Today's Lunchtime News featured part 3 of the "Buy and Hold Apocalypse" series, wherein MF Templar has been examining returns of stocks, bonds & T-Bills during the 30s and 70s. By the end of the day we hope to have four more conference call summaries ready for you, for Red Roof Inn, Mity-Lite, GT Interactive Software, and Cree Research. We'll also have a feature on Xylan, a networking concern that recently made Morgan Stanley's Nifty Fifty. Coincidentally (or perhaps not), Morgan Stanley managed Xylan's initial public offering.
MF Merlin's Economic News today discusses the Commerce Department's advance estimate of the Gross Domestic Product for the second quarter, the National Association of Purchasing Management's July survey of the status of the manufacturing sector, and the latest weekly report on new claims for unemployment insurance. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar continues drawing lessons from historical market returns. Enjoy!
RED ROOF INNS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RRI)") else Response.Write("(NYSE: RRI)") end if %>
1-800-633-8284
(reservation #: 1878488)
ETHAN ALLEN INTERIORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %> investors must be leaning back smugly on their sofas, putting their feet up on the coffee table. The furniture manufacturer and retailer beat estimates by seven cents today, posting $0.51 per share and crediting higher sales volume, better manufacturing efficiencies and retail performance, monitoring of operating expenses and lower interest expense. Impressed, Wheat First upped the company from "outperform" to "buy" and shares lumbered ahead $5 1/8 to $27.
Well, the America Online stock quote says that GOLDEN BEAR GOLF <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JACK)") else Response.Write("(NASDAQ: JACK)") end if %> rose 29,500% today. Not quite. The initial public offering (IPO) debuted today priced at $16, and rose $2 1/2 to $18 1/2. Merrill Lynch underwrote the issue and apparently has great expectations for this golf concern to succeed by buying and fixing up golfing facilities. Of course, its connection with Jack Nicklaus can't hurt, either.
Analyst ink was flowing today, with many companies benefiting from upgrades. Alex. Brown & Sons upgraded shares of WILLIAMS SONOMA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSGC)") else Response.Write("(NASDAQ: WSGC)") end if %> to "buy" from "hold" this morning, causing shares of the beleaguered retailer to rise $2 1/2 to $22 this morning... MEN'S WEARHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUIT)") else Response.Write("(NASDAQ: SUIT)") end if %> dressed up $1 1/8 to $18 3/4 this morning when Robbie Stephens hiked its rating to "buy" from "long-term attractive"... Goldman Sachs continued to move the market with its Priority List, knocking FILA HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> up $10 5/8 to $91 1/4 today after it placed the footwear manufacturer on the list.
QUICK TAKES: Computer data flow specialist ADAPTEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADPT)") else Response.Write("(NASDAQ: ADPT)") end if %> rose $4 to $45 1/2 today, following a Bear Stearns "buy" reiteration... Semiconductor concern XILINX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XLNX)") else Response.Write("(NASDAQ: XLNX)") end if %> advanced $1 7/8 to $34 1/4 on a SoundView Financial upgrade from "long-term hold" to "long-term buy"... Fool Portfolio holding AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> jumped $2 7/8 to $33 3/8 on news that it plans to move to the "Big Board" -- the New York Stock Exchange. The company is expected to change its ticker symbol to AOL... GENERAL SCANNING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GSCN)") else Response.Write("(NASDAQ: GSCN)") end if %> unveiled a new line of laser marker systems today, and was rewarded with a $2 15/16 to $14 rise.
MORE QUICK TAKES: Talk about roller coaster rides -- MAGAL SECURITY SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MAGSF)") else Response.Write("(NASDAQ: MAGSF)") end if %>, first up after recent bombings, then down after a "sell" rating, is now up $15/16 to $8 1/4 after winning a several-million-dollar contract to provide pallet screening systems to Israel... LERNOUT HAUSPIE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LHSPF)") else Response.Write("(NASDAQ: LHSPF)") end if %> continues to surge on the news that MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> will use their text-to-speech technology in "future" applications. Up $1 1/4 to $20 1/4, the reaction has been pretty extreme over the past two days... NUKO INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NUKO)") else Response.Write("(NASDAQ: NUKO)") end if %> popped up $1 1/8 to $8 5/8 on a major contract with Samsung... BENCHMARQ MICROELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BMRQ)") else Response.Write("(NASDAQ: BMRQ)") end if %> surged $1 1/2 to $8 3/4 on no apparent news... CYPRESS SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CY)") else Response.Write("(NYSE: CY)") end if %> jumped $1 1/2 to $11 3/8 after forecasting steady future growth.
