Kimmunications

What Dara Torres Can Teach Us About Investing

Don't you just love the Olympics? I don't watch much television, but I was glued to the set last Friday night, watching the opening ceremonies. The pageantry and the technology on display were simply breath-taking.

I've always admired Olympic athletes for their dedication and discipline. It takes long hours at the gym, on the track and in the pool, each and every day, to reach elite status. And every Olympic games, I look forward to the stories behind the athletes, the tales of triumph and overcoming adversity.

This year, my favorite story has to be that of Dara Torres, the 41-year-old swimmer who helped her relay team win a silver medal. This is her fifth Olympic games. She first competed in the Los Angeles games of 1984 -- the year before her fellow Olympian, Michael Phelps, was even born!

Can you imagine the discipline it took for Torres to maintain her elite status as a swimmer? She's battled through countless surgeries and grueling training sessions over the years, and she's arguably better than she's ever been -- last year, she set an American record in one of her events. And did I mention she had a baby just two years ago? Think of all the times she could have easily given up and walked away. And yet, she persevered.

Dara Torres is a success story because of her discipline. And the same commitment to discipline can do for investors what it does for elite athletes.

Success in investing comes from creating a plan and sticking to it every day. That sounds awfully complicated, but it really isn't -- provided you have a solid system in place.

Systematic investing strips away the complex external variables and tells you exactly what to do and when. A huge rally or one-day drop in the stock market may cause your emotional brain to make rash decisions that you'll regret later, but a system will help keep you on the right track. In the event you suffer an investing "injury," a system will help you recover faster. By sticking to your system, you're more likely to avoid the mistakes that send other investors permanently to the sidelines.

Dara Torres' system of disciplined training has made her the oldest Olympic swimming medalist in history.  A disciplined system of investing – be it dollar-cost averaging or the Snider Investment Method®-- may make you a successful investor at any age.

SOURCE:

1. Clarey, Christopher. "With Silver, Torres Sets Age Record for Medalist," The New York Times, 10 August 2008. [accessed 12 August 2008]

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes 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 888-6SNIDER 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, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Who's watching your pack?

Last week, I was in Alaska with the Bora Bora Society, a great group of Snider Method workshop alumni who travel together once a year.  While there, I met an Iditarod racer and his dogs. The racer, called a "musher," explained to us just how grueling the race can be -- more than 1,150 miles through mountains, across frozen rivers, and into dense forest and desolate tundra. All this at sub-zero temperatures, gale-force winds and blinding blizzards. The wind chill was once recorded at -100 degrees Fahrenheit! 

To see the work and training involved in such an endeavor is truly amazing, and I think I could have spent my entire trip just learning about the dogs and the care it takes to cross the finish line.

It takes a steely resolve and a little insanity to even want to compete in this race, and the mushers ought to be admired. But the real athletes, the real stars are the sled dogs themselves, which the mushers treat like their own children.

They were training one young dog -- maybe a little over a year old --  who was obviously new to the game. All the dogs were hooked together and running, but the young one kept turning his head, looking at the scenery around him.

I noticed one of the older dogs, perhaps the oldest in the pack, was right beside him. Every time the young dog broke his concentration, the older one nipped at him to keep him in line.

"We don't really do much training," the musher said. "The dogs really train each other."

That got me thinking about how families treat investing and personal finance. Your family is like a team of sled dogs; you all must work together to navigate the rocky terrain through all sorts of weather. The older, more experienced members of your family need to make sure the younger ones learn how to run the race the right way.

So who's watching out for the young pups in your family? Are you teaching your children and grandchildren good money habits? They won't pick it up in school -- most high school graduates don't even know how to balance a checkbook!

Sure, the younger pups may not appreciate your nipping at them whenever they wander astray. They'll yelp and bite back… but you must keep at it. Your involvement in your family's financial education will serve your pack well.

(By the way, there are more photos from the trip on our Bora Bora Society page on Flickr.)

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Kim Snider is the President and Founder of Snider Advisors, an SEC Registered Investment Advisor, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method and how to stop enriching your investment advisors at your expense, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes 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 888-6SNIDER 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, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Investing Like Yale

In times when the market is going every which way, it can be comforting -- and rewarding -- to follow a rigid system. This video from Investment News shows how large university endowment funds follow a system to get better results. It also features an interview with a big-name fund manager who also follows a system.

Key quote: "We've found over the years that the numbers are more reliable than opinions, and that includes my own opinion." - Steve Leuthold, The Leuthold Group

Also, for those of you in the Snider Method® who are nervous about the international stocks Lattco® gives you, pay close attention to the discussion of overseas markets.

