Rekenthaler on When to Buy Stocks Directly

In a recent Morningstar article, columnist and veteran fund researcher John Rekenthaler argued that novice investors should avoid the direct purchase of equities until they become “sufficiently educated.” Here are some of Rekenthaler’s key points: “The young investor who starts with stocks courts the danger of performing so badly as to become disillusioned, thereby abandoning equities.” “The math is unfavorable for the direct-equity investor,” Rekenthaler writes, explaining that market indexes are moved by a relatively… Read More

Morningstar Study: Which Investment Factors Work?

A recent article in Morningstar outlines results of a study the firm conducted on seven investment factors showing that volatility, size and momentum worked best. The article provides the following chart, which depicts each factor’s excess return on a cumulative basis (over 16 years): The article suggests focusing on the patterns illustrated: “The excess-return totals aren’t particularly meaningful,” it says, “because these factors cannot be purchased. They come attached to stocks, which in turn offer… Read More

Morningstar’s Rekenthaler on Economic Predictions

A recent article by John Rekenthaler of Morningstar begins: “Economic predictions are wonderfully useful…after the fact.” He discusses hindsight bias, and how “history gives a simple picture of that which was once complex.” To illustrate his point, Rekenthaler shares the results of a Merrill Lynch survey of 200 institutional investment managers across the world on various items to gauge their views on the biggest “tail risk”—that is, the item most likely to have caused a… Read More

Study Finds that Simple is Better in Mutual Fund Management

A recent study conducted by researchers at Queen’s University in Ontario shows that, on average, domestic stock mutual funds that use hedge fund strategies such as leverage, options and/or shorting underperformed their peers, writes John Rekenthaler in a recent Morningstar article. Using 17 years’ worth of U.S. mutual fund return data, the study delved into why this occurred. “As you may suspect,” writes Rekenthaler, “some of the shortfall owes to extra costs.” However, he says,… Read More

Rekenthaler Report: It’s Hard to Be Like Buffett

While every fund manager yearns for Buffett results, “most don’t mimic his investment approach” writes Morningstar’s John Rekenthaler in his September report. Concentrated, low-turnover portfolios are “not for everybody,” he says, and even when managers try to follow in the Oracle’s footsteps the results are often “dismal”. Rekenthaler says there are two dozen U.S. stock mutual funds that could be called Berkshire hopefuls based on their large-value or large-blend investment styles, fewer than 25 stock… Read More

Every Crisis is Different

It would be great if we could extract lessons from every financial crisis and then apply those lessons to avert future crises. Alas, writes Morningstar columnist John Rekenthaler, “The market’s turning points are never evident until after they have occurred.” That’s not to say, however, that some don’t read the writing on the wall and act accordingly. Rekenthaler writes, “Investors of various backgrounds figured out the housing bubble before it popped. Many more anticipated the… Read More

Rekenthaler: 3 Options for Outperformance

John Rekenthaler of Morningstar asks “what are the possible paths to outperformance?” and comes up with three options. Find the “market’s dummies”: First, he says, there is the “traditional approach” in which “there seems to be plenty of opportunity for the gifted minority to relieve the dumb of the burden of wealth.” But, Rekenthaler maintains, “it hasn’t worked that way.” Instead, “most of the stock market’s would-be wolves have instead been deceived sheep – dumb… Read More

The Trouble with Mean Reversion

Mean reversion is a key part of many investors’ strategies, and right now some are pointing to above-the-mean cyclically-adjusted price/earnings ratios as a sign that stocks are overvalued. But Morningstar Vice President of Research John Rekenthaler says mean reversion isn’t as simple as it may seem. If you take the current long-term mean and see where stocks were in relation to that mean in, say, 1992, it might look like it was an easy choice to buy… Read More