Kimmunications

Podcast for 9/25/07: Highlights from KRLD live show

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Highlights from the live call-in show on KRLD-AM (1080) in Dallas-Fort Worth.

MP3 Download: Hi (128k) | Lo (24k)

Length: 14:05

Notes:
0:37  Terry asks about his 401(k) and whether he can roll it over from his current employer
6:14  Dale talks about his experience with the Snider Method
8:56  Ken sold a business and wanted to know what to do with the money
10:40  Ken (a different Ken) has $200,000 and wants to know if he should pay down his mortgage significantly or invest the money

Resources:
Make The Right Call for Financial Success
How to Turn Your 401(k) into a Million-Dollar Nest Egg

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

A Painful Example of Short-Term Thinking

Two weeks ago, I offered some alternative views on volatility. One of them was from Nassim Taleb, a guest on my radio show and author of the recent best-seller, The Black Swan. A wonderful example from his previous book, Fooled by Randomness, illustrates the cost of focusing on short term results.

 

Imagine you are retired and spend all your time tending to your nest egg. Let's assume two things about your portfolio performance:

 

1. You will earn 15% ; and
2. The variance will be ± 10% from this average.

 

Based on the information above, we know the long-term result of your portfolio will be around 15%; but in any given year, the 10% variance means the return could vary significantly from that number.

 

The question is: How much will the short-term results differ from the long-term certainty?

 

Suppose we use a Monte Carlo simulation to generate 100 possible futures. We would expect the results, when plotted, to resemble a standard bell curve. In other words, 68 of the 100 different possible results would lie within one standard deviation of 15%, or somewhere between 5% and 25%.

 

Moreover, all but 5 sample years would be within two standard deviations, falling somewhere between -5% and 35%. So even though the long-term return is 15%, the variance from year to year can be hefty.

 

Given the normal distribution within our bell curve, we know that the probability of your portfolio being positive, in any given year, is 93%. Those are pretty good odds, wouldn't you say?

 

Now here is where people lose the game. If you focus on the short-term results, randomness has some "unexpected scaling properties" (see the table below). At any given second, your portfolio has basically a 50/50 chance of being positive! If you check it every day, you will be distressed just slightly less than half the time. If you read only your monthly statements, however, you'll be pleasantly surprised two-thirds of the time. And if you calculate your net worth only once a year, you will be tickled pink 19 years out of every 20!

 

 

Now consider this. Psychologists tell us the pain of loss is felt far more than the pleasure of equivalent gains. Given that, imagine the effect your constant monitoring of short term performance will have. You can see how shorter term monitoring causes emotional responses.

 

Of course, if the volatility were higher than 10%, the swings would be even greater. Needless to say, your discomfort is likely to be magnified accordingly, right?

 

What we have here is confusion. When looking at your portfolio, you are confusing signal with noise, something I have written about previously. We can calculate the noise-to-signal ratio of your hypothetical portfolio I described above.

 

According to the chart in Nassim's book, if you check your investments every year, then for every true reading you will encounter 0.7 misleading ones. If you check performance once a month, the noise-to-ratio is 2.32 to 1. And if you are checking streaming real-time quotes by the second, the noise-to-signal is a completely ridiculous 1,796 to 1!

 

Investors must choose their investments based on how well they match up to their lifetime objectives, risk tolerance, time horizon and temperament. Once determined, the investments should not change unless one of these factors change and that shouldn't be very often. To look at a portfolio at any point in time and make a change based on your perception of performance in that moment is death by a thousand cuts.

 

SOURCE:

 

1. Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb; second edition (Texere, 2004)

http://www.amazon.com/exec/obidos/ASIN/158799190X/financialsu0f-20

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Podcast for 9/18/07: Interview with Paul B. Farrell

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Kim interviews Marketwatch.com columnist and author Paul B. Farrell about Wall Street's Machiavellian ways.