Go here to watch the video: http://link.brightcove.com/services/link/bcpid1125967528/bclid1125949998/bctid1498976295

Snider Advisors makes 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, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Market Timers Creep Out of the Woodwork

Have you ever been driving around, listening to the radio, when you hear something so offensive, so wrong, that you can't help but scream? That happened to me last Saturday afternoon. 

I was driving home from our after-show "Lunch Bunch" when I heard a financial advisor - on the same station my show comes on - tell his listeners that we should trust him because he said to get out of the market back in November. He said if everyone had done as he advised, we'd all be happier right now amid this market volatility.

Several other so-called advisors are on the airwaves warning of an impending recession. "Get your money out of the stock market now," they say.

These advisors are suggesting that they can properly time the market. And they want you to pay them a hefty premium to do it.

Why the myth persists

Why do so many think you can successfully time the market? Because we hear about the successful calls all the time. Elaine Garzarelli correctly predicted the stock market crash of 1987. Ralph Acampora became famous for predicting the dot-com bubble. We don't hear about all the market calls they made that didn't come true. But because they got it right once or twice, the media treat them as geniuses.

You're probably familiar with the phrase, "Even a stopped watch is right twice a day." It's the same for many market timers. Abby Joseph Cohen is always bullish, and when she turns out to be right, she's labeled brilliant. Roger Babson is credited with predicting the stock market crash of 1929. But he was giving doom-and-gloom speeches throughout the 1920s, even as the market reached historic highs year after year. When the crash happened, suddenly he was right.

I've even heard stories from friends in the financial services industry that the big firms keep analysts who make opposite calls, just so they can point to the one who gets it right.

The evidence

So our radio financial advisor friend correctly predicted when to get out of the market. Congratulations. But to be a successful market-timer, you can't just know when to get out. You also have to know when to get back in. And that's no easy task. There's about a one-in-ten chance of guessing it correctly, according to Vanguard's John Bogle. He tells William A. Sherden in The Fortune Sellers:

To make money, you have to make two market calls: one to get near a low point and one to get out near a high one, which means that your chance of success is about one hundred to one (one-tenth times one-tenth). And, doing it twice has a one-in-ten-thousand chance of succeeding.

…

In the 30 years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently. Indeed, my impression is that trying to do market timing is likely not only not to add value to your investment program, but to be counterproductive.

Bogle's impressions are supported by several studies, one of which is from Dalbar. Their Quantitative Analysis of Investor Behavior has, for many years, shown how investors shoot themselves in the foot trying to chase returns. In other words, impulsive investors. But market timers do even worse, according to their 2004 study:

Although the S&P 500 on average grew by 13 percent over that 20-year sample, Market timers actually lost money.

And these financial advisors are suggesting that timing the market is a good thing?

By getting out of the market, as these advisors suggest, you may avoid losing some capital in the short term. But you're almost assured of missing out on the gains when the market starts going back up. According to a study from SEI Investments, the majority of a bull market's gains come in its first few days and weeks. If you wait until you see the market turn, you've already missed a golden opportunity.

From The Wall Street Journal:

SEI looked at the dozen bear markets since World War II. If you held stocks at the market bottom, you made an average 32.5% over the next 12 months. But what if you bought one week after the bottom? Your gain was trimmed to an average 24.3%. Meanwhile, if you didn't buy until three months after the market bottom, your gain was just 14.8%

So what do we do?

I have no idea whether we're headed for a recession or a prolonged bear market. I don't have a crystal ball, and I'm not in the business of predicting the future direction of the stock market. What I do know is that the stock market is the best place for long-term growth over time, just not all the time. Trying to time the market is a fool's errand.

Any advisor who tells you otherwise is either lying or sadly misguided.

SOURCES:

1. Dalbar Inc., Quantitative Analysis of Investor Behavior, 2004.

2. "It's Time to Prepare Yourself for an (Inevitable?) Bull Market." Getting Going, The Wall Street Journal, Oct. 23, 2002. http://online.wsj.com/article/SB1035309775900025391.html?mod=googlewsj (accessed April 30, 2008)

3. Sherden, William A. The Fortune Sellers: The Big Business of Buying and Selling Predictions. New York: John Wiley & Sons Inc., 1998.

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Kim Snider is the President and Founder of Snider Advisors, an SEC Registered Investment Advisor, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method and how to stop enriching your investment advisors at your expense, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes 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, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Shaped Skis and Cash Flow Investing

I have been skiing as many years as most of you have been investing - almost 40 years. I may not be the best skier on the mountain but I have always taken pride in my proficiency on skis.

