Posts tagged ‘investing’
Secure Your GPS (Global Portfolio Specialist)
We’ve all been there, our head in our hands, lost in the middle of nowhere. One reason for blame can be overconfidence in the directions provided or our map reading abilities. Now we have GPS (Global Positioning System) devices – a tool I now could never live without. In the investment world, with the damage that has been done, intelligent advice is needed more than ever. Unfortunately, there is no GPS device to guide our investments, but many individuals would do their self a favor by finding the right experienced professional advisor to act as your GPS device (Global Portfolio Specialist).
Getting from point A to point B in the real world can be quite simple. In the investment world, the roadways are constantly shifting. Changes in interest rates, tax policies, unemployment, fiscal initiatives can represent obstacles, the equivalent of road construction barriers, potholes, erosion, mudslides, and earthquakes in our quest for financial freedom. Navigating these winding paths can require a GPS advice. Asking for help or directions can be embarrassing and castigating for some, especially for some proud males. Stubbornly appearing to have the answer can be more important for some, and can cloud the decision making process – even if assistance can lead to the most efficient path to prosperity.
Having a guide at your fingertips as you meet unknown forks in the road is a nice asset to have. Unfortunately finding the right guide is much easier said than done, many guides can have ulterior motives and hidden agendas that conflict with yours. So although, having a guide may be ideal, finding the right guide requires a lot of research (read how to find an advisor). The scope of qualifications between the capabilities of one advisor compared to another can be like comparing a plastic butter knife with a stainless steel swiss-army knife. The cheap butter knife may handle a few simple needs, but most investors would be better served by someone with a breadth of tools that can assist you with a diverse set of circumstances.
The old cliché states men hate to get directions while women seek a security blanket (a plan). GPS is not full proof, as occasionally the software is not updated or gets confused. But tech geeks like me have grown to love the assistance and benefit from the heightened efficiency and safety it provides. Not only am I more confident, but it also gets me to where I want to go in less time.
Having your guide is important when it comes to investments, but having someone with expertise in tax planning (should I consider Roth conversion in 2010?); estate planning (what impact will the expected changes in the estate tax rate have on my future?); and insurance planning (do I have adequate life, health, and business insurance?) can be critical. All these areas can have a profound impact on whether you achieve your personal and financial goals.
Along the road of life, there can be many bumps, twists and turns. If you would like the assistance of a professional advisor, consider doing your homework and finding the appropriate GPS. Here is a checklist:
1) Where are You Now? This means taking inventory of your assets and liabilities, getting a handle on your income and expenses, and having a firm understanding of your tax and family planning issues (will, trust, powers of attorneys, etc.)
2) Where are You Going? Next you need to know where you want to go? You may have a rough idea, but in order to create a coherent plan, goals need to be defined.
3) Create a Plan. Everyone’s map or blueprint will look different. Some will need highly detailed directions, while others due to different circumstances may have less complex needs or shorter distances to travel. Some may need guidance and directions to reach an adjacent state, while others may have more ambitious goals or planning needed to reach the peak of Mount Everest. Different destinations and circumstances will require different planning.
4) Monitor and Adjust Plan as Necessary. Road conditions, weather, breakdowns, flight cancellations, among many other unforeseen circumstances can change the path to your goal. That’s why it’s so important to review, not only the changes in external circumstances, such as the financial markets, but also any individual changes whether it’s health, family, personal, or goal related.
Some people prefer to do things the old-fashion way or are happy with subpar technology (i.e., compass). However, if you do not want to get lost, or want a clearer defined map, then it’s time to shop for that new Global Portfolio Specialist who can help guide you to your destination.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) or its clients owns certain exchange traded funds, but currently has no direct position in GRMN. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Compounding: A Penny Saved is Billions Earned
What is “compounding” and why is it so great? It sounds like such a fancy financial term. One can think of compounding as a snowball rolling down a hill – the longer the snowball rolls (or the higher up the mountain you begin), the more compounding will expand the size of your snowball. Expanding your investment portfolio through compounding should be your major goal.
Albert Einstein, arguably one of the most intelligent people to walk this planet, was asked to describe mankind’s greatest discovery. His answer: “compound interest.” He went so far as to call it one of the “Eight Wonders of the World.” The benefits of compounding can be demonstrated via famous explorer, Christopher Columbus.
We all know the story, “In 1492, Christopher Columbus sailed the ocean blue.” To emphasize the benefits of compounding, let us suppose that Christopher Columbus made an investment in the historic year of 1492. If Chris had placed a single penny in a 6% interest-bearing account and instructed someone to remove the interest every year and put it in a piggybank, the total value collected in that piggybank would eventually accumulate to more than 30 cents. A pretty nice multiplier-effect on one penny, but not too much absolute cold hard cash to write home about…agreed?
"It's magic, I can turn pennies into billions."
However, if the young explorer had placed the same paltry investment of one cent into the same interest-bearing account, but LEFT the remaining earned interest to compound (thereby earning interest upon the previously earned interest) the results would be drastically different.
What would you guess the compounded account would be worth in 2009?
$10,000? $100,000? $1 million? $10 million? $100 million?
“NO” is the correct answer to all these guesses.
The correct answer: $121,096,709,346.21! Your eyes do not deceive you. That one penny invested in 1492 would have grown to $121 billion dollars today. If you don’t believe me, pull out your calculator and multiply $.01 * 1.06%, and repeat 517 times. Surely, we will not live 517 years to collect on an investment of such long duration. However, with proper planning everyone has the ability to invest quite a bit more than one cent to significantly build future wealth.
As an advisor, the problems related to compounding I see investors commit most are two-fold:
1) Investors are constantly shifting money in and out of their accounts (usually at suboptimal points) due to apprehension and greed, thereby nullifying the benefits of compounding.
2) Because of overpowering fear relating to current economic conditions, investors are parking their money in low yielding CDs (Certificates of Deposit), savings accounts, checking accounts, money market accounts, or other low returning investment vehicles. This strategy is equivalent to pushing the aforementioned snowball over the sidewalk, rather than down a long, steep hill.
In order to reap the rewards of compounding and dramatically expand your investment portfolio, a systematic, disciplined approach to investing needs to be followed. A system that more likely than not has a 20 year horizon rather than 20 days. Now go start saving those pennies!
Time to Take Out the Trash: From Garbage to Cream
As we saw with the +50% move in the 2003 NASDAQ recovery when there was a flight to garbage (lower quality stocks), eventually the cream rose to the top in the later stages of the 2002-2007 bull market. Usually investors get what they pay for, yet many of the companies that were left for dead in 2008 (including bankruptcy fears) have rebounded the fiercest. As the “anti-Great Depression” trade has paid off handsomely for those low quality stocks, high quality stocks have patiently waited on the sidelines eager to jump along for the escalating ride. Ben Levisohn, Business Week writer, thinks it’s time for high quality stock’s to outperform their junky brethren. Here’s what Mr. Levisohn had to say:
“The stock market has gained 58% since its bear-market low Mar. 9, but the rally hasn’t lifted all equities equally. As is typical in many market bouncebacks, the worst recovered first. Low-quality companies, those with weak or nonexistent profits, mediocre return on equity, and less-than-stellar balance sheets, outpaced their more solidly profitable peers by nearly a 2-to-1 margin, according to research from Baird Private Wealth Management.”
Intuitively, the “garbage” rally makes sense from the standpoint, the harder you fall, the faster you will bounce. However, the sustainability of such rapid, fierce moves should be questioned. Eventually, fundamentals move up investors’ priority list and the “cream” (quality stocks) rises to the top.
Mr. Levisohn further highlights the disparity between “garbage” and “cream” by noting:
“Baird found that companies not earning a profit gained 92% from the Mar. 9 lows through the end of August, compared with a 47% rise for companies that had the highest profit margins. Companies with the lowest return on equity outperformed those with the highest by more than 2 to 1, according to Baird.”
