Given the opportunities that present themselves in volatile markets, this interview is particularly timely. Additionally, First Eagle Global, a fund Peter and Jason have used for a long time, has re-opened to new investors and may be of interest to some listeners. While value investing is nothing new, from Graham to Buffett those who do it well have been very successful. Charles is one who does it well and he shares his insights with our listeners.
We hope you enjoy this show, and here’s to your success!!!
Jason and Peter
They discuss the reasons many of us don’t fully address our financial planning needs and how we can overcome these problems. Dr. Cochran talks about handling our fears, procrastination, and the mindset that make some successful and others not.
This last topic, what Dr. Cochran refers to as “plenty vs. paucity”, is a powerful theory and she has made it her mission to educate the public on this topic. Dr. Cochran believes that each of us forms our basic understanding of the world and the opportunities it provides us in childhood and that from there on we are separated into two camps, those who view opportunities as endless and those who view them as finite. By recognizing which fundamental belief system we hold, and the repercussions of those beliefs, we can re frame our entire view of the world and benefit from the change. Although we only touch on this topic, it is something you will undoubtedly hear more about in the future.
The behaviors that Dr. Cochran and Jason discuss that prevent people from establishing a concrete financial plan are issues that each of us deal with to some extent. Every listener will identify with some part of this conversation and recognize these behaviors in friends and loved ones. The good news is that once identified, the reasons for inaction are overcome and each of us can move closer to our goals of maximizing our financial lives.
Dr. Cochran has a site which also contains her own podcast. You can reach it here.]]>
In short, Arnott identified a major problem with typical index investing and found a potential solution. The problem is that indexes are “cap weighted” so that companies that are overpriced make up more of the typical index than companies that are underpriced. Obviously since prices tend to revert towards their mean, or true value, this cap weighting hurts overall performance.
The problems with cap weighting were illustrated in 2000-2002. In 2000 the average stock was up, as it was in 2001 and 2002. But in 2000 and 2001 the indexes took a big hit. The reason for this was because technology stocks had become seriously overvalued, the prices were way too high. This overvaluation meant that their cap weight was very high, giving them a disproportionate weight in the index. Therefore when those stocks crashed, and because they had become such a large piece of the indexes, they brought the entire indexes down.
Had the indexes not been cap weighted, but weighted on traditional methods of determining size, the indexes would not have crashed. Arnott went beyond that to look back over 45 years to determine the difference in returns between a fundamental index and cap weighted index. He found that over that period of time, the fundamental index outperformed a cap weighted index by 2.2% per year, compounded. He also found that traditional risk measurements showed a fundamental index to be slightly less risky than the cap weighted index
Why do we cap weight stocks?
1. The markets are cap weighted, therefore cap weighted indexes represent the performance of the markets as a whole
2. It’s been done this way for a long time
3. It does better than the average actively managed fund
However, that does not mean it’s the most efficient way of weighting stocks. Arnott argues that sales, revenues, earnings, cash flow, assets, book value, dividends, number of employees, and other traditional methods of determining size of companies is more efficient. So fundamental indexing gives bigger weights to bigger companies, irrespective of stock value.
In short, a fundamental index weighs the company, not the stock price. It erases the problem of over weighting overvalued stocks and under weighting undervalued stocks.
When applied worldwide, it was found that fundamental indexing could improve international investing by 3%. Not only do stocks have bubbles but countries have bubbles too, therefore fundamental indexing works well not just on US stocks, but on a worldwide basis as well.
Find out more about Rob and Research Affiliates here Research Affiliates®
Articles on fundamental investing:
A better way to index? - October 30, 2006
Fundamental index funds merit a look - InvestmentNews
Index Wars (PowerShares FTSE RAFI U.S. 1000 Portfolio, SPDR Trust) | SmartMoney.com
PIMCO Bonds - Arnott Fundamental Indexing Interview
Wikipedia definition of fundamental indexing:
Fundamentally based indexes - Wikipedia, the free encyclopedia]]>
This episode of Pro Money Talk provides a high-level introduction to the valuable tax-advantaged savings plans available to business owners in the U.S. Our expert guest is Sam Harding, an Accredited Pension Administrator (APA) with more than 25 years of experience in retirement plan consulting and administration for small to mid-sized businesses. If you’re in business (even if you’re the sole employee of your company), or if you’re thinking of starting a business, you need to know about these potent savings tools.
Our discussion provides a roadmap, including definitions, of various retirement plans with a focus on so-called “qualified plans” that offer the biggest benefits for business owners and employees.
Revised plan contribution limits. Automatic enrollment (companies can choose to opt employees in to 401k plans).
A handy pdf document comparing various types of retirement plans as well as their advantages and disadvantages may be found here.
Sam Harding is the founder and President of Retirement Administration, Inc., based in Los Altos, California. Sam is an Accredited Pension Administrator (APA). He has served a three-year term on the Board of Directors of the National Institute of Pension Administrators (NIPA), and is the past president of the Northern California NIPA Chapter. Sam brings more than twenty-five years of experience in meeting the retirement planning needs of small to mid-sized companies. More information about Retirement Administration, Inc., may be found here.]]>
Steve is the editor-in-chief of Forbes magazine and CEO of Forbes Inc. You may remember that he ran in the presidential primaries in 1996 and 2000 on a platform that included the introduction of a flat rate income tax.
In addition to the flat tax, Steve is a strong supporter of free market thinking and restrained government spending. In this interview we talked to Steve about:
· His 17% flat income tax proposal.
· How low income Americans would pay no income tax.
· Avoiding estate, capital gains, and AMT taxes.
· Competing for jobs and industry in a global economy.
· The paradox of how a flat tax can lower individual income tax but raise tax revenues.
· Giving taxpayers a choice between tax systems to avoid fear of loss.
We wrap up the discussion with a quick take on the recently deceased Nobel laureate Milton Friedman.
For more information on Steve Forbes, the flat tax, and Steve’s book, Flat Tax Revolution, please see the links below.
Steve Forbes - Wikipedia
Flat Tax - Wikipedia
Flat Tax Revolution on Amazon]]>