 

After decades of skiing on long, stiff, straight boards, ski technology has shifted dramatically. Now everyone skis on short, supple, shaped skis. These new skis require you to ski differently than we did in the old days. In fact, everything is almost the exact opposite. To ski well on the new skis, I have to unlearn a lot of years of skiing.

 

Us old-timers learned to ski with our knees together. On the new skis you ski with your legs apart. On the old long boards, you weighted and unweighted your skis with one sliding in front of the other to turn. Now you turn both skis at the same time by applying the slightest amount of pressure with your big toe to the inside edge of the ski. Skiing the old way, your weight was all on one leg. Now you put weight on both skis. And here is the one that really screws me up - now I lean to the right to turn left and visa versa!

 

The overwhelming temptation is to stick with what I know. Why try to learn this new way of skiing? After all, I have gotten this far with the old way, right?

 

In a nutshell, it is because the new way is better. More accurately the new way is more appropriate, given my objectives, which are to be able to ski all different types of terrain with minimal energy expended and the least chance of bodily injury.

 

These were not my major concerns when I was younger. My objectives have changed and so too must my style of skiing.

 

So, here I am, in Squaw Valley, taking a few days vacation after a convention in San Francisco. I finally broke down, after several years of resistance, and took a lesson on how to ski the new way. Let me just tell you … I hate it.

 

Now I know how investors feel when they switch from the old capital appreciation model to this new-fangled way of cash flow investing. The old way was comfortable. This way I feel totally awkward. Every time the instructor tells me to lean left to turn right, my brain revolts! It feels similar to the sensation of trying to pat your head and rub your stomach at the same time. I get angry. At him? At me? I am not sure - maybe both.

 

The easy thing to do would be to go back to the old way. But I can't. I am determined to push through this initial awkward stage. No doubt about it, it's going to take awhile.

 

Some people have a natural sense of where their body is in space and can make physical adjustments quickly and easily. I have never been one of those people. I have to work at it - just like some of our investors instantly "get it" and others struggle before the light bulb finally goes off.

 

But why? Why do I have to make this change? Because in a logical moment I realized the new way was better suited to what I was trying to accomplish.

 

I am older now and no longer have the benefit of a young body - just as an older investor no longer has the benefit of time. Now I enjoy being able to cover maximum terrain with minimum effort - just as our investors want maximum results with minimal risk. The new way lets the skis do all the work instead of me - just as our way is about making your money work harder so you don't have to. And most importantly, the new way allows me to safely navigate difficult terrain because I am skiing on a more stable platform - just as our investors want/need a platform to navigate difficult markets.

 

So, in spite of the fact that I felt like an out of control beginner today, I will stick with it. I have to trust. I know, eventually, this too will feel natural. In the meantime, my logical brain will just have to drag my lizard brain along.

 

Kim Snider Financial Communications makes 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. Individual results may vary.

The Performance Paradox - Greed - (Part 2)

Last week I wrote about what I call the Performance Paradox. The Performance Paradox is: The more you want or need it, the more you try to get it, and the more you micromanage it, the worse it will be.

 

There are two sides to the Performance Paradox. One is fear, which I discussed last week. The other is greed. Let's see how these two work together to decimate investor performance.

 

John is a 45 year old employee of a defense contractor here in town. His company offers a 401(k), which he maxes out each year. John characterized the performance of his 401(k) as "awful" and his performance as the manager of his 401(k) as "mediocre at best."

 

"Why do you say your 401(k) is awful?", I asked.

 

"I keep hearing how the Dow is at an all-time record high but my 401(k) is nowhere near an all-time high. I must be doing something wrong."

 

"How do you decide what funds to pick within your 401(k)?"

 

"I pick the one with best track record over the last couple of years?"

 

"Only one?"

 

"Yes. I go for the one going up the most. But as soon as I get in them it seems like they stop going up."

 

"So then what do you do?", I asked.

 

"I sell them."

 

"And then how do you pick the next one?", as if I didn't know the answer.

 

"The same way."

 

It didn't take a lot of detective work to spot the cause of his sub-par returns. His portfolio decision-making was being driven by greed. Of course, this process for picking investments flies in the face of what we know to be true - namely that markets are cyclical. Trees don't grow to the sky and all investments go through periods where they do well and others where they do not so well.

 

So take a mutual fund that has out-performed the market in each of the last three years. People start to notice. The fund manager gets written up in Barron's. The fund makes a bunch of lists in magazines like Smart Money and Forbes, with titles like "The 10 Funds You Must Own This Year Unless You Want to Be Poor and Stupid" and money comes pouring into the fund from people like John.

 

This is great news for the fund company - big cash inflows - exactly what they hope for. They make a lot of money and the fund manager gets a multi-million dollar bonus.

