AAII Investor Update: Returns and the Full Story

Thursday, January 12, 2012
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

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Look For

You can use fund statements to your advantage.

Believing Performance Claims
When is a return too good to be true? Mark Hulbert ran the numbers.

AAII Discussion Boards
Over what time period do you analyze fund manager performance?

Most Popular AAII Articles

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  3. “2011 Year-End Screening Review: A Difficult Year for Stocks and Strategies”
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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 49.1%, up 0.3 points
  Neutral: 33.7%, down 0.3 points
  Bearish: 17.2%, unchanged

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »


Three-year total returns for stock mutual funds jumped last quarter. The average annualized gain was 16.8% as of December 31, 2011. This compares to an average annualized three-year gain of 2.0% at the end of September 2011 for the large-cap, mid-cap and small-cap funds tracked for our Quarterly Low-Load Mutual Fund Update.

You can credit the calendar for this improvement. Three-year returns are moving past the bear market. They now just include the final two quarters of the last bear market. Thus, the returns are factoring in a low starting point and a significant rise from that point. Deleted from the calculations are declining stock prices from the first three quarters of 2008.

It is a timing issue that ties performance to the period looked at. One-year and five-year returns are nowhere near as good as the three-year returns are. Yet my expectation is that we will see several funds, newsletters and advisors start to tout their three-year performance. It makes for good marketing, but not good investment analysis.

It also brings up an interesting question: What period should you look at? The answer depends in part on what you are trying to analyze. For fund (and advisor) performance, look at one-, three- and five-year performance. Ten-year performance can be valuable if the fund manager and his methodology have not changed. I would also look at returns during the most recent bull and bear market periods to get a sense of both volatility and how the manager does during good and turbulent market conditions.

In terms of analyzing a specific company, five years’ worth of data is a good period of time to draw conclusions. I usually extend the analysis to six years for revenue, earnings and cash flow analysis just so I can calculate five full years of changes (e.g., the annual revenue growth five years back). There is nothing magical about using five years, but five often is long enough to include different economic conditions. An argument for a longer time period could be made, but you need to be careful that industry and competitive conditions have not significantly changed. Six years ago, earnings for Nokia (NOK) or Research in Motion (RIMM) were not affected by competition from Apple (AAPL) or Google (GOOG).

Also be sure to take into consideration the conditions that existed over the time period you are analyzing. For example, most companies grew revenues and earnings over the past two years because of global economic expansion. This is why it is important to include qualitative analysis with your quantitative analysis. Understanding the factors that influenced the numbers helps you determine whether the data is good or bad and if it tells the full story.

More on AAII.com

Update to the Popular Tortoriello Article

Many of you have asked about how to screen for stocks based on the characteristics listed in Richard Tortoriello’s May 2010 article, Quantitative Strategies for Selecting Stocks. We have posted the criteria used by John Bajkowski for his Tortoriello’s Quantitative Strategies article on AAII.com. You can directly download the spreadsheet with the instructions.

The Week Ahead

The U.S. financial markets will be closed on Monday, in observance of Martin Luther King Jr. Day.

Six Dow components will report earnings next week. American Express (AXP), Bank of America (BAC), Intel (INTC), International Business Machine (IBM) and Microsoft (MSFT) are scheduled to report on Thursday. General Electric (GE) will release its results on Friday. Joining them will be approximately 40 other members of the S&P 500.

(If you use an online earnings calendar, such as the ones published by Yahoo! Finance, MarketWatch or Earnings.com, double check the release date with the company you are following. I’ve noticed incorrect dates, such as Charles Schwab (SCHW) scheduled for Monday (a date has not been formally announced). You can confirm the date by going to the investor relations section of a company’s website.)

The week’s first economic report will be the January Empire State manufacturing survey, which will be published on Tuesday. Wednesday will feature the December Producer Price Index (PPI), January industrial production and capacity utilization and the January National Association of Home Builders housing market index. The December Consumer Price Index (CPI), December housing starts and building permits, and the January Philadelphia Fed survey will be published on Thursday. Friday’s lone report will be December existing home sales.

The Treasury Department will auction $15 billion of inflation-protected bonds (TIPS) on Thursday.

No Federal Reserve officials are currently scheduled to speak.

January stock options will expire on Friday,

AAII Sentiment Survey

Bullish sentiment edged up slightly, while bearish sentiment stayed at unusually low levels in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 0.3 percentage points to 49.1%. This is the highest level of optimism registered by the survey since February 10, 2011, when bullish sentiment reached 49.4%. The historical average is 39%.

Neutral sentiment, expectations that stock prices will remain unchanged over the next six months, slipped 0.3 percentage points to 33.7%. Even with the decrease, neutral sentiment is above its historical average of 31% for the third time in the past four weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, was unchanged at 17.2%. Pessimism not only stayed at its lowest level since December 23, 2010, it also remained at a reading that is more than one standard deviation below the historical average of 30%.

The positive start to 2012 is keeping individual investors hopeful about the short-term direction of stock prices. The survey results also continue to reflect an overall improvement in moods with bullish sentiment now above its historical average for nine out of the last 14 weeks. Even with the improvement in sentiment, individual investors still remain concerned about the pace of economic growth, Washington politics and the European sovereign debt crisis.

» Take the sentiment survey



Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor