Stocktake

Warren Buffett, we're told, is having a disastrous time.

His Tesco shareholding has cost him dearly in recent months, while last week he lost more than $2 billion in two days after the market punished IBM and Coca-Cola following disappointing earnings.

Buying Tesco, Buffett has admitted, was a “huge mistake”, and he recently reduced his stake in the struggling retailer.

However, his attitude to Coke’s share price swings is likely to be very different. Coke has made billions for Buffett since he first bought its stock in 1988 – remember, Buffett says his favourite holding period is forever – and remains some 150 per cent higher than in 2009.

As for IBM, its shares are slightly below the $170 Buffett originally paid for them in 2011.

However, Buffett said at the time he hoped IBM shares would “languish throughout the next five years”.

Why? Because of its stock buyback programme.

If you are going to be a net buyer of stocks in the future, whether directly with your own money or indirectly through buybacks, “you are hurt when stocks rise”, he noted, and “benefit when stocks swoon”.

Consequently, he calculated his shareholding would be worth more if the stock price averaged $200 rather than $300.

The buybacks mean Buffett now owns 7 per cent of IBM, compared to 5.5 per cent in 2011. Not such a bad week after all. Ebola no threat to stocks All kinds of fanciful reasons have been cited for recent market volatility.

Take Ebola. FactSet noted last week that out of 68 earnings conference calls by S&P 500 companies, Ebola was mentioned by just six firms. Only one suggested it might negatively impact operations.

In contrast, Europe was cited in 44 conference calls, with 20 citing a negative impact.

The strong dollar was an even bigger concern, 29 companies expressing negative sentiment towards it.

Whenever markets dive, commentators latch on to whatever bad news story they can find – Isis! Ebola! China! – and pin the blame on one or all of them, as if every market move must be neatly explained away.

Investors should question such simplistic narratives, and ask, why now? Is this concern new?

Is it a shock, something not already priced into stocks? Are there obvious financial implications?

Or is it, like in the case of Ebola, just another case of storytelling?

Halloween treat for investors? October lived up to its reputation as a volatile month, but the so-called Halloween indicator suggests markets are heading into a period of seasonal strength.

Since 1950, all market gains have come over the November-April period.

A $10,000 investment in the Dow Jones Industrial Average compounded to almost $700,000, compared to a small loss for the May-October period.

Nor is it some weird US phenomenon. Global returns have averaged 6.9 per cent compared to just 2.4 per cent from May through October, one study noted, with the anomaly found in 81 of 108 countries analysed and only two countries bucking the trend.

It’s especially evident in western Europe, the Halloween-based trading strategy beating a buy-and-hold approach in 90 per cent of 10-year periods.

Many explanations have been offered, but few stand up to scrutiny.

Whatever the reason, embattled investors will hope history repeats itself in coming months.

US priced to perfection US stocks will barely beat inflation over the next 10 years, according to high-profile investment firm Research Affiliates, but European and emerging markets look like good bets.

The S&P 500's hefty valuation means US stocks will produce real annual returns of just 0.7 per cent, it estimates, but indices in Britain, Italy, Spain, China and Brazil should deliver inflation-adjusted annual returns ranging from 5 to 9 per cent. Those with strong stomachs might buy into unloved Russia – it's priced to yield annual returns of 13.8 per cent, meaning a near quadrupling over the next 10 years is possible.

Bigots lose out on gains Anti-Semitism, a new study finds, is bad for your wallet.

German people living in areas where Jews were most likely to be sent to concentration camps are 7.5 per cent less likely to invest in stocks today, according to the study. Those living in districts where pogroms took place as far back as the 14th century are 12 per cent less likely to invest in stocks.

Why? Jewish people have long been associated with financial services. Resented for their supposed control of finance, this led to distrust of finance becoming a cultural norm, one “transmitted across generations”.

The irony is reduced exposure to stocks is obviously bad for one’s financial health.

“Persecution of minorities reduces not only the long-term wealth of the persecuted,” the study concludes, “but of the persecutors as well”. See http://goo.gl/ukAEf0