August is the Coolest Month

 Cool in the sense of excellent for stock investors, that is. Instead of fixating on the "January effect", Jason Zwieg's Intelligent Investor newsletter points out, we should focus on the "August effect."

According to Bill Schwert, emeritus professor of finance at the University of Rochester, August has averaged the highest returns of any month, at 1.45%, even better than January -- the month whose supposedly superior results have been touted for years in books, blogs and research papers. 

Zweig also reminds us of what happened 39 years ago on August 12, 1982. Without fanfare the most horrendous stock market decline since the Depression ended.  Investors contrarian enough to start buying equities would have prospered mightily. Stocks rose 229% before Wall Street had its 1987 panic attack. Thereafter stocks rose another 582% percent before the dot.com bubble burst. 

Inflation-adjusted DJIA Historical Chart

Investing's Enormous Generation Gap

From "Your father’s stock market is never coming back,” Fortune’s  readable guide to how the Fidelity-generation’s investing differs from that of Robinhood’s youngsters. (Though not a Fortune subscriber, I was able to access the article here.) 

Jerry [father] spent three decades saving and investing, prudently, and dutifully. He and Nancy have accumulated $1.2 million—for them it’s all the money in the world. Took them their entire lives.

Aiden [son] made $800,000 in the past 12 months, starting with the $25,000 his grandfather left him. He did it from a phone, knowing virtually nothing about the instruments he traded.

 Will this century’s Roaring ‘20s investors see their wealth disappear as dramatically as it did in the last century? Will NFTs really take over from ETFs? 

Maybe the 2020’s Won’t Roar ’til 2024

Energized by hope that COVID 19 vaccines will be plentiful by summer, the exuberant stock market is already looking beyond the pandemic. Too hasty? 

A Yale professor who has studied pandemics believes the end of this one is not yet nigh. "Given what we can learn from history," Dr. Nicholas A. Christakis warns, "I don’t think people should just imagine that we’re going to rapidly and easily return to normal.” 

Even if we achieve herd immunity this year, the good times won’t roll.

If you look all the preceding centuries of epidemics, then it’s clear that we’re going to have an intermediate period in which we come to terms with the pandemic’s psychological, social, and economic toll. I think that will last through 2023, approximately. We need to recover from the terrible shock of this experience. Millions of businesses have closed. Millions of Americans are out of work. Millions of children have missed significant amounts of school. Millions of people have lost family members to the virus. Many will have chronic disabilities from contracting it. We need to come to terms with all of these things, which will take time.

Christakis expects that "sometime in 2024 — the timing isn’t precise — we’ll enter the post-pandemic period. And I think that’s going to feel a little like the Roaring Twenties in the last century.”

If so, all investment managers and financial advisers have to do is help wealthholders survive another two years or so. Then, party on!

The Great GOP Stock Market Myth

The market commentators on TV are at it again. The high-wire stock market will not only avoid virus-induced catastrophe, they tell us, but stocks will then soar to new highs. Unless Democrats capture the White House. In that case, “Look out below!”

Wall Street has long believed stocks do better with a Republican POTUS. As a wealth manager quoted in the Financial Times explains: “Historically, equity markets have favored Republican presidents as they generally have more market-friendly policies.”

Except . . . historically the stock market has done no such thing. Since 1976, FT reports, the average annualized return under

Democratic presidents has been 14.3 percent, against 10.8 percent under Republicans.

In a really long-term comparison, 1920 to 2016. the Democrats win by a landslide. Annualized return for the Dems: 10.83 percent. Republicans (penalized by both the Great Depression and the Great Recession) 1.71 percent.

Why do Wall Streeters cling to the myth that Republican presidents lead to bigger investment gains? Perhaps they're too credulous. Republicans may talk “market friendly” and Democrats may threaten tougher taxes and regulations, but politicians' ability to influence the economy and stock prices is probably less than they would like us to believe.

The Same Old Bull

Came across this twenty-year-old Wall Street Journal illustration while cleaning out my graphic archives. Still timely.

CNBC is the New ESPN

On TV I watch sports, mostly. When Covid-19 closed down sports broadcasts, the least bad substitute was the daily stock picking game on CNBC.

