully unaware that they are paying so much for so little (an assertion that I will back up here shortly). Additionally, the investment choices given are usually extremely limited relative to the broad investment universe available to IRA owners, and typically are mutual funds that the insurance company manages in-house (more fees for them) or are managed by a "preferred provider" who kicks back fees to the insurance company (isn't that a cozy relationship?). And did we mention that these insurance contracts take a PhD in nuclear physics to understand?
There are now more than 1,100 different annuities on the market according to SmartMoney Magazine, up from 295 a decade ago. Variable annuities are suppose to be sold by prospectus because of their complexity and heavily regulated status, but the truth is many people aren't even aware that they are buying a variable annuity, or have only the vaguest idea of what they are buying. Russell Schellenberger was a successful business man who "didn't even know he'd bought one (variable annuity), according to Janet Paskin of SmartMoney. The word "annuity" hadn't even been mentioned during the sales process. It is a safe bet that Mr. Schellenberger wasn't given a prospectus, not that the highly legalized boilerplate would have necessarily enlightened him much. I'm a Chartered Financial Analyst (CFA)r with twenty years of forensic financial statement analysis under my belt. Nevertheless, I was recently put to the test on behalf of a nice, older couple who handed me their prospectus in the hope of getting an explanation of what they'd just purchased (They weren't given the prospectus before they signed on the dotted line, but instead received it after I explained to them that they were suppose to have gotten one and that the prospectus would explain the investment to them). After wading through the legal document I can honestly claim that I was only half right... they were suppose to have gotten a prospectus.
It's important to understand that the new-age variable annuity is an expensive, yet untested product. Traditional insurance works by using large numbers of people to spread risk out; the insurance company keeps the difference between the premiums collected and the insurance paid out. Variable annuities concentrate risk in the stock market. There is more than a little concern within the industry that insurance companies will not be able to meet their obligations if the stock market continues to under perform expectations. York University professor Moshe Milevsky has studied annuities for decades and believes that the new products are under priced to cover the cost of protecting investors in a crash. Moody's has raised red flags recently over concerns that insurance companies will not be able to meet their promises to investors under plausible worst case scenarios. And annuities do fail. Exhibit A is U.K. Equitable, a major British insurance company. U.K. Equitable was forced to sharply reduce the minimum guaranteed payout to annuity holders in the late 1990's because interest rates didn't do what actuaries had predicted.
Turns out then that the minimum income guarantee that is available (for an extra cost) is only as good as the financial strength of the insurance company selling the annuity. But what about the basic product itself (assuming that the insurance companies will survive the next big downturn in the stock market) - is the minimum income guarantee really a panacea for investors who have under saved and are now worried that they will outlive their assets? The answer is not really. Here's how the typical product works these days:
An investor buys a variable annuity, placing the money into an investment account that then disburses the money to sub accounts composed of typically high cost mutual funds (remember that cozy relationship between the insurance company and the either captive mutual funds or "preferred providers"?) The mortality and expense fees for the variable annuity usually run around 1.65% per year while the underlying funds usually suck out another 1.5% to 2.0% of the investors money every year. A 3.0% plus per annum expense ratio is a high hurdle to overcome and almost guarantees under performance of the contract relative to owning individual stocks and bonds or low cost, no-load mutual funds. Your broker is often receiving the 12b-1 trailers on the funds in which you invest inside the variable annuity by the way.
Your investment account is left to grow, and the insurance company hopes it grows sufficiently to cover the guaranteed income payments once you start to take them down the road. One product I recently reviewed for an investor had been bought when the investor was 60 years of age. He was guaranteed a minimum income benefit of $30,000 per year if he left the money in place for at least 10 years. He bought a $300,000 variable annuity which was placed into stock mutual funds. The insurance company moved the bulk of the money into a fixed account earning 2% per annum when the bottom fell out of the market in 2008 - it will remain their for the rest of the contract life in order to protect the insurance company. The investor will be allowed to take $30,000 of his own money out of the contract every year until he dies, starting when he turns 70. Of course, the average life expectancy for a man of his socioeconomic background and health is around 78. It is still barely possible that his investment account will make it back close to the original $300,000 level before he turns 70, since he does still have $29,000 invested in stock mutual funds within the annuity - perhaps it will double in the next 8 years, although that is unlikely.
Regardless, this investor has taken $300,000 from his tax deferred IRA (in which he had absolute freedom to invest in any number of low cost mutual funds or directly in a portfolio of blue chip stocks) and put the money into a restrictive, condition-filled insurance product that might actually return all of his original investment to him by the time he turns 80 (if he lives that long and the insurance company is still solvent). Should he manage to make it to 85-years of age he will have hit the jackpot! By 85 he will have been allowed to withdraw $450,000 over a 15-year period (some of the money likely the insurance company's). Whoop dee do!
Why the facetious celebration? Do the math! Our investor will have taken out $450,000 from an original investment of $300,000 made 25-years earlier. A fifty percent gain over 25- years comes to exactly 2% per annum compounded (and that's before paying income tax on the withdrawals). You can better than double that return right now in 20-year tax-free Treasuries, and easily construct a bond portfolio that allows you a substantially higher guaranteed income stream than the annuity, without the onerous restrictions placed on you by the insurance companies - who might not even be in business in 25-years!
Yep! Ya really gotta love those variable annuities and the snake-oil salesmen who peddle them!