 

But it is bad news for the new investors like John. It’s a death knell. Big inflows are a contrarian indicator. They almost always signal the end of the run.

 

What John does not consider is it is absolutely impossible for the above average performance to continue indefinitely. The aggregate return of investors is the stock market return less transaction costs. There is no persistence in stock market returns. The funds which do well in any given period are typically the worst performer in subsequent periods. In short, the results are basically random.

 

So driven by greed, John buys the hot fund. When it fails to meet his unrealistic expectations, as it inevitably will, he sells it. What has he just done? Bought at the top and sold at the bottom. If you look at the fund's performance on Morningstar it will seem to have done quite well. Look at John's performance and it won't be anything close.

 

This pattern is well documented in an annual study by Dalbar called the Quantitative Analysis of Investor Behavior or QAIB for short. What the QAIB tells us is that in any rolling 20 year period the average investor underperforms their investment by a significant margin because of a persistent pattern of buying high and selling low.

 

This pattern can be driven by greed, as in John's case, or by fear, as I wrote about last week. Either way, the result is the same.

 

What is the answer?

 

The one thing I know for sure about investing is to make money over the long run you have to stay put. Successful investing requires discipline and patience. As I said last week, investing in the stock market is a winning strategy over time, just not all the time.

 

The investor who moves in and out of various investments because the one they are in now doesn't feel good or because they think the grass is greener somewhere else will always get the opposite of their intended result. That is the Performance Paradox.

 

Next week, we'll talk about the antidote. Stay tuned.

 

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 Performance Paradox - Fear - (Part 1)

When the markets re-opened on September 17, 2001, the Dow was down, at one point, 850 points and the S&P lost 5% of its value. I remember remarking to my husband (boyfriend at the time) that I felt as if I was moving through Jell-O. Much of what we thought we knew about our world had just gone out the window. No one knew what was coming next. Would there be more attacks? Was this just the beginning? And even if there weren't, how would the economy withstand such an unprecedented disruption?

 

That week, a number of our clients called us. Some just wanted to talk. Others wanted to know what to do. Should they continue with the Snider Investment Method as if nothing has happened? Should they sell their Snider Method positions? Should they liquidate their other stock market holdings?

 

Our response, as it always is, was to stay the course. There was no reason to alter the strategy or do anything different. After all, our investment objectives, tolerance for risk or time horizon did not change when those airplanes slammed into the World Trade Center. I put together a 60 second radio spot that aired on local radio before the markets reopened which told people we would be buyers of stock when the markets reopened.

 

Many people, clients and otherwise, thought we were nuts. Some called to say they were dumping their portfolios. We advised strongly against it, but it was their money. They could do what they wanted.

 

Those who dumped their portfolios did so out of fear and are classic examples of one side of what I have come to call the Performance Paradox. The Performance Paradox is that the more we react to the short term performance of our portfolio, either out of fear or greed, the worse our long-term performance will be.

 

The person who invests from a base of fear, in other words is so afraid of market losses or is so obsessed with short term performance, that he sells every time an investment goes down creates a pattern of turning temporary losses in value into permanent losses of capital. Do this over and over again and you will continually turn winners into losers.

 

What is the answer?

 

To be a successful investor, you must be an optimist. You must recognize and internalize that we live in the greatest, most transparent economy in the world. There will be downturns and tough times - no question. All of us have a tendency, especially as we get older, to think the world is going to hell in a hand basket.

 

And yet, we also know that ten years after any economic disruption - whether it be the Great Depression, the 1987 crash, the currency crisis of the late 1990s, September 11th or whatever - we can look back and we will not wish we had sold. Instead we will wish we had invested everything we had at the time.

 

This is not to say that investing is risk-free and that even the most optimistic among us won't go through periods of doubt. By definition, we will experience severe declines periodically in the future. Investing in the stock market is a winning strategy, most of the time, but not all the time. And those down years can be hard to ignore.

 

If we could accurately predict when those down years would occur, this discussion would be moot. We would simply get in ahead of market upturns and get out ahead of the downturns. But of course, no one can accurately predict when the downturns will come or how long they will last. As Nobel Laureate Paul Samuelson said, "The stock market has forecast nine of the last five recessions."

 

What we can predict is, if you are an optimist who takes a long term view of the market, you will prosper over the years because you will have found a proven strategy for success. The investor who takes the opposite approach - who is bound up in fear and as a result monitors his portfolio constantly and reacts out of fear to short term declines in value, will not be successful over the long run.

 

This is the Performance Paradox. The more you want or need it, the more you try to get it, and the more you micromanage it, the worse it will be.

 

So which are you? Do you take an optimistic long-term view of the market? Or do you try to micromanage the short term performance of your portfolio?