MP3 Download: Hi (128k) | Lo (24k)

Length: 13:12

Notes:
1:07  Paul Farrell explains why he was drawn to the book, The Politics of Life: 25 Rules For Survival in a Brutal and Manipulative World by Craig Crawford.
2:15  Wall Street is using the power of behavioral finance against investors.
2:35  Rule No. 1: Life is a filthy battle for control.
3:35  Rule No. 5: Ambition is never, never satisfied.
4:40  Rule No. 10: The more visible your power, the more its limits are known.
5:55  Rule No. 12: Most would rather follow a leader than lead a following.
7:21  Next Rule: Those who prefer to lead a following cannot be trusted.
7:54  Rule No. 17: Those who are dependent on you will be the most faithful.
9:55  Rule No. 25: The powerful never give up control; it must be taken away.

Resources:
Paul B. Farrell
The Lazy Person's Guide to Investing
The Politics of Life: 25 Rules For Survival in a Brutal and Manipulative World

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Protecting seniors from predatory practices

Chances are, you are over 65, have a loved one over the age of 65, or both. Financial services firms are targeting older Americans because of the tremendous opportunity they represent for these firms. Older Americans control record amounts of wealth in the United States and where there is bait, there will be sharks.

 

Regulators are particularly concerned about predatory practices aimed at seniors. These practices fall into four broad categories:

 

• Recommending products or services that are not appropriate given the person's individual situation;
• The use of false designations which imply special expertise in retirement and senior issues;
• High-pressure sales seminars aimed at seniors;
• Diminished capacity and the financial abuse of seniors by caregivers.

 

Suitability

 

Regulations require brokers and registered financial advisors to always place the customers best interest ahead of their own. Before recommending “the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable” for that customer, based on “the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.”

 

Unfortunately, financial advisors often ignore this rule by selling products inappropriate for the customer because they pay a high commission. The Financial Industry Regulatory Authority (FINRA) is the largest non-governmental regulatory agency for securities firms doing business in the United States. FINRA's examiners have been focusing specifically on recommendations to seniors that involve:

 

• Products that have withdrawal penalties or otherwise lack liquidity, such as deferred variable annuities, equity indexed annuities, some real estate investments and limited partnerships;
• Variable life settlements;
• Complex structured products, such as collateralized debt obligations (CDOs);
• Mortgaging home equity for investment purposes; and
• Using retirement savings, including early withdrawals from IRAs, to invest in high risk investments.

 

FINRA has repeatedly stated that variable annuities are generally considered to be long-term investments and are therefore typically not suitable for investors who have short-term investment horizons, like seniors. FINRA has stated in various regulatory bulletins, that this is true even of some variable annuities that offer riders specifically designed for seniors, including those offering guaranteed life benefits.

 

FINRA has also held forth on the lack of suitability of variable life settlements, which are often improperly aimed at investors over the age of 70; and taking out home equity for investment purposes. FINRA also warns against recommendations that investors use retirement savings, in some cases by making early withdrawals from IRAs pursuant to Section 72(t) of the Internal Revenue Code, to make unsuitable alternative investments.

 

In spite of these rulings, I continue to see these investments being sold to seniors. You don't have to dig hard to find them either. I hear stories from my clients every day. If you or your loved one is over the age of 65 and an advisor recommends any of these products or strategies to you, chances are, he or she is taking advantage of you. I admit there are exceptions but they are extremely rare.

 

Misleading Credentials

 

Several state securities regulators have adopted rules aimed at protecting older investors from misleading professional designations and credentials. In Massachusetts, for example, new regulations govern use of credentials and professional designations that use words such as "senior," "retirement" and "elder" in combination with words such as "certified," "advisor" and "specialist" to imply an expertise in advising senior investors. Most regulatory agencies, government and non-government alike, consider anyone 65 years of age or older "senior." Nebraska and Washington have followed suit.

 

This was necessary because there has been a rash of these designations that have sprung up over recent years with little or no transparency as to what they actually mean. In fact, the largest of these, The Society of Certified Senior Advisors, which offers the "certified senior advisor" designation, will begin requiring its CSA's to disclose that they may have no particular expertise when it comes to financial issues affecting seniors.

