Financial Wisdom

I am the astronaut of boxing. Joe Lewis and Dempsey were just jet pilots. I’m in a world of my own.
~ Muhammad Ali

We can take heart in the knowledge that even the most experienced and celebrated investment professionals don’t always take their own advice when it comes to their personal finances. In a series of revealing interviews, The Wall Street Journal columnist Jason Zweig drove this point home.

John Bogle, the founder of Vanguard Funds, is famous for his belief that investors should rebalance their portfolios on a regular basis, selling what’s gone up and buying more of what’s gone down, using low-cost index funds. But Bogle admitted that he rarely touches his own portfolio and has gone years without changing his own asset allocations.

Harry Markowitz is a Nobel Prize-winning economist who analyzed the risk and return of a diversified portfolio. He told Jason Zweig, however, that he splits his own retirement contributions equally between stocks and bonds, failing to follow the investment formula that won him the Nobel Prize.

Most surprising was Zweig’s interview with Burton Malkiel, an economist at Princeton University and a prominent author on financial topics. Malkiel’s book A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, has been an influential volume advancing the efficient market hypothesis since its publication in 1973.

Malkiel argued that prices of publicly traded assets reflect all publicly available information. By Malkiel’s reasoning, no one can outperform the market, because it is the ultimate model of efficiency. His theory suggests that a dart thrower using the stock listing in The Wall Street Journal may be as effective as the efforts of any professional money manager. Malkiel has advocated index funds that simply track various broad market exposure.

Zweig revealed in his interview with Malkiel, however, that the famed economist keeps about a third of his own money in individual stocks and actively managed funds. “I call myself a random walker with a crutch,” he said.
Like the rest of us, these veteran investment professionals and theorists are immersed in the world around them and see the opportunities and inefficiencies in the market with their own eyes. They don’t want to miss out any more than you or I should want to.

THIS ISSUES FALLEN ANGEL FOR CONSIDERATION
KBR Inc. (heavy construction) KBR: $17.31*

KBR is a global contruction and engineering firm. Shares of this company are down more than 60% from their 2007 highs. The company, spun-off from Halliburton in 2005, has $1.1 billion in cash on its balance sheet and no debt. Currently trading at a P/E of 10 times we think these shares offer 50%+ upside over the next 3 years.

* Price as of 5/5/09

This entry was posted on Tuesday, May 19th, 2009 at 2:38 pm and is filed under Fallen Angels Report. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.