Invest Better as a Contrarian

Comment posted to “Being a Contrarian Means Thinking Differently,” by Ken Fisher, in the July 2015 AAII Journal.

Ken Fisher’s contrarian definition, backed up by common sense, is an excellent investing approach. Unfortunately, generational amnesia and talking-head media types who get paid for linking daily events to stock market movements provide a steady stream of mostly useless analysis. We should all listen less to the know-it-alls and apply practical long-term strategies that ride above the noise. There are not enough nuts to satisfy all the blind squirrel investment analysts looking for their next meal.
—J. Yockers from Oregon

Issues With Model Shadow Stock Holding

Comment posted to “Major Rule Change Made to the Model Shadow Stock Portfolio,” by James B. Cloonan, in the July 2015 AAII Journal.

Global Power Equipment Group (GLPW) took a huge hit back in late April/early May and lost almost 50% of its value. I have seen some news that the company is facing litigation accusing it of misleading shareholders through their financial reporting.

How does the Model Shadow Stock Portfolio handle such cases? Perhaps they would not meet the standards for ownership or continued holding if the data was correct. If the litigation goes through, could it stand to lose more?
—Ryan from Georgia

Editor Charles Rotblut, CFA, responds:
Global Power found an error in how its cost of goods sold was calculated. We don’t know exactly what the error was and (as we send this month’s issue to the printer) are waiting for more information.

As far as litigation is concerned, it’s not uncommon for lawyers to jump on news of a financial restatement, but it does not mean an actual lawsuit has been filed or that it will be successful. Several of the press releases have been solicitations for a large shareholder to be a lead plaintiff.

The reason why we suggest holding at least 10 shadow stocks is to diversify against the risk of negative news headlines related to any single stock.

Cap-Weighted Index Misleading as Benchmark

Comment posted to “Is Outperforming the Market Alpha or Beta?,” by Larry Swedroe and Andrew Berkin, in the July 2015 AAII Journal.

I am curious about the notion that the various indexes represent an “efficient market.” I have been arguing for 50 years that a cap-weighted index leans against the security that diversification seeks. I am not a math genius, but it seems illogical to accept a cap-weighted index as a good benchmark. Too many changes are motivated by performance comparisons, which can be misleading.
—Bruce Sansom from Alberta

Voting Proxy to Make a Statement

Comment posted to “Proxy Voting for Individual Investors,” by Robert Stein, in the July 2015 AAII Journal.

Except in the case of a corporate raider, I tend to vote against what the board would want even on the most trivial issues, such as the appointment of an accountant. There is far too little dissent in these elections; more board members would sit up and take notice if they saw a “nay” vote. I don’t have enough shares to swing an election, so I can at best raise a caution flag.
—Clinton Dawkins from New York

Long-Term Care and Annuities

Comment posted to “Using Annuities for Long-Term Health Care,” by Stan Haithcock, in the July 2015 AAII Journal.

Please explain this sentence: “It’s important to point out that this type of coverage does not have the same tax benefits as traditional long-term care insurance and should never be used as primary coverage.” I am assuming the author is referring to a federal tax benefit?
—John Wiltse from Nebraska

Stan Haithcock responds:
What I am referring to is that income riders attached to deferred annuities (typically variable or fixed index) do not have any tax benefits. Any money coming out is taxed at LIFO (last in, first out) ordinary income levels. That goes for both state and federal tax purposes. The statute referred to addresses pure long-term care products (actually a health insurance product), not income riders attached to variable or indexed annuities (which is a life insurance product).

Related

Mutual Funds

How to Measure the Skills of Your Fund Manager

Related

Trading Strategies

Is the AAII Sentiment Survey a Contrarian Indicator?

Related

Financial Planning

Sorting Through Your Portfolio Mail