 

Next week, I'll look at the flip side of the Performance Paradox - greed. Then we'll talk about the antidote. Stay tuned.

 

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 Value of Systematic Investing

My doctor told me recently I had to add strength training to my workout regimen. So in addition to the miles I put in each morning with my dog Dritte, now I am spending an additional hour in the weight room. My favorite channel is the NFL Network. I turn it on to fill up the silence while I work out.

 

So there I am doing my bent-knee dead lifts when a discussion amongst the analysts made my ears prick up. Were the string of great Denver Broncos running backs over the years so successful because they were great running backs? Or was it because they played in coach Mike Shanahan's "system" that made even average running backs Pro Bowl candidates?

 

How can a system make an average running back great? And what does that have to do with investing? Stick with me here for a minute and I'll tell you.

 

One analyst said it was because Shanahan's system was very user friendly. It made the complex simple by eliminating all the extraneous variables. This allowed the player to concentrate on just a couple of key things that have the biggest impact on success.

 

Another analyst said the system reduced the number of times that a player had to interpret what was happening on the field. The player knew which hole to hit, or which player to block before the ball was snapped. The less interpretation, the less likely the player was to interpret incorrectly or blow an assignment. He always knew exactly what to do and when because the system was explicit.

 

But is that enough to propel a running back with average talent up amongst the league's leading rushers?

 

Opponents have tendencies that can be quantified. In a third and long situation, a defense will blitz a known percentage of the time. A system determines that percentage and then seeks to respond with the play that is most likely to succeed in that particular scenario.

 

Having a system doesn't mean the quarterback is going to rip off a pass for a first down time every time. It does mean, if executed properly, they'll get the first down more often than the team who makes the decision on the fly. The system which is based on probabilities puts the odds in your favor.

 

How might this apply to you and the great game of money?

 

Any form of systematic investing, whether it be dollar cost averaging or the Snider Investment Method™, does the same thing. The system makes the complex world of investing simple by stripping away extraneous variables, and telling you exactly what to do and when. This makes the probabilities work for you instead of against you.

 

Perhaps most important, a system removes emotional decisions that are likely to be wrong. Have you ever seen a quarterback try to squeeze a ball into triple coverage and get intercepted instead of heaving it out of the back of the end zone when he has no play? (Can you say Rex Grossman?)That is an emotional decision.

 

Occasionally a play like that will work out, in spite of the bad decision. But a quarterback who does that over and over again can't win over time. And if you can't win, you won't play in the NFL for very long.

 

I believe success, regardless of the endeavor, comes from simply doing the right thing over and over again every day. I believe that without systems, we are likely to wander off track. But I also believe, armed with a good system, every investor is capable of being an All-Star.

 

 

 

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 5/29/07: Interview with Jay Zagorsky

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Kim interviews Jay Zagorsky, a researcher at The Ohio State University, about his research finding no correlation between intelligence and building wealth.

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

Length: 10:58

Notes:
2:26  Jay Zagorsky explains where the data for his research came from. The Ohio State Center of Human Resource Research runs a longitudinal survey -- they track people from the time they're teenagers until they die. This group started in 1979.
4:10  Zagorsky says there's a strong relationship between intelligence and income, but not between intelligence and net worth. There was a non-linear relationship between financial difficulty and intelligence.
5:55  People who were least in financial difficulty had an I.Q. of about 115 -- slightly higher than average.
6:26  Zagorsky says this research finds that anyone can rule the financial world; I.Q. has no impact.
6:55  Zagorsky describes the difference between this study and others. This study looked particularly at Baby Boomers, while others haven't.
8:15  Intelligence didn't seem to have an impact in any particular areas of financial distress. In other words, there was no evidence linking higher IQ's to, say, missing credit card payments.
8:42  This research didn't account for various risk factors or people's desire for gratification. I need to have it now vs. I'm willing to defer my satisfaction until the future.
9:33  Zagorsky says he wants to examine the drive to become wealthy and the ability to delay gratification.

Resources:
Ohio State - Center for Human Resource Research

 

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 Psychology of Financial Success

The hardest of the three functions of a Family CFO is managing behavior. Have you ever noticed how easy it is to know what you should do with your money but how hard it is to actually do it? That is because our relationship with money is very complex.

 

At one point in my life, I made my living as an options trader. I had three mentors who taught me how to be successful as a trader and what they taught me about trading also influences the way I invest, and how I teach others to invest. In case you are wondering about the distinction, trading and investing are not the same thing. Trading is hunting. Investing is farming.