 

Beginning June 1, financial advisors in Massachusetts, can use only senior designations that have been accredited by a national accrediting agency. Nebraska maintains a list of "approved" designations. The North American Securities Administrators Association (NASAA), which represents state securities regulators, plans to develop similar guidelines by the end of the year and recommend their adoption to other states.

 

Similarly, FINRA found that some third-party vendors are marketing ghostwritten books on senior investing to registered representatives as tools to establish credibility. Basically, the advisor buys the book and then puts their name on it as the author.

 

Rules, such as NASD Rule 2210 and NYSE 472 prohibit firms and registered representatives from making "false, exaggerated, unwarranted or misleading statements or claims in communications with the public". So does the Investment Advisor Act, a federal law. FINRA has stated that representing yourself as an author of a book you didn't write, to confer some level of expertise you don't really have, is misleading and may violate state and federal law.

 

High pressure sales seminars

 

Many financial services firms, including ours, use sales seminars. But regulators are particularly concerned right now about the so-called "free-lunch seminars" that target seniors.

 

SEC Chairman Christopher Cox said the agency is scrutinizing brokers and advisers who conduct meetings over free meals at "fancy hotels and restaurants." The effort will begin in Florida in the coming weeks, Cox said today at a conference in Washington hosted by the Consumer Federation of America.

 

"If we find that instead of a legitimate sales seminar and a free meal, seniors are being exposed to pitches for unsuitable products, with high-pressure sales tactics and wild claims about projected returns, and no disclosure of the actual risks of the investment, we'll move in hard and fast," Cox said.

 

The initiative is part of "a comprehensive national strategy for protecting older investors" that is being carried out by SEC field offices, state and local regulators and law enforcement, said Cox, 53. NASD enforcement chief James Shorris, named to the post yesterday, said his agency will also make protecting elderly investors a priority.

 

I have to admit, some of the findings of this sweep are scary to a legitimate firm like ours because it is difficult to tell the difference. For example, a Yahoo article says:

 

While their promoters paint the "free lunch" seminars as educational sessions, sometimes promising that nothing will be sold, "they are designed to sell — either at the seminar itself or later," said Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations. "They're not educational events."

 

The investigation conducted by the SEC, state regulators and FINRA found the use of scare tactics to get seniors to question their current investments, claims of fantastic returns with no risk, and "ringers" in the audience who would stand up and offer testimonials of how much they had earned.

 

For one, we don't target seniors - our demographics mirror the general population. But as the number of seniors in the population increases, so will the number of seniors served by us. It seems that we must now err on the side of caution to avoid being painted with the same brush - probably not a bad idea anyway.

 

We have called our free sales events, "educational seminars" but we have never said we aren't selling anything because we obviously are. The sub-title of our events is "An introduction cash flow investing and the Snider Investment Method™." What we do say is you won't be subjected to a high-pressure sales pitch, which you won't. We try to respectfully give you the facts and then leave you alone.

 

But while we don't try to get anyone to sign up on the spot, we do sometimes offer a discount if you sign up for a paid workshop within seven days. When our classes are not full, encouraging someone to sign up for an earlier class seems like a wise business decision. Is that high pressure? I'd like to hear your thoughts.

 

The one that really sets my teeth on edge is the one about the "ringers" in the audience. This should really make some of our students who routinely show up to talk with others pretty mad. We have never, ever paid someone for their testimonial. Anyone who shows up at our marketing events is a client who paid to learn the Snider Investment Method™, is using it, and wants to tell others. They get nothing in return.

 

The last information session we did in Frisco, there was a woman in the audience who I didn't even recognize as being one of our graduates. During the Q&A, she asked me if she could stand up and tell her story. I didn't ask her to be there. I didn't ask her to stand up. She just did - and I appreciated it. I am grateful to know that what I taught her made a meaningful difference in the quality of her life.

