Investment Help

If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Wednesday, August 31, 2011

Should You Follow Buffett?

MoneyCone has written a must read analysis, "Following Buffett Blindly Can Be Injurious to Your Wealth,"  from the perspective of the investor who might consider jumping on the coattails of some of his deals.  Be sure to note the very apt art on the article showing a pack of "SMOKEME" cigarettes.

It is not easy for me to write objectively about Buffett's latest deal, Bank of America, because formerly I was a managing director at an investment subsidiary of theirs and saw first hand and experienced how they operate.  I have to say that I just don't understand why someone of Buffett's stature would deal with them (or Goldman Sachs for that matter) even with the outrageous terms he obtains.  I, for one, would grab my wallet and be sure to never let the likes of Hugh McColl or Ken Lewis get behind me. Dealing with their top management reminds me of Indiana Jones in the snake pit.

Many times I like to start a presentation by quoting Buffett to the effect that most investors are better off investing in low-cost index funds.  This is met with the question of why would Buffett recommend this when he invests in individual stocks?  The answer I jokingly give is that, if the questioner looks in the mirror and sees Buffett looking back, he can forget the recommendation to use index funds.  The more serious answer is that Buffett doesn't invest in individual stocks like most investors.  Even from the beginning, he visited companies and jumped right into their finances.  This morphed into an approach where he controlled companies and literally replaced the dead wood.  Today his stature enables him to rescue or semi-rescue firms by providing capital at terms that make even seasoned investors gasp.

The investment markets attract many people who are looking for an easy way to get rich.  Naturally the thought crosses their mind to follow the likes of Buffett.  In fact, there are generally a couple of shelves of books in most bookstore business sections devoted  to Buffett's investment approach.  After al,l how can you go wrong following a man with the performance record of Warren Buffett?

MoneyCone answers this question with the numbers.  His article is worth reading more than once by every DIY investor.

Tuesday, August 30, 2011

DIY Investor in Top 10 of Dividend Ninja

Source::The Dividend Ninja
DIY Investor was picked by Dividend Ninja as one of his top 10 blogs, which I consider an honor considering the others in the list and the fact that Dividend Ninja is a high-quality blogger.

Anyone interested in investing and financial topics, and especially top of the line research on dividend paying stocks, will find this list a great resource.

Thanks, Ninja!

DIY Investor is Back

By Lori Steenhoek aka oldest daughter
Hurricanes, earthquakes, hey...respect mother nature!  Roads here are blocked, power lines are down all over the place, and it's not clear what is open and what is closed.  Rooms have stopped shaking, and the winds and rain have departed.  The sun is out and the cleanup is underway.

I spent most of the morning looking for gasoline to fill up a generator lent to us by our new best friend Mike.  Thanks Mike!  It saved the food in our freezer.

Being without electricity for several days hasn't been fun.  But we're up and going (and hopefully stay that way!) now.  Don't take for granted the important things in your life that you use everyday!

I do have to say that I've had mixed emotions being Internetless.  Partly I felt like an addict in withdrawal.  Admittedly my fingers twitched as I glanced at the inert keyboard over the past few days. On the other hand, it felt good taking a few days off.  Head clearing, actually.  It is truly amazing how much of our days (for many of us) is consumed online.  Being away for a few days gives me many interesting blogs to catch up on, which I'm looking forward to.

I missed a lot of the big runup in the market yesterday, although I got snippets of the news off my BlackBerry - nothing like watching the 3-ring circus on CNBC, though, which I'm sure was highly entertaining in the same vein as is professional wrestling to many.

Thankfully my clients have portfolios structured in line with pre-determined asset allocation models, so there wasn't the stress of "is this for real or not and should I jump in or out" kind of mentality of the market timers.  Like mother nature, the forces of the market are to be respected.  Trying to outguess them can be hazardous to an investor's health, as many whose retirement plans have fallen to the wayside can testify.

It's good to be back thinking about investments and bashing CNBC.

Thursday, August 25, 2011

My Mentor Phil and the Housing Market

Early in my investment career I had a friend/mentor, Phil, who believed that the market does what hurts people the most.  He would sit down and talk out loud, reasoning with himself a likely course for events to unfold - both on the upside as well as the downside - that would be painful for investors.  In early 2009, as investors fled the market, he surely was questioning what would hurt investors the most. And it occurred - the market took off on a moonshot in early March as many investors stood on the sidelines with their 1% certificates of deposit.

Conversely, when  main street was piling into internet stocks in 2000, Phil's philosophy cast considerable doubt on the "this time it's different" mantra and expected a nasty outcome.  During that time frame, I was at a money managers' meeting where a boast was made that the prior week had garnered a short-term capital gain sufficient to buy a new Lexus.  Someone asked why a profit wasn't taken.  The response:  "and give up those types of gains in the future."

Now being naturally nosy, I queried the boaster a bit.  In his early 40s he had a portfolio that, if liquidated and put into U.S. Treasury bonds, would have afforded him, even at that young age, a very nice early retirement by most people's standards.  I would be willing to bet that today, in his early 50s, he is probably wondering how many years he will have to continue to work - a consequence of greed and not appreciating Phil's philosophy.

Today, of course, housing is in the pits, having morphed over the past 10 years from being the lynchpin of retirement plans to the elephant in the corner people are wondering whether they should just walk away from.

Phil would probably offer up the thought that maybe - just maybe - housing is ready to turn around. Phil's theory gave him areas to investigate.  What would he find in the housing market today?