Are you worried that you might end up in a long-term care facility? No problem! Your variable annuity will double the amount of your money you are allowed to take out if you do (if you pay extra for the privilege). Worried that you will run out of money before you die? No problem! Your handy dandy variable annuity will guarantee you a monthly payout for life (if you pay extra). Worried about dying early with your annuity investment under water? No problem! Your variable annuity will reimburse your beneficiary your original investment (if you pay extra and - in many cases - aren't 75 or older). Of course all of these guarantees come with a heavy price - most variable annuities will charge you more than 3% each and every year that you own the contract, although the fees are difficult to tease out of the offering documents and most people are blissfully unaware that they are paying so much for so little (an assertion that I will back up here shortly). Additionally, the investment choices given are usually extremely limited relative to the broad investment universe available to IRA owners, and typically are mutual funds that the insurance company manages in-house (more fees for them) or are managed by a "preferred provider" who kicks back fees to the insurance company (isn't that a cozy relationship?). And did we mention that these insurance contracts take a PhD in nuclear physics to understand?
There are now more than 1,100 different annuities on the market according to SmartMoney Magazine, up from 295 a decade ago. Variable annuities are suppose to be sold by prospectus because of their complexity and heavily regulated status, but the truth is many people aren't even aware that they are buying a variable annuity, or have only the vaguest idea of what they are buying. Russell Schellenberger was a successful business man who "didn't even know he'd bought one (variable annuity), according to Janet Paskin of SmartMoney. The word "annuity" hadn't even been mentioned during the sales process. It is a safe bet that Mr. Schellenberger wasn't given a prospectus, not that the highly legalized boilerplate would have necessarily enlightened him much. I'm a Chartered Financial Analyst (CFA)r with twenty years of forensic financial statement analysis under my belt. Nevertheless, I was recently put to the test on behalf of a nice, older couple who handed me their prospectus in the hope of getting an explanation of what they'd just purchased (They weren't given the prospectus before they signed on the dotted line, but instead received it after I explained to them that they were suppose to have gotten one and that the prospectus would explain the investment to them). After wading through the legal document I can honestly claim that I was only half right... they were suppose to have gotten a prospectus.
It's important to understand that the new-age variable annuity is an expensive, yet untested product. Traditional insurance works by using large numbers of people to spread risk out; the insurance company keeps the difference between the premiums collected and the insurance paid out. Variable annuities concentrate risk in the stock market. There is more than a little concern within the industry that insurance companies will not be able to meet their obligations if the stock market continues to under perform expectations. York University professor Moshe Milevsky has studied annuities for decades and believes that the new products are under priced to cover the cost of protecting investors in a crash. Moody's has raised red flags recently over concerns that insurance companies will not be able to meet their promises to investors under plausible worst case scenarios. And annuities do fail. Exhibit A is U.K. Equitable, a major British insurance company. U.K. Equitable was forced to sharply reduce the minimum guaranteed payout to annuity holders in the late 1990's because interest rates didn't do what actuaries had predicted.
Turns out then that the minimum income guarantee that is available (for an extra cost) is only as good as the financial strength of the insurance company selling the annuity. But what about the basic product itself (assuming that the insurance companies will survive the next big downturn in the stock market) - is the minimum income guarantee really a panacea for investors who have under saved and are now worried that they will outlive their assets? The answer is not really. Here's how the typical product works these days:
An investor buys a variable annuity, placing the money into an investment account that then disburses the money to sub accounts composed of typically high cost mutual funds (remember that cozy relationship between the insurance company and the either captive mutual funds or "preferred providers"?) The mortality and expense fees for the variable annuity usually run around 1.65% per year while the underlying funds usually suck out another 1.5% to 2.0% of the investors money every year. A 3.0% plus per annum expense ratio is a high hurdle to overcome and almost guarantees under performance of the contract relative to owning individual stocks and bonds or low cost, no-load mutual funds. Your broker is often receiving the 12b-1 trailers on the funds in which you invest inside the variable annuity by the way.
Your investment account is left to grow, and the insurance company hopes it grows sufficiently to cover the guaranteed income payments once you start to take them down the road. One product I recently reviewed for an investor had been bought when the investor was 60 years of age. He was guaranteed a minimum income benefit of $30,000 per year if he left the money in place for at least 10 years. He bought a $300,000 variable annuity which was placed into stock mutual funds. The insurance company moved the bulk of the money into a fixed account earning 2% per annum when the bottom fell out of the market in 2008 - it will remain their for the rest of the contract life in order to protect the insurance company. The investor will be allowed to take $30,000 of his own money out of the contract every year until he dies, starting when he turns 70. Of course, the average life expectancy for a man of his socioeconomic background and health is around 78. It is still barely possible that his investment account will make it back close to the original $300,000 level before he turns 70, since he does still have $29,000 invested in stock mutual funds within the annuity - perhaps it will double in the next 8 years, although that is unlikely.
Regardless, this investor has taken $300,000 from his tax deferred IRA (in which he had absolute freedom to invest in any number of low cost mutual funds or directly in a portfolio of blue chip stocks) and put the money into a restrictive, condition-filled insurance product that might actually return all of his original investment to him by the time he turns 80 (if he lives that long and the insurance company is still solvent). Should he manage to make it to 85-years of age he will have hit the jackpot! By 85 he will have been allowed to withdraw $450,000 over a 15-year period (some of the money likely the insurance company's). Whoop dee do!
Why the facetious celebration? Do the math! Our investor will have taken out $450,000 from an original investment of $300,000 made 25-years earlier. A fifty percent gain over 25- years comes to exactly 2% per annum compounded (and that's before paying income tax on the withdrawals). You can better than double that return right now in 20-year tax-free Treasuries, and easily construct a bond portfolio that allows you a substantially higher guaranteed income stream than the annuity, without the onerous restrictions placed on you by the insurance companies - who might not even be in business in 25-years!