 

I know some firms may use shills or "ringers." I don't know how they sleep at night, but I know they do. So how does someone differentiate between a legitimate customer who is there because they really believe in the product and a shill? How does someone distinguish between a legitimate firm using a seminar to sell a legitimate product to people for whom it is appropriate from a sleaze ball who doesn't care about anything other than generating the highest possible commission? Again, I'd like to know your thoughts. You can leave them in the comments below.

 

At the end of the day, I guess that is the regulator's concern as well. So from my perspective, and that of any other legitimate firm who wants to use seminars to educate potential customers about their products or services, we should be thankful the regulators are trying to clean this area up. If successful, attendees can feel confident the material being presented is accurate and they will not be subjected to any high-pressure sales pitch.

 

My very real concern though, is that in the process, some legitimate firms like ours may get painted with the same, very broad brush.

 

Diminished Mental Capacity and Suspected Financial Abuse

 

The last issue regulators are concerned about is diminished capacity and financial abuse by caregivers. This is obviously a non-regulatory issue and has nothing to do with a firm like ours - except that we have the potential to spot it and take actions to protect the client.

 

What can you do?

 

The first thing is to make sure you or any family members have a will, a living will and a durable power of attorney in case of incapacity. That will save you from going through the court system if a loved one loses the mental capacity to make decisions.

 

The second is to begin a dialog with aging family members about their financial situation as early as possible. Don't wait until the last minute. A conversation now about whether your parents have long-term care insurance, for example, may lead them to let you in more on their finances as you go along.

 

Third, offer to accompany them on appointments with financial advisors - especially if you have any doubts about their capacity to make sound financial decisions. The elderly are much more susceptible to fraud or just being taken advantage of.

 

Finally, educate yourself on financial matters. You not only need it to protect yourself, but you may also need it to protect those who once protected you.

 

SOURCES (direct quotes are indented):

 

1. Financial Industry Regulatory Authority. "Seniors" Regulatory Notice 07-43 September, 2007.

 http://www.finra.org/RulesRegulation/NoticestoMembers/2007NoticestoMembers/P036815

 

2. "Mass limits use of senior credentials"; Boston Globe; May 17, 2007.

http://www.boston.com/business/ticker/2007/05/mass_limits_use.html

 

3. "States re-evaluating who should be licensed"; Financial Advisor; September, 2007.

http://fa-mag.com/issues.php?id_content=2&idIssue=125&show=fronline

 

4. Annys Shin. "SEC targets free-lunch scams"; WashingtonPost.com; March 24, 2006.

http://blog.washingtonpost.com/thecheckout/2006/03/sec_targets_free_lunch_scams.html

 

5. Marcey Gordon. "Free lunch seminars can entrap seniors"; Associated Press; September 10, 2007.

http://www.boston.com/business/ticker/2007/05/mass_limits_use.html

 

2. Bruce Fraser. "Role Reversal"; Financial Advisor; September, 2007.

http://fa-mag.com/issues.php?id_content=2&idArticle=1568

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

A different perspective on market volatility

It is my experience that you have three primary concerns when it comes to your investments: 1) Catastrophic losses of principal; 2) Outliving your money; and 3) Knowing who to trust. Am I right? Talking to people just like you, day in and day out, I know those fears are heightened by extreme market movements like we have experienced in the last few weeks. True?

 

So I thought it might be helpful to give you some perspective on market volatility from various authors who I know and respect. From Dr. Benoit Mandelbrot¹, in The (Mis)behavior of Markets:

 

From 1916 to 2003, the daily index movements of the Dow Jones Industrial Average do not spread out on a graph paper like a simple bell curve. The far edges flare too high: too many big changes. Theory suggests that over time, there should be fifty-five days when the Dow moved more than 3.4 percent; in fact there were 1001. Theory predicts six days of index swings of more than 4.5 percent; in fact, there were 366. And index swings of more than 7 percent should come once every 300,000 years; in fact, the twentieth century saw forty-eight such days.