Millions tired of sheltering in place seem to agree with me. With no sports to bet on, they're taking advantage of the free stock trading offered by Schwab, Fidelity and others to play the stock market.

Serious investors they are not. For these thrill seekers, it's not whether you win or lose but how you play the game. Some juice up the excitement with options. Others just get weird, the NY Times observes: "Transactions that make little economic sense, like buying up the nearly valueless shares of bankrupt companies, are off the charts."

Serious or not, Barron's notes,  the stocks-for-sport crowd is big enough, and frantic enough, to influence stock prices.

Do you suppose there'll be playoffs at the end of the regular season?

Seeing Helps Investors Believe

MarketWatch offers two graphics that investment advisers may want to add to their educational materials.

This one shows how often and how vigorously stock returns go up and down.

A second graphic (a lively GIF) shows the likelihood of stock investors making money over various time periods. Investors holding for 20 years can't lose – at least they never have. But remember, that perfect success rate assumes all dividends are reinvested.

The Trump Market’s Still Up (a Little)

$100 invested in stocks when President Trump took office
would have been worth $110 when the market closed out 2018.

Check out The Washington Post's interactive graphics to see the results of a $100 investment over various time periods.

There's Always a Way to Beat the Market

Recent example of market beating: investors boosting their returns with bets that stock prices would keep calm and carry on. Exchange traded products linked to VIX, a volatility index, emerged to make betting on low volatility easier.

Then volatility exploded with a vengeance. Some bettors lost big. Two ETPs quickly folded.

It's just another chapter in the same old story, according to this comment from The 10 Point for February 16:

Jan Rogers Kniffen wrote: “In the early 1980s the strategy of holding a ‘diversified’ portfolio of junk bonds worked well, until the market for junk crashed, people lost fortunes and some went to jail. Then, every pension fund manager (including me) got pitched on ‘portfolio insurance.’ It worked well until the crash of ‘87 when everything cascaded down and funds lost fortunes. Then there was the ‘craze’ for investing in a ‘diversified’ portfolio of mortgage-backed securities. That worked well until the crash of the housing market. Low-vol strategies are the same, they will work well until the market changes—whoops, the market changed.”

The next market beater? Who knows?  But remember the wisdom of Sir John Templeton: "The four most dangerous words in investing are: 'this time it's different.'"

The Incredible Shrinking Stock Market

In 1996, writes Jason Thomas of the Carlyle Group in his WSJ($) op-ed, there were 7,322 domestic companies listed on U.S. stock exchanges. Today there are only 3,671. The Wilshire 5000 is down to around 3,500 companies.

Easy access to venture, growth and private-equity capital means that companies no longer need to pursue an initial public offering to fund growth or access liquidity. Increases in regulations, shareholder lawsuits and activist demands have also diminished the appeal of a public listing. Over the past two decades, the number of annual IPOs has fallen sharply, to 128 in 2016 from 845 in 1996.

Successful new companies prefer to stay private to avoid hassle. Thanks to eased rules, they can acquire plenty of capital and hundreds of direct or indirect shareholders without going public.

The trend away from IPOs has benefited private market players at the expense of everyday investors. With companies like Uber, Airbnb and other successful startups delaying their IPOs for so long, there is little prospect for public returns on a scale similar to those enjoyed by Amazon’s early stockholders.

Yesterday’s growth stocks have migrated to private portfolios. As a result, stock pickers have slimmer pickings. Investors in index funds face leaner returns. "Today," Thomas asserts, "it isn’t possible to assemble a portfolio with the same makeup as the stock market of 1997 without exposure to private markets."

Another drawback, not mentioned by Thomas: Investing in nonpublic stocks through private equity partnerships or hedge funds is way more expensive than buying an index fund. Private investors face high fees and must hand over a share of the profits.

The world of everyday investing is in transition. Over the next decade or two the changes are likely to be drastic. Now if we just had 20-20 foresight….

Related post: The Stock Market is Disappearing Before Our Eyes.

The Stock Market is Disappearing Before Our Eyes

Sometimes you know what's happening but still need reminding that it's HAPPENING. This chart comes from Jason Zweig's WSJ column($), Stock Picking Is Dying Because There Are No More Stocks to Pick.