With the sickly stock rally and the removal of the “global meltdown” scenario apparently behind us, I concur with Mr. Levisohn that now is the time to focus on “quality” stocks. What does “quality” mean? From a quantitative perspective, concentrating on those companies with high returns on invested capital (ROIC), high returns on equity (ROE), companies with low levels of debt (leverage), generating healthy levels of cash flow (See Cash Flow Article), represents “quality” investing to me. From a fundamental standpoint, management teams with a clear track record of success, and companies with deep barriers to entry, and a healthy pipeline of growth opportunities are other quality characteristics I look for.
Companies retaining these higher quality traits generally are not held hostage to the capital markets and banking system (i.e., no bailouts necessary). As a result, these companies have the flexibility to invest additional resources into areas like research & development, marketing, manufacturing, and mergers & acquisitions. Superior companies have the ability to step on the throats of weaker competitors, thereby extending their competitive advantage and garnering additional market share.
We have experienced a massive rebound in the markets since the March lows, but now it’s time to take out the garbage. As I search for high quality stocks through my computer terminal, I’ll be enjoying my delicious coffee…with extra cream.
Read Entire Business Week Article Here
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
The Hidden Train Wreck – Professional Athlete Portfolios
Need capital for a floating furniture venture? How about an oxygen absorbing skin procedure? Well, if you are having any difficulty, just call an NFL, NBA, or MLB rookie. Even wealthy professional athletes have been impacted by the financial crisis, not to mention the aggressive sales tactics of the investment industry and the players’ poor money management skills. Many players are too busy concentrating on winning games, while their portfolios are suffering losses. The statistics are staggering. Here are the findings, according to an article published in Sports Illustrated earlier this year:
- “By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.”
- “Within five years of retirement, an estimated 60% of former NBA players are broke.”
- The divorce rate for pro athletes ranges from 60% to 80%, based on estimates from athletes and agents.
- “According to the NFL Players Association, at least 78 players lost a total of more than $42 million between 1999 and 2002 because they trusted money to financial advisers with questionable backgrounds.”
These are not old, dementia-suffering widows living in Florida we are talking about, but rather professional athletes, many of which made multi-million fortunes during their playing careers. The article goes out of its way to demonstrate this is not a fringe issue affecting a minority of professional athletes. Numerous examples were provided, including the following:
- Ten current and former Major League Baseball players, including outfielder Jonny Damon of the New York Yankees, had some of their money tied up in the alleged $8 billion fraud perpetrated by Robert Allen Stanford.
- Raghib (Rocket) Ismail lost a fortune by investing in excessively risky ventures, including a movie about music label COZ Records; a cosmetics procedure company; a nationwide phone-card dispensing venture; and a framed calligraphy company opened in New Orleans two months before Hurricane Katrina hit.
- Drew Bledsoe, Rick Mirer and five other NFL retirees each invested a minimum of $100,000 in a failed start-up, which touted “biometric authentication” technology that potentially could replace credit cards with fingerprints. The players eventually sued UBS (the financial-services firm) for allegedly withholding information about the company founder’s criminal history and drug use.
- Torii Hunter, outfielder for the Los Angeles, invested almost $70,000 in living-room furniture that included inflatable rafts – perfect for those consumers living in flood zones. Suffice it to say, the results did not meet initial expectations.
- In addition to his legal problems, NFL quarterback Michael Vick filed for Chapter 11 bankruptcy last year partly because he could not repay about $6 million in bank loans that he directed toward a car-rental franchise in Indiana, wine shop in Georgia and real estate in Canada.
- Retired NBA forward Vin Baker’s seafood restaurant in Old Saybrook, Connecticut, was foreclosed on in February 2008 due to nearly $900,000 in unpaid loans.