Yep! Ya really gotta love those variable annuities and the snake-oil salesmen who peddle them!
Thursday, October 22, 2009
Stock Brokers and Dictatorships
It's a twofer today for those of you willing to indulge me by reading on...
The securities and exchange commission (SEC) found that 76% of main street investors (the public) don't know the difference between a representative of a broker-dealer and a registered investment adviser. Score one for the stockbrokers who have successfully managed to fool the public into thinking they are investment advisers. These guys (and gals) are good at what they do, which is trick the public into thinking they get paid for giving advice when, in fact, they do not. In plain English from a recent article in the Investment News: "The broker-dealer rep does not get paid to give advice and is not licensed to provide advice, and hence is not an "adviser". Such reps get paid when they sell a product: thus they are salespeople."
It would appear obvious that when Broker-Dealers (Wachovia/Wells Fargo, E.D. Jones, A.G. Edwards, Morgan Keegan, Merrill Lynch/Bank of America, Morgan Stanley and numerous others) refer to their salespeople as financial advisers, financial counselors, financial planners, and financial consultants that they are intentionally trying to mislead the public. (My own personal favorite is the guy I met recently who referred to himself as a "financial health coach". Sometimes you just have to laugh at the snake oil salesmen and the lengths they will go to hide behind pithy self-made descriptions!) Personally, I think their titles ought to reflect what they really do so that the public isn't misled. How about "financial services sales representative"? Or perhaps "vice president of mutual fund and variable annuity sales"? After all, when is the last time a "vacuum cleaner adviser" knocked on your door looking to advise you on your need for a new vaccuum?
Of course Wall Street owns the regulators (it's called regulatory capture by the academics) and is able to twist and turn them however they choose. Which is why Big B-Ds are now allowed to also register as RIAs and dual register their brokers. The problem, of course, is that the public has no way of knowing when the stockbroker has his registered adviser hat on and is giving actual objective advice (is that even possible with a juicy commission at stake?) as opposed to trying to sell product. Just ask yourself, when is the last time your broker representative put you into a no-load mutual fund that paid him nothing for doing so? Exactly! After all, there is a reason why fewer than 5% of all financial advisers are fee-only! Fee-only advisors are required to provide sound advice over a period of years before they will make what a broker can make in a single transaction.
Dictatorships confiscate property from individuals as a matter of course. The dictator takes what he wants when he wants it. The American constitution specifically protects property rights, or at least it did until recently. One recent and particularly egregious example (but certainly not the only one) involves the shameful manner in which the current administration stole from hospitals, pension funds, and nonprofit endowments - among others - in order to enrich its political supporters. Sound like a wild, inflammatory accusation? I'll walk you through it and you be the judge.
The Chrysler near-bankruptcy provides a very telling case in point of what can happen when a tyrannical government acts for the "good of (some of) the people". The Chrysler auto bank-debt restructuring committee consisted of four big banks and Elliott Associates. The committee proposed that collateralized senior debt holders should be paid in full (since the debt was collateralized by all of Chrysler's assets). Four hundred years of contract law (going back well into English history) and the American Constitution stood behind the committee's proposal. (There is a well-defined pecking order in bankruptcies and restructurings with senior, secured creditors getting paid before unsecured creditors and unsecured creditors getting paid before stockholders. It is that well-defined pecking order that allows lenders to calculate the risk they assume when lending money to companies which need capital to grow or restructure.)
Unfortunately for the senior lenders to Chrysler (whom were investing on behalf of pension funds - including Indiana's PERF, hospitals, and non-profit endowments among others), the Obama administration decided to reward its political supporters by leapfrogging the unsecured creditors to the front of the line. The unsecured creditors represented the UAW's pension fund and post-retirement health-care-related claims.
It was widely reported that the Obama administration gave the creditors an ultimatum, telling them to accept 32 cents on the dollar for their bonds or be named and blamed by the president of the United States as the cause of Chrysler's bankruptcy. Meanwhile, the administration was offering unsecured creditors (the unions) 60 cents on the dollar for their pension and health care claims, standing hundreds of years of contract law on its head and shredding the U.S. Constitution's protection of property rights in the process. Resisting debt holders, who are required by law as fiduciaries to the hospitals, pension funds and non-profits whom they represented, to do their utmost to act in their investors best interests, received threatening phone calls from governors, senators, and congressional representatives to apply additional pressure. It has also been reported that lenders received threats of SEC and IRS investigations, according to Grant's Interest Rate Observer, if they resisted accepting the government's "generous" offer. (Anyone else picturing Chavez seizing private assets down in Venezuela and strong arming private industry into submission? Anyone else remembering the history of the "Worker's Revolution", in the darkest days of the rise of the Soviet Union, as private industry was wiped out by centralized government planning?)
You, my dear reader, are sadly mistaken if you don't think any of this will eventually impact you more than it already has (remember, it was our "Big-Brother" government that got us into this mess in the first place with more than 50 years of fiscal and monetary mismanagement accompanied by a pernicious mission creep that threatens to completely destroy a once vibrant free-market economy). One of the most obvious unintended consequences of the theft is that the cost of money will rise as lenders require higher interest rates to compensate them for government's capricious "taking" of their property. Credit is the life blood of our economy; there is no economic growth, or only very slow economic growth without abundant credit. A lack of economic growth means a lack of job creation, and that means millions of Americans will remain unemployed due to Big Government's oppressive actions, which are creating a chilling effect in the credit markets even as the Federal Reserve attempts to stimulate lending through its irresponsible spending of taxpayer's money. The bill for the great rape of the American Constitution and American contract law has not yet even begun to be calculated.