Shares of EGGHEAD INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EGGS)") else Response.Write("(NASDAQ: EGGS)") end if %> were fried today, down $2 1/8 to $7 1/8 as the software retailer reported a first quarter loss of $0.43 per share when a loss of only $0.10 was expected. Egghead closed more stores than it opened in the quarter, and is hanging many hopes on remodeling existing stores. Gross margins rose from 16% to 19% over the last quarter.
SILICON GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %> slid down $3 1/2 to $22 1/2 after earning, on its own, $0.46 per share for its fourth quarter -- fully four cents ahead of estimates. So what's the problem? It's a four-letter word: Cray. Silicon Graphics acquired Cray Research this year, and Cray's quarter was less rosy. Including Cray's results yields a loss of $0.30 per share. The company remains bullish about its 1997 prospects, and cited a strong reception for its 64-bit, R10000-based products. Montgomery Securities cut the company from "buy" to "hold."
Biotech concern CHIRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHIR)") else Response.Write("(NASDAQ: CHIR)") end if %> plunged $10 3/4 to $77 1/4 today, after noting that shipping and clinical testing delays will not be helping future earnings. For example, shipping of the Betaseron product will be delayed due to product labeling changes and requisite regulatory attention. Yesterday the company reported earnings of $0.35 per share, up from $0.02 in the year-ago quarter. CS First Boston cut the company from "buy" to "hold" and reduced estimates, while Cowen & Co. downgraded it from "strong buy" to "neutral."
Apparently, something in a press release from SCICLONE PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCLN)") else Response.Write("(NASDAQ: SCLN)") end if %> did not jibe with expectations. The stock slumped $4 1/4 to $7 7/8 this morning after the company clarified results and strategies for its Zadaxin hepatitis B treatment. Zadaxin only yielded a 40% remission rate, compared to an unusually high 27% remission rate in the placebo group. Chief Financial Officer (CFO) Mark Culhane noted that, "We expect a significant product launch later this year after we get additional approvals... We have seven new drug applications that have been pending for up to 12 months and are awaiting imminent approvals." Josephthal Lyon downgraded the firm from "speculative buy" to "hold."
QUICK CUTS: NAPRO BIOTHERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NPRO)") else Response.Write("(NASDAQ: NPRO)") end if %> dropped $1 1/4 to $8 3/4 this morning when it decreased the number of shares it was issuing in a public offering today. The company only sold 1.6 million instead of the 2.0 million originally planned... MOTORCAR PARTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MPAA)") else Response.Write("(NASDAQ: MPAA)") end if %> shares shifted down $2 5/8 to $12 7/8 after the company missed estimates by two cents on record income, up 97% from the year-ago quarter... Edu-tainment concern EDMARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EDMK)") else Response.Write("(NASDAQ: EDMK)") end if %> wasn't entertained much when it posted a loss of $0.07 per share, two pennies worse than expected, and suffered a $2 3/8 to $13 7/8 loss as a result.
An Investment Perspective
by Randy Befumo (MF
Templar)
FOOL ON THE HILL
Buy & Hold Apocalypse
Episode Four: No Moss Grows on a Rolling Return
The "buy and hold" approach has received the harshest attacks recently from investors preoccupied by skewed data which suggests that in recent history buy-and-hold candidates have caused investors ruin. These critics love to pull out all sorts of statistics proving that investors who invested at the height of the market at various points in history took exceedingly long periods of time to break even again. Much of this silliness is calculated off the cuff using straight index values for the Dow Jones Industrial Average or S&P 500 -- a process we know is flawed because indices do not measure total return -- they just measure price-weighted or market capitalization-weighted capital appreciation. (See the Evening News from July 29th and July 30th for more details on this claim.)
