7 Education and Research
Important lecture by head of Yale's Endowment
Nov/07/08 07:34 AM
David Swensen has been the investment manager of Yale's Endowment since 1985 and is known as one of the best investors of our time. He recently was a guest lecturer at one of Yale's economics classes and the lecture is posted online.
Our investment process is largely based on the "Yale Model" of investing and I believe you will find his thoughts reassuring and educational.
Click here to watch Swensen's lecture at Yale.
Glance into ETF index holdings of Harvard, MIT and Yale Endowments.
Oct/30/08 12:34 PM
The
endowments of Harvard, MIT, and Yale all utilize
Index ETFs as a part of their investment strategies.
Reviewing their top ETF holdings provides insight
into their investment strategy.
It seems that heading into this crisis, they had significant allocations to Emerging Market Equity Indexes. It will be interesting to review their public filings at year end. I would not be surprised to see them adding to their US Equity positions as the US markets declined in September and October.
It seems that heading into this crisis, they had significant allocations to Emerging Market Equity Indexes. It will be interesting to review their public filings at year end. I would not be surprised to see them adding to their US Equity positions as the US markets declined in September and October.
Harvard Endowment
MIT Endowment
Yale Endowment
Comparing 1929 to 2000
Oct/25/08 09:33 AM
We
understand how tough it is to watch your portfolio go
down amidst this crisis. Our firm was founded by a
group of families and we invest side by side with our
clients. We're all experiencing a very difficult
situation together and, like you, we look forward to
its end. In the mean time we must remain disciplined
and diversified. The following analysis exemplifies
how the current events compare and contrast with
those of the past.
First, let's look at the roaring 20's and the 2000 tech bubble. Why is this analysis relevant today? The current bear market is remarkably similar to the sell-off that occurred from 1937 to 1938. In short, if 2008 is our version of 1937, this could could amount to one very bad year followed by a year of good returns.
The technology gains seen in the 1920’s and the euphoria after the end of World War I lead to an extremely speculative market that crashed in 1929. In similar fashion, the technology gains seen in the 1990’s and the euphoria after the end of the Cold War lead to an extremely speculative market that crashed with the bursting of the tech bubble.
Today we are facing a financial system that has outgrown a regulatory system created in the 1930’s. The regulation that was enacted in the 1930’s was critical to restoring market order and confidence. The same holds true today. Over the next few years we will see our regulatory and political leaders enact a series of new regulations that will bring our current rules and regulations up to date.
We saw the worst equity erosions from 2000 to 2002, which was very similar to the equity erosion from 1929 to 1931. In 1937 the S&P 500 fell 36%. We believe 2008 may be our version of 1937, which will hopefully amount to one year of poor market performance.
The following document shows how the market moved through the periods discussed (1929-1947 and 1998-present) and pinpoints important events along the way. For those of you who are not visual thinkers you might find the following document a bit confusing Click Here to see our work.
In doing our research we found that we're not the only one's with this belief. If you’d like to read a detailed comparison: Click Here
First, let's look at the roaring 20's and the 2000 tech bubble. Why is this analysis relevant today? The current bear market is remarkably similar to the sell-off that occurred from 1937 to 1938. In short, if 2008 is our version of 1937, this could could amount to one very bad year followed by a year of good returns.
The technology gains seen in the 1920’s and the euphoria after the end of World War I lead to an extremely speculative market that crashed in 1929. In similar fashion, the technology gains seen in the 1990’s and the euphoria after the end of the Cold War lead to an extremely speculative market that crashed with the bursting of the tech bubble.
Today we are facing a financial system that has outgrown a regulatory system created in the 1930’s. The regulation that was enacted in the 1930’s was critical to restoring market order and confidence. The same holds true today. Over the next few years we will see our regulatory and political leaders enact a series of new regulations that will bring our current rules and regulations up to date.
We saw the worst equity erosions from 2000 to 2002, which was very similar to the equity erosion from 1929 to 1931. In 1937 the S&P 500 fell 36%. We believe 2008 may be our version of 1937, which will hopefully amount to one year of poor market performance.
The following document shows how the market moved through the periods discussed (1929-1947 and 1998-present) and pinpoints important events along the way. For those of you who are not visual thinkers you might find the following document a bit confusing Click Here to see our work.
In doing our research we found that we're not the only one's with this belief. If you’d like to read a detailed comparison: Click Here
ETF Market Makers Struggled Last Week
Sep/23/08 08:41 AM
In this article I address poor market making in two
PowerShare ETFs and how
you can protect and correct poor execution.
