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Investment News and Trends

John Bogle Gives His Take on the Nervous Market

In a recent media interview, John Bogle, founder of The Vanguard Group gave his reaction on how to deal with the nervousness in the stock market. "As an investor, if you have your asset allocation right, certain amount in stocks and in bonds, I would do nothing. I would ride it out. Because in the long run when you think about the stock market, business returns. Corporations earn more year after year. That is likely to happen."

Bogle notes why it's important to stay put. "If you want to get out of the market, you have to be right twice. You have to get out at the right time and you have to get in at the right time. The odds of doing that successfully are not high."

But Bogle believes that speculators should be nervous. "I might even say to them, ‘get out.' There is a lot of risk out there, not all of which has been uncovered. The volatility in the market as I look at the numbers is totally without precedent in the history of the stock market."

More Volatility than Ever

Bogle points out that when he came into the investment business and for decades after, "maybe three or four days of the year did you get a move in the market up or down 2%. In the past four months we have had 14 of them, five up and nine down." Bogle comments that no matter what the data say (and he distrusts some of the government's reports), anything can happen in the current securities markets. "So this gives the speculator something to worry about."

Bogle sees the odds now tilting toward a recession. People are spending less and are not borrowing against home equity which was a huge force during the recent economic boom.
He adds, "I see consumer confidence diminishing."

Merrill, JP Morgan, Lehman Place Bets on Climate Change

Many of the large private banks are beginning to advise their clients of the negative investment consequences and of the opportunities climate change presents.

"Going forward, we believe companies will find it harder to hide behind bad environmental habits while governments impose legislative changes, investors become more engaged in these issues and demand more transparency on the supply chain," says Zoe Knight. Knight is head of socially responsible investment research for Merrill Lynch and author of the study, "Combating Climate Change - Opportunities and Risks." The report outlines some of the harsh consequences of climate change including global warming, decreases in water availability, declines in crop yields, increased risk of flooding, disease and more.

Investors Seek Greater Corporate Transparency

The Merrill report also describes the very important Carbon Disclosure Project, a formal effort by investors to gain access to GHG (greenhouse gas) emissions data. Some 2400 large corporations were sent questionnaires and asked to report on emissions and related issues. Investors hope the data will help them compare newly set environmental valuation measures and force companies to be more proactive on the issue.

"Companies which are aware of the impact their business practices have on the overall environment, including climate change, and proactively take actions to mitigate any unfavorable impact, may create a significant competitive advantage compared with companies, which through lack of awareness, become blindsided by regulation," notes a report from Lehman Brothers, "The Business of Climate Change."

Another area that holds out promise, especially for longer-term minded investors is "carbon sequestration," or the process of burying carbon dioxide captured from power generation and manufacturing that would otherwise spread into the atmosphere.

"Over time, we anticipate that carbon capture and sequestration (CCS) will develop into an extremely large industry involving hundreds of chemical-type plants and extensive pipeline networks," conclude researchers at JP Morgan.

In their report, "Capturing the Gains from Carbon Capture," researchers emphasize not to expect much in the near term - "we see little prospect of substantial revenue or profit over the next five years." But, CCS could be commercially attractive beginning in Europe, say by 2013.

Stock Picks: Are You Following Your Neighbor's Advice?

Several months back we spoke with Robert Shiller, Yale Economist and author of the groundbreaking book, "Irrational Exuberance." Shiller noted that the "herd mentality," oddly enough plays a major role in individual stock purchases.

New research seems to back up Shiller's ideas. Mark Hulbert, editor of the Hulbert Financial Digest recently wrote a column where he cites a study that showed that investors greatly rely on the recommendations of their neighbors in making investment and stock purchase decisions. The study is titled, "Information Diffusion Effects In Individual Investors’ Common Stock Purchases: Covet Thy Neighbors' Investment Choices" and was conducted by professors of finance at the University of Illinois.

According to Hulbert, the study of 35,000 households showed "there was strong evidence of such herding behavior." Investors learn by word of mouth which stocks their neighbors are buying and "tend to favor those stocks themselves."

Is this a good thing? You might say, "probably not." It is much better to rely on data and the advice of a professional. But there are benefits, say the authors, Zoran Ivkovich and Scott J. Weisbenner. "It may be that in an increasing complex world, word of mouth is an efficient, inexpensive way to find out about promising opportunities."

But they point out the dangers of herd investing: not enough attention to individual portfolio diversification and "individual investors on average don't outperform the market." So while it's fine to listen to what the Joneses are saying about stock selection,"we should buy only if it survives more objective scrutiny," says Hulbert