- “NBA guard Kenny Anderson filed for bankruptcy in October 2005. He detailed how the estimated $60 million he earned in the league had dwindled to nothing. He bought eight cars and rang up monthly expenses of $41,000, including outlays for child support, his mother’s mortgage and his own five-bedroom house in Beverly Hills, Calif.—not to mention $10,000 in what he dubbed “hanging-out money.” He also regularly handed out $3,000 to $5,000 to friends and relatives.”
- “Former NBA forward Shawn Kemp (who has at least seven children by six women) and, more recently, Travis Henry (nine by nine) have seen their fortunes sapped by monthly child-support payments in the tens of thousands of dollars.”
Besides irresponsible spending, and greedy advisors, contributing factors to all the losses are the “boring” and “unintelligible” nature of securities investments. Professional athletes like to flaunt investments like night clubs and car dealerships – there is a “thrill of tangibility,” according to SI writer Pablo Torre.
Professional athletes are not the only ones suffering losses. Ordinary investors have lost also and are learning it’s not what you make – rather it’s what you preserve and grow. The majority of the athletes do not realize their peak earnings years cover a very brief period, and therefore need to be more prudent with their money management since the windfall moneys must be spread over many years.
Trust is an important but difficult trait to find for many of these athletes since many opportunistic friends, acquaintances, and family members in many cases put their self interests ahead of the professional athlete’s needs. There is no simple formula for intelligent money management, however there are ways for athletes to protect their financial blind spots:
1) Educate Themselves. Learn the basics of what you are investing in. You may not learn the ins and outs but you can get a basic understanding of the expected return and volatility of your investments. Athletes often forget about diversification as well, “Chronic over-allocation into real estate and bad private equity is the number one problem [for athletes] in terms of a financial meltdown,” Ed Butowsky of Chapwood Investments says.
2) Trust But Verify. Ronald Reagan famously made those statements decades ago and the principle applies to money too. Many athletes pay tens of thousands of dollars for investment advice, so asking questions is advisable. Specifically, ask how performance is trending versus comparable benchmarks and get a view over multiple time periods.
3) Avoid Friends and Family. If possible, separating business from friends and family is a wise idea. When emotions mix with money, harmful decisions can damage the athlete’s financial future.
4) Determine Fees & Commissions. When investing hundreds of thousands, if not millions of dollars, fees and commissions can be substantial; therefore it is imperative for the athletes to know what they are paying their advisors.
5) Experience Matters. Check out the background of your advisor and determine the licenses and credentials they hold. If you were flying a plane in a heavy storm, you would want an experienced pilot flying the plane, not a flight attendant.
6) Budget. Establish an investment plan with a sustainable lifestyle that accounts for inflation. As veteran agent Bill Duffy says, whose clients include Suns guard Steve Nash and Nuggets forward Carmelo Anthony, “A pro athlete’s money is supposed to outlive his career. Most players never get that.”
Athletes spend their whole lives trying to make the professional ranks in order to earn the big bucks. Due to their high profile status, financial advisors and trusted individuals prey on the sports figures’ wealth. Unfortunately a majority of the athletes lack the money management skills and discipline to preserve and grow their earned wealth. Perhaps repeatedly shining a light on the dirty under-belly of this tragic problem will prevent future financial train wrecks from occurring. Until then, I guess we’ll just have to sift though the bankrupt remains of inflatable sofa raft companies and liquidation proceeds from failed night clubs.
Read the Complete Sports Illustrated Article Here
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Tips for Survival and Prosperity in Challenging Economic Times
Survival requires multiple strategies
We have all been impacted in some shape or form by the worst financial crisis experienced in a generation. The question now becomes what did we learn from this mess and how can we better prepare for a more prosperous financial future?
Here are some important tips to follow:
Save and Invest: Before paying others, pay yourself first. You can achieve this goal by saving and investing your money. Given the weak state of our government “safety net” programs, such as Medicare and Social Security, it has become more important than ever to save. Life spans are extending as well, meaning a larger “nest egg” is needed for retirement. If you don’t have the time, discipline, or emotional make-up to manage your own money, then seek out a fee-only advisor* who does not have a conflict of interest in regards to building your wealth.