Last week PowerShares S&P 500 BuyWrite Portfolio (PBP) experienced extremely poor execution on two trades. On Friday September 19th, 4,000 shares traded at $400 then executed down closer to its NAV price of 24. PBP then traded 929 shares at $300. It then resumed trading closer to its NAV of 24.
My attention was originally drawn to the poor market making because of our position in PowerShares Emerging Markets Sovereign Debt Portfolio (PCY). It also experienced erratic trading. Calls to PowerShares last week about PCY yielded nothing. Their reps had no idea why it was trading erratically and never called us back with an answer.
Therefore, in my search for answers I decided to review the PowerShares Prospectus for this ETF. I found the following risk disclosures:
“Market Trading Risk - Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Underlying Index.”
“Additional Risks – Fluctuation of Net Asset Value - The NAV of a Fund’s Shares will generally fluctuate with changes in the market value of the Fund’s holdings. The market prices of the Shares will generally fluctuate in accordance with changes in NAV as well as the relative supply of and demand for the Shares on the AMEX, the NASDAQ or the NYSE Arca. The Adviser cannot predict whether the Shares will trade below, at or above NAV. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for the Shares will be closely related to, but not identical to, the same forces influencing the prices of the stocks of a Fund’s Underlying Index trading individually or in the aggregate at any point in time.
However, given that the Shares can be purchased and redeemed in Creation Units (unlike shares of closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their NAV), the Adviser believes that large discounts or premiums to the NAV of the Shares should not be sustained.” – A complete prospectus can be obtained on powershares.com.
After reviewing the prospectus I did not feel that it adequately disclosed the risks or possibility of extremely poor execution. Therefore this week I called PowerShares to inquire further about the erratic trading in (PBP) and (PCY) and they finally had an answer: They informed me that some of the market makers in their funds had executed trades poorly amidst the heavy trading volumes last week. They ended up busting the trades that were executed poorly to give fair and accurate pricing of PCY intra-day value to the market.
PowerShares also informed me that they would review on a case-by-case basis the execution of trades that are far away from their ETF’s intra-day values. The representative I spoke with suggested that before placing trades in their funds I should check to see if the ETF is trading near its intra-day.
Obviously limit orders are important and would have prevented some of the issues that occurred in the trading of these two ETFs. In addition you can be more certain of accurate pricing by reviewing the intra-day values of an ETF before you trade.
Example: in yahoo finance the ticker for PCY’s intra-day value is “^PCY-IV”.
Lastly, if you experience extremely poor execution, call PowerShares and notify them of the error. They may be able to assist you in correcting it.
Disclosure: The author’s firm has positions in the following PowerShares ETFs PSP, PFP and PCY.
you can protect and correct poor execution.
Last week PowerShares S&P 500 BuyWrite Portfolio (PBP) experienced extremely poor execution on two trades. On Friday September 19th, 4,000 shares traded at $400 then executed down closer to its NAV price of 24. PBP then traded 929 shares at $300. It then resumed trading closer to its NAV of 24.
My attention was originally drawn to the poor market making because of our position in PowerShares Emerging Markets Sovereign Debt Portfolio (PCY). It also experienced erratic trading. Calls to PowerShares last week about PCY yielded nothing. Their reps had no idea why it was trading erratically and never called us back with an answer.
Therefore, in my search for answers I decided to review the PowerShares Prospectus for this ETF. I found the following risk disclosures:
“Market Trading Risk - Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Underlying Index.”
“Additional Risks – Fluctuation of Net Asset Value - The NAV of a Fund’s Shares will generally fluctuate with changes in the market value of the Fund’s holdings. The market prices of the Shares will generally fluctuate in accordance with changes in NAV as well as the relative supply of and demand for the Shares on the AMEX, the NASDAQ or the NYSE Arca. The Adviser cannot predict whether the Shares will trade below, at or above NAV. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for the Shares will be closely related to, but not identical to, the same forces influencing the prices of the stocks of a Fund’s Underlying Index trading individually or in the aggregate at any point in time.
However, given that the Shares can be purchased and redeemed in Creation Units (unlike shares of closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their NAV), the Adviser believes that large discounts or premiums to the NAV of the Shares should not be sustained.” – A complete prospectus can be obtained on powershares.com.
