Thursday, July 24, 2014
FAIRFIELD-SUISUN, CALIFORNIA
99 CENTS

Diversity an investor’s best friend

sievers column sig

By
From page B8 | February 17, 2013 |

One of the most important insights about investing is that you are only one of a multitude of people trying to do well.

You may be smart but are you astute enough to recognize an opportunity far enough in advance to actually do something about it? Trying to pick investments that are superior is a daunting task and every study shows that humility is a good addition to an investment strategy.

To illustrate, hark back to New Year’s Day 2012. In addition to overdosing on televised college football, you spend part of the holiday working on the family finances. Armed with a laptop and various online financial tools, you’re on the hunt for appealing stock market opportunities.

To prune the list of candidates to a manageable size, you decide to focus on firms that are leaders in their respective industries and exhibit above-average scores on various measures of financial strength. As you work your way through the alphabet, you come to the “P” stocks, and another candidate appears. It’s a prominent player in a major industry (good), but operates in a notoriously cyclical industry (not so good), is currently losing money (definitely not good), pays no dividend, and has a junk-bond credit rating of BB-minus.

Next! You push the “delete” key and move on.

Congratulations. You just passed up the best-performing stock in the entire S&P 500 Index for 2012.

Shares of PulteGroup Inc., a Michigan-based homebuilder with a 60-year history, jumped 187.8 percent last year amid strong performance for the entire industry. For the year ending Dec. 31, 2012, all 13 homebuilding firms listed on the New York Stock Exchange outperformed the S&P 500 Index by a wide margin, with total returns ranging from 34.1 percent for NVR, Inc. to 382.8 percent for Hovnanian Enterprises, Inc. The Standard & Poor’s SuperComposite Homebuilding Sub-Index rose 84.1 percent in 2012 compared to 13.4 percent for the S&P 500 Index.

The point? For those seeking to outperform the market through stock selection, underweighting the market’s biggest winners can be just as painful as overweighting the biggest losers. Investors are often caught flat-footed by stocks that do much better or much worse than the broad market, and the problem is not limited to individuals.

Not one of the 10 seasoned professionals participating in Barron’s annual Roundtable stock-picking panel in early January 2012 mentioned homebuilding stocks or any housing-related firms.

The recent surge in housing shares also serves as a reminder that stock prices are forward-looking and tend to rise or fall well in advance of clear changes in company fundamentals.

Investors who insist on waiting for evidence of healthy profits before investing are often frustrated to find that a firm’s stock price has appreciated dramatically by the time the firm begins to report cheery financial results. Shares of Hovnanian Enterprises, for example, rose 580 percent between Oct. 7, 2011, and Dec. 31, 2012, even though it continued to report losses. Similarly, it is not unusual for a firm’s stock price to decline long before signs of trouble become obvious.

The behavior of the S&P Homebuilding Sub-Index in recent years illustrates the challenge of relying on industry characteristics to provide a reliable guide to the direction of stock prices. Many observers in recent years predicted that a recovery in the housing industry would be agonizingly slow, and they were right. Many investors in recent years have avoided housing stocks as a consequence, and they’ve been wrong: Housing stocks have outperformed the broad U.S. stock market by a healthy margin from the market low in March 2009 to the present day.

The lesson: Markets have 101 ways to remind us of Nobel laureate Merton Miller’s observation that diversification is the investor’s best friend.

Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from UC Berkeley. Contact him at mark@wealthmatters.com.

LEAVE A COMMENT

Discussion | No comments

The Daily Republic does not necessarily condone the comments here, nor does it review every post. Read our full policy

.

Solano News

 
City buys PG&E property for train station project

By Ryan McCarthy | From Page: A1

Artists with trowels transform highway wall

By Barry Eberling | From Page: A1, 1 Comment | Gallery

 
 
County court employees rally against cuts, furloughs

By Jess Sullivan | From Page: A3 | Gallery

Crews to begin Vacaville slurry seal street project

By Susan Winlow | From Page: A3

 
2nd candidate eyes Vacaville mayoral run

By Susan Winlow | From Page: A3 | Gallery

Bertani schedules town hall meet

By Amy Maginnis-Honey | From Page: A3

 
Inmate wants $47,657 for artwork he says guards took

By Ryan McCarthy | From Page: A4

Incumbent Hunt to run for Vacaville council seat

By Susan Winlow | From Page: A4

 
Vacaville police arrest fugitive Dezmon Frazier

By Amy Maginnis-Honey | From Page: A4

Accused foster father testifies in murder trial

By Jess Sullivan | From Page: A4

 
Sesame Street USO tour visits Travis

By Staff Sgt. Christopher Carranza | From Page: A5 | Gallery

Fairfield police log: July 21, 2014

By Susan Hiland | From Page: A10

 
Weather for July 24, 2014

By Daily Republic | From Page: B10

Fairfield police log: July 20, 2014

By Susan Hiland | From Page: A10

 
Suisun City police log: July 22, 2014

By Susan Hiland | From Page: A10

Suisun City police log: July 21, 2013

By Susan Hiland | From Page: A10

 
Suisun City police log: July 20, 2014

By Susan Hiland | From Page: A10

Fairfield police log: July 22, 2014

By Susan Hiland | From Page: A10

 
.