The securities and exchange commission (SEC) found that 76% of main street investors (the public) don't know the difference between a representative of a broker-dealer and a registered investment adviser. Score one for the stockbrokers who have successfully managed to fool the public into thinking they are investment advisers. These guys (and gals) are good at what they do, which is trick the public into thinking they get paid for giving advice when, in fact, they do not. In plain English from a recent article in the Investment News: "The broker-dealer rep does not get paid to give advice and is not licensed to provide advice, and hence is not an "adviser". Such reps get paid when they sell a product: thus they are salespeople."
It would appear obvious that when Broker-Dealers (Wachovia/Wells Fargo, E.D. Jones, A.G. Edwards, Morgan Keegan, Merrill Lynch/Bank of America, Morgan Stanley and numerous others) refer to their salespeople as financial advisers, financial counselors, financial planners, and financial consultants that they are intentionally trying to mislead the public. (My own personal favorite is the guy I met recently who referred to himself as a "financial health coach". Sometimes you just have to laugh at the snake oil salesmen and the lengths they will go to hide behind pithy self-made descriptions!) Personally, I think their titles ought to reflect what they really do so that the public isn't misled. How about "financial services sales representative"? Or perhaps "vice president of mutual fund and variable annuity sales"? After all, when is the last time a "vacuum cleaner adviser" knocked on your door looking to advise you on your need for a new vaccuum?
Of course Wall Street owns the regulators (it's called regulatory capture by the academics) and is able to twist and turn them however they choose. Which is why Big B-Ds are now allowed to also register as RIAs and dual register their brokers. The problem, of course, is that the public has no way of knowing when the stockbroker has his registered adviser hat on and is giving actual objective advice (is that even possible with a juicy commission at stake?) as opposed to trying to sell product. Just ask yourself, when is the last time your broker representative put you into a no-load mutual fund that paid him nothing for doing so? Exactly! After all, there is a reason why fewer than 5% of all financial advisers are fee-only! Fee-only advisors are required to provide sound advice over a period of years before they will make what a broker can make in a single transaction.
Dictatorships confiscate property from individuals as a matter of course. The dictator takes what he wants when he wants it. The American constitution specifically protects property rights, or at least it did until recently. One recent and particularly egregious example (but certainly not the only one) involves the shameful manner in which the current administration stole from hospitals, pension funds, and nonprofit endowments - among others - in order to enrich its political supporters. Sound like a wild, inflammatory accusation? I'll walk you through it and you be the judge.
The Chrysler near-bankruptcy provides a very telling case in point of what can happen when a tyrannical government acts for the "good of (some of) the people". The Chrysler auto bank-debt restructuring committee consisted of four big banks and Elliott Associates. The committee proposed that collateralized senior debt holders should be paid in full (since the debt was collateralized by all of Chrysler's assets). Four hundred years of contract law (going back well into English history) and the American Constitution stood behind the committee's proposal. (There is a well-defined pecking order in bankruptcies and restructurings with senior, secured creditors getting paid before unsecured creditors and unsecured creditors getting paid before stockholders. It is that well-defined pecking order that allows lenders to calculate the risk they assume when lending money to companies which need capital to grow or restructure.)
Unfortunately for the senior lenders to Chrysler (whom were investing on behalf of pension funds - including Indiana's PERF, hospitals, and non-profit endowments among others), the Obama administration decided to reward its political supporters by leapfrogging the unsecured creditors to the front of the line. The unsecured creditors represented the UAW's pension fund and post-retirement health-care-related claims.
It was widely reported that the Obama administration gave the creditors an ultimatum, telling them to accept 32 cents on the dollar for their bonds or be named and blamed by the president of the United States as the cause of Chrysler's bankruptcy. Meanwhile, the administration was offering unsecured creditors (the unions) 60 cents on the dollar for their pension and health care claims, standing hundreds of years of contract law on its head and shredding the U.S. Constitution's protection of property rights in the process. Resisting debt holders, who are required by law as fiduciaries to the hospitals, pension funds and non-profits whom they represented, to do their utmost to act in their investors best interests, received threatening phone calls from governors, senators, and congressional representatives to apply additional pressure. It has also been reported that lenders received threats of SEC and IRS investigations, according to Grant's Interest Rate Observer, if they resisted accepting the government's "generous" offer. (Anyone else picturing Chavez seizing private assets down in Venezuela and strong arming private industry into submission? Anyone else remembering the history of the "Worker's Revolution", in the darkest days of the rise of the Soviet Union, as private industry was wiped out by centralized government planning?)
You, my dear reader, are sadly mistaken if you don't think any of this will eventually impact you more than it already has (remember, it was our "Big-Brother" government that got us into this mess in the first place with more than 50 years of fiscal and monetary mismanagement accompanied by a pernicious mission creep that threatens to completely destroy a once vibrant free-market economy). One of the most obvious unintended consequences of the theft is that the cost of money will rise as lenders require higher interest rates to compensate them for government's capricious "taking" of their property. Credit is the life blood of our economy; there is no economic growth, or only very slow economic growth without abundant credit. A lack of economic growth means a lack of job creation, and that means millions of Americans will remain unemployed due to Big Government's oppressive actions, which are creating a chilling effect in the credit markets even as the Federal Reserve attempts to stimulate lending through its irresponsible spending of taxpayer's money. The bill for the great rape of the American Constitution and American contract law has not yet even begun to be calculated.
Tuesday, September 29, 2009
Bonds For The Long Run?
