Proof That Chasing Performance Does Not Work

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One of the reasons most retail investors perform so poorly in stock investing is that they tend to chase performance. Investors always go with the hottest theme or stock that driving the markets at any given time. During the late 1990s it was tech stocks, energy and security stocks after the 9/11 attacks, banking and other financial stocks leading up to the global credit crisis,  etc. When more investors chase the same stock or fund or a theme prices go up to unsustainable levels and at some time the mania ends and the bubble bursts.

Investing in markets is about buying low and selling high. Many investors end up doing the opposite by chasing performance. The disastrous effect of chasing performance is shown in the chart below:

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Chasing-Performance-Bad-Idea

Source: Desparately Seeking Safety, Seth J Masters, Alliance Bernstein

The average stock investor earned less than half of the annualized total returns generated by the S&P 500 from 1992 thru 2011. The average bond investor performed even worse earning less than 1% compared to the U.S. bonds return of 6.5%.

The main reason for the poor performance of the average investor is that they sold stocks and bonds that performed poorly to buy stocks and bonds that performed well. This led them to sell low and buy high.

So the key takeaway from this post is that investors should always stay clear of the hottest trend in the market and instead focus on buying low and selling high.

Related ETFs:

SPDR S&P 500 ETF (SPY)
SPDR Gold Trust ETF (GLD)
iShares Silver Trust ETF (SLV)
United States Natural Gas Fund (UNG)
United States Oil Fund (USO)

Disclosure: No Positions

The Top 10 African Banks by Profit

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The January edition of The Banker magazine has published the list top ranked banks in Africa under many categories. The Top 10 African banks by Profit in the full year of 2011 are shown in the table below:

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Top-10-African-Banks-by-Profit

Source: The Banker

South African banks dominate the list taking 6 of the 10 spots. Standard Bank Group (SGBLY) made the most profits. It is worth noting that the five biggest banks in the continent are also from South Africa. However banks from other countries are trying to catch up. Egyptian banks with the second biggest banking market in Africa hold only less than 1/3rd of the total assets held by South African banks.

Three of the above five South African trading on the US OTC markets are listed below with their current dividend yields:

1.Company: Absa Group Limited (AGRPY)
Current Dividend Yield: 4.74%

2.Company: Nedbank Group Ltd. (NDBKY)
Current Dividend Yield: 3.87%

3.Company: Standard Bank Group Limited (SGBLY)
Current Dividend Yield: 9.19%

Note: Dividend yields noted are as of Feb 8, 2013

Disclosure: Long NDBKY

Why Invest in Mid-Cap Stocks via ETFs

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Thousands of mid-cap companies trade on the US markets. These companies generally tend to have small market caps of $1 billion to $5 billion. Though the actual definition of mid-cap companies varies,  they can be considered as firms that are neither huge such as the giants with multi-billion market caps or very small with a few million dollar market caps or start-up companies. Investing in these middle of the range companies is extremely tricky and investors are better off investing in them via ETFs.

Some of the reasons to invest in mid-cap stocks using ETFs are listed below:

  • Mid-cap stocks are extremely volatile and investing in ETFs reduces the volatility risk.
  • It is very difficult to follow and keep track of all the news and earnings releases from these firms.
  • Individual mid-cap stocks are very risky to invest since picking the winners from so many choices is not easy.
  • Some of these companies have low trading volumes which makes them volatile and difficult to trade.
  • Many of these mid-caps do not pay dividends or have very low dividend yields making them unattractive for dividend reinvestment for higher returns.
  • As the dividend yields are tiny or zero, they are not income producing investments. Hence they are not preferred by income investors.
  • Diversification benefits offered by an ETF are simply impossible to replicate for retail investors.
  • Investing in mid-caps through mutual funds is an expensive proposition as mutual fund companies charge higher fees for these funds.

