Getting The Facts
“Just the facts, ma’am”
Sergeant Joe Friday never said, “Just the facts, ma’am.”
He said, “All we want are the facts, ma’am…All we know are the facts.”
“The story you are about to hear is true; only the names have been changed to protect the innocent.”
The narrator introduced the story.
On April 26, 1951, on a black and white Zenith television, viewers heard, “You’re Detective Sergeant, you’re assigned to auto theft detail. A well organized ring of car thieves begins operations in your city. It’s one of the most puzzling cases you’ve ever encountered. Your job: break it.”
The past two years of stockmarket activity is “the most puzzling” I’ve “ever encountered.” My job is to explain it with just the facts.
Finding facts stripped of emotion and sales pitch takes some searching.
Finding reliable sources for facts takes some investigation.
The facts you are about to read are accurate, to the best of my knowledge; the names have not been changed, and there’s plenty of guilt for everyone.
My best resource:
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Asset Allocation: Balancing Financial Risk by Roger Gibson
So, what am I learning now from Mr. Gibson.
David Drucker, an independent registered investment advisor, interviewed Mr. Gibson on March 26, 2009. “Roger Gibson on the Market Crash” is available on Morningstar Advisor (a service provided by Morningstar).
“All we want are the facts…All we know are the facts.”
Drucker’s first question, “Do we need to somehow recognize and incorporate a new level of volatility in the asset classes we use?”
Gibson’s answer, “It depends on whether we’re looking at short- or long-term volatility. Certainly 2008 was without much precedent in terms of how big the losses were and how far they stretched across all asset classes….”
Facts:
- All of Morningstar tracks 3,734 funds invested primarily in U.S. stocks lost money
- All of the 978 non-USA funds lost money.
- All of the 144 U.S. and non-U.S. realestate funds lost money.
- All of the 128 natural resource funds lost money.
- More than 4,000 funds tracked by Morningstar lost value.
Before going back to Drucker’s interview, an overview of corporate earnings might add prespective to mutual fund returns.
Mutual funds gain or lose value because of corporate earnings. If corporations do well, thier stocks perform well (not always, but usually).
Stocks go up or down, most times, because corporate earnings go up or down. Standard and Poors reports that corporate earnings for the past 20 months decreased more than 90%. Corporate earnings have been recorded since 1936. Current corporate earnings, or lack of earnings, are the worst on record.
“In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.” (Chart of the Day)
Drucker proceeded to ask about bond/fixed income funds since asset allocation models include both. Gibson’s firms studied bond fund performance too.
Facts:
- The Morningstar database tracks 1,730 bond funds (taxable and municipal)
- 1176 (68%) fixed income funds lost money.
“In 2008, panic fed on itself. I had more than a couple of sleepless nights in the last quarter as foreign markets were in a freefall because the U.S. markets were in a freefall, and the next morning U.S. markets were again in a freefall because foreign markets were in a freefall, and so on.”
Roger Gibson, David J. Drucker interview, March 26, 2009
Risk premium may inprove in future years.
Risk premium is the difference between the return received for a risk-free investment and the return on a risk-investment (stocks, commodities, etc.)
For example:
If stocks returns are 9%
and if Treasury returns are 4%
The risk-premuim is 5%
“During times of excessive optimism, people overshoot markets on the high side, and during times of extreme fear and panic, markets overshoot on the downside. In 2008, people panicked and dumped securities, which sets the stage for higher-than-normal rewards for people holding on.”
Roger Gibson, David J. Drucker interview, March 26, 2009
Drucker: So there will just be some years–like 2008–where asset allocation, with all its benefits, won’t keep us safe.
Gibson: Let me answer that with my favorite quote, by Paul Volcker, who, 15-20 years ago, was at CFA conference and said, “You cannot hedge the world.” I love that quote, if you’re living on this planet, you can manage risk, but you can’t eliminate it. We got that lesson in 2008.”
“All we want are the facts…All we know are the facts.”