After reviewing the prospectus I did not feel that it adequately disclosed the risks or possibility of extremely poor execution. Therefore this week I called PowerShares to inquire further about the erratic trading in (PBP) and (PCY) and they finally had an answer: They informed me that some of the market makers in their funds had executed trades poorly amidst the heavy trading volumes last week. They ended up busting the trades that were executed poorly to give fair and accurate pricing of PCY intra-day value to the market.
PowerShares also informed me that they would review on a case-by-case basis the execution of trades that are far away from their ETF’s intra-day values. The representative I spoke with suggested that before placing trades in their funds I should check to see if the ETF is trading near its intra-day.
Obviously limit orders are important and would have prevented some of the issues that occurred in the trading of these two ETFs. In addition you can be more certain of accurate pricing by reviewing the intra-day values of an ETF before you trade.
Example: in yahoo finance the ticker for PCY’s intra-day value is “^PCY-IV”.
Lastly, if you experience extremely poor execution, call PowerShares and notify them of the error. They may be able to assist you in correcting it.
Disclosure: The author’s firm has positions in the following PowerShares ETFs PSP, PFP and PCY.
Individual investors have refused to globalize.
Aug/23/08 01:35 PM
Retail investors’ behavior is not reflective of the
current global landscape. According to Hewitt
Associates’ 401k data for 2007, retail investors were
only allocating 14% of their equity portfolios to
international investments. This contrasts starkly
with the current US portion of global market cap and
global GDP. Unlike retail investors, institutional
investment activity clearly reflects awareness of the
rapid expansion occurring outside the US.
I heard Paul Wolfowitz, former head of the World Bank, lecture on this topic several years ago. At the time, Mr. Wolfowitz pointed out that in 25 years the US portion of global market cap would shrink from roughly 50% to 25%. He also outlined that this trend began to accelerate in the 1970s (at that time US markets made up 66% of global market cap). What troubles me is that institutional investors like Harvard and CalPERS have increasingly moved their equity allocations in line with this global market cap shift. Unfortunately, individual investors who are increasingly more responsible for their own investment decisions (as DC plans overtake DB plans) are showing no signs of adjusting to this trend. This could prove to be a costly mistake.
According to the MSCI Blue Book, in 1970 the US public equity markets made up of 66% of global market cap. We recently ran a simulation using S&P 500 (SPY), MSCI EAFE (EFA) and MSCI EM (EM) Indexes to test how investors would fair if they had kept pace with globalization. We began the simulation in 1970 with 60% invested in the S&P 500 and 40% in the MSCI EAFA index. In 1988 we shifted the portfolio to be 40% the S&P 500, 40% MSCI EAFA and 20% the MSCI EM index to reflect the shrinking global landscape. Rebalancing annually, this global portfolio averaged a return of 11.71% vs. 10.50% for the S&P 500 over the same period.
The case for retail investors to move to a global portfolio is a case for improving their returns. Since 1970 the rate of real GDP growth has slowed in the US. This is also reflected by a US public equity market that has seen its growth rate slow post-1970. This is exactly why institutions are increasingly moving toward global equity mandates. The risk to US retail investors is that they may see investment returns significantly below previous generations. This does not bode well for those investing for retirement today.
Disclosure: The author’s firm has positions in SPY, EFA, and EEM.
I heard Paul Wolfowitz, former head of the World Bank, lecture on this topic several years ago. At the time, Mr. Wolfowitz pointed out that in 25 years the US portion of global market cap would shrink from roughly 50% to 25%. He also outlined that this trend began to accelerate in the 1970s (at that time US markets made up 66% of global market cap). What troubles me is that institutional investors like Harvard and CalPERS have increasingly moved their equity allocations in line with this global market cap shift. Unfortunately, individual investors who are increasingly more responsible for their own investment decisions (as DC plans overtake DB plans) are showing no signs of adjusting to this trend. This could prove to be a costly mistake.
According to the MSCI Blue Book, in 1970 the US public equity markets made up of 66% of global market cap. We recently ran a simulation using S&P 500 (SPY), MSCI EAFE (EFA) and MSCI EM (EM) Indexes to test how investors would fair if they had kept pace with globalization. We began the simulation in 1970 with 60% invested in the S&P 500 and 40% in the MSCI EAFA index. In 1988 we shifted the portfolio to be 40% the S&P 500, 40% MSCI EAFA and 20% the MSCI EM index to reflect the shrinking global landscape. Rebalancing annually, this global portfolio averaged a return of 11.71% vs. 10.50% for the S&P 500 over the same period.