US / World

Lawsuit tests racial policy at California prisons

By The Associated Press | From Page: A1, 2 Comments

 
40 bodies from jet solemnly returned to Dutch soil

By The Associated Press | From Page: A10

Honduran families deported back to a bleak future

By The Associated Press | From Page: A10

 
Lockdown lifted at Little Rock Air Force Base

By The Associated Press | From Page: A10

US pushes for truce as Gaza battle rages

By The Associated Press | From Page: A10

 
Casualty numbers raise questions about Gaza war

By The Associated Press | From Page: A10

.

Opinion

Good men lost due to Bergdahl

By Letter to the Editor | From Page: A7

 
Is Logue tripping over words?

By Letter to the Editor | From Page: A7

 
.

Living

Community Calendar: July 24, 2014

By Susan Hiland | From Page: A2

 
Today in History for July 24, 2014

By The Associated Press | From Page: A2

Horoscopes for July 24, 2014

By Holiday Mathis | From Page: A9

 
.

Entertainment

4-day Comic Con festival kicks off in San Diego

By The Associated Press | From Page: A6

 
Filmmaker Michael Moore’s divorce is finalized

By The Associated Press | From Page: A6

CBS says Colbert keeping CBS’ ‘Late Show’ in NYC

By The Associated Press | From Page: A6

 
CBS event marks civil rights anniversary

By The Associated Press | From Page: A6

.

Sports

Pence drives in 3, Giants beat Phillies 3-1

By The Associated Press | From Page: B1 | Gallery

 
Raiders start to arrive for start of camp

By The Associated Press | From Page: B1

Tight end Vernon Davis arrives at 49ers training camp

By The Associated Press | From Page: B1

 
Cespedes hits 2 HRs, A’s hold off Astros 9-7

By The Associated Press | From Page: B1

Big innings fuels 16-1 Expos victory in Area 1 opener

By Paul Farmer | From Page: B1 | Gallery

 
Testimony ends in trial over $2B Clippers sale

By The Associated Press | From Page: B2

Playful Pole wins Tour stage, as Nibali marches on

By The Associated Press | From Page: B2

 
4 Cities to meet with USOC about 2024

By The Associated Press | From Page: B2

Mavericks’ Felton pleads guilty in NYC gun case

By The Associated Press | From Page: B4

 
Chiefs, running back Jamaal Charles reach deal

By The Associated Press | From Page: B4

Seattle’s Sidney Rice announces his retirement

By The Associated Press | From Page: B4

 
Broncos owner giving up control due to Alzheimer’s

By The Associated Press | From Page: B4

.

Business

Stopping deadly oil train fires: New rules planned

By The Associated Press | From Page: A1

 
US economy, though sluggish, may now be sturdier

By The Associated Press | From Page: B5

GM issues 6 more safety recalls

By The Associated Press | From Page: A10

 
.

Obituaries

Mary Bell Scrivner Sanders

By Nancy Green | From Page: A4

 
Arturo Montenegro

By Nancy Green | From Page: A4

Joseph Ross Smith Jr.

By Nancy Green | From Page: A4

 
Shirley T. ‘Mac’ McFadden

By Nancy Green | From Page: A4, 5 Comments

.

Comics

Frank and Ernest

By Daily Republic Syndicated Content | From Page: A8

 
Dilbert

By Daily Republic Syndicated Content | From Page: A8

Garfield

By Daily Republic Syndicated Content | From Page: A8

 
Baby Blues

By Daily Republic Syndicated Content | From Page: A8

Rose is Rose

By Daily Republic Syndicated Content | From Page: A8

 
B.C.

By Daily Republic Syndicated Content | From Page: A8

Beetle Bailey

By Daily Republic Syndicated Content | From Page: A8

 
Peanuts

By Daily Republic Syndicated Content | From Page: A8

Baldo

By Daily Republic Syndicated Content | From Page: A8

 
Wizard of Id

By Daily Republic Syndicated Content | From Page: A8

Blondie

By Daily Republic Syndicated Content | From Page: A8

 
For Better or Worse

By Daily Republic Syndicated Content | From Page: A8

Pickles

By Daily Republic Syndicated Content | From Page: A8

 
Crossword

By Daily Republic Syndicated Content | From Page: A9

Sudoku

By Daily Republic Syndicated Content | From Page: A9

 
Bridge

By Daily Republic Syndicated Content | From Page: A9

Cryptoquote

By Daily Republic Syndicated Content | From Page: A9