Tighten Belt: In order to save and invest you need to be in a position where you are creating excess income. Cutting costs is one way to generate additional income. Eating out less, buying used, taking more affordable vacations, conserving energy, purchasing private label goods are a few easy ways to save money that will accumulate over time. If those efforts are still not adequate, one should then contemplate adjusting their living situation (i.e., down-size) or pursue additional income opportunities – either through a pay raise or higher paying job alternatives.
Pay Down Debt: If your credit card company is charging you a 15-20% rate on unpaid credit card balances and gouging you for late-fees and cash advances, then look for other sources of affordable financing. A home equity line of credit or second mortgage may make sense for some, if the fees and lower interest rates make economic sense. Contact a financial planner or tax professional to determine the appropriateness of these debt alternatives. Ultimately, the goal is to reduce debt and create more financial flexibility.
Take Free Money: If your employer offers matching payments to your retirement plan contributions, they are effectively offering you free money. Take it! The government offers you some tax deferral savings through IRA (Individual Retirement Account) contributions, so take advantage of that benefit as well.
Form a 6-Month Emergency Fund: The economy may be in a bottoming-out phase; however we are not out of the woods yet. Unemployment is approaching 10% and many companies and industries continue to struggle. Build a protective financial cushion should you or your family hit a bump in the road.
Invest in Yourself: Investing for retirement is crucial, however investing in yourself is just as, if not more, important than traditional investing. What I’m referring to is job training, education, and health awareness. We live in a globalized economy and in order to compete against those starving for our jobs, we need to improve our skills and education. Lastly, we cannot neglect our health. Finances need to be put in perspective. Our health should be a top priority and a disciplined balance between diet and exercise will not only reduce stress, but it will also improve mental health.
Times have been challenging, but when the going gets rough, the tough go saving. Take control of your financial future rather than letting economic circumstances control you. Financial success however should not come at the expense of your health, so also focus on a balanced program of diet and exercise. There are no free lunches in this world, but following these steps will help lead you on a path to prosperity – even in these challenging economic times.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Wade W. Slome, CFA, CFP is President and Founder of Sidoxia Capital Management, LLC (www.Sidoxia.com), a fee-only Registered Investment Advisory firm headquartered in Newport Beach, California.
Action Dan (Poker King) and Professional Investing
"Action Dan" wins millions in poker by skillfully mixing art with science
As I write in my book (How I Managed $20,000,000,000.00 by Age 32), successful investing requires skillful use of both art and science. What I find so fascinating is that the same principles apply to poker playing. Like investing, poker is also a game of skill that rewards a player who adequately understands the mathematical probabilities (science) while still able to appropriately read the behavior of his or her opponents (art). Take for example professional poker player and 1995 WSOP champ Dan Harrington. In 2003 he finished 3rd at the World Series of Poker Main Event (the Super Bowl of poker) out of a pool of 839 players. In 2004, the following year, despite the pool more than tripling to 2,576 participants, Mr. Harrington managed to finish 4th and take home a cool $1.5 million in prize money. Did luck account for this success? I think not. Odds, if left to chance, would be 1 in 25,000 for repeating this feat, according to the Economist.
In the short-run, random volatility and luck can make the average investor look like Warren Buffett, but because of the efficiency of the market, that same average investor will look like a schmuck over the long-run. Legg Mason Funds Management put out an incredible chart that I believe so elegantly captures the incoherent and meaningless, short-term noise that the media attempts to interpret daily. What appears like outperformance in the short-run may merely be the lucky performance of a reckless speculator.
Source: Legg Mason Funds Management
Dan Harrington, and so many other talented professionals know this fact all too well when an inexperienced “donkey” over-bets a clearly inferior hand, only to nail an inside-straight card on the “river” (last card of the round) out of pure luck – thereby knocking out a superior professional player. Over the long-run these out-of-control players end up losing all their money and professionals relish the opportunity of playing against them.