Wharton professor Jeremy Siegel wrote a very popular book in the 1990s called Stocks for the Long Run, in which he made a case for building equity-centric portfolios. Professor Siegal's thesis is that stocks beat bonds over long periods of time by so much that investors must have meaningful exposure to stocks in order to accumulate sufficient wealth for retirement. The fact that stocks have beaten bonds on average by more than 3% per year from 1871 through 2008 would seem to support Siegal's point of view. Further, Siegal maintains that the recent horrendous performance of stocks is exceedingly rare and that investors need to maintain substantial buy-and-hold exposure to equities.
However, not everyone agrees that investors should heavily weight their portfolios toward equities. Boston University professor Zvi Bodie believes that equities are simply too risky over the long run and the core of a retirement portfolio should be Treasury Inflation Protected Securities (TIPS). He contends that a portfolio of stocks doesn't become less risky the longer you hold it because, historically, there have been multi-decadal periods in which bonds have beaten equities (periods long enough to encompass an individual investors entire investment life). Furthermore, Bodie claims that stocks are a poor way to hedge against an investor's future income needs - which is, after all, the main reason for investing in the first place. Bodie believes that inflation-indexed bonds are the best asset for matching future liabilities.
However, not everyone agrees that investors should heavily weight their portfolios toward equities. Boston University professor Zvi Bodie believes that equities are simply too risky over the long run and the core of a retirement portfolio should be Treasury Inflation Protected Securities (TIPS). He contends that a portfolio of stocks doesn't become less risky the longer you hold it because, historically, there have been multi-decadal periods in which bonds have beaten equities (periods long enough to encompass an individual investors entire investment life). Furthermore, Bodie claims that stocks are a poor way to hedge against an investor's future income needs - which is, after all, the main reason for investing in the first place. Bodie believes that inflation-indexed bonds are the best asset for matching future liabilities.
Now facts are facts and the S&P 500 has outperformed bonds by about 3% over the last 137 years. Why on earth would anyone not want maximum exposure to the stock market if they had a sufficiently long time horizon? Well, that turns out to be the rub - the time horizon. As pointed out by Bodie, bonds have outperformed stocks for long periods of time in the past. In fact, bonds beat stocks over the 68 year period ending in 1871. Bonds outperformed stocks from 1929 to 1949 - a 20-year stretch that saw the stock market lose some 89% of its value at its nadir. Currently bonds have outperformed stocks over a 41-year period going back all the way to 1968! And now comes the $64,000 question: Do you really care that stocks are likely to outperform bonds by about 3% over the very long run if you happen to be the poor slob investing in them during one of those horrible, multi-decade long stock market debacles? After all, average returns are all well and good, but you only get to live your life once! There are no redo opportunities!
But how likely is it that you will be one of those unfortunate investors living through a down period in the stock market? Well, there is a 1-in-20 chance that the S&P 500 will underperform a broad U.S. bond index by 130% over a ten-year period. There is a 1-in-5 chance that stocks will underperform bonds by 50% cumulatively over a ten-year-period. Knowing that, on average, the S&P 500 will outperform a broad bond index by 50% over a 10-year period is of small comfort to those investors who don't happen to get the average stock market return during the period that THEY are invested in the stock market. The fact that the shortfalls in stocks vs bonds over 10-year periods are much greater than the shortfalls generated over a single year is also exactly why Bodie argues that stocks are not less risky over longer periods of time. His point made another way is simply that looking at average returns does not address the question of the magnitude of a shortfall when one does occur. In Bodie's own words from his original 1995 paper, "But as has been shown in the literature, the probability of a shortfall is a flawed measure of risk because it completely ignores how large the potential shortfall might be."
What then to do with your investment portfolio. The reality is that most of us do not have an investment portfolio big enough to stick 100% into bonds - we need the extra capital appreciation kick that will come to us from stocks over 10 and 20 year periods... on average. Yet it seems apparent that heavily overweighting stocks is far too risky as well. Put another way, meaningful exposure to assets other than bonds increases investors chances of successfully funding their retirement by reducing longevity risk - the probability of outliving your assets. Building a diversified portfolio of stocks, bonds, commodities, and real estate increases the likelihood of creating a sufficient, sustainable income stream during retirement while still being able to withstand a worst-case scenario in the stock market - a worst-case scenario that seems to come along all too frequently!
One last comment: we are writing from the point of view of buy-and-hold investing, which is the same point of view that Professor Siegel has in his book. Biechele Royce Advisors is not a buy and hold investor on behalf of its clients. We add value and control stock market risk by refusing to overpay for a business. We buy good companies at great prices and great companies at good prices. We sell those same companies when they return to fair value. Our price discipline and focus on stockpicking gives us a big advantage over buy-and-hold investors during secular bear markets!
Tuesday, September 1, 2009
It's the Government Stupid!
Public opinion appears to blame the free market system for the current state of affairs in which we find ourselves. Voters have turned overwhelmingly to the federal government for answers to the economic malaise that exists throughout the 50 States. The Obama administration has spent hundred of billions of dollars already and pledged trillions more in an effort to get consumers spending and the economy expanding once again - to the applause of a majority of U.S. citizens. Yet, it is the misguided fiscal and monetary policies of the last 50 years (with the exception of a brief period in the 1980s) that have culminated in the worst recession since the Great Depression. It is the continued application of those policies that will almost certainly lead to more economic pain in the coming decades. Americans must get a clue! It is the Federal Government which bears overwhelming responsibility for the current mess. It is the Federal Monster that must be reigned in and subjugated to the will of the free people of the United States of America, or most of us will die poor.