Zweig's column draws upon a revealing Credit Suisse report. Welcome to a world where mutual funds and accredited investors invest freely in billion-dollar companies without going near the stock market. 

Will Trump be the Stock Market's New Hoover?

As the year winds down, stock investors apparently welcome the prospect of a Republican in the White House. If the Trump presidency brings bumper returns, it will defy the odds. As Cullen Roche illustrates, the stock market tends to do better –much better–under Democrat presidents. Since Herbert Hoover took office, stocks have returned an average of 1.7% annually under Republicans. Returns under Democrat presidents, 10.8%.

From The Washington Post comes this chart of stock performance.

Will the market continue to greet Trump as enthusiastically as it welcomed Herbert Hoover? There's no telling, but we probably shouldn't worry. As Roche concedes, "judging stock market performance by presidencies is silly."

A Good Way to Time the Market

It's Throwback Thursday: 
Timing the Market? Watch Congress!

Do Democrats in the White House Mean Higher Stock Returns?

Over the last 50 years, according to a Democrat promo making the Internet rounds, stocks averaged an 11% annualized return when a Democrat occupied the White House. And when a Republican sat in the Oval Office? Less than 3%.

Democrat Commanders in Chief do go hand in hand with better stock returns. Here we linked to a 2008 NY Times comparison going back to 1929.  The performance gap is pronounced. Even so, "hand in hand" isn't necessarily the same as cause and effect.

Because the Republicans retain a reputation as the party of fat-cat billionaires, the gap in stock market returns is counter-intuitive. Which may explain why some investors don't believe it.

Current example, this Well Fargo survey of investors: Only 15% believed a Democrat in the White House would be better for the stock market. Twice as many thought they would profit more from a Republican.

Regular Folks Aren’t Hot For Stocks

The ups and downs of the stock market continue to scare savers, judging by this survey from Bankrate. Not so many years ago, real estate proved scary, too. But people don't hear about the daily price fluctuations as they do with the stock market.

Bitcoin 2.0: the End of Stock Exchanges?

Whether Bitcoin has a bright future as money is debatable, but perhaps that's beside the point. Maybe the point is innovations such as Medici:

Patrick Byrne, the CEO of Overstock.com and would-be financial revolutionary …wants to use the technology behind Bitcoin to create a securities market that exists not in any one particular place, but as a collection of data distributed across computers anywhere on Earth, with no need for the DTCC, the New York Stock Exchange or any of the other middlemen who oversee the world’s capital markets.

This new system, which he calls Medici, after the banking family that ruled over Renaissance-era Florence, would do something no other stock exchange has ever done. It would skip the centralized clearinghouse entirely, and keep track of trading, clearance, and ownership on everyone’s computers at once. It would transform processes that now depend on centralized institutions for trust, and let people instead transact directly with one another.

Why is Bitcoin's success as a money substitute debatable? Matt O'Brien at Wonkblog believes the cryptocurrency is perceived as too good a store of value:

Bitcoin's finite supply means that its price should go up, and keep going up. So if you have dollars that are losing a little value to inflation every year and Bitcoins that are gaining it, which one are you going to use to buy things with? The question answers itself, and it raises another. Why would this ever change? *** Buying things with Bitcoin would be like cashing out your Apple stock in 1978 to go grocery shopping even though you have plenty of actual cash lying around.

Once upon a time, stockholders felt safe from fraud because they possessed actual stock certificates. Then most certificates moved into depositories. Now they've largely vanished. Will investors be willing to take the next step, into cryptostocks?

Ready For a Santa Rally?

For investors in world stock markets, research reveals, "December has been, on average, around four times more profitable than the average month…. "

According to the table published by The Telegraph, the phenomenon is most pronounced in Japan. Alas, it's least evident in the U.S.

Bulls, Bears and Bucks

Bull and Bear at Frankfurt Stock Exchange

Mark Forsyth in his Times column finds poetry on Wall Street: "Pump and dump. Rank and yank. Short and distort. Trash and cash."

The financial world is a veritable zoo, Forsyth observes: dogs and pigs (who get slaughtered) and penguins and black swans and, of course, bulls and bears.