Talk to professionals and ask them what the biggest mistake new players make? The predominate answer: novices simply play too many hands. In the world of investing, the same can be said for excessive trading. Commissions, transactions costs, taxes and most importantly, ill-timed, emotionally driven trades lead the average investor to significantly underperform. I’ve referenced it before, and I’ll reference it again, John Bogle’s 1984-2002 study shows the significant drag the aforementioned costs have on professionals’ performance, and especially the average fund investor that underperformed the passive (a.k.a., “Do Nothing” strategy) S&P 500 return by more than a whopping 10% annually!
I consider myself an above average player, and I’ve won a few small tournaments, but match me up against a professional like “Action Dan” Harrington and I’ll get destroyed in the long-run. Investing, like professional poker, can lead to excess returns with the proper integration of patience and a disciplined systematic approach. I strongly believe that all great long-term investors successfully implement a strategy that marries the art and science aspects of investing. Don’t hold your breath if you expect to see me on ESPN, it may be a while before you see me at the Final Table with Dan Harrington at the World Series of Poker.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, and at the time of publishing had no direct positions in LM, DIS, or BRKA/B. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
History Never Repeats Itself, But It Often Rhymes
As Mark Twain said, “History never repeats itself, but it often rhymes.” There are many bear markets with which to compare the current financial crisis we are working through. By studying the past we can understand the repeated mistakes of others (caused by fear and greed), and avoid making similar emotional errors.
Do you want an example? Here you go:
“Today there are thoughtful, experienced, respected economists, bankers, investors and businessmen who can give you well-reasoned, logical, documented arguments why this bear market is different; why this time the economic problems are different; why this time things are going to get worse — and hence, why this is not a good time to invest in common stocks, even though they may appear low.”– Jim Fullerton, former chairman of the Capital Group of the American Funds (written November 7, 1974)
Although the quote above seems appropriate for 2009, it actually is reflective of the bearish mood felt in most bear markets. We have been through wars, assassinations, banking crises, currency crises, terrorist attacks, mad-cow disease, swine flu, and yes, even recessions. And through it all, most have managed to survive in decent shape. Let’s take a deeper look.
1973-1974 Case Study:
For those of you familiar with this period, recall the prevailing circumstances:
- Exiting Vietnam War
- Undergoing a recession
- 9% unemployment
- Arab Oil Embargo
- Watergate: Presidential resignation
- Collapse of the Nifty Fifty stocks
- Rising inflation
Not too rosy a scenario, yet here’s what happened:
S&P 500 Price (12/1974): 69
S&P 500 Price (8/2009): 1,021
That is a whopping +1,380% increase, excluding dividends.
What Investors Should Do:
- Avoid Knee-Jerk Reactions to Media Reports: Whether it’s radio, television, newspapers, or now blogs, the headlines should not emotionally control your investment decisions. Historically, media venues are lousy at identifying changes in price direction. Reporters are excellent at telling you what is happening or what just happened – not what is going to happen.
- Save and Invest: Regardless of the market direction, entitlements like Medicare and social security are under stress, and life expectancies are increasing (despite the sad state of our healthcare system), therefore investing is even more important today than ever.
- Create a Systematic, Disciplined Investment Plan: I recommend a plan that takes advantage of passive, low-cost, tax-efficient investment strategies (e.g. exchange-traded and index funds) across a diversified portfolio. Rather than capitulating in response to market volatility, have a systematic process that can rebalance periodically to take advantage of these circumstances.
For DIY-ers (Do-It-Yourselfers), I suggest opening a low-cost discount brokerage account and research firms like Vanguard Group, iShares, or Select Sector SPDRs. If you choose to outsource to a professional advisor, I recommend interviewing several fee-only* advisers – focusing on experience, investment philosophy, and potential compensation conflicts of interest.
