THE MARKETS
Who should you believe, Warren Buffett or Bill Gross?
Buffett and Gross are generally recognized as two of the world's
greatest investors. Buffett made his name in equities while Gross
made his name in bonds as the head of Pimco, a trillion-dollar
money management company. Both have outstanding multi-decade track
records and both are billionaires.
Yet, today, they disagree on the merits of investing in
"currency-based investments" such as money market funds, bonds,
mortgages, bank deposits, and other instruments.
Buffett says these investments "are among the most dangerous of
assets. Their beta may be zero, but their risk is huge." Further,
he says, "Right now bonds should come with a warning label,"
according to a February 9 Fortune magazine article.
His beef with currency-based investments is they do not protect
you from the risk of inflation. You may get your principal back
plus interest, but, in times of high inflation, your "real" return
may not keep up with inflation and you could lose purchasing
power.
Gross, on the other hand, has piled into bonds in a big way.
After dumping all of his U.S. government debt securities in
early 2010, Gross has steadily built it back up according to
Bloomberg.
Gross favors government securities in the 5- to 7-year maturity
range because of the Federal Reserve's pledge to keep short-term
rates low.
Okay, how do you reconcile the divergent views of two
outstanding investors? Quite likely it's a matter of timing.
Buffett is probably looking at a 7- to 10-year time horizon and, in
that scenario, bonds might lose purchasing power and could
experience capital losses if interest rates rise and bond prices
decline.
Gross, though, is probably thinking shorter term. With the Fed's
pledge to keep interest rates low for the next couple years and the
economy still stuck in slow motion, the risk of bond prices
declining and inflation rising rapidly in the short term may be
manageable.
Bottom line, it's not just your outlook that matters, it's also
important to know the timeframe for your outlook.
|
Data as of 2/10/12
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
-0.2%
|
6.8%
|
1.0%
|
17.5%
|
-1.3%
|
1.9%
|
|
DJ Global ex US
(Foreign Stocks)
|
-0.4
|
9.6
|
-9.9
|
14.8
|
-3.7
|
5.9
|
|
10-year Treasury Note
(Yield Only)
|
2.0
|
N/A
|
3.7
|
2.9
|
4.8
|
4.9
|
|
Gold
(per ounce)
|
-1.3
|
8.7
|
26.5
|
23.4
|
20.8
|
19.1
|
|
DJ-UBS Commodity Index
|
-0.4
|
3.0
|
-11.3
|
9.4
|
-2.4
|
4.8
|
|
DJ Equity All REIT TR Index
|
-2.1
|
6.7
|
9.0
|
33.6
|
-1.9
|
10.8
|
| Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS
Commodity Index returns exclude reinvested dividends (gold does not
pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT TR Index does include reinvested
dividends and the three-, five-, and 10-year returns are
annualized; and the 10-year Treasury Note is simply the yield at
the close of the day on each of the historical time
periods.Sources: Yahoo! Finance, Barron's, djindexes.com, London
Bullion Market Association.Past performance is no guarantee of
future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable or not available. |
WHAT IF the keepers of the Dow Jones Industrial
Average added Apple to the index in 2009 instead of Cisco Systems?
This is not just a hypothetical exercise; rather, it makes an
important point about using indices to measure overall market
performance.
In June 2009, General Motors and Citigroup were removed from the
Dow 30 average and replaced by Cisco and Travelers Cos, according
to Bloomberg. At the time, Cisco was trading at about $19.50 per
share. Last week, Cisco traded at about $20.00 per share -
essentially no change in nearly three years. By contrast, Apple was
trading at about $143 per share in June 2009 and closed last week
near $500 per share.
Unlike most other market indexes, the Dow Jones Industrial
Average is a "price weighted" index, which means stocks with a
higher price (e.g., Apple) have greater impact than lower-priced
stocks (e.g., Cisco).
So, taking a look at the woulda, shoulda, coulda, Bespoke
Investment Group recalculated where the Dow would be if Apple was
added to the index in 2009 instead of Cisco. They discovered that
instead of the Dow being in the 12,800 range last week, it
hypothetically would have been near 14,600 - an all-time record
high.
Notice how one stock could have made nearly a 2,000 point
difference in the Dow index in less than three years. Of course,
the reverse is also true. A stock could have been added to the Dow
in 2009 and gone down the last couple years and taken the Dow down
with it.
Here's the point. We tend to think of indexes are representing
"the market," but, in reality, they represent the keepers of the
indexes representation of the market. There's human intervention in
some of these indexes and that could greatly influence their
performance.
In the end, the only index that matters is your index - the one
that measures your progress toward reaching your goals. That's the
index we try to beat.
WEEKLY FOCUS - Does this
make sense?
One must maintain a little bit of summer, even in the middle of
winter.
- Henry David Thoreau, author, poet, philosopher
For your convenience the sources have
been listed below:
http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-let...
http://mobile.reuters.com/article/vbcSmallBusiness/idUSTRE77S67420110830
http://www.bloomberg.com/news/2012-02-10/pimco-s-gross-buys-treasuries-while...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY8XF5XAOngs
http://www.bespokeinvest.com/thinkbig/2012/2/8/aapl-vs-csco-woulda-shoulda-cou...
http://www.goodreads.com/quotes/tag/inspiration