  • mortgage rates at all time lows (30 year fixed < 4%)
  • housing prices down significantly (down 4%/12 months)
  • money supply up (note recent turn up)

The  money supply is starting to get some attention.  Banks are loaded with excess reserves and have a choice between pitiful Treasury yields or more attractive lending rates.  It looks like they are starting to make loans again:

In thinking along with Phil and trying to identify likely surprises over the next several months, the housing market is one to keep on the radar screen.  Wherever you are Phil, we're on the same wavelength.  I'm sure.

Wednesday, August 24, 2011

Paul Merriman Videos on Portfolio Construction

Biz of Life presents 9 videos as the first part of a series that details the process of portfolio construction by renowned investment manager Paul Merriman.  The explanations are very well done.  Merriman shows how, over the longer term, based on academic evidence, adding asset classes increases expected compound annual return from 9.5% to 12%.  He clearly demonstrates the role of risk in the portfolio construction process.

This is one of the best explanations I have seen on this complex subject and is the starting point for understanding the investment process.  I highly recommend these videos for newbies as well as a review for more knowledgeable investors.  Those who make a living explaining these concepts will surely appreciate Merriman's clear presentations.

Saturday, August 20, 2011

The Best Investment?

Keynes:  The market can stay irrational longer than you can stay solvent.

To see how various investments have fared is easy.  Just look in the rear view mirror.  In fact, the "rear view mirror" approach is a very popular investment approach.  What isn't generally appreciated is that it often ends badly.  Ask those that jumped on the bubble in 2000.

Let's consider some year-to-date returns:

TLT (longer term U.S. Treasury exchange traded fund): +20.79%
GLD (gold exchange traded fund): +29.02%
INTC (intel common stock):  -6.03%

Performance numbers are through 8/19 and were obtained from Morningstar.

The rear view mirror investor has it easy.  Go 50% TLT and 50% GLD.  This portfolio captures the rampant fear in the marketplace based on the dysfunction of global governments and the rise of anger over the continuing request for responsible parties to bail out the irresponsible.  This fear is what has driven the price of gold sharply higher and the yield on longer Treasuries to unprecedentedly low levels.

But what lies ahead?

Consider that the yield on the 10-year U.S. Treasury note is close to 2%. 2%!  Ten years!  Worth mulling over.  With governments having to borrow record amounts as far as the eye can see and rumblings about the possible inflation impact, some  hard reflection would seem to be in order.

Put against this the 4% dividend yield on Intel common stock and the liklihood that the dividend will be increased consistently over the next 10 years.  Furthermore, consider that the whole world wants every bit of personalized entertainment and information at its fingettips via its cell phone.

Of the 3 investment choices, which do you think will have the best performance over the next 6 months, 1 year, 5 years? 

Disclosure:  The above is for informational purposes only.  Investors need to do their own research and or consult a professional advisor before making investment decisions.

Friday, August 19, 2011

What is Stagflation?

Source: Time
Backstory:  Unemployment stubbornly high.  High percentage of unemployed chronically unemployed.  Official numbers underreport extent of unemployment.  Overall Consumer Price Index (CPI) reported at 0.5% - approximately 6% annual rate.

One of my favorite exercises with my macro econ students is to think about how many "inflation" words we can think of, to define them, and to give instances when they occurred.  There is inflation, deflation, disinflation, hyperinflation, and stagflation.  Stagflation is the one DIY investors are hearing more often today.

Stagflation doesn't often raise its ugly head - thankfully.  To understand stagflation, it is useful to understand that macro economic weakness is generally perceived as a problem in inadequate aggregate (total) demand.  In this view, the problem is corrected by increasing aggregate demand using standard monetary policies ( increase the amount of money in the economy, thereby lowering interest rates) or by fiscal policy (lowering taxes and increasing government spending).

There is a bit of a difficulty in this that we are currently facing.  If the Fed supplies excess reserves to the banking system, but the banks don't lend, then we are in a liquidity trap a la the U.S. in the 1930s and Japan in the 1990s.  The banks aren't lending because they need to recapitalize after their bad lending spree of recent years.  Businesses aren't borrowing because demand uncertainty is rising.

As an aside  I know some readers probably flinched at the mention of the typical fiscal and monetary policies because  they are the exact prescription for the mess the global economy finds itself in today. The problem is that, if you lower taxes and increase government spending to combat economic weakness, you commonsensically need to run surpluses, i.e. reverse the policies when the economy is strong.  This is what politicians do not have the stomach for and their economic advisors wimp out and "swallow the whistle," as we say when referees fail to call a blatant foul.

Anyways, with stagflation, the economy experiences weak aggregate demand and inflation pressures. The problem, then, is that the usual policies (which, in truth, are commonly viewed as the proverbial  free lunch) won't work.  Fiscal policy will only exacerbate inflation, and monetary policy that will lower inflation will ramp up unemployment.  This was the situation in the early 1980s.  Then Fed Chairman Volcker (we should have never let him resign!) cracked inflation expectations by letting short-term rates rise to 20%, and the unemployment rate skyrocketed.  In stark terms, stagflation causes the usual macro economic models to break down.  They fail to provide seemingly easy solutions.

After taking Volcker's medicine, the next 20 years produced exceptional economic growth and low inflation.  As a point of history, Volcker was almost tarred and feathered and run out of D.C. before his medicine took hold.