 

One of those mentors was a psychologist who had spent much of his career working for hedge funds, specialist companies and the proprietary trading desks of the big Wall Street firms counseling their traders on how to control their behavior. This is not dissimilar to the function of a sports psychologist, or others who specialize in the psychology of performance.

 

Of course, today we have the recognized fields of behavioral finance, neuroeconomics and socionomics. But back then, if these areas of study existed, they did not have a name. Still, even today, many people don't realize there are these psychologists working up and down Wall Street and most of you are only vaguely aware of the behavioral aspects of investing.

 

One of the first things my mentor said to me when we started working together was, "What ever issues you have will play themselves out in your trading."

 

My immediate thought was, "What issues? I don't have any issues. What kind of psychobabble is this? I want to learn how to trade, not be psycho-analyzed!" It was years later that I would allow myself to see that he was right. Boy did I have issues!

 

My parents divorced when I was very young. My father had a lot of money. My mother and stepfather - not so much. I had a very contentious relationship with my father for as long as he lived. I desperately wanted his love and approval, but on my terms - not his.

 

The way my father showed love and approval was with his money. The way he showed disapproval was by withholding it. This felt conditional and controlling to me. I resented it and fought him every step of the way - eventually driving him away for good. We did not speak for the last seven years of his life.

 

Somehow, along the way, I got money and love confused. My daddy left. He must not love me. My daddy is unhappy with me. He withholds his money. Money must be love. Since my daddy doesn't love me, I must not be deserving of love. If I am not deserving of love, I must not be deserving of money since money is love.

 

I know it is pretty convoluted looking back at it now. But that is how my little kid brain interpreted it.

 

I am not bragging when I say I am reasonably smart, well-educated, ambitious, entrepreneurial and therefore have always earned a nice living, even before I graduated college. But this created a real problem for me. It meant I always had money. At some points along the way, I had a lot of money.

 

One thing I have learned is that our brain cannot tolerate inconsistency. It needs our outside world to match our inside world. Our subconscious is capable of amazing things to make it so. Looking back at my life, I can see a pattern where every time I achieved financial success, I sabotaged it. So I have this recurring pattern of lots of money, broke, lots of money, broke.

 

From the outside, it was easy to say that each time I hit a broke phase, it was someone else's doing. Some external event beyond my control wiped me out. But once I understood the issues I had around money, and why, I could clearly see that my behavior - some action I took, no matter how easily justified at the time - set me up for failure over and over again because I couldn't tolerate financial success.

 

Weird, huh?

 

So my mentor was right. And a funny thing happened. When I understood it, I could deal with it. Now I know I am deserving of both love and money. I understand they aren't the same thing. As a result, I have plenty of both. This was the big Aha! Whatever you believe you deserve is exactly what you will get.

 

So my question to you is this: If you are not as financially successful as you want to be, what issue do you have that is getting in the way? Like me, you may initially write the question off as a bunch of hocus-pocus. But I promise you, if you are not financially successful, it has nothing to do with how much money you make. I can show you many "Millionaires Next Door" who accumulated small fortunes on relatively modest earnings.

 

No. Financial success has nothing to do with how much you make and everything to do with what is going on inside your head.

 

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 Courageous Investor

Mike was a caller on my radio show Saturday afternoon. Four or five years ago, he had gotten very aggressive in his allocations in his 401(k). Now that the market had been going up for awhile, he was nervous and wanted to know should he change his allocations to something more conservative?

 

What Mike was suggesting is called market timing and it is doomed to failure. Stock picking and market timing are by-products of an obsession with day-to-day performance which is a sure way to get the opposite result.

 

One of the lessons I teach is that most of us are getting the cart before the horse. We pick our investments based on their performance and hope they will meet our objectives.

 

The path to successful investing lies in doing it the other way around. First, you must decide what your objectives are. What is your money's higher purpose? Why are you putting it to work? What do you want it to help you achieve?

 

This is not about numbers. Your objective isn't an 8% return or $1 million dollars in the bank. This is about what you are able to do. This is about being able to do what you want, when you want, without worrying how you are going to pay for it. And most likely, it isn't just one thing. It may be several.

 

I have one client in his mid-50's, his peak earning years, who took two years off to do missionary work in Africa. I have another client who left his job to take care of his two sons full time. Now he is getting his teaching certificate so he can be on the same schedule as his boys as they grow older.

 

Maybe your goals are a little bit more mundane. You just want to have enough money to be able to quit working some time before you die. That's OK. But I would encourage you to allow yourself to get creative and think big. What really lights your fire? What is the one thing you secretly want to do if you had enough money and enough courage? That one thing is your money's higher purpose.