 

In other words, there is far more volatility in the markets than most people realize. That is Dr. Mandelbrot's central message. Rather than ignore this risk, I think we should be teaching people how to make it work to their advantage.

 

From Nassim Nicholas Taleb², in Fooled by Randomness:

 

Prices swing more than the fundamentals they are supposed to reflect, they visibly overreact by being too high at times (when their price overshoots good news and when they go up without any marked reason) and too low at others. The volatility differential between prices and information meant that something about 'rational expectation' did not work.

 

Prices swing more than the underlying fundamentals because markets are driven by the human emotions of fear and greed. Neither of these have anything whatsoever to do with the underlying fundamentals.

 

From Ed Easterling³, in Unexpected Returns:

 

The average annual change for the Dow Jones Industrials Average stock market index, as a simple average, is just over 7% over the past century, 1901-2003... Over that period, what percentage of the years would you expect the annual change would occur in the range of -10% to +10%? Most investors seem to guess a number between 60 to 70 percent—that a clear majority of the years would be inside the range. What range would be required to include half of the years inside that range? … It is very surprising to most investors that the yearly range in the stock market has been inside the range of -10% to +10% only 30 percent of the years. Remarkably, to include half the years inside the range, it has to be expanded to -16% to +16%.

 

Of course, that also means that 50% of the years had a return of greater than ±16%, too. For an investor who looks at his or her portfolio value as a gauge of success, those swings would be pretty scary. For a cash flow investor, who gauges success by the amount of income a portfolio can generate, and by extension, the sort of lifestyle the portfolio can sustain, those market swings should be irrelevant.

 

Finally, there is this from Peter Bernstein⁴ in, Against the Gods: The Remarkable Story of Risk, who I tried to get on the show but could not:

 

For true long-term investors—that small group like Warren Buffet who shut their eyes to short-term fluctuations and that have no doubt that what goes down will come back up—volatility represent opportunity rather than risk, at least to the extent that volatile securities tend to provide higher returns than more placid securities.

 

This is the approach I take to volatility. Volatility is my friend, not the enemy. I love, love, love volatility. To me, the last month or so has been the absolute ideal!

 

How do you feel about big market moves? Do they scare you? Make money for you? Or not affect you at all? Do any of these perspectives surprise you? Do you agree? Disagree? Feel free to leave your thoughts and comments below.

 

We have taught 3009 investors how to:

 

• Manage their emotions
• Preserve capital
• Get growth even as markets decline
• To generate enough portfolio income to do what they want, when they want, without worrying about market ups and downs.

 

If you have over $25K to invest, register today for our free introductory class on cash-flow investing and the Snider Investment Method™.

 

 

 

 

1. I first interviewed Dr. Mandelbrot in 2004 for my radio show. Dr. Mandelbrot is the father of fractal geometry, which in case you are interested, is what makes all of today's amazing computer animation so lifelike. He is also the Sterling Professor of Mathematics at Yale and a Fellow Emeritus at IBM's Thomas J. Watson Laboratory.

 

2. I first interviewed Nassim Taleb for my radio show in August, 2004. (You can listen to the podcast of that interview here.) In fact, it was Nassim Taleb who introduced me to both Dr. Mandelbrot and Terry Burnham. In addition to Fooled by Randomness, Nassim Taleb is also the author of the recent best-seller, The Black Swan. Dr. Taleb is a fellow at the Courant Institute of Mathematics of New York University.

 

3. I first interviewed Ed Easterling for my radio show in April, 2005. We have had him on several times since. (You can listen to the podcasts of our interviews here and here.) Ed is the founder of Crestmont Research and Adjunct Professor at SMU's COX School of Management where teaches a graduate course on hedge funds. Ed's website, crestmontresearch.com, is a wealth of wonderful primary research on market cycles.