Since the 1980s, the U.S. economy as well as the global economy have become considerably wealthier; and it is probably true that the wealthier an economy becomes, or people for that matter, the more difficult it is to take corrective medicine when necessary.

Stay tuned.

Thursday, August 18, 2011

Is This Another Great Depression?

John Maynard Keynes
The Dow is down 450 points, the S&P 500 is off 50 points, the 10-year Treasury note yield is close to 2%, and gold is up $31/oz.
As a long time observer of markets, I have studied and wondered about how it felt as the 1930s unfolded.  I 'm not claiming to be an expert on the Great Depression like our esteemed Federal Reserve Chairman, Ben Bernanke, but have read widely on the subject.

I find it ironic that Bernanke et al. find Federal Reserve policies  responsible for the duration as well as the magnitude of the 1930s economic downturn when, today, a well-supported argument is emerging pointing to the Greenspan/Bernanke Fed  playing a major role in today's debacle.  To wit:  look at today's inflation report and anemic employment number, both of which have been heavily affected by Fed policy.

It wasn't long ago that even the mention of the possibility of the U.S. entering a 1930s economic downturn was laughable.  The response was always a dimissive "we know too much today" in terms of economic policy to counter economic downturns.  Implication:  we are a lot smarter than they were in the 1930s!

The fact of the matter is that, at this point, just about everything, including the kitchen sink, has been thrown at the economy; and the response has been pitiful.

John Maynard Keynes, in the General Theory of Employment, Interest, and Money, famously painted the capital markets as a type of beauty pagent judging contest where the goal was to  guess which contestants others would think most attractive-thereby breaking down into an onion-peeling type situation.  Today all eyes are on governments.  What policies will they enact next?  What will be the outcome of the next press conference or Jackson Hole speech?  Investors are worrying about how other investors will react to government policies.  These events--in lieu of future earnings and other company and economic fundamentals.

Having said all this, I don't expect a serious double-dip type downturn and don't  believe a 1930s situation is unfolding.  Instead, I see this is as an opportunity with stocks offering exceptional dividend yields and growth prospects for those with a bit longer of an investment horizon.

Still, with politicians driving the bus, it is hard to hold onto confidence.  Be sure to keep your seat belt on!

Wednesday, August 17, 2011

Scratch Governor Perry - An Embarrassment

Campaign rhetoric can get ugly.  Everybody knows that, and the American public braces itself during campaign season--which, unfortunately, starts earlier each season.  Still, in the running for the ugly trophy, Governor Perry set the bar awfully high  let's hope nobody else gets near it during this campaign season) in remarks about Ben Bernanke, Chairman of  the Federal Reserve.

First he said they would treat Bernanke "...pretty ugly" down in Texas if he prints more money before the election.  Imagine your neighbor saying that to you for not cutting your grass say!  A rational response would be to try to get your neighbor locked up.  The only saving grace is the general public has no idea how monetary policy works and how the Fed prints money.  But still - a threat is a threat.

Secondly, he said it would be almost "treasonous."  What?  The definition of treason covers a gamut of actions, but in this context it has to be taken as political action betraying the country.  On the basis of this definition, they would have to bring in 75% or more of our legislators.  These are the folks who have spent, like drunken sailors, way more than they brought in during the periods when the economy was going gang busters.

I am certainly not a fan of Bernanke or Greenspan, his predecessor; but their actions didn't  put us in the precarious debt crisis we are in today.  Furthermore, it should be absolutely clear that the Chairman is doing everything he can possibly think of to get the country on the right track and put people to work.

I, and many others, believe he is taking the wrong measures; but they are not for the wrong reasons and, who knows, they may work.

Frankly, remarks like Governor Perry's remind me of pre-WWII Germany.  They have no place in America.  The American people should denounce Governor Perry - he is an embarrassment.

Tuesday, August 16, 2011

My Top 7 Posts

Kevin at "Invest it Wisely" has invited me to participate in the "My Top 7 Posts" project.
Thanks Kevin.  Here it is:  The project asks for posts related to 7 categories.  I cheated and added a couple under two headings.

Your most beautiful post

I'd have to go with the one I just wrote describing a bit about a remarkable man, Edward Abbey, who had a passion for nature.  Included in the post was a mention of the memories from cross country trips with my son.  The subtle message was that, in the end, all of this financial blogging is about enabling people to get the most out of life.  I get the same message from fellow bloggers when I read about some of the fantastic trips they have been on.

Your most popular post

The post I wrote on how to calculate the time weighted return consistently gets more hits than anything else, although it was written some time ago.  I have to say that I'm disappointed  that  brokers don't make the ability to calculate performance more readily available.  As I've mentioned and stressed in numerous posts, Schwab does and it is a reason I use them.  Incidently, posts on how to calculate just about anything tend to be popular.  I guess readers see the title and, if they don't know how to do the calculation, will read the post.

Your most controversial post

Also, probably a recent one where I disagreed with a popular finance topics journalist.  I disagreed with her assessment that a 65-year-old shouldn't "feel guilty" about being befuddled dealing with retirement questions.  My view is that people need to take responsibility before they reach 65 and think about retirement.  My comment on her site for the newspaper was deleted as inappropriate.  I guess she or her site overseer didn't like disagreement.

Your most helpful post

I have to put down two.  First, a 3-parter on advice for my younger daughter.  Like many young college graduates, she was handed a booklet on the company 401(k) and needed guidance.  The simple idea of using low-cost index funds and participating at least up to the company match and starting at a young age is lost on so many young people.  Part of the mission of my site is to get adults and those who understand this to spread the message.

