This morning’s common E-mail concern wondered: “Is this the actual point?” The reference was towards the Media applauded 5 month spurt from the Dow Jones Industrial Regular (DJIA), an progress into the maximum levels in about four yrs, but nonetheless miles from an All Time Higher (ATH). The that means within was much, significantly larger — speaking mainly because it does to some essential misconceptions quite a few people have within their approach go to inventory current market investing.
Traders manage to think that (1) the favored averages (the Dow and S & P 500) accurately reflect the direction of the entire inventory market place; (2) that the Dow contains only the best of the best US companies; (3) that most professional money managers are unlikely to outperform the market place averages; (4) that personal investment portfolio sector values are married into the market averages.
Actually, the sector averages reflect what investors expect from the economy, interest rates, politics, climate change, and a lot of other variables. They are also trailing indicators of what buyers actually know about things such as corporate earnings, tax policy, unemployment rates, and regulation. The industry averages report the direction and show the trend of past prices of the limited number of securities they contain, and are subject to massive short term gyrations caused by all kinds of current events.
The DJIA contains just 30 stocks, twenty-seven NYSE and three NASDAQ. The S & P 500 is much more diverse, but neither is designed to reflect the price performance of any particular mix of securities based on the quality of their earnings or the safety of their dividends. The “Blue Chip” Dow common, for example, contains 17 stocks that are less than “A” rated and 13% of the companies are rated below investment grade.
The Investment Grade Value Stock Index (IGVSI) is designed to report the historical price movements of NYSE, B+ and better rated, dividend paying US companies. At the moment, there are only 352 companies that qualify — so at least 30% of the S & P 500 cannot possibly contain Investment Grade Value Shares. The actual number is less than half. Over the past several many years, the IGVSI has outperformed the popular averages significantly.
Most professional money managers are in charge of public-access, open-end Mutual Funds. Their decision making is influenced by their corporate investment committees, performance ranking agencies, and the uninformed, ill-trained, investment public that is up to its armpits in self directed IRA, 401(k), and other investment portfolios. Most buyers are required to use open-end mutual funds; the remainder are encouraged to use passive speculation vehicles — go figure!
When the lemmings head for the cliffs, managers must sell securities; when greed infects the masses, managers must buy into the bubble. It is not the managers who underperform the averages, it is their bosses on Wall Street and on Main Street who are always push-pulling within the wrong direction. Sector Cycle Investment Management (MCIM) users are likely to outperform the markets over the course of most industry cycles.
Personal portfolio market place values are a function of their investment system, content, and management. Clearly, those that are passively managed (an oxymoron) and/or managed by the mutual fund mob can expect only to mirror the sector averages. However, investment portfolios can be self-directed for better results.