SUNDAY, AUGUST 15, 2010 PERSONAL FINANCE
The case for betting against the crowd
by Thomas M. Anderson Is there wisdom in crowds?
Many professional money managers think so, although usually the wisdom comes from doing exactly the opposite of what the crowd does. And as a smart investor, you may want to learn about and start following some of these “sentiment” indicators. This isn’t voodoo. Often, sentiment indicators are remarkably accurate. For example, on March 5, 2009, negative sentiment, as measured by surveys from the American Association of Individual Investors, hit the highest level ever recorded. On that day, seven of 10 investors classified themselves as bears. Only four days later, Standard & Poor’s 500-stock index bottomed after declining 55 percent in 18 months and embarked on a recovery that has lifted the benchmark 71.6 percent through Aug. 4. Currently, the weekly AAII
surveys are giving mixed signals. The Aug. 5 survey found that 38 percent of investors were bearish, meaning that they expect stocks to decline over the next six months. The July 8 AAII survey was the most pessimistic in recent weeks, with 57 percent taking a bearish stance. David Chalupnik, head of equities at First American Funds, has been studying sentiment data closely and also sees it as mixed now. After the May 6 “flash crash” and the increased market volatility through June and July, Chalupnik thinks that individual investors won’t turn bullish on stocks for a while. “I expect them to be optimistic about stocks once a rally is well under way and job growth returns,” he said. The AAII survey hasn’t
For the investor, some bold words
by Knight Kiplinger investing. I
I am also a saver, fueling my investments with continuous savings from current income. I know that every kind of asset entails risk— even cash, which can be eroded by inflation. I know that higher returns entail higher risk, in every kind of asset. I accept those risks, but I mitigate them by owning a diversity of assets.
I regard my home as a place to live, not as an investment. It is not a substitute for retirement savings. I have an investment
TIM GRAJEK
cornered the market on measuring investor sentiment. Investors Intelligence, a New Rochelle, N.Y., research firm, surveys more than 100 investing newsletters each week to divine their feelings. The July 14 survey found that bears outnumbered bulls for the first time since April 2009. By July 21, bears and bulls were found in roughly equal numbers. Investors Intelligence charges $199 a year for its survey data. Follow the smart money:
Surveys, however, just present opinions. Many experts say that a truer measure of sentiment is where investors are putting their money. That’s why Liz Ann Sonders, Schwab’s chief investment strategist and one of our favorite market gurus, likes
SentimenTrader.com’s Smart
Money/Dumb Money Confidence index. The index tracks the movement of money using a basket of indicators, such as option positions held by traders (the smart money) and flows into and out of Rydex funds, which let ordinary investors make leveraged bets on the direction of the stock market and individual sectors (the, um, not-so-smart money). The index “allows you to see what the ‘good’ market timers are doing with their money compared to the ‘bad’ market timers,” Sonders said. By mid-May, smart-money
investors turned bullish, while the dumb money retrenched, according to SentimenTrader. At the end of June, a similar spike in smart-money bulls offset dumb-money bears. But now both sides are neutral. A
SentimenTrader subscription, which costs $25 a month or $250 a year, gives you access to the Smart Money/Dumb Money Confidence index in addition to a boatload of other sentiment data. Look for extremes: When
investor sentiment is significantly negative, as it was in March 2009, the time is ripe to move in the other direction. Chalupnik plans to add cyclical, low-quality stocks to the funds that he manages when bearish sentiment is high and to reduce positions when optimism reigns. That sounds like a hard strategy to execute. Here’s an easier way to take advantage of the market’s fear and greed: Rebalance your portfolio toward stocks when investors give up hope and do the opposite when they turn super-bullish. —Kiplinger’s Personal Finance
plan and a plan for asset allocation, in consultation with a financial adviser. I invest regular amounts every month, in both rising and falling markets. I know I cannot gauge market tops and bottoms. If I receive a windfall — a bonus, bequest or gift — I gradually feed it into my regular investment mix. I don’t pour more
money into hot markets or completely cash out of plunging markets. I spread my
investments among several asset classes, in a mix fitting my age and risk tolerance.
My share of bonds roughly equals my age. I will allocate to stocks a
am an investor. I do not trade my assets frequently. That’s speculation, not
declining portion of my financial assets as I get older.
I rebalance my
portfolio every quarter. If the stock market plunges, pushing my stock allocation way below its target percentage, I sell bonds and use my cash to buy stocks. I force myself to sell high and buy low by periodic rebalancing — just what is temperamentally difficult for most investors to do. I know that stocks are risky in the short run, so I hold in equities no money for which I have a likely need in the next three years.
But stocks are not too risky in the long run. They have outperformed all other commonly traded assets over periods of 15 years and longer. Foreign stocks account
for at least 15 percent of my stock allocation. I believe that developing economies will enjoy much higher growth than the United States in the decades ahead. I never borrow against
my stocks.Margin calls could force me to sell good assets at a bad time. I stick with my game
plan. I do not check the value of my investments every day or even every week. I try to keep my cool when other folks are losing theirs.