Secondly, recommending Andrew Hallam's forthcoming book,  Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Ramit Sethi's I Will Teach You To Be Rich.  A really great part of financial blogging is that a few hours of explaining some basic concepts can make a huge difference in people's lives that they will be thankful for many years in the future.

A post whose success surprised you

A post about Michael Jordan's house got more attention than I expected.  But, on reflection, I guess with people around the world constantly plugging his name in search engines it probably isn't surprising. Anyways, it was a good chance to explain the difference between value in use and value in exchange - a distinction many people, even those who have taken economics, don't get.

A post you feel didn't get the attention it deserved

I wrote about the Khan academy  which has an enormous library of online educational YouTube videos on all kinds of subjects, including financial topics, which I didn't get much response on.  I probably didn't go into enough depth because I know people are very much interested in the basics, such as how to calculate P/E ratios, present value, and why bond prices drop when interest rates rise and all of this at people's fingertips at the Khan Academy site.  Many of these topics are explained very well by Khan who has been called Bill Gate's "favorite teacher."

The post you are most proud of

Again, a 3-parter that takes new investors through the Schwab site but encourages them to check out their own site.  The purpose is to get newbies over their fear of investing.  For some, it is like a math phobia.  Many are surprised at the information they have at their fingertips and how useful it is in getting them on a solid path to reach their goals for retirement.

It’s your turn!

I nominate…


The Biz of Life

The Investment Fiduciary

The Dividend Ninja


Thanks again, Kevin, for the invite!

Monday, August 15, 2011

Review of Schwab

Readers of this blog know I prefer to use Schwab for clients because of its asset allocation tracking and its performance capabilities.  It provides clients with up-to-date time-weighted return performance numbers for accounts as well as the benchmark index chosen by the client.

Here is another overview of the benefits of Schwab from another source:

by Eric of Narrow Bridge Finance .

How Hard is Financial Planning?

Michelle Singletary, financial columnist for The Washington Post, described on Sunday a friend's financial issues.  The friend is 65 years old, was recently laid off, and now is perplexed by numerous financial issues.  These include whether to take a lump sum or a pension, when to take Social Security, should she roll over her 401(k), etc.  The friend doesn't have the information at hand, hasn't thought about these issues, and Ms, Singletary claims, "She shouldn't feel guilty."

I disagree.  She should feel guilty.  These are issues people need to take responsibility for way before they reach 65 years old.  They need to either meet with a financial planner and sort them out or figure it out themselves.

The theme of this site, of course, is that most people can figure out much of it themselves.  The starting point is fairly straight forward and, rather than listing numerous questions that mix the issues up, I would rather that Ms. Singletary had proceeded systematically.  The starting point is to figure how you will get paid once you no longer are working at your primary job.  Anybody who is 50 or older and hasn't done this should stop reading and go do it.  Find out about Social Security, throw in your pension, and finally throw in 4% of your nest egg.  Add up and ask yourself if you can live off that number.  Most people can't and will have to continue saving and probably have to ramp up their saving.

Once you've started down the path to understanding your retirement situation, you'll want to get more sophisticated.  There are good calculators online, that are free and easy to use, that will automatically get you to answer the questions posed by Ms. Singletary.  One I like is FIRECalc, but there are a number of them that can be found by googling "retirement calculators."

For what it's worth, I think most people who don't know probably think financial planning is a horrendous undertaking  on par with doing your taxes.  Again, I would disagree; and I think many people are in my camp.  It can be an interesting eye opener to get a handle on your financial situation and strategize for that day when retirement arrives.

In terms of getting started, it makes a lot of sense to at least meet with a financial advisor and schedule at least two hours to go over the whole process--including an approach to managing investments.  In my experience, this  meeting typically more than pays for itself as the advisor shows the client some areas where taxes can be saved and expensive investments avoided.

For those who thumb their noses and go "neener, neener," I say "you are guilty."

Sunday, August 14, 2011

Bucket List Item

A few years back, my son David and I made several cross country camping trips. One was to dip our big toes into the Pacific Ocean; another was to reach Carlsbad Caverns.  We pretty much winged these trips, looking for free camping and out-of-the-way sites.  I had a couple of things I wanted to see (Custer's Last Stand) and he had a few things.

I highly recommend road trips to see the U.S. for those who can swing it.  Approaching the Rocky mountains, driving the Sun Road in Glacier National Park, watching the climbers at Devil's Tower in Wyoming, and camping in the Badlands of South Dakota are all memorable, unforgettable experiences.

One evening we pulled into Arches National Park in Moab, Utah--a point of interest for David.  The sign said the campground was full, and we pulled up to the ranger booth to get directions to the next nearest campground.  The lucky star my son was born under shone down, and the ranger said they just had a cancellation in the park and would we be interested.

The reason for the cancellation was quickly apparent as we put up the tent.   No part of it was ever more than a foot off the ground in the ferocious wind.  I had put that tent up many times but never in such a  wind.  Somehow we survived the night without being blown away.  The next day and the day after we hiked throughout the park, taking in all the spectacular scenery.

Only recently I came across an amazing book recommended by a friend  - Desert Solitaire.  In this book, the late Edward Abbey tells of his experiences as a ranger at Arches.  The writing is superb - Abbey was a poet with words - and his views are strongly held.  For example, he was strongly against paved roads into the National Parks.  He believed  you couldn't experience nature looking outside from inside a car. For those who couldn't walk or bicycle in, he was for buses - a la Denali National Park in Alaska.