If you believe, like some economists, CEOs, and investors, we have suffered through the worst of the current “Great Recession” and you are sitting on the sidelines, then it might make sense to heed the following advice: “Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished.” Dean Witter made those comments 77 years ago – a few weeks before the end of worst bear market in history. The market has bounced quite a bit since March of this year, but if history is on our side, there might be more room to go.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*For disclosure purposes: Wade W. Slome, CFA, CFP is President & Founder of Sidoxia Capital Management, LLC, a fee-only investment adviser based in Newport Beach, California.
The Yuppie Bounce & the Lemming Leap
Source: Gary Larson – Where’s Your Preserver?
Making money in the stock market is a tough game, and most people don’t beat the market because like lemmings the average investor follows the herd mentality to underperformance. So, should Wall Street analysts and the media be crucified for their analysis? The short answer is yes. Certainly there are some exceptional analysts and journalists, however most of them merely report what is happening or are looking in the rear-view mirror. Beyond that, the vast majority of commentators prey on emotions of the public and masses by pushing them into knee-jerk selling panics at the bottom and also getting them frothing at the mouth to buy at market peaks. Can I understand why they offer such bad advice? Yes. Quite simply, the incentive structures are wrong.
If you are an analyst or journalist, the number one priority (incentive) is not to be wrong, because if they are mistaken, then job loss becomes a bona fide risk. However, if they throw in some fancy language and mix it in with a lot of caveats, there virtually is no risk of being wrong. If factors happen to change, no worries, their opinions can change too. Therefore, most analysts huddle together in tight packs reporting the same news du jour as everyone else, while mixing in a fair dosage of fear and greed to drum up more interest. These incentives align well for the journalists/analysts but unfortunately not for the average investor.
Joshua Brown over at the Reformed Broker recently wrote an excellent piece highlighting his so-called “Yuppie Bounce” example. Last winter, as all the discretionary consumer stocks (Joshua Brown calls them “waster stocks”) were getting pasted, the pundits were advising investors to pile into defensive stocks. Lo and behold, this was the absolute worst time to follow that advice. Mr. Brown gives a superb Starbucks (SBUX) versus Wal-Mart (WMT) example showing how SBUX has effectively doubled over the last nine months just as WMT flat-lined.
Source: The Reformed Broker (Joshua M. Brown)
Investing is like a game of chess, so although a current move may sound logical, it’s more important to think about decisions multiple steps into the future. Most successful long-term investors don’t follow the conventional lines of thinking, and they are generally swimming against the tide. Therefore, if you are going to jump in with the other lemmings, make sure you have your life preserver with you.
DISCLOSURE: Some Sidoxia Capital Management and client accounts HAVE direct positions in WMT at the time the article was published. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Philosophical Friday: Investing is Like Religion
Nothing like the subject of religion to make people feel uncomfortable, so why not dive in!
Investing Is Like Religion: Everyone believes their religion will lead them down the right path to spiritual prosperity. Adherants.com divides religions into 22 separate groupings. If you look at the loosely grouped big five (Christianity, Judaism, Islam, Hinduism, and Buddhism), these cover the vast majority of religious practitioners globally – an estimated 4 billion to 5.5 billion people.
In investing, most individuals stubbornly believe their philosophy is the right way to make money. With the hopes of creating order, the investment industry relies on tools like Morningstar’s nine style box categories, which places investors in tidy, clean groups. Unfortunately, not every strategy fits nicely into a style box, especially if you try to integrate investment vehicles like hedge funds and quantitative funds.
Can’t We All Just Get Along?: I believe religions can co-exist just like different investing philosophies can co-exist. Certainly there are less worthy religions, for example you can think of cults that prey on vulnerable individuals. The same can be said for investing – as long as greed continues to exist (a certainty), there will be unscrupulous crooks and shady businesses looking to take advantage of people for a quick buck.