I remind myself often: I am an investor. — Kiplinger’s Personal Finance
More from Kiplinger Go to
www.kiplinger.com for more analysis.
KLMNO
G3
EZRA KLEIN GOP should rethink opposition to health care’s cost-control board klein from G1
reelection every few years. So they’ve punted. Some Republicans say IPAB is just one more punt: It hands the hard decisions off to someone else. But that’s exactly why it might work.
Behind the acronym will be 15 presidential appointees, each confirmed by the Senate. They’ll be drawn from the health-care industry, academia, think tanks and consumer groups. Their reform proposals will have to pass through Congress, but they will have some advantages: If Congress doesn’t act, their recommendations go into effect. If Congress says no but the president vetoes Congress and the veto isn’t overturned, their recommendations go into effect. If Congress wants to change their recommendations in a way that’ll save less money, it will need a three-fifths majority. Oh, and no filibusters allowed. The hope is that this will free Congress to permit cuts by making it easier for them to dodge the blame. “Putting the knife in someone else’s hand will be a relief,” says Robert Reischauer, director of the Urban Institute and a former director of the Congressional Budget Office. “It will allow Congress to rant against the cuts without actually stopping them.” The board’s first recommendations will be for 2015, but it’ll take until 2018, when its purview expands to cover hospitals, for it to really start swinging its weight around. If the board makes it that far, it’ll
be the most aggressive effort lawmakers have ever made to control Medicare’s costs. That’s a big if. Republicans
have zeroed in on the board as a soft target in their campaign to gut the health-care reform bill. “In true fashion of Obama- Reid-Pelosi hubris,” Cornyn said, “the IPAB is the definition of a government takeover.” A government takeover of . . . Medicare? Putting aside the metaphysics
of the government taking over a government program, Cornyn makes two arguments, and they show the difficulty Republicans are having opposing health-care reform without opposing fiscal responsibility and much-needed deficit reduction.
One of his arguments is that
IPAB would take these decisions away from Congress, which is more accountable to voters (and thus hasn’t been able to make any of these decisions). “America’s seniors deserve the ability to hold elected officials accountable for the decisions that affect their Medicare,” he said.
“I think that’s dead right,” Reischauer said. “And when the political system is willing to assume those responsibilities, they should get them back.” But in recent years, Congress has been feckless in the face of Medicare’s spending. Repeal IPAB and you’ve restored the status quo on Medicare. That status quo was leading to federal bankruptcy. Cornyn knows this, and so his other argument is that Congress buckled before lobbyists and that IPAB doesn’t go far enough.
“Special-interest groups cut deals with Democrats to specifically exempt hospitals, 28 percent of Medicare’s budget, from the IPAB’s ax,” his statement points out. That deal is more of a three-year reprieve, as hospitals would come under IPAB’s ax in 2018, but still, Cornyn is right. It’s a bad deal. The sensible thing would be to remove it to make the board even stronger. It’s the best shot we’ve had at entitlement reform in a generation, and Republicans have always said they’re for entitlement reform. The same goes for the other cost controls in the bill. The tax on high-value health insurance, which Sen. Scott Brown (R-Mass.) attacked during his campaign, begins to do what Sen. John McCain (R-Ariz.) proposed doing in the 2008 presidential race: End the tax code’s subsidy
for employer-provided insurance. Republicans could make the policy stronger and achieve a longtime policy goal. Instead, they’re attacking it because it’s one of the bill’s vulnerabilities. There was another path here: One of the unnoticed dynamics of health-care reform was that Democrats were so desperate to pass a bill that they were willing to accept cost controls that they would’ve laughed at in normal circumstances. They ran over unions to begin taxing employer benefits and created a process making it harder to protect Medicare from future cost-cutting reforms. Republicans could’ve used the opportunity to strengthen the sort of cost controls they’ve long said they wanted, while focusing their repeal efforts on the bill’s spending sides. But they’re doing the opposite,
and there’s a real risk to their strategy: If the bill’s hard choices are political losers, the policies that cost money aren’t. Subsidies for poor people are popular. Rules preventing insurers from discriminating based on preexisting conditions are popular. Tax credits for small businesses are popular, and so is closing the doughnut hole in the Medicare Prescription Drug Benefit. Cost controls aren’t. And Republicans, who’ve frequently argued that the bill is too costly, are taking aim at them. If they repeal the parts but not the whole, we could end up with the bill’s cost control wrecked but its spending intact. “You can’t argue that you’re for fiscal responsibility, then argue for taking out all the fiscally responsible parts,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
We talk a lot about the deficit these days. And when we talk about it, what we’re really talking about is how to convince the bond markets that we’ll do what’s necessary to get our health-care spending under control and get our long-term budget into balance. If we don’t convince them, one day the bond markets might conclude that our political system is too weak and divided to cut the deficit and stop lending to us at low rates, sparking a fiscal catastrophe. Which do you think would
make them more confident? Seeing the two parties in a virtuous competition to make the cost controls in the health-care bill even stronger? Or watching as one party tries to systematically strip every cost control out of the first serious effort in memory to attack health-care spending?
kleine@washpost.com
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