Edward Abbey
Here is an excerpt from the book where Abbey talks to tourists:

"Where's the Coke machine?"
"Sorry lady, we have no coke machine out here.  Would you like  a drink of water?" (She's not sure.)
"Say ranger, that's a godawful road you got in here, when the hell they going to pave it?"  (They gather round, listening.)
"The day before I leave." ( I say it with a smile; they laugh.)
"Well how the hell do we get out of here?"
"You just got here, sir."
"I know but how do we get out?"
"Same way you came in,  It's a dead end road."
"So we see the same scenery twice?"
"It looks better going out."
"Oh ranger, do you live in that little housetrailer down there?'
"Yes madam, part of the time. Mostly I live out of it."
"Are you married?"
"Not seriously."
"You must get awfully lonesome way out here."
"No, I have good company."
"Your wife?"
"No, myself."  (They laugh; they all think I'm kidding.)
"Well what do you do for amusement?"
"Talk with the tourists." (General laughter.)

My recommended bucket list item:  camp Arches National Park and read Desert Solitaire before you go.

Saturday, August 13, 2011

Bulls and Bears

Source TheLanguageLab
It seems counter intuitive that indexing a portfolio can outperform very smart people who spend enormous resources analyzing company specific information, macroeconomic data, charts of price and volume history, and even sunspots. After all, in many aspects of life, those who are most talented and work the hardest get ahead. But apparently not so in the investment world, with the exception of those who work hard at studying and understanding the evidence.

Studying the evidence over many periods and from different perspectives leads to the conclusion that most managers will underperform the market after costs, whether they try to market time, pick the best stocks or funds, or use a technical approach.  Furthermore, even those who outperform over a given period do not persist in their out performance. In a practical sense, trying to pick the best performing funds on the basis of track record is futile. Morningstar demonstrated this by picking mutual funds for its 401(k) fund that underperformed on an aggregate basis.

How is this counter intuitive finding explained?  There is a whole literature that goes into this; but, from a very basic standpoint, it goes back to the notion of a market transaction.  At any point in time, the bulls and bears are evened out.

First, think about a simple economic transaction where I sell my calculator to you for $50.  The transaction means that you value the calculator for more than $50 and I value it at less than $50.  This is the essence of a market.  The same type of transaction takes place in the stock market.  When I sell 100 shares of Microsoft for $25.10/share, I believe it is worth less and the buyer believes it is worth more.  There is a difference here, however.   One of us will be wrong. .

Ramp this up to the portfolio level, and go one step further and consider market views.  Here are some views presently held:

Ralph Acampora   technician... market headed higher to challenge year's high by year end
      main idea:  VIX (primary measure of market anxiety) is high; and each time it has been this high, the market has been significantly higher 4 months  later. (DIY Comment:  Let's jump in!)

David Rosenberg  economist ...stocks headed sharply lower...main idea:  market does not appreciate how weak the economic data is...we are headed for recession... need to look at 3-month average when looking at data to even out the revisions and short term influences. (DIY Comment:  Whoa...maybe we had better hold off.)

Jay Feuerstein  CIO 2100 Xenon...Dow Jones Industrial Average headed for 8200...main idea:  GDP without Government is negative and global economy weaker than perceived. (DIY comment:  Yikes!)

Jamie Dimon CEO JP MOrgan Chase & Co....Market headed sharply higher...main idea:  companies ready to "rock and roll" once governments get out of the way, including Europe...companies have cash and much improved capital structures. (DIY comment:  Good luck lessening the influence of the government - especially with elections around the corner...note to self - send Mr. Dimon link to recent Republican candidate debate.)

Obviously, some prognosticators will look brilliant as we move into 2012 and others will look bad.  All are very smart and convincing.  All probably have their portfolios positioned to conform with their beliefs.

All of the above applies as well to sectors and individual stocks.  Again, it is in the nature of a simple transaction.

Friday, August 12, 2011

Market Volatility

CNBC yesterday made a big deal out of four consecutive days of 400 points or more swings in the Dow Jones Industrial Average.  Here is a look at volatility in terms of percentages for the S&P 500:

Source: New York Times

As shown, there have been 3 instances of 4 consecutive days where the average moved by more than 4%.  A 4% move today is even more interesting when you consider that savings accounts offer less than 1%.

With the DJIA at 11,143, the math works out today to be a bit over 100 points for each percent. The 1987 20% drop is the infamous "'87 crash" that is constantly referenced.

Thursday, August 11, 2011

Put Me on the Super Committee

Source: CNNMoney
Help me out here, but does anyone truly believe that the super committee is going to get this country's finances under control?  For crying out loud, we just went through an exceedingly embarrassing spectacle of many of these same men making asses of themselves as they postured and sound bited and brought the financial markets to its knees.  These are the exact same people who don't want to pay the bills they have voted on.  Some are focused solely on the 2012 elections and will use their membership as a platform to further that agenda.  It is why we are where we are.  They have demonstrated that they put their own personal interests ahead of the country's.

Consider independents who aren't seeking election or reelection or have presidential ambitions.  The super committee is just the same ole same ole.  I nominate myself. 

