Clients stopped in a couple of weeks ago to check-in and to say thanks for their performance in relation to the Russell 2000 this year. I was astonished that they knewabout the Russell ? Very few non-professionals do, so allow me to enlighten you so that you too can become familiar with this index.
The Russell 2000 measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. It is constructed to provide a comprehensive and unbiased small-cap barometer and is reconstructed annually to ensure larger stocks do not distort its performance. As I escorted my clients out of the office, I complimented their awareness of theRussell 2000. They admitted that they heard it on CNBC, just prior to leaving their home that morning.
We are witnessing one of the largest bifurcations in recent years between large and small companies. The S&P & DOW are somewhat flat this year, but the Russell 2000 has been slammed. For instance, as of 9/30/14, 54% of the Russell 2000 companies are down 20% or more and 19% are down 40% or more during the past 12 months. This tells me that the entire sector is out of favor (and maybe out-of-whack) and that there is money on the sidelines. Bullish? Yes, but at the right price and time. After all, tax-selling season is upon us. So, what’s the hurry?
It’s understandable (and maybe smart) to be bearish because it is difficult to read the morning paper or watch the evening news report on global chaos, political incompetence & man doing unspeakable things to fellow man. It is challenging to filter the constant bombardment of negative sentiment and remain bullish in the stock market. It just might be smart to get out of the market to avoid catastrophe and reduce the chances of suffering a large decline. Yet, being bearish may not be profitable. Here is why:
First of all, you reduce the chance of riding the long-term gains that the stock market has to offer. When you get out, you just never know when to get back in. Research shows that when stocks plunge in unison, they generally rebound over subsequent months. In a striking statistical fact (Cost of Timing the Market) it is demonstrated that long-term performance is surprisingly dependent on whether you were in the market during the FIVE BEST DAYS each year. A buy and hold strategy from 1900-2012 would have yielded stupendous returns but if you had missed the five best days each year, your long-term returns would have been negative. (Yikes!) I believe that this clearly illustrates the perils of attempting to time the market. My question then, to those who might want to get out (but would expect me to determine the best time to get back in) is this: Can YOU identify the five-best days of the year, for the ensuing years?
A successful investor needs the following things: staunch reliance on value, long-term capital and a strong stomach. Opportunism, buttressed by a contrarian attitude and strong balance sheets, can yield amazing results during meltdowns. The absolute best buying opportunities come when asset holders are forced to sell in large numbers. Stay tuned for my next chapter titled – Patient Bullism
I know what many of you may be thinking (or not). The last few weeks have wreaked havoc and listening to the news and reading the headlines, your thoughts become bearish. So please refer back to the last paragraph on page 1. Thank you.
There are two kinds of people who lose money: those who know nothing and those who know… everything
Who are you calling a moron? A hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron. Our job as contrarians is to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling – and if our view turns out to be right – that’s the route to the greatest rewards earned with the least risk
HEALTH TIP… ASLEEP at the CART You have heard the warning – don’t shop on an empty stomach, but how about, don’t shop sleepy? You are more likely to purchase high-calorie grub when you’re tired, a Swedish study reports. Sleep-deprived men bought an average of 1,319 more calories worth of food than well-rested guys did. Why? After a poor night’s sleep, your stomach produces extra ghrelin, an appetite hormone that can make food seem more appealing. No wonder my wife doesn’t let me shop!
It is frightening to think you might not know something, but more frightening to realize that the world is run by people who believe they know EXACTLY what is going on. I live by the notion that I know very little; and therefore, I question most everything. Trust me, this is not a relationship builder!
Large amounts of money are not made by buying what everybody likes, they are made by buying what everybody underestimates.
Here’s to relationship building, creative uncertainty, and a fine autumn. Please let me hear from you.
All my best,
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.