 

4. Peter Bernstein is the one author on this list who I do not know. I talked to his assistant about getting an interview on my radio show some years ago and he declined. Peter Bernstein is the author of the semimonthly analysis Economics and Portfolio Strategy. He has authored six books on economics and finance. He was the first editor of The Journal of Portfolio Management.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Podcast for 9/11/07: Interview with Doug Hirschhorn

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Kim interviews Dr. Doug Hirschhorn, a.k.a. "The Trading Dr." They talk about the psychology of investors and the four most common emotional pitfalls traders face.

MP3 Download: Hi (128k) | Lo (24k)

Length: 23:40

Notes:
1:05  What is a trading coach, and what does that have to do with sports psychology?
2:42  Doug gives an overview of the four emotional pitfalls traders face.
    1. Fear of Missing Out
    2. Focusing on the money and not the trade
    3. Losing objectivity on a trade
    4. Taking on risk because you're up (or down) money.
3:40 If you're really here to make money, then don't make decisions that are counterproductive, like making trades because you're afraid to miss an opportunity.
4:42  Traders sometimes experience "trading injuries" that can cause them to undertrade or lose confidence. It's similar to when an athlete experiences a major injury.
6:40  In order to make money, you have to not focus on making money. You have to focus on making the right trade.
8:50 If you stick to your disciplines, you have good days/weeks/months of trading, even if the outcome isn't good. The more you stick with your good methods, you more success you'll have.
10:00  Manage your risk and the returns take care of themselves. But also make only high-quality trades where you have "edge."
11:33 Emotions can really mess things up. Something changes in our thought processes when we have real money on the line. Use a system you develop when you're sane, when there's no money on the line, and stick with it when you do have money in the game. That's the gist of staying objective when investing.
16:38  A mechanical investment strategy (following step by step) is good to take emotions out of the equation.
18:29 Doug explains pitfall #4 -- taking on risk because you're up or down money. Casinos prey on this. To be successful trading, you need to think like a casino thinks. Mental accounting sometimes messes us up.

Resources:
Dr. Doug Hirschhorn, The Trading Dr.
The Head Coach

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Subscribe:

Kim interviews Dr. Doug Hirschhorn, a.k.a. "The Trading Dr." They talk about the psychology of investors and the four most common emotional pitfalls traders face.

MP3 Download: Hi (128k) | Lo (24k)

Length: 23:40

Notes:
1:05  What is a trading coach, and what does that have to do with sports psychology?
2:42  Doug gives an overview of the four emotional pitfalls traders face.
    1. Fear of Missing Out
    2. Focusing on the money and not the trade
    3. Losing objectivity on a trade
    4. Taking on risk because you're up (or down) money.
3:40 If you're really here to make money, then don't make decisions that are counterproductive, like making trades because you're afraid to miss an opportunity.
4:42  Traders sometimes experience "trading injuries" that can cause them to undertrade or lose confidence. It's similar to when an athlete experiences a major injury.
6:40  In order to make money, you have to not focus on making money. You have to focus on making the right trade.
8:50 If you stick to your disciplines, you have good days/weeks/months of trading, even if the outcome isn't good. The more you stick with your good methods, you more success you'll have.
10:00  Manage your risk and the returns take care of themselves. But also make only high-quality trades where you have "edge."
11:33 Emotions can really mess things up. Something changes in our thought processes when we have real money on the line. Use a system you develop when you're sane, when there's no money on the line, and stick with it when you do have money in the game. That's the gist of staying objective when investing.
16:38  A mechanical investment strategy (following step by step) is good to take emotions out of the equation.
18:29 Doug explains pitfall #4 -- taking on risk because you're up or down money. Casinos prey on this. To be successful trading, you need to think like a casino thinks. Mental accounting sometimes messes us up.

Resources:
Dr. Doug Hirschhorn, The Trading Dr.
The Head Coach

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Podcast for 9/4/07: Interview with Dr. Annamaria Lusardi

Kim interviews Dr. Annamaria Lusardi, economics professor at Dartmouth, about her recent paper on financial literacy and retirement preparedness.