My recommendations would include having all agencies cut expenditures immediately by 10%.  I would recommend that Congress cut its pay by 20% and revamp its benefits to align with what average Americans get.  Hey Kerry and Hensarling, you with me on this?  I would suggest meeting immediately with all the heads of Departments - especially Department of Education - and ask them to justify their existence.

I would recommend that Social Security COLA adjustments be cut in half.  Furthermore, Medicaid should start at 67.  Eliminate the tax deduction for mortgage interest and student loans, period.  Put a special tax on farmers.  They are subsidized when prices are low; they should pay more when prices are higher.  Better yet, let farmers compete openly.

Increase taxes on the wealthy, especially the Paris Hilton tax loophole.  Increase the tax on dividends and on capital gains - no one who is earning an income should pay higher taxes than those whose earnings come from the work of others - period.

I know these suggestions make sense because they would get everybody in the country pissed at me so they must be on the right track.  And they are just a start.  As an important aside, forget the argument that these cuts would negatively impact the economy - they would, in fact, likely spark a recovery once people recognize that the days of handouts are over.  The economy card has been way over played.

Bottom line:  let everyone truly sacrifice.  The President is right on this, IMHO.

Wednesday, August 10, 2011

CNBC and the Fed Meeting

I've got two questions:  First, do the commentators on CNBC have any idea how clownish they look?  Yesterday, as the market rose, then plummeted on the Fed announcement and finally ended up sharply, the commentators, guests, as well as the regular reporters, had great after-the-fact explanations at each stage-as they do at the end of each day. They parade on - one right after the other - first explaining that the Fed didn't tell markets what they wanted to hear as prices went down and then oops! prices are rising; so guests and reporters reparsed the Fed statement and found that  the Fed said exactly what the market  wanted to hear.

Secondly, do the reporters realize how ridiculous they look in practically begging Bernanke to take actions to push stock prices higher?  The incessant pleading in the hope that he will announce that rates will stay low for a protracted period, that he will announce QE 3, that he will change the maturity distribution of the Fed's Treasury portfolio, that the committee will lower the rate on excess reserves, etc. repeated over and over is akin to beggars on the streets of London asking for crumbs from the passersby.  Sadly, this has turned into the step child of the deficit crisis.

Since 1994, when Greenspan actually surprised Wall Street with a rate increase, the likes of Goldman Sachs, Bank of America, and the late Lehman Brothers have fattened themselves on the free ride given by the Fed in announcing its policy and spelling out its intentions.  By announcing its policy and now actually holding periodic press conferences, in case CNBC et. al, are too stupid to understand it, they have enabled the Street to exploit carry trades in which they sweep in essentially risk-free profits by borrowing practically free money and lending further out the yield curve at higher rates.  The bottom line, sadly, is that  the Federal Reserve by its actions (in the guise of transparency)  has become totally impotent - a lackey for the banking system.  Short-term rates have been close to zero and two massive attempts at monetizing the debt (let's call it what it really is), and still we are scratching our heads and wondering if we're facing a "double dip."

As for CNBC - at least it's great entertainment.

Tuesday, August 9, 2011

Where Are We on the Emotional Roller Coaster?

It won't be news for most investors in today's market, but emotions are a  major hurdle for investors.  And the data bears that out.  For example, Dalbar  , in their "Quantitative Analysis of Investor Behavior 2011," found that the average stock investor achieved an average annualized return of 3.83% versus the return on the S&P 500 of 9.14% through the end of 2010.  The underperformance is primarily due to investors piling in at market peaks and jumping ship at bottoms.  That is, they buy high and sell low - the opposite of what needs to be done to achieve solid performance.

So where are we on the roller coaster?  Let's take a look:

Source: investorbrain
Obviously we never know for sure, but it is crystal clear we aren't at the point of "Euphoria"( I hope that helps!).  We know that people are liquidating in a big way; and that awful, awful word "capitulation" is being bandied about with ever-increasing frequency.

It is reasonable to guess that we are moving towards the trough on the right hand side.  The obvious difficulty is that it is difficult to say how far down we'll go.  One thing that has been shown over and over is that trying to pinpoint the "Point of Maximum Financial Opportunity" is futile and, in fact, leads to missing the first couple of stages of the upturn, when it comes.

From the people I talk to and the commentary on CNBC on other channels, my guess is that we are between "Panic" and "Capitulation."

A fact to keep in mind, also, is that there are some superb companies that are becoming very reasonably priced in this debacle.

Monday, August 8, 2011

Fear vs. Greed

A popular way of viewing markets is in terms of a battle between fear and greed.  When greed has the upper hand and prices are rising sharply, it seems perfectly normal.  When fear gains the upper hand and prices plummet, like the correction we are now experiencing, not so much.

All kinds of advice comes out of the woodwork during times like the present.  After all, it's a chance to look like a genius.  Reputations are made in times like this.  Stay on the path, we are not lost, the road is straight ahead.  Coming out of the bush after listening to the advisor goes a long way towards inspiring confidence.

But the fact of the matter is that there is a bit of a moral hazzard issue here.  If the advisor is correct, then he or she is seen as a wise person.  On the other hand, if stocks are lower 10 years from now, the client is the one that loses.

It is notable that the advice to stay the course has always worked in the past.  On the basis of historical experience, it is the "safe" bet.  And, in fact, there are very good reasons why it should work this time - reasons that long-time market observers understand.  For example, stocks are getting cheap relative to the usual metrics of p/e ratios and dividend yield.  Also, actions are taking place behind the scenes to correct the problems.  One scenario (this should get a good laugh) is that the U.S. and the rest of the world actually begin to get their fiscal messes in order.