The case for retail investors to move to a global portfolio is a case for improving their returns. Since 1970 the rate of real GDP growth has slowed in the US. This is also reflected by a US public equity market that has seen its growth rate slow post-1970. This is exactly why institutions are increasingly moving toward global equity mandates. The risk to US retail investors is that they may see investment returns significantly below previous generations. This does not bode well for those investing for retirement today.
Disclosure: The author’s firm has positions in SPY, EFA, and EEM.
August: Best and Worst Asset Classes of 2008
Aug/13/08 11:49 AM
What asset classes are winning in 2008 as of
Wednesday, August 13th?
1) +15.45% - Biotechnology (XBI)
2) +14.77% - Commodities (GSG)
3) -0.66% - Domestic Real Estate Investment Trusts (RWR)
What asset classes are losing in 2008 as of Wednesday, August 13th?
1) -21.16% International Real Estate (RWX)
2) -20.73% Domestic Listed Private Equity (PSP)
3) -19.39% Emerging Markets (EEM)
How are the broad markets as of Wednesday, August 13th?
Domestic: Stocks (SPY): -12.06% and Bonds (AGG): -1.22%
International: Stocks (EFA): -18.69% and Bonds (BWX): +0.20%
Emerging Market: Stocks (EEM): -19.39% and Bonds (PCY): -7.75%
Our Comments: An interesting trend has emerged within the markets in the last few weeks. We're finally seeing some strength from the dollar and weakness in commodities. This trend change is matched by a strengthening of domestic stocks and a dramatic decline of the foreign stock markets.
Most importantly in our minds we have seen great strength from Micro Cap. This may be signaling that the US markets are out of the woods. We are well aware that things are looking better for the domestic markets.
While the US economy is facing significant challenges in some industries not all is doom and gloom. We must always remember that the markets are a leading indicator and they seem to be indicating things will begin to improve.
1) +15.45% - Biotechnology (XBI)
2) +14.77% - Commodities (GSG)
3) -0.66% - Domestic Real Estate Investment Trusts (RWR)
What asset classes are losing in 2008 as of Wednesday, August 13th?
1) -21.16% International Real Estate (RWX)
2) -20.73% Domestic Listed Private Equity (PSP)
3) -19.39% Emerging Markets (EEM)
How are the broad markets as of Wednesday, August 13th?
Domestic: Stocks (SPY): -12.06% and Bonds (AGG): -1.22%
International: Stocks (EFA): -18.69% and Bonds (BWX): +0.20%
Emerging Market: Stocks (EEM): -19.39% and Bonds (PCY): -7.75%
Our Comments: An interesting trend has emerged within the markets in the last few weeks. We're finally seeing some strength from the dollar and weakness in commodities. This trend change is matched by a strengthening of domestic stocks and a dramatic decline of the foreign stock markets.
Most importantly in our minds we have seen great strength from Micro Cap. This may be signaling that the US markets are out of the woods. We are well aware that things are looking better for the domestic markets.
While the US economy is facing significant challenges in some industries not all is doom and gloom. We must always remember that the markets are a leading indicator and they seem to be indicating things will begin to improve.
Stock pickers are dead
Aug/06/08 10:01 PM
More evidence of the shift towards indexing vs. active management (stock pickers) appeared today as the Massachussets State Pension Fund moved 2 billion out of Legg Mason active mangers to indexing strategies. Eventually they will be moving all domestic equity exposure to indexing strategies. This was reported on Bloomberg today (click to read article).
Even more incredible, there was a study released that shows only 0.6% of active managers exhibited truly positive alphas over the 1975 to 2006 period (click to read study). We believe strongly in the benefits of Indexing, especially for individual investors. The odds of successfully picking stocks and the odds of picking an active manager that will outperform their relative benchmark is incredibly low.
Yipee! Inflation is here...
Jul/16/08 12:10 PM
Well, everything (except real estate) has been getting a lot more expensive and it looks like it’s not going to get any better. Consumer prices increased by 1.1% month over month in June. This was a lot higher than the consensus forecast and it’s the biggest monthly rise since Hurricane Katrina. The annual inflation rate jumped to a 17 year high of 5%.
So what does this mean for you and your portfolio? For discussion purposes let me highlight some of the techniques used by universities to hedge against inflation.