MP3 Download: Hi (128k) | Lo (24k)

Length: 27:10

Notes:
0:19  Introduction of Dr. Annamaria Lusardi and paper "Financial Literacy and Retirement Preparedness."
0:54 Dr. Lusardi talks about the two previous papers she and her research partner, Olivia Mitchell, wrote on financial literacy.
1:59  The three questions they asked in their first survey: 1) If you had $100 in a savings account, and the interest rate was 2% per year, after 5 years how much would you have if you let the money grow? 2) If the interest rate is 1% and inflation is 2%, after 1 year would you be able to buy more or less than today? 3) Does buying a single company stock provide a safer return than a stock mutual fund? The large majority couldn't answer these simple questions correctly.
3:04  They were surprised how widespread this lack of knowledge was.
4:44 The questions in this latest paper: 1) If the chance of getting a disease is 10%, how many people out of 1,000 could be expected to get the disease? 2) If 5 people all had the winning lottery number, and the prize is $2 million, how much would each of them get? Most people got these wrong, too.
5:49  If they got the questions right, they were asked about compound interest: If you have $200 in an account, which earns 10% per year, how much would you have after 2 years?
6:59  How the answers break down by different groups
8:21  Connections between financial literacy and financial success
9:32 Not a chicken-and-egg problem; people who are more financially literate tend to be more financially successful.
10:42  What the results tell us about baby boomers in particular.
12:58  This lack of financial literacy isn't just an American problem. It's global.
14:43 What's being done to address this lack of literacy-- One is financial education in high school, but this doesn't address those who are out of high school. Employers and the Internet are viable alternatives, but how do you guarantee the quality of the education, and how do you avoid conflict of interest? Dr. Lusardi says government institutions and non-profit foundations are the best equipped to address this problem.
17:15  Dr. Lusardi details what Japan did after World War II to instill saving and frugality in its citizens.
18:37  Dr. Lusardi says it's not that financial education is ineffective; it's that the cure is inadequate for the disease.
20:34  More on conflict of interest
23:37 Basic takeaways: People don't have a lot of financial knowledge. It shouldn't be taken for granted, especially since more and more people are responsible for their own retirement.

Resources:
1. Lusardi, Annamaria and Mitchell, Olivia S., "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs" (January 2007). Available at SSRN: http://ssrn.com/abstract=957796

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

What I know For Sure About Investing … In No Particular Order

1. Your investment objective has nothing to do with account value and everything to do with the lifestyle the sum total of your assets can sustain indefinitely into the future.
2. Investment success is based on performance of the entire portfolio, not the current performance of an asset class or individual security.
3. Older investors are fighting the wrong dragon. When you are living off your portfolio, the enemy is not loss of capital but inflation.
4. Focus on the things that are farther out first. If your investment objectives include retirement, paying for a child's college education and buying a new house, work on the one that is farthest away first.
5. We cannot plan for a future we cannot imagine.
6. Cash flow investing is a better way to invest than capital appreciation investing. I can prove it to you. Come to one of my free classes on cash flow investing.
7. You are uniquely qualified to manage your own investments because you are the only one with no conflict of interest.
8. If you can reduce fees by 2%, by managing your own portfolio, that is the equivalent of a risk-free 2% return. On a risk adjusted basis, that is huge.
9. Investments should be picked based on how well they match up to your investment objectives, risk tolerance, time horizon and temperament - not based on short-term performance.
10. Investing is 10% knowing what to do and 90% doing it.

 

What do you know for sure about investing? Please leave your thoughts in the comment section below. I will expand each of these ideas in the coming weeks.

 

We have taught 3009 investors how to:

 

• Manage their emotions
• Preserve capital
• Get growth even as markets decline
• To generate enough portfolio income to do what they want, when they want, without worrying about market ups and downs.

 

If you have over $25K to invest, register today for our free introductory class on cash-flow investing and the Snider Investment Method™.

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

The Wall Street Journal's Disservice to Investors

A couple of people emailed me about the story that appeared on page one of the Tuesday, August 14, 2007 edition of the Wall Street Journal headlined "Over Their Heads: Small Investors, Too, Get Nailed by Arcane Trades." This headline would have been pretty "scary" and confusing to investors with little or no knowledge of options, futures or exchange-traded funds.