Not interested in politics? You should be. Politics is the process by which groups of people make decisions, among the most important of which are how to allocate scarce economic resources. Politics, when left to run amok, can ruin an economy, as has happened in Zimbabwe, where inflation is running at 11,200 percent per annum. The United States is not immune to hyperinflation and, in fact, may be barreling head on into just such an environment. Highly inflationary environments are not typically good investing environments. Wealth preservation becomes problematic to say the least, never mind wealth creation.
Right now the markets are running nicely and many economists and political pundits are declaring victory over the recession that has been with us now since sometime in 2007 (the precise start of the economic contraction is still open to debate and will likely be moved back closer to 2006 (once the government is finished massaging the data for political purposes and the academics move in to correct the record). The folks at ECRI say that their leading indicators are pointing toward a very strong recovery in the economy; they are far less sanguine about the chances of a sustainable recovery.
The problem is that the Obama Administration is not addressing the underlying structural problems with our economy, choosing instead to simply stimulate the economy with additional credit, which may have positive short term consequences, but is unlikely to provide a lasting source of economic expansion. We have too much debt; the government is loading more debt on at a furious rate. We have too little manufacturing; the government is doing nothing to address the hollowing out of American industry, which has occurred over the last 30 years. We are fighting two wars, but do not have the money to pay for either. The cold war is over. We need to pull out of most parts of the world. We are not the world's policeman; there is no money in our Treasury for it and the world does not reward us for it.
Get the Federal Government out of state and local affairs. Shut down the giant spending machine that is increasingly sapping our national vitality and robbing us of our individual initiative. Get government out of business so that businessman can compete against one another, rather than having to compete against a government that can change and manipulate the rules at will to ensure supremacy. Let American ingenuity have free reign once again. Let small businesses grow unfettered by government interference! Job growth will follow. Real income growth will follow (Real income is currently below 1973-1975 recession levels.)
The stock market isn't likely to keep its gains. The consumer is 70% of the economy and the consumer has no money to spend other than what the federal government is handing out. The economy is highly likely to slip back into recession more or less as soon as the federal government stops giving people money to spend. The profit recovery implied by the stock market rally from the March lows is unlikely to materialize. We are entering silly season in the stock market - that period where the boys on Wall Street underpin the market in an effort to maximize year-end bonuses. The most likely outcome of this secular bear market rally is a nasty sell-off sometime early next year, perhaps around the March time-frame.
We are maintaining our price discipline by refusing to pay up for businesses that are no longer undervalued, and by taking profits on companies that are up 40% or more since the March lows (business valuations do not change so rapidly as that in the real world). We are acknowledging the lunacy of our federal government's (this isn't a Democrat/Republican thing by the way - both parties are responsible) fiscal and monetary policy by favoring tangible assets over financial, and international assets over domestic.
We strongly urge investors to tread with extreme caution over the next six months as the government's massive spending winds down and the underlying structural problems reassert themselves. The piper has not yet been paid for 30 years of over consumption, over spending, and easy credit.
Not interested in politics? You should be. Politics is the process by which groups of people make decisions, among the most important of which are how to allocate scarce economic resources. Politics, when left to run amok, can ruin an economy, as has happened in Zimbabwe, where inflation is running at 11,200 percent per annum. The United States is not immune to hyperinflation and, in fact, may be barreling head on into just such an environment. Highly inflationary environments are not typically good investing environments. Wealth preservation becomes problematic to say the least, never mind wealth creation.
Right now the markets are running nicely and many economists and political pundits are declaring victory over the recession that has been with us now since sometime in 2007 (the precise start of the economic contraction is still open to debate and will likely be moved back closer to 2006 (once the government is finished massaging the data for political purposes and the academics move in to correct the record). The folks at ECRI say that their leading indicators are pointing toward a very strong recovery in the economy; they are far less sanguine about the chances of a sustainable recovery.
The problem is that the Obama Administration is not addressing the underlying structural problems with our economy, choosing instead to simply stimulate the economy with additional credit, which may have positive short term consequences, but is unlikely to provide a lasting source of economic expansion. We have too much debt; the government is loading more debt on at a furious rate. We have too little manufacturing; the government is doing nothing to address the hollowing out of American industry, which has occurred over the last 30 years. We are fighting two wars, but do not have the money to pay for either. The cold war is over. We need to pull out of most parts of the world. We are not the world's policeman; there is no money in our Treasury for it and the world does not reward us for it.
Get the Federal Government out of state and local affairs. Shut down the giant spending machine that is increasingly sapping our national vitality and robbing us of our individual initiative. Get government out of business so that businessman can compete against one another, rather than having to compete against a government that can change and manipulate the rules at will to ensure supremacy. Let American ingenuity have free reign once again. Let small businesses grow unfettered by government interference! Job growth will follow. Real income growth will follow (Real income is currently below 1973-1975 recession levels.)
The stock market isn't likely to keep its gains. The consumer is 70% of the economy and the consumer has no money to spend other than what the federal government is handing out. The economy is highly likely to slip back into recession more or less as soon as the federal government stops giving people money to spend. The profit recovery implied by the stock market rally from the March lows is unlikely to materialize. We are entering silly season in the stock market - that period where the boys on Wall Street underpin the market in an effort to maximize year-end bonuses. The most likely outcome of this secular bear market rally is a nasty sell-off sometime early next year, perhaps around the March time-frame.
We are maintaining our price discipline by refusing to pay up for businesses that are no longer undervalued, and by taking profits on companies that are up 40% or more since the March lows (business valuations do not change so rapidly as that in the real world). We are acknowledging the lunacy of our federal government's (this isn't a Democrat/Republican thing by the way - both parties are responsible) fiscal and monetary policy by favoring tangible assets over financial, and international assets over domestic.