Often in managing their endowments, universities construct portfolios that include several hedges against inflation. To begin with, Treasury Inflation Protected Securities (TIPS) is an allocation that universities often use. These are bonds that typically go up when the consumer prices go up. David Swensen, the former head of the Yale Endowment, believes TIPS are an important component to a portfolio. Universities often allocate to commodities, precious metals and natural resources as well. On a sad note, usually real estate is a good inflation hedge, but unfortunately the deleveraging of the credit markets will likely prevent an appreciation in real estate in the near term. Important Disclosure
The bear's back and it's not pretty.
Jul/02/08 08:44 PM
So it’s been 5 1/2 years since the last bear market. From the high in October the Dow is just over 20% down and that meets the most common definition of a bear market. The Nasdaq joined the Dow with a loss of 21.3% for the year.
How often do we have bear markets?
They tend to appear every four to five years. (There have been 19 in the last 100 years.)
How long do they last?
An average of 18 months.
How far do they fall?
The market decline is an average of 36%.
What’s the good news?
They can provide great buying opportunities for equities. According to this Financial Times blog, in the last 100 years the best times to buy were 1921, 1932, 1948 and 1982. So while things might get uglier, the upside is this could be a great time to buy equities.
How is Belray handling the bear market?
Our strategy of investing like universities means we’re very diversified and our average portfolio is only slightly down for the year. Our rebalancing rules allow us to take advantage of these market declines.
Important Disclosure
How's my breath?
Jun/27/08 06:29 AM
One more day like yesterday and we’ll be in an official bear market. Doom and gloom seems to be perpetuating throughout Wall Street. The one good sign is that no one can figure out how anything good will happen. That leaves room for an upside surprise. So until we get surprised or people just give up it’s not going to be much fun.
If June felt particularly painful, that’s because it was the worst June on record for the Dow Jones since the great depression. Don’t forget to smile, the economy grew at a 1 percent annualized rate in the first quarter of 2008.
Important Disclosure
Earth to Global Inflation
Jun/23/08 09:19 AM
Capital Economic provides us with some research and they sent us an interesting piece on how the resurgence of global inflation is raising fears of a return to the 1970s. They point out that the good news is that, there is little sign of commodity-led inflation becoming embedded in the economy via wage and price-setting behavior. With economic activity weak and labor markets softening, households will find it very hard to secure higher wage increases to compensate for higher prices.
This is good and it should allow the supply and demand responses to eventually bring commodity prices back down to earth.
Important Disclosure
ETF's and why some advisors avoid them
Jun/19/08 08:32 AM
Exchange Traded Funds (ETFs) have been around since
1993. They are not a new phenomenon in the financial
world, yet they are often overlooked by many of our
peers (other advisors). Oddly enough one of the Yale
Endowment’s biggest positions is an ETF. ETFs may be
a solid investment because of their low costs, tax
efficiency, and stock-like features, so why hasn't
the Investment Advisory community caught on?
It is not the case that investment professionals are unaware of the benefits of investing in ETFs. Many agree that they are one of the most cutting-edge investment tools in quite some time, however the problem seems to be that there are just too many. Investment Advisors are apprehensive about untested indexes and can be overwhelmed by the number of ETFs available, new and old.
Many Investment Advisors market themselves and pride themselves on the idea that they are able to pick the stocks that will perform best. An index, like one used in an ETF, would devalue the research and intelligence that Advisors believe goes into this stock selection.
Also, and perhaps most importantly, it is difficult to charge high fees when selling products that use an index. Another argument is that more and more young people coming out of business school are staying away from the Investment Advisory business and gravitating towards hedge funds and private equity firms. This would mean that Investment Advisory firms tend to be older and older advisors are more likely not to know or care what ETFs are.
Any way you look at it investment advisors have tended to neglect ETFs even though they can be a very advantageous investment tool and have been an important investment tool for university endowments.
Important Disclosure
It is not the case that investment professionals are unaware of the benefits of investing in ETFs. Many agree that they are one of the most cutting-edge investment tools in quite some time, however the problem seems to be that there are just too many. Investment Advisors are apprehensive about untested indexes and can be overwhelmed by the number of ETFs available, new and old.
Many Investment Advisors market themselves and pride themselves on the idea that they are able to pick the stocks that will perform best. An index, like one used in an ETF, would devalue the research and intelligence that Advisors believe goes into this stock selection.
Also, and perhaps most importantly, it is difficult to charge high fees when selling products that use an index. Another argument is that more and more young people coming out of business school are staying away from the Investment Advisory business and gravitating towards hedge funds and private equity firms. This would mean that Investment Advisory firms tend to be older and older advisors are more likely not to know or care what ETFs are.
