Thursday, January 10, 2013

Chinese Stock Fraud Alert

Click here to view an excellent video report from ABC News Nightline last night regarding several fraudulent Chinese stocks trading on the NASDAQ and New York Stock Exchange.  More American money has been lost on these frauds than the Bernie Madoff fraud.

What is incredible to me is how brazen the frauds have been.  Where are the regulators?  Clearly there is little due diligence being performed by the stock exchanges or the US Securities and Exchange Commission (SEC).  This is the downside to the theory that free market capitalism will self regulate.  Free markets will self regulate - in the long run.  But, many folks may get hurt in the short run. 

We must remind ourselves, that just because a stock trades on NASDAQ or the New York Stock Exchange does not mean it has anyone's seal of approval.  Investing in any company requires looking at the financial statements and making sure the auditor's report states that the financial statements can be relied upon.  Also, the auditor should be well-known.  After all, even Bernie Madoff had a clean auditor's report.  However, Madoff's auditor was a one-man firm not even located in New York City.   Click here to see a list of large, reputable audit firms

The lesson here is that investing in so-called "emerging markets" is best left to professionals.  Also, I should point out that the diversification benefits of emerging market stocks on a well diversified portfolio are small and can be outweighed by the expenses, complexity, and risks involved.  

Monday, January 7, 2013

Historical Asset Class Returns 2012

Almost everything one needs to know about investing can be found in this chart. It is worth studying for several minutes.  This is a re-post from last year with updated chart returns through 2012.  2012 was a good year for investors in general, and very good for stocks in particular.

The chart above shows the last 15 years of investment returns by asset class. On the far right I have calculated the 20-year average for each asset class and pointed out the best and worst annual returns for the past 20 years for each asset class.  I love this chart - which is why I put it on the back cover of every book I have written.  Almost everything you need to know about investing can be learned from this chart:
  1. Stocks beat bonds over the long-run.  In the far right columns of the chart you will notice that all 4 of the major stock classes have a higher 20-year average return than all 4 of the major bond classes. You will notice that the various stock classes averaged 10-13% annual returns over 20 years while the various bond classes averaged just 5-8%.  
  2. Stocks don't beat bonds EVERY year, but they win about 75% of the time.  You will also notice that a stock class claimed the top spot in 11 out of the past 15 years (and 16 out of the past 20 years).