A 1490 edition of Aesop’s Fables contains an extra story never seen before. It’s about two guys who make a deal to sell a bearskin to apes, before having actually obtained a bear. They reckon that bear hunting must be easy, but when it’s time to hunt they both flee in fear, one climbing a tree and the other playing dead.

The moral of the fable: Don’t sell the skin till you have caught the bear. Any financier, though, will recognize the principle of the naked short. This maxim was so well known in the 18th century that those who sold speculatively were known as bearskin jobbers, and then simply as bears

Our founder, Merrill Anderson himself, pointed out that nest eggs are fake. Forsyth concurs:

The nest egg that we’re taught to store away? It is a perfectly real thing among chicken farmers, who insert a fake egg into a nest. The hen won’t leave until the egg hatches, and in the meantime she lays a bunch of real eggs of her own. Thus the nest egg is the capital, the real egg’s the interest.

Like to make a few bucks? "The only reason that anyone has ever made a buck," Forsyth writes, "is that Native Americans had no interest in coins or checks, and preferred to be paid in buckskins."

Bring Back the Tontine?

Does the secret of financial security in retirement reside in a product devised by a 17th-century Italian banker? In a WSJ column University of Toronto professor Moshe Milevsky proposes the return of the tontine.

Imagine a group of 1,000 soon-to-be retirees who band together and pool $1,000 each to purchase a million-dollar Treasury bond paying 3% coupons. The bond generates $30,000 in interest yearly, which is split among the 1,000 participants in the pool, for a guaranteed $30 dividend per member. A custodian holds the big bond and charges a trivial fee to administer the annual dividends. So far this structure is the basis for all bond index funds. Nothing new. But in a tontine arrangement the members agree that—if and when they die—their guaranteed $30 dividend is split among those who are still alive. 

So if one decade later only 800 original investors are alive, the $30,000 coupon is divided into 800, for a $37.50 dividend each. Of this, $30 is the guaranteed dividend and $7.50 is other people's money.  

Then, if two decades later only 100 survive the annual cash flow is $300, which is a $30 guaranteed dividend plus $270. When only 30 remain, each receives $1,000 in dividends—a 100% yield in that year alone.

Back in the Gilded Age, Milevsky notes, almost half of U.S. households owned some sort of tontine insurance. The policies appear to have been a form of deferred annuity, spiced up with a longevity bonus. Popularity led to excess – some tontine products amounted to little more than swindles, according to Wikipedia. Since 1906 tontines have been banned in the U.S.

Could the tontine make a comeback?

Francis Guy, The Tontine Coffee House. New-York Historical Society

The Tontine Coffee House on Wall Street, established in 1793, is still remembered because it became overcrowded with brokers. They decided to move out and form a stock exchange.

Did You Hear the One About Retirement Investing?

Last weekend brought us Prairie Home Companion's annual Joke Show:

How can you defend yourself when a bunch of clowns attack?

Go for the juggler!

Not to be outdone, The New York Times suggested a way to avoid coming up short when investing for retirement. As the article (much read on the Times web site) points out, the stock market's Lost Decade hit hardest at those near retirement age. The bigger your stock portfolio, the greater your dollar loss when its value doesn't keep growing as "average returns" led you to expect.

Solution? The Times offered this advice from William Bernstein:

What the wise person does is save a large amount of money when they are young.

Simple, isn't it? Accumulate several million before age 40 (doable if you were one of Google's original employees) and you can get out of the market.

Must have been a real thigh-slapper for young couples struggling to pay off college loans and mortgages.

Check out the graphs accompanying the Times article. See also the comments to a related blog post.

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Although the magic of compounding may turn into black magic when market values fall, compounding does work wonders when the market booms. Ask those who retired in 1999, a time when long-term investors could scarcely believe their good fortune.

But those lucky retirees then had to suffer through the Lost Decade, unless they had cashed out. So maybe they weren't so lucky. And those who unluckily retired at the end of the Lost Decade have already seen their net worth grow significantly if they stayed invested.

Moral: wealth fluctuates. Whether you run your own business or invest in shares of a lot of businesses, your net worth will keep changing. What J. Paul Getty said about billionaires applies to mere High Net Worth Individuals as well.