On the other hand, we are definitely in uncharted waters as usual.  Go back to late 2008 and early 2009. We know how markets turned out.  There was a massive rally ( which is firmly in investors' memories) from March 2009 on.  But what if the Fed and the Treasury hadn't stepped up at the last minute and guaranteed money fund assets?  What if TARP hadn't passed the second time around?

Today's situation is scary because we are depending on Europe to do the right thing policy wise.  In other words, we aren't driving the car.  Furthermore, we've got craziness in the U.S. political arena that can't be papered over easily by monetary and fiscal policy.

One observation I have made as an advisor is that many people are taking risks with their portfolios they don't have to.  In other words, they are set for a comfortable retirement even if they earn a modest 3% or so return on their assets.  They don't need 60% invested in equities.  They may want to think about reducing equity exposure.  The additional expected return doesn't compensate for the possibility of a big downdraft from here.  Others are well advised to stay the course, and younger people should start to put on their buying hat, IMHO.

Sunday, August 7, 2011

Former Fed Officials Interviewed

I don't know about others, but when I see these types of interviews, I waffle between cringing and biting at the bit to ask a question. For example, when they say that QE2 was successful because it increased inflation, I want to follow up with the comment that unemployment is still above 9% and consumer confidence is plummeting! How can they say it worked? How can they be rationally talking about more of the same? Are they at all cognizant of the employment picture?
Then they go on and on about Fed forecasts and admit that they have been horrible. Their response "Wall Street forecasts have also been poor." So this is how we make policy? This is the basis of how they jerk around the price of money and create uncertainty in the business sector?
As you watch, ask yourself if they are aware of how bad the employment situation is. Over half of those out of work today have been unemployed for a long time. Furthermore, unemployment benefits are on the verge of being extended for a much longer time. And these former Fed officials talk as if we are in the economic environment of the 1980s.

Source: Wall Street Journal.

Saturday, August 6, 2011

Financial Concepts Children Need to Know at Various Ages

As they have demonstrated with unwavering consistency, kids are financially illiterate.  Many parents understand that this puts them at the mercy of the shark-infested waters of the financial services industry and are seeking a remedy.

Here is a good article on "What Kids Should Know About Money At 9, 13, 18 and 23."

I would add that someone in the family should sit down with the "kid" when they get their first real job and carefully go over the benefits package, including insurance offerings, health insurance choices, and especially the company 401(k).  At this point, carefully review the importance of exploiting the company match as well as saving and investing at a young age.

Bankrate offers a simple savings calculator that can show the value of saving at a young age.

Two books I recommend that can be read profitably by  parent as well as budding careerist are:
I Will Teach You To Be Rich and Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School

Friday, August 5, 2011

The Reich Video

Robert Reich explains the economic situation in 2 minutes:

Here's Robert P. Murphy's 10-minute  response:

I'm off to get aspirin.

Thursday, August 4, 2011

A Nasty Graph

Here is an interesting graph from "Calculated Risk" I found on Jay Hancock's blog.


It vividly illustrates the critical difference between the employment picture emerging from the most recent recession compared to previous recessions.

The question is why the employment recovery has been so overwhelmingly anemic compared to the past and why the economy continues to struggle despite unprecedented policy actions both on the fiscal and monetary side.

The answer to me is clear.  The Federal Reserve caused the most recent recession by pushing interest rates down to 1% in the midst of a fairly robust housing market.  What people fail to grasp is that, by manipulating the federal funds rate, the Federal Open Market Committee (FOMC) is manipulating the most important price in the economy - the price of short-term money.  By driving the rate to 1% in 2003, they lowered sharply the price of housing (again, in a fairly robust housing market).  Then after sucking in fringe buyers with Fed-enabled teaser rates and exotic mortgages, they turned around and pushed rates sharply higher making the new mortgages unaffordable to new homeowners.

The part that people don't get, or better, don't want to see is that all of this has real effects in the labor market.  Instead of seeking an education that reflected the needs of the market, job seekers piled into the construction industry.  They piled into the mortgage broker industry.  They piled into fringe areas supporting these industries.  Great money could be made as a mortgage broker's assistant.  And so it went until the bust.

More recently, we have been in the mode of trying to figure out how to put the unemployed back to work and have slowly come to realize that this doesn't happen overnight.  The policy tools suggested by standard macroeconomic models aren't working.  The unemployed need new skills.  The ability to drive a nail is no longer in demand.

One question that needs examining is why the FOMC, under Greenspan and with the urging of Bernanke, pushed rates to 1% in 2003.  The line given is that they feared deflation lurking in the shadows.  But where is the evidence that deflation was imminent?  Macroeconomic forecasting is widely recognized as maybe just a half step above crystal ball grazing.

There was no deflation, and the disinflation that occurred certainly wasn't because of weakening demand.  It was because of the bust and the aftermath of the corporate governance problems with some lingering effects from 9/11.

At the time, there were accolades constantly showered on Greenspan.  Congress didn't understand his testimony but proclaimed his genius as he manipulated the fed funds rate during his tenure.  Too many accolades, especially in the macroeconomic policy arena, and soon arrogance begins to grow geometrically.  And that, IMHO, led us down the wrong path and to the results shown in the graph.

Wednesday, August 3, 2011


Tomorrow I talk to a group of kids from low income families on investing.  It is the last subject in a multi-week program on Financial Literacy put on by Making Change of Howard County.

