Online Journal for the Moose Pond Investors Club

September Observations

In terms of investment return, we been treading water for most of 2006. The value of a unit in the funds is almost where it was when we started the year. We have an excellent portfolio. Although it is weight more heavily with larger growth stocks.

In general terms, stocks that have consistent increases in earnings and revenue, at a rate faster than the growth of the economy, are characterized as growth stocks. In contrast, stocks with a low price-to-book (P/B) ratio and low price-to earings (P/E) ratio are characterized as value stocks. Mutual funds are frequently characterized as either growth, value, or blend (a combination of growth and value). Mutual funds are further characterized as large, medium, or small capitalization. Market capitalization is simply the number of shares issues time the market price of share of stock.

All of this is a leading up to the observation that large capitalization stocks have not done as well as value stocks. Similarly, growth stocks have not done as well as value stocks, in the last 12 months or so. The Callen Periodic Table of Investing Returns shows how different sectors (large, medium, and small capitalization, and growth, value, and blend) have different returns from year to year.

So what do we do at this point? Stay the course. We have an excellent portfolio, even though it is weighted more heavily in larger growth stocks. As we buy more stocks, we should look for opportunities in smaller stocks, especially smaller growth stocks that are cheaply priced.

You can see how growth, value, and market capitalization interact, using this spreadsheet. The spreadsheet calculates return for a portfolio over the last 15 years based on the asset classes in the portfolio. The S&P 500 is a good surrogate for large capitalization stocks. Similarly, the Russell 2000 is a good proxy for small capitalization stocks.

To compare investment returns, enter a number, e.g., “100” in the blue column for the asset class you want to examine and “0” for all others. You can also look at the return of various combination of asset classes. You might find this spreadsheet helpful if you are trying to decide how to allocate long term savings.

After a great deal of research, I see considerable merit in having a substantial amount of core savings allocated among index funds that represent these asset classes. I am paying much closer attention to asset classes. (Moose pond Investors is really a large/medium cap, growth asset class.) Asset allocation might be the subject of a future posting if there is any interest. But for now, the returns of the various asset classes will help explain why the Moose Pond returns have not been stellar this year.

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