We strongly urge investors to tread with extreme caution over the next six months as the government's massive spending winds down and the underlying structural problems reassert themselves. The piper has not yet been paid for 30 years of over consumption, over spending, and easy credit.
Thursday, August 6, 2009
Investing in Stocks
We wrote about portfolio diversification a while ago - we related how a 15 - 25 stock portfolio can give you 90% of the benefits of diversification and how a 40 stock portfolio can give you 99% of the benefits. (Diversifying away non-systemic - company specific - risk is important in achieving the highest possible return for the amount of risk taken). We work hard educating our clients on the importance of building properly diversified and appropriate portfolios consisting of stocks and bonds. Properly diversified to us means eliminating all unnecessary risk while appropriate means putting our clients at a risk (and return) level that works for their financial situation and temperament.
But what about individual stock selection? If strategic asset allocation (the percentage of a portfolio allocated to stocks, bonds, real estate, commodities, and cash) accounts for most of the variation in returns over the long run (and it does), why even bother with individual security selection?
A very good question indeed!
Because we can add to returns with careful security selection and reduce taxes through tax loss harvesting. The empirical evidence overwhelmingly shows that we can outperform the market using a common sense approach to investing - buying businesses when they are trading for less than a knowledgeable buyer would pay for the entire company in an arms length transaction. In other words, buying companies when they are trading cheaply. It only makes sense! An investor should outperform the market over the long run by purchasing undervalued businesses and avoiding overvalued businesses - and the academic data supports that view.
How is it possible that the market is inefficient enough to give value investors a known edge over other types of investors? Economics 101 teaches us that excess profits in a capitalistic system are eventually competed away. Why don't the majority of investors recognize that value investing brings superior returns and join the gravy train?
The answer lies with some well-known investor biases that endure, despite wide recognition that they exist. People will be people! It is estimated that only about 10% of investors are value investors while the other 90% chase growth and momentum. Value investors are able to take advantage of investor biases which create excess profit opportunities for them. For instance, investors routinely associate good companies with good investments and are willing to pay a premium for them in the stock market. The Behavioral Finance term is "representativeness". Good companies are usually widely recognized as such and are highly priced as a result - and on average they under perform the market going forward. Likewise, investors routinely associate low growth (bad) companies with poor investments and shun them, creating a profit opportunity for the savvy value investor.
As well, a majority of investors expect stocks with poor liquidity (thinly traded) to have lower returns, yet the empirical evidence shows otherwise. Also, investors expect lower returns from stocks that are not widely followed by the financial analyst community, yet the evidence contradicts that expectation. Less widely followed stocks actually tend to outperform.
It really isn't rocket science. Rather, it is having the patience and discipline to buy a good company at a great price (or a great company at a good price) and waiting for the herd to recognize that it was overly pessimistic. It is also about having the discipline NOT to buy a stock just because the entire stock market it rising. We will not pay up for an investment - ever! Price discipline makes for successful investing and we never forget it at Biechele Royce Advisors. Although we aren't willing to market time per se, we are willing to let cash build up in our client accounts if we can not find good businesses at great prices or great businesses at good prices. Price discipline is risk management and risk management is a must during a secular bear market.
But what about individual stock selection? If strategic asset allocation (the percentage of a portfolio allocated to stocks, bonds, real estate, commodities, and cash) accounts for most of the variation in returns over the long run (and it does), why even bother with individual security selection?
A very good question indeed!
Because we can add to returns with careful security selection and reduce taxes through tax loss harvesting. The empirical evidence overwhelmingly shows that we can outperform the market using a common sense approach to investing - buying businesses when they are trading for less than a knowledgeable buyer would pay for the entire company in an arms length transaction. In other words, buying companies when they are trading cheaply. It only makes sense! An investor should outperform the market over the long run by purchasing undervalued businesses and avoiding overvalued businesses - and the academic data supports that view.
How is it possible that the market is inefficient enough to give value investors a known edge over other types of investors? Economics 101 teaches us that excess profits in a capitalistic system are eventually competed away. Why don't the majority of investors recognize that value investing brings superior returns and join the gravy train?
The answer lies with some well-known investor biases that endure, despite wide recognition that they exist. People will be people! It is estimated that only about 10% of investors are value investors while the other 90% chase growth and momentum. Value investors are able to take advantage of investor biases which create excess profit opportunities for them. For instance, investors routinely associate good companies with good investments and are willing to pay a premium for them in the stock market. The Behavioral Finance term is "representativeness". Good companies are usually widely recognized as such and are highly priced as a result - and on average they under perform the market going forward. Likewise, investors routinely associate low growth (bad) companies with poor investments and shun them, creating a profit opportunity for the savvy value investor.
As well, a majority of investors expect stocks with poor liquidity (thinly traded) to have lower returns, yet the empirical evidence shows otherwise. Also, investors expect lower returns from stocks that are not widely followed by the financial analyst community, yet the evidence contradicts that expectation. Less widely followed stocks actually tend to outperform.
It really isn't rocket science. Rather, it is having the patience and discipline to buy a good company at a great price (or a great company at a good price) and waiting for the herd to recognize that it was overly pessimistic. It is also about having the discipline NOT to buy a stock just because the entire stock market it rising. We will not pay up for an investment - ever! Price discipline makes for successful investing and we never forget it at Biechele Royce Advisors. Although we aren't willing to market time per se, we are willing to let cash build up in our client accounts if we can not find good businesses at great prices or great businesses at good prices. Price discipline is risk management and risk management is a must during a secular bear market.