 

The article tells the story of various investors who have tried to use short selling, market neutral funds, commodities, and foreign investments to protect their portfolios against declining stock prices. The gist of the article is about how these measures have failed and their investors "burned".

 

Let's look at the sub-text of this article and see how it is great for selling newspapers but sends the absolute wrong message to investors. The article implies:

 

1. It is possible to avoid falling portfolio values when market prices fall.

 

2. We should look at the individual pieces of the portfolio and how they are performing rather than the portfolio as a whole.

 

3. When something goes down in value, sell it; when it goes up, buy it.

 

4. Options and futures are inherently risky, as implied by the heading, "Exotic Instruments" on the chart of optionsXpress' option trading volume.

 

Shame on you Wall Street Journal! This is a blatant case of, "If it bleeds, it leads!" You aren't educating investors with a story like this. These messages are going to cause people to lose money because they got the wrong message from a "reputable" paper like the WSJ.

 

Here is what you should have told us:

 

1. Globalization has lead to increasing linkage between investments. Investments that once moved independent of one another now move in the same direction, at the same time. Trying to avoid losses in portfolio value will inevitably lead to disappointment. Instead, learn how to make your money work, even when portfolio values are falling.

 

2. A portfolio is a group of investments, which when taken as a whole, are designed to achieve the investment objective, over time. There is no such thing as a perfect investment. Hold any investment long enough and there will be times that you hate it. Other times you will love it. What you want to do is have enough performing well, at any one time, to make up for the ones that are performing poorly and as a whole, achieve your objective.

 

3. Buy and sell decisions within your portfolio should have nothing to do with the short-term performance of the individual investments. If the combination of investments are properly matched to your investment objective, risk tolerance and time frame, your investments should only change when one of these parameters change.

 

4. Options and futures are not inherently good or bad, safe or risky. They are just a tool. It is the way people choose to use them that is safe or risky, smart or dumb. When used incorrectly, knives can be dangerous too, but I don't try to cut a side of beef with a spoon! Derivatives are some of the most flexible investment tools available to individual investors. Using them to create cash flow and manage risk is smart. Using them to place a highly leveraged bet on the future direction of wheat is dumb!

 

Unfortunately, most people are taught the dumb way - or know someone who is taught the dumb way. I feel badly for the people in the article but I think it is a symptom of a larger problem. The problem is investors are being driven less and less by sound investment principles and more and more by fear and greed. As someone in the article mentioned, investors often know just enough to shoot themselves in the foot.

 

I believe in self-directing your own investments. Managing your own portfolio reduces cost, eliminates conflict-of interest and puts control over your financial future where it belongs - in your hands. However, this article also points out the value of having an experienced financial coach - someone who can look at what you are doing, see the mistakes you might be making, and give the appropriate guidance.

 

We have taught 3009 investors how to:

 

• Manage their emotions
• Preserve capital
• Get growth even as markets decline
• To generate enough portfolio income to do what they want, when they want, without worrying about market ups and downs.

 

If you have over $25K to invest, register today for our free introductory class, Personal Investing 101: An introduction to cash-flow investing and the Snider Investment Method™.

 

SOURCE:

 

1. Eleanor Laise, et al. "Over Their Heads: Small Investors, Too, Get Nailed by Arcane Trades." Wall Street Journal 14 August 2007; A1

http://online.wsj.com/article/SB118705636964396823.html (Subscription required)

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

DISCLAIMER:

No statement on this blog should be construed as a recommendation to buy or sell a security or to provide investment advice. All investors should consult a qualified professional before trading in any security. Stock and option trading involves risk, including the possible loss of capital, and is not suitable for all investors. Past performance is not a guarantee of future results. Investment objectives, risks and other information about the Snider Investment Method™ are contained in the Snider Investment Method Owner's Manual; read and consider them carefully before investing.