Stocks

According to Bianco Research, only 17% of more than 4,000 funds that invest in large U.S. stocks beat their benchmark for the 2011 calendar year. In most years, fewer than half do. According to Bianco’s research, the return correlation of U.S. stocks has quadrupled since the mid-1990s.

As recently as 1997, it took 20 stocks to eliminate most of the likelihood of enduring more risk than the market as a whole; today, according to Bianco, it takes 40.

The division of foreign markets into developed and emerging segments dates back to 1981, when Antoine van Agtmael, an economist at the World Bank, referred to third-world countries as emerging markets. In a 2011 performance study, the Aperio Group looked at 10 years of return data (12/31/2000 to 12/31/2010) from all active emerging markets mutual funds. 

Anyone who put money into an S&P 500 index fund between late 1998 and early 2001 experienced a cumulative loss, as of January 21, 2012. Adjusted for inflation, the S&P lost 18% from August 2000 to January 2012. According to Yale economist Robert Shiller, this has never happened to the U.S. stock market, even if one were to go back to 1871. Even those who bought on the eve of the 1929 crash experienced a brief gain, in inflation-adjusted terms, in 1937.

Companies that buy back their own stock reduce their outstanding share count that, in turn, helps to boost earnings per share. Some argue that buybacks are not a good predictor of the stock’s future performance (e.g., executive officers of a company may encourage a buyback because their bonus may be tied to earnings per share). It appears that the best kinds of repurchases are ones that managers opt for simply because they view shares as cheap. 

According to a Wall Street Journal article (February 2012), historical evidence shows stocks with lots of “buys” from analysts do no better than the broad market, on average. Perhaps this is because analysts give 11 times as many “outperform” or “buy” recommendations than they do “underperform.” New research suggests there may be a way to discern which “buys” are worth heeding.

The largest stocks are sometimes classified as “megacaps,” companies with a market value of > $100 billion. The S&P 100 Stock Index is comprised of stocks whose average market capitalization is $114 billion (as of March 2012).

One way to determine sustainable growth for a stock is a measurement called “return on invested capital.” This measures whether companies are finding lucrative projects that can power future growth. Today, numbers in the 13-16% are considered ordinary, while those above 30% are excellent (e.g., Apple, Philip Morris International, and Priceline.com both have returns on invested capital of more than 40% as of March 2012).

The Dow was launched on May 26, 1896 as a “price-only” index that does not capture (include) the dividend income of the underlying companies. According to finance professor Statman of Santa Clara University, with dividends reinvested along the way, from its May 1896 inception to March 2012, the Dow would have closed at 1,339,411 (not 13,000). This number is more than 100 times a closing price of 13,000.