Friday, July 10, 2009
Mutual Funds and Benchmarks
Many people are invested in mutual funds. Most people have no clue how to tell if their mutual funds are better or worse than average. Many people allow their financial advisor, planner, accountant, or fee-based advisor (broker) to put them into mutual funds but must take their advisors word for the "best-in-breed" claim. Unfortunately the reality is that actively managed mutual funds do not out perform their unmanaged benchmarks on a risk-adjusted basis after taking fees into account. Furthermore, the mutual funds that do outperform their benchmarks on a risk-adjusted basis over trailing five and ten year periods are unlikely to outperform going forward. In other words, the top ten performing mutual funds in a market segment - say large cap - over the trailing ten year period are unlikely to be the same funds that out perform over the following ten year period. Bottom Line? There is no way to know in advance which funds will outperform their benchmarks on a risk-adjusted basis, net of fees, over five and ten year periods.
Now stop and think through what I just wrote. Most financial advisors tout their mutual fund picking ability as a primary reason to hire them (never mind the fact that their advice is often skewed by which funds pay the best commission!). Yet the brainiacs ensconced in the ivory towers of Wharton, the University of Chicago, and Harvard will tell you in excruciating detail why it is impossible to know a priori which mutual funds will out perform their benchmarks. John Bogle of Vanguard has it right! Index funds will beat the majority of actively managed mutual funds over long periods of time and, therefore, are above average!
Now stop and think about THAT for a moment. You can actually outperform the majority of mutual funds over the long run simply by indexing. Furthermore, since an index fund merely matches its benchmark's risk (average risk) yet outperforms the majority of peer group funds, you are able to know in advance that you are investing in a fund with a favorable risk/reward relationship (average risk and above average reward). And you didn't even need a Morningstar report to figure it out!
But since many of you are determined to speculate on mutual funds much in the same way that many of you speculate on individual stocks, here's the appropriate way to measure your actively managed fund's performance. You must compare your fund to the asset subclass in which it invests. A large cap growth fund should be bench marked against the Russell 1000 growth index and a large cap value fund should be bench marked against the Russell 1000 value index. In both cases, you should adjust for risk. Unfortunately, even then it isn't quite so simple since most fund managers cheat. Large cap fund managers will add small and mid cap stocks, or foreign stocks to their portfolio in an effort to beat their benchmark by going outside the appropriate universe of stocks. Of course they will sell those stocks before the required reporting period so that no one is the wiser - the practice of cleaning up the portfolio prior to reporting holdings is known as window dressing and is a common Wall Street practice.
To recap: Investors who use mutual funds should index. The academic case is overwhelming. Index funds outperform the majority of their actively managed peer group with only average risk. You don't need a fee-based financial advisor (aka broker) to pick actively managed mutual funds for you, since he's whistling in the dark anyway, while collecting commissions on those A, B, and C shares. What you need is someone to help you arrive at an appropriate strategic asset allocation and then implement that allocation with index funds. Better still, seek out a financial advisor that employs Chartered Financial Analysts capable of building low-cost stock portfolios chock full of businesses purchased at less than their fair market value, because the same academic research that categorically shows it is better to index than attempt to pick mutual fund outperformers, also shows that value investing outperforms the market over the long run!
Now stop and think through what I just wrote. Most financial advisors tout their mutual fund picking ability as a primary reason to hire them (never mind the fact that their advice is often skewed by which funds pay the best commission!). Yet the brainiacs ensconced in the ivory towers of Wharton, the University of Chicago, and Harvard will tell you in excruciating detail why it is impossible to know a priori which mutual funds will out perform their benchmarks. John Bogle of Vanguard has it right! Index funds will beat the majority of actively managed mutual funds over long periods of time and, therefore, are above average!
Now stop and think about THAT for a moment. You can actually outperform the majority of mutual funds over the long run simply by indexing. Furthermore, since an index fund merely matches its benchmark's risk (average risk) yet outperforms the majority of peer group funds, you are able to know in advance that you are investing in a fund with a favorable risk/reward relationship (average risk and above average reward). And you didn't even need a Morningstar report to figure it out!
But since many of you are determined to speculate on mutual funds much in the same way that many of you speculate on individual stocks, here's the appropriate way to measure your actively managed fund's performance. You must compare your fund to the asset subclass in which it invests. A large cap growth fund should be bench marked against the Russell 1000 growth index and a large cap value fund should be bench marked against the Russell 1000 value index. In both cases, you should adjust for risk. Unfortunately, even then it isn't quite so simple since most fund managers cheat. Large cap fund managers will add small and mid cap stocks, or foreign stocks to their portfolio in an effort to beat their benchmark by going outside the appropriate universe of stocks. Of course they will sell those stocks before the required reporting period so that no one is the wiser - the practice of cleaning up the portfolio prior to reporting holdings is known as window dressing and is a common Wall Street practice.
To recap: Investors who use mutual funds should index. The academic case is overwhelming. Index funds outperform the majority of their actively managed peer group with only average risk. You don't need a fee-based financial advisor (aka broker) to pick actively managed mutual funds for you, since he's whistling in the dark anyway, while collecting commissions on those A, B, and C shares. What you need is someone to help you arrive at an appropriate strategic asset allocation and then implement that allocation with index funds. Better still, seek out a financial advisor that employs Chartered Financial Analysts capable of building low-cost stock portfolios chock full of businesses purchased at less than their fair market value, because the same academic research that categorically shows it is better to index than attempt to pick mutual fund outperformers, also shows that value investing outperforms the market over the long run!
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