Some of the ETFs to invest in the mid-cap space include:

  1. S&P MidCap 400 SPDR ETF (MDY)
  2. iShares Russell Midcap Index Fund (IWR)
  3. iShares S&P MidCap 400 Index Fund (IJH)
  4. iShares Russell Midcap Growth Index Fund (IWP)
  5. Powershares Dynamic Mid Cap Growth Portfolio Fund (PWJ)
  6. Powershares Dynamic Mid Cap Portfolio Fund (PJG)
  7. Schwab U.S. Mid-Cap ETF (SCHM)
  8. SPDR Dow Jones Wilshire Mid Cap ETF (EMM)
  9. SPDR S&P 400 Mid Cap Growth ETF (MDYG)
  10. Vanguard Mid-Cap ETF (VO)
  11. Vanguard Mid-Cap Growth ETF (VOT)
  12. Vanguard S&P Mid-Cap 400 ETF (IVOO)
  13. Vanguard S&P Mid-Cap 400 Growth ETF (IVOG)

Disclosure: No Positions

The 20 Most Popular UK Equity Income Stocks

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FE Trustnet recently published a research report listing the most popular UK income stocks held by UK Equity Income Funds. The 20 stocks in the list are all members of the FTSE 100 index. According to the report, AstraZeneca, Centrica and Imperial Tobacco are the highest-conviction plays among UK Equity Income managers.

The most popular UK equity income stocks are listed below with their ticker on the US market and the current dividend yields:

S.No.CompanyTickerDividend Yield as of Feb 8, 2013
1GlaxoSmithKlineGSK5.16%
2Royal Dutch ShellRDS-A5.10%
3VodafoneVOD5.56%
4BPBP5.00%
5HSBCHBC3.17%
6British American TobaccoBTI4.06%
7AstraZenecaAZN5.90%
8Imperial TobaccoITYBY4.63%
9BTBT3.30%
10CentricaCPYYY4.54%
11BHP BillitonBBL2.87%
12UnileverUL3.16%
13Legal & GeneralLGGNYX4.49%
14Rio TintoRIO2.88%
15BAE SystemsBAESY5.57%
16TescoTSCDY4.04%
17Reed ElsvierRUK3.15%
18National GridNGG5.79%
19BG GroupBRGYY1.41%
20DiageoDEO2.41%

 

Source: The most-popular stocks with UK Equity Income managers, FE Trustnet

British companies have traditionally paid out a larger portion of their earnings as dividends compared to US firms.The country dividend yield for U.S. and UK as of Feb 7 is 2.1% and 3.3% respectively per FT market data. The dividend yield of the S&P 500 has stayed around 2% for many years now. High dividend yields and no withholding taxes on dividends for US residents make British income stocks attractive to US investors.

Except HSBC none of the other top British banks appear in the list above. HSBC weathered the global credit crisis well and has a strong presence in the US market. Imperial Tobacco and British American Tobacco have consistently paid out high dividends and are perennial favorites for income investors and fund managers alike. Overall US investors looking to add British dividend stocks to their portfolios can use the stocks listed as a starting point.

Disclosure: Long LGGNY

Why Invest In Oil Well Services and Equipment Companies

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One of ways to profit from the growth of oil industry in the U.S. is to invest in companies that supply the tools and services needed by the industry. This strategy is similar to the one followed by some investors that became rich by investing in picks and shovels rather than the gold miners during the great California gold rush of the 1800s.  Here are five reasons why investing in oil well services and equipment providers is a sound idea:

  • The big oil majors such as ExxonMobil (XOM), BP Plc (BP), Chevron (CVX),  etc. prefer to contract out work related to servicing of their rigs, maintenance of pipelines, construction, etc. to other companies who specialize in those areas
  • The services and technology offered by the service and equipment providers are hi-tech and cannot be easily replicated by new entrants in the field.
  • In addition to the U.S. market firms in the industry have presence abroad and have the potential from growth in overseas markets.
  • New discoveries of oil sources by the oil exploration and producing companies provide additional opportunity for growth.
  • Natural disasters, man-made disasters, terrorism,  etc.  affecting oil wells and pipeline systems offer additional businesses to these firms on a regular basis.

Five randomly-selected oil well services and equipment providers are listed below for further research:

1.Company: Baker Hughes Inc (BHI)
Current Dividend Yield:1.31%

2.Company:Diamond Offshore Drilling Inc (DO)
Current Dividend Yield: 0.67%

3. Company: McDermott International Inc (MDR)
Current Dividend Yield: N/A

4. Company: Nabors Industries Ltd (NBR)
Current Dividend Yield: N/A

5. Company: Transocean Ltd (RIG)
Current Dividend Yield: N/A

Disclosure: No Positions