What is the best way to disprove this notion? To examine the actual aggregate returns of stocks since the advent of the liquid secondary market and to find out the actual returns, while isolating a class of securities that can be used as a proxy for the typical "buy and hold" stock. (Readers who have been following this series will remember that we defined a "buy and hold stock" in our Introduction to the Buy & Hold Apocalypse as one whose current market value was low, relative to its underlying economic value.)
We can look at the aggregate returns of all stocks on a rolling basis since 1926 by simply opening up the Ibbotson Associates 1996 Yearbook, a compendium of market facts available in the business section of many libraries. The Yearbook looks at the returns of "large company" and "small company" stocks, long-term bonds, Treasury Bills (our proxy for a money market) and inflation over various rolling periods from 1926 to 1995. A "rolling" period is where you run consecutive time series data that overlaps. For instance, if you were measuring ten-year returns you would go from 1971 to 1980, 1972 to 1981, 1973 to 1982, etc., in order to get rolling returns. This process enriches the data you have to work with when you are dealing with a relatively short period of time.
In yesterday's Evening News, we established through Jeremy Siegel's data that you were guaranteed to have a positive return that was superior to that of bonds if you held stocks for thirty years or more between 1871 and 1992. The rolling return data in the Ibbotson Yearbook over a more recent and relevant time period shows that "large company" stocks produced positive returns in 56 out of 56 overlapping periods, while "small company" stocks did the same in 53 out of 56 periods. Small company stocks were the highest-returning asset in 44 out of the 56 periods and large company stocks were the highest or second highest returning asset in 52 of the 56 periods. Putting this information together makes a pretty convincing case that our "holding" period can be whittled down to 15 years from 30 years to outperform bonds or other financial assets -- a great boon to many baby boomers who are starting now to save for a retirement 15 or 20 years away.
Although not quite as overwhelming, the ten-year returns for large company stocks and small company stocks are heartening. Both had positive returns in 59 out of 61 overlapping ten year periods, with the *single* worst ten-year period for large company stocks measuring a total -0.89% return and small company stocks getting crunched for -5.70% in its worst ten-year period. It would stink to be flat for ten years, but this is hardly the crisis scenario that market timers love to paint. I mean, if the worst ten years in history has you basically even (not including inflation), it is hardly a catastrophe if you have continued to put new money into the market in subsequent periods, enjoying the high rate of return that often follows market underperformance (i.e. late 1987, 1975 and 1976, etc.).
For the universe of all stocks with five-year rolling returns, things get a little less sure. "Large company" stocks have positive returns in 59 out of 66 rolling five-year periods and "small company" stocks have positive returns in 57 out of 66 similar chunks of time. If the general trend is the further out, the less risk you take, this makes sense. It is interesting to note that the return is positive in both situations about 90% of the time. Either "large" or "small company" stocks outperformed all other asset classes for 55 out of the 66 periods measured, implying that the compounded total return for stocks was better than all other asset classes almost 83% of the time over five year periods -- not exactly terrible odds. And these odds can be improved greatly if one recognizes the common causes of market corrections and adjusts one's fundamental screening criteria for those time periods (which we will discuss in the last episode of this series on Friday, Market Timing Is Bunk.)
If we tighten up our stock selection requirements and enter the realm of "buy and hold stocks" as defined previously, the results become even more impressive. Recently I wrote that an investor who bought "value", i.e. "buy and hold", stocks and held them for five or ten years over the past forty years would have done well. A commentator on the message boards called this proposition ludicrous, beginning to give the bull and bear market talk that clearly identified him as a market timer. He first disputed my claim by stepping outside the time period I circumscribed, referencing the returns from the top at 1929 to 1950. He then further claimed that from January 1965 to December 1975 stocks averaged -1.0% a year, from November 1968 to October 1978 stocks averaged 2.30% per year and finally that from December 1972 to July of 1982 stocks averaged 3.90%.