What should my message be?  Should I get into the nitty gritty of how to invest in common stock by getting quotes, doing fundamental research, etc.?  Should I talk about p/e ratios, book value, and such? Or should I talk about the value of time and explain how money grows over long periods of time, what a 401(k) is, and understanding whether their employer offers a match?

I teach economics as a profession, so I have to start with some economics.  I'll try to convince them that they are, in fact, wealthy both in relation to the world today and to all the people who have ever lived.  I'll point out that there are billions of people on the planet who have no easy access to clean water, aren't sure where their next meal is coming from, and do hard physical labor even at a young age.  I'll point out that living in a free market, capitalistic economy means that the best and brightest among us are working 24/7 trying to figure out what we want in the way of clothes, music, cars, vacations, etc.  This extends to the medical field as well.

I'll point out that my ancestors 300 to 400 years ago were probably in northeastern Poland on the Russian border.  Historians tell us that they were self sufficient, probably never traveled more than 75 miles from where they were born, ate food that we couldn't stomach today, and likely totally illiterate. Their life expectancy was less than half ours.
I'll ask some questions.  I'll ask  how much they would have to be paid to give up the internet including Facebook, etc., for the rest of their lives.  I'll ask if they would rather have been the richest person alive 200 years ago or an average American today.  I'll point out that there was no such thing as the internet when I was their age and the richest person alive 200 years ago never rode in an automobile or even had television.  I'll point out that 200 years ago people died of diseases that have since been eradicated by medical science.

On the investing side, my most important message will be the importance of delaying gratification and taking advantage of time.  I'll briefly describe Mischel's famous marshmallow experiment where young kids were given a choice between eating a marshmallow now or waiting 15 minutes and getting 2 marshmallows.  The experiment teaches a lot on the difficulty of delaying gratification.

I'll stress how $1,000 grows at an 8% rate of return over a working life of 40 years.  We'll talk a bit about the 401(k) and how that will likely be their first encounter with investing.  This will entail an explanation of mutual funds and the company match and a mention of the risk/return trade off.  The main message will be that, if they invest and save smartly, someday when their 65th birthday arrives (the hardest thing of all for younger people to grasp!) they will have choices.

Monday, August 1, 2011

Index Investing - The Value of Knowing Where you Are

I have continually stressed the importance of knowing performance. Knowing where you are going and where you are at is always important in investing but especially, I believe, in volatile markets.

Investors are emotional.  When news headlines are overwhelmingly negative and stocks drop off a cliff, they sell.  When events are positive and prices skyrocket, they pile in.  And, when the dust settles and they get their performance over the long term, it tends to be well below those who are able to ride out the ups and downs. This is true of DIYers as well as the pros.

Recent events illustrate this well.  Watching the news and the ineptness of our legislators made many investors understandably queasy and want to throw in the towel.  After all, the talk of the U.S. not paying its bills and possibly getting downgraded is unprecedented.  The possibility of a 2008-type financial markets debacle was widely discussed and ratcheted up the discomfort of many investors. On the other hand, there were enticements.  Approximately 3 out of 4 companies reporting earnings did better than expected, and some produced eye popping results. The possibility of a so-called whipsaw was high, with earnings results luring investors in and political events scarring the bejeebers out of them.

But how is the "stay-the-course" indexer doing through all of this?  First off, by using Schwab or a similar service, the indexer  knows up-to-date performance of the specific model they are tracking against using low-cost index funds.  Schwab offers several models.  My clients in retirement tend to use the "Moderately Conservative Model."  This benchmark is comprised of 50% Barclay's Aggregate Bond Index, 10% 3-month Treasury Bill index, 25% S&P 500 (large cap equity), 10% MSCI EAFE (International Equity), and 5% Russell 2000 Small Cap Equity.  This model is basically 40% stocks/60% bonds.

The "Moderately Conservative Model" is up +3.60% year-to-date and + 10.15% over the past 12 months!  These performance numbers are through Friday's close, so they are completely up-to-date. Investors who use Schwab's service or a similar service know exactly where they stand at any point in time.  I believe this is critical for retirees, especially in volatile markets where rash decisions can be harmful.  As always, if drawing down assets, retirees should  have at least 12 months in payments in a cash-equivalents type of vehicle to prevent having to raise funds in a down market.

At the other end of the spectrum are those who can take more risk.  These are generally clients who are accumulating assets.  A popular Schwab model here is the "Moderately Aggressive Model."  It is comprised of 45% S&P 500, 20% MSCI EAFE, 15% Russell 2000 (small cap), 15% Barclay's Bond Aggregate, and 5% 3-month T-bill.  Basically it is 80% stocks/20% bonds.

Through Friday's close, it is up +3.41% year-to-date and +16.44% for the 12 months.  Clients, of course, like being up; but I try to emphasize that, if they are accumulating assets (for example regularly adding to their 401k), they would be better off if the numbers were negative.  After all, as accumulators, they are buying stocks.  What is important is the value of the portfolio when they begin drawing down their assets.  But alas!  People have a hard time understanding that lower prices are best for accumulators.

Sometimes investors in volatile markets say they sleep like a baby - they cry all night!  This isn't true for indexers who know where they are going and where they are at.

Disclosure:  I am not affiliated with Schwab.  This information is intended for educational purposes only. Investors should do their own research or consult a professional before making investment decisions.