Regulation: I suppose our law enforcement agencies and courts serve as regulators over a small minority of churches who break the law, but given the recent collapse of parts of our financial system it makes sense we are retooling and recalibrating our oversight and regulations. There is no doubt that negative trends like the unfettered growth of toxic mortgages (including subprime), over leveraging of investment banks (ala Bear Stearns, and Lehman), and exponential growth of complex derivative products (such as CDS and CDOs) need to be controlled with more oversight. There needs to consequences to improper actions – some religions have been known to discipline their members too.
Investing Takes Faith: We have gone through an extremely trying year and a half and iconic experts like Warren Buffett have had the wherewithal to invest successfully through uncertain economic cycles because of faith in capitalism. Even at the other side of the investing spectrum, in areas like quantitative and technical trading, the practitioner still needs to have enough faith in their systems and models with the belief they have an edge that can help them outperform. Regardless of the approach, one must have faith in their investment philosophy to be successful over the long-term.
Although there countless versions of religions all over the world, I’m confident that the Church of Money Under the Mattress (CMUM) will not lead the majority of investors to the Promise Land. Even for those risk averse savers, there are ways to heighten your expected return without assuming undue risk. Irrespective of your religious beliefs, may your spiritual journey bring you hefty profits…
Wade W. Slome, CFA, CFP® (Sidoxia Capital Management, LLC)
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct positions in BRKA/B at the time the article was published. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Howard Right on the Mark(s)
Legendary investor Howard Marks opines on the financial markets in his recently quarterly client memo. One should pay attention to these battle-tested veterans with scars to prove their survival skills. Rather than neatly package a common theme from the long document I will highlight a few areas.
Marks is cautious but sees better buying opportunities ahead.
Recent Past vs. Long Past: For most of the 16 page memo Howard Marks reminisces on his 40+ years in the investment industry and contrasts the 2003-2007 period with the majority of his years. He states in the old days, “There were no swaps, index futures or listed options. Leverage wasn’t part of most institutional investors’ arsenal…or vocabulary. Private equity was unknown, and hedge funds were too few and outré to matter. Innovations like quantitative investing and structured products had yet to arrive, and few people had ever heard of ‘alpha.'”
Marks on Siegel: Marks targets Wharton Professor Jeremy Siegel as a contributor to the overly bullish mentality of 2003-2007, “Siegel’s research was encyclopedic and supported some dramatic conclusions, perhaps foremost among them his showing that there’s never been a 30-year period in which stocks didn’t outperform cash, bonds and inflation…but…30 years can be a long time to wait.”
Marks on Risk: “So yes, it’s true that investor’s can’t expect to make much money without taking risk. But that’s not the same as saying risk taking is sure to make you money…If risky investments always produced high returns, they wouldn’t be risky.” On the psychological impacts of risk, Marks goes on to say, “When investors are unworried and risk-tolerant, they buy stocks at high p/e ratios and private companies at high EBITDA multiples, and they pile into bonds despite narrow yield spreads and into real estate at minimal “cap rates.'”
On Quant Models and Business Schools: Marks quotes Warren Buffet regarding the complexity of quantitative models, “If you need a computer or a calculator to make a calculation, you shouldn’t buy it.” Charlie Munger adds his two cents on why quantitative models exist: “They teach that in business schools because, well, they’ve got to do something.”
Investing as a Mixture of Art & Science: In my book I describe investing as a combination of “Art” and “Science.” Marks addresses a s similar insight through an Albert Einstein quote:
“Not everything that can be counted counts, and not everything that counts can be counted.”
Views on the Credit Rating Agencies: To highlight the absurdity of the mortgage credit rating system, Marks compares the agencies’ ratings to hamburger: “If it’s possible to start with 100 pounds of hamburger and end up selling ten pounds of dog food, 40 pounds of sirloin and 50 pounds of filet mignon, the truth-in-labeling rules can’t be working.”
If you would like to access the remainder of memo, click here to read the rest. Overall, Mr. Marks gives a balanced view of the markets and economy, but feels “better buying opportunities lie ahead.” Thankfully, I’m finding some myself.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Investing Caffeine 