 

	"In the long run, you only hit what you aim at." - Henry David Thoreau   "Aim at heaven and you will get earth thrown in. Aim at earth and you get neither." - C.S. Lewis

 

The cool thing about approaching money this way - even if you don't hit what you aim at - if you aim high enough, even a miss will put you in a pretty good position. So why not aim high?

 

Once you understand your money's higher purpose, then you have two other factors to consider before you can even begin to think about which investments to put your money to work in. You must also consider where you fall on the risk/reward continuum and your temperament.

 

Investments stretch along a risk-reward continuum, from those that produce a guaranteed return to those that offer the chance, but not the promise, of a return. Generally, the higher the return, the higher the risk, although it should be noted that risk can take many different forms. It is not always the loss of capital. That is where your temperament comes in.

 

What sort of investor are you? Are you patient or impatient? Do you stick with an idea that makes sense or do you change philosophy every time what you are doing begins to feel the slightest bit uncomfortable? How hands on are you? How much time do you want to spend managing your investments? These are all questions of temperament.

 

Only when you are crystal clear on these three things can you begin to choose the investment philosophy that is best suited to your specific needs. And yet, when I ask a room full of investors how many can tell me what their money's higher purpose is, only 1 in 10 typically raise their hand.

 

When you get clear about these things before choosing an investment, questions like Mike's go away. Investment strategies and specific investment vehicles are chosen based on their ability to achieve your objectives with the appropriate amount of risk and no more, while be mindful of the fact that your investment strategy must fit your temperament.

 

When you take this top-down approach, your investments - in other words, your money's place of employment - should only change when your money's higher purpose changes. And that, I shouldn't need to tell you, should occur very infrequently.

 

	"Courage is never to let your actions be influenced by your fears." - Arthur Koestler

 

An investor who takes this approach is a courageous investor. A courageous investor never changes course based on fits of fear or greed. The beauty is, the level of commitment to the investment approach matches the level of commitment to the objective. Provided you are committed to your money's highest purpose, the rest becomes a moot point.

 

In the new movie release, Georgia Rule, Lindsay Lohan's character, Rachel, has an exchange with Simon (Dermot Mulroney) about the difference between right and wrong and a lie and the truth. She turns to him and asks sarcastically, "How does it feel to be so sure of yourself?" Without missing a beat, he shrugs his shoulder and replies with complete sincerity, "Yeah, it's pretty good."

 

That is the feeling you get when your investments are based on a higher purpose instead of something facile like growth, income or capital preservation or base like a millions of dollars or 50% return. Wouldn't you like to feel that sure of yourself on a topic that makes some of the smartest people feel so uncertain?

 

Learn more about how to put your money to work consistent with its highest purpose in my upcoming class, "The Family CFO's Guide to Investing." I am offering this class in June only - once in Frisco, once in Fort Worth and once in Dallas. The best part is, like this article, it is free. Check the dates and get registered at kimsnider.com.

 

And as always, feel free to leave your thoughts and comments below.

 

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.

Investor or speculator?

Many of Wall Street's most colorful metaphors and fables come, unwittingly for most, from a book originally published in 1940 by Fred Schwed, Jr. (yes, that was his real name) called "Where Are the Customers' Yachts?" Schwed went to work on Wall Street in 1920 and wrote one of the enduring investment classics about his time there.

 

The book is simultaneously eye-opening and hilariously funny. More amazing is that many of its truisms seem prophetic given the passage of almost 70 years. It just goes to show, that for all the changes we have experienced in the investment business, not much has changed at all. Everything old becomes new again.

 

One of the passages in this book which caught my attention was the following description of investing in comparison to speculation:

 

Speculation is an effort, probably unsuccessful, to turn a little money into a lot.

 

Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.

 

If you take a thousand dollars down to Wall Street and attempt to run it up to $25,000 in the course of a year, you are speculating. If you take $25,000 down there and attempt to earn a thousand dollars a year with it (by buying twenty-five four-percent bonds) you are investing. The odds against your being successful in the first venture are roughly 25 - 1. The odds against the success of the second venture are "odds on", or something like 1 -25.

 

Jason Zweig correctly points out in the foreword, "Today, as in Schwed's time, people who try to get rich quick still insist on calling themselves 'investors' - even though they are clearly speculators."

 

I believe in investing, not speculation. I believe this because my goal is to make money, not lose it. But the difference between investing and speculation is, as Schwed himself points out, only a matter of degree. So where do you draw the line? How do you define which is which? What criteria do you use?

 

I would love to know your thoughts on the topic. Do you see a difference? Which are you? Did you set out to consciously do one or the other? Let us know by posting your comments below.

 

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.