Fortunately, I have compiled the stock by stock returns for the thirty Dow Jones Industrial Average stocks between 1961 and 1996 on an annual basis and have some hard data to dispute these claims. (This 35-year spreadsheet is available in FoolMart for a measly twelve bucks, by the way.) Measuring the thirty Dow stocks as a portfolio, assuming equal amounts invested like real investors do, yields significantly different results than what were quoted. For the January 1965 to December 1975 period (actually eleven years, incidentally) the return was more like 5.1%, not the -1.0% quoted. And, for 1965 to 1975 the two rolling ten-year returns are 1.83% annualized and 3.97% annualized, with inflation at 5.2% and 5.7% respectively, on an annual basis for the same period.
It is important not to take these returns out of context, however. Given that T-Bills (our proxy for money markets) returned 5.7% and 5.6% over the same period, the possibilities of cash were not all that staggering either. One of the great fallacies promulgated by market timers is that corrections in the stock market happen completely outside of the entire monetary and economic background, something any true student of the data recognizes is patently untrue. The important fact to focus on here is that despite the tumultuous 1973-1974 period, a ten-year holder would have at worst been about even and would have had average annual returns within two to four percent of a money market. Assuming any ability at all to select stocks, the returns would have been much higher. We will take the Dow Dividend Approach 10 as a proxy for adequate stock selection, as a four-year could pick these. (For more information on the Dow Dividend Approach, check out our Dow Dividend Approach area.)
Frankly, I think the single greatest logical error of the market-timing, scare-mongering crowd is assuming mean performance when simple approaches like the Dow Dividend 10 are out there. Even over the devastating 1965-to-1974 period, a Dow 10 portfolio would have returned an average 5.85% and would have outperformed both T-bills and bonds. Come again? It's true... get the spreadsheet and check for yourself. And furthermore, the whole "long-term bonds are safer 'cause you are guaranteed your principle back" school of thought needs a head check as well. If you are tying up money in long bonds for ten to thirty years in order to guarantee the return of principle, you might as well be in stocks. And you should definitely not pretend that selling your bonds before maturing will not cause a loss -- the same economic factors that cause stocks to fall in value don't help bonds all that much either most of the time, as we will see in Market Timing Is Bunk.
For you aggressive investors who want to focus on five-year returns, the worst five-year period since 1961 for a Dow 30 portfolio was 1970 to 1974, where you would have had a -0.87% average annual return. Not great, but no disaster. Particularly when you consider the Dow 10 over the same period would have logged a 7.09% performance. In fact, looking at the rolling return data (which you would have to construct using the data on the spreadsheet) that is the only negative five-year period in the past 35 years, buttressing my initial claim that a buy-and-holder in buy-and-hold stocks would have done fine during the most devastating market decline in this half of the century.
NOTE: It is important to realize that the returns for large and small company stocks that I have been using for the past two days from the Ibbotson data are something I view with a little skepticism. The reason for this is a phenomenon called extinction. Some argue that the returns for small company stocks have been pumped up by researchers looking back over historical databases to calculate them because of the fact that bankrupt companies are routinely erased from database records. This means that the returns for the companies which totally blew it and lost all of their shareholders' money have been erased, biasing the returns. As a disproportionate amount of bankruptcies occur among small stocks, this pushes the historical returns of small stocks up a notch or two. I personally believe that the total return of small and large stocks has actually been about the same since 1926 after you factor all bankruptcies back in -- which would be around 10.0%. **This Fool owes a special thanks to Legg Mason Fund Advisors' Bill Miller for information in this article and other articles in this series.**
Tune in to the Lunchtime News's "Fool Plate Special" column tomorrow, where we ask the fatal two-fisted question -- was Raskob really wrong and was the Nifty Fifty a total disaster?
Iomega in Fooldom Today!
Do you wish you could scour our voluminous Iomega message folders each day, but for some ridiculous reason, find that you just don't have the time? Or do you actually take the time to read every Iomega post, but find yourself somehow surrounded by people urging you to get a life? Rejoice! The Motley Fool has heard the cry of those feeling overwhelmed by the folder, and has begun offering a daily digest of it. Sporting the best posts from the last 24 hours, "IOMG in Fooldom Today" can be e-mailed to you five times a week. And the price? At the moment, it's quite reasonable -- it's free. If you'd like to sign up, simply send an e-mail to [email protected] from the address where you'd like to receive the reports. Make sure you type "subscribe" in the *body* of the message. (MFiomg is an automated account, not a person.)