Any way you look at it investment advisors have tended to neglect ETFs even though they can be a very advantageous investment tool and have been an important investment tool for university endowments.
Important Disclosure
Quotes from Bogle, Buffet, Graham, Lynch, Miller and Templeton
Apr/11/08 04:12 PM
I never grow tired of studying great investors. Here
are a few of my favorite quotes:
Warren Buffett - "Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."
John Templeton - "Invest at the point of maximum pessimism."
Peter Lynch - "Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide."
Benjamin Graham - "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."
John Bogle - "When reward is at its pinnacle, risk is near at hand."
Bill Miller - "The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."
Important Disclosure
Warren Buffett - "Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."
John Templeton - "Invest at the point of maximum pessimism."
Peter Lynch - "Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide."
Benjamin Graham - "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."
John Bogle - "When reward is at its pinnacle, risk is near at hand."
Bill Miller - "The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."
Important Disclosure
Bear Stearns
Mar/15/08 04:00 PM
I would imagine this is how investors who tried to
bottom pick Bear Stearns are feeling today:
Important Disclosure
Important Disclosure
Podcast on rough markets
Jan/22/08 04:05 PM
My dad and I had a conversation about the market
conditions after a rough few weeks in the markets.
To listen click on the link: Slowing US Economy
Update 10-24-08: As it turned out we were incorrect in our analysis. Fortunately our investment style involves little to no market timing. While we will always opinions, our indexing and diversification assumes that investors (including ourselves) cannot accurately predict market movements.
To listen click on the link: Slowing US Economy
Update 10-24-08: As it turned out we were incorrect in our analysis. Fortunately our investment style involves little to no market timing. While we will always opinions, our indexing and diversification assumes that investors (including ourselves) cannot accurately predict market movements.
Homebuilders Index off 68%
Sep/14/07 04:02 PM
While retail investors are selling out of their
REIT's and watching the value of their homes decline,
the smart money on Wall Street is gearing up to buy
everything on sale. The S&P Homebuilders index
(ETF: XHB) peaked in July of 2005 and has fallen 68%
since then. The real estate bust has sent individual
investors running for the hills, while veteran
investors like Warren Buffet, Bill Miller and The
Carlyle Group have rolled up their sleeves and
started buying into the weakness.
They have proven to be a bit early, but listen to what Bill Miller had to say in his recent letter to investors: "The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade."
While Buffet and Miller have focused on the homebuilders, other institutions are not shying from buying hard assets. Carlyle just finished raising $3 billion for a private equity fund and it plans to put it to work in a relative value strategy. The leverage will be low, they will only borrow $4 billion, giving them a total of $7 billion to invest. One thing's for sure, a weak dollar is making U.S. assets like real estate look more attractive to foreign investors and over the next few years their appetite for these discounted assets may be the stabilizing factor for the sector.
In 2005 the homebuilders index signaled the eventual real estate slow down. It acted as a leading indicator falling before other housing related stocks and as a result it is likely to be the first real estate sector to turn around. While the average individual investor is thinking, "real estate is just getting worse!" and the average institutional investor is saying, "I can't buy them because I need to make next month's numbers," investors with a longer time horizon, like Warren Buffet and Bill Miller, are likely to be well rewarded. Most people are calling for the real estate slowdown to continue into 2009 and 2010. If that prediction is true, it's likely that housing related stocks, and XHB, will bottom well before that time.
They have proven to be a bit early, but listen to what Bill Miller had to say in his recent letter to investors: "The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade."
While Buffet and Miller have focused on the homebuilders, other institutions are not shying from buying hard assets. Carlyle just finished raising $3 billion for a private equity fund and it plans to put it to work in a relative value strategy. The leverage will be low, they will only borrow $4 billion, giving them a total of $7 billion to invest. One thing's for sure, a weak dollar is making U.S. assets like real estate look more attractive to foreign investors and over the next few years their appetite for these discounted assets may be the stabilizing factor for the sector.
In 2005 the homebuilders index signaled the eventual real estate slow down. It acted as a leading indicator falling before other housing related stocks and as a result it is likely to be the first real estate sector to turn around. While the average individual investor is thinking, "real estate is just getting worse!" and the average institutional investor is saying, "I can't buy them because I need to make next month's numbers," investors with a longer time horizon, like Warren Buffet and Bill Miller, are likely to be well rewarded. Most people are calling for the real estate slowdown to continue into 2009 and 2010. If that prediction is true, it's likely that housing related stocks, and XHB, will bottom well before that time.