.2(S) + .8(M) = FS

There are two formulas that I apply to financial success. One is E + S + I = FS and the other is .2(S) + .8(M) = FS. For those of you who don't like math, I can picture your eyes starting to glaze over now, but stick with me. I am not about to get all nerdy on you.

 

The first is a formulaic expression of something you have heard me say many times before. Financial success comes from thinking like an entrepreneur (E), saving prodigiously (S), and investing wisely (I). Hence, E + S + I = FS. This basic formula for financial success is the subject of my first book, which I have finally started to make headway on after three years of swearing I was going to get it done!

 

The second refers to my belief that financial success is only 20% skill-set (S) and 80% mindset (M). That is true at the broad level and it applies to each of the three areas of financial success mentioned above.

 

When I say think like an entrepreneur, you don't have to have years of management experience to benefit from that perspective. You just need to be educated on some basic management tools, like personal financial statements. That is the easy part. Anyone can learn those. The hard part is the mind set side of the equation.

 

The traits of successful entrepreneurs are the same traits you should bring to your personal finances in order to be successful. Those are 1) commitment and determination; 2) creativity, self-reliance and the ability to adapt; and 3) believing in yourself and that you are worthy of financial success.

 

Saving money doesn't take all that much knowledge. I think it is fair to say anyone can do it. With proper financial literacy education, like that provided by Money Camp, even kids can grasp the concept of saving for what you want and different wallets for spending, saving and charitable contributions.

 

Having the discipline to save is another matter altogether. It has been said, "The reason most people fail instead of succeed is they trade what they want most for what they want at that moment."

 

I know in my own life, if left to my unconscious, I tend to be a spender rather than a saver. I didn't really become a saver until I met my husband, who is a natural saver. But once I started doing it, I realized I got a lot of satisfaction from seeing my net worth grow. Who knew the number on the bottom of personal balance sheet could bring more deep and lasting satisfaction than some gee-gaw I bought?

 

Don’t get me wrong. I still like nice things. But now whether I spend or save is a very conscious decision rather than an unconscious one.

 

Finally, you have investing. No where is my 80%/20% formula more pronounced than here. When it comes to skill set, it helps to understand that many of the most powerful concepts in investing are the simplest ones. It does not take complex investment strategies to build wealth through investing. In fact, the opposite is true. The more time you spend on it, and the more complicated your investment schemes, the less likely you are to get your desired result.

 

For years now, women who have just completed the Snider Investment Method™ workshop come up to me with incredulous voices and say, "I can do this!" In my mind I think, "Well, duh!"

 

Often they will say something like, "My husband has always taken care of our money", or "I am an artist. I didn't think I would understand investing", or "I didn't know anything about investing when I walked in and I was sure I would be totally lost."

 

(By the way - I am pretty sure there are men who think the same thing but I just don't think they are as willing to admit it to me!)

 

Anyone can learn to invest. It has nothing to do with whether you are an artist or an engineer. In fact, academic research says it has nothing to do with how smart you are.

 

Jay Zagorsky, a researcher from Ohio State University has studied the relationship between IQ and wealth. "Smarter people tend to get paid more on the job, but there's no relationship between intelligence and net worth when holding other factors constant," says Zagorsky, whose report was published in the journal, Intelligence.

 

(Just as another aside, we have scheduled an interview with Jay Zagorsky. So listen for my interview with him in the coming weeks on my radio show, Saturdays at noon CT on 1080 AM KRLD in the Dallas Fort Worth area and in our Financial Success Coaching podcast available from iTunes, Odeo and right here on the Kimmunications blog.)

 

So what does account for your ability to build net worth through investing? It is your ability to control your emotional responses to meaningless, short term price movements. It is your ability to avoid extreme states of fear or greed. It is your ability to do the right thing every single day even though it often feels wrong.

 

In short, investing is almost totally a mind game. That is why hedge funds hire psychologists to work with their traders in the same way professional sports team hire sports psychologists to work with athletes. I know because one of them was one of my mentors. Investing is 20% skill and 80% in your head. That is one of the very first things he said to me when we started working together and I know it is as true as the sky is blue.

 

That is why the way I invest my own money is a system that tells me what to do in every single circumstance. It leaves nothing to my discretion because I worked it all out based on probabilities beforehand. Then I follow it religiously to take the game out of my head and make it all about knowledge. That is a game I can win and in my opinion the only way you can win it.

 

So follow my convoluted algebra here. If E + S + I = FS and .2(S) + .8(M) = FS then E + S + I = .2(S) + .8(M). In other words, in order to achieve financial success, you must be educated on the nuts and bolts. That is important. But more important is your mental approach to money.

 

If that is true, then doesn't it also follow that the people you need to surround yourself with are not just salesmen who make their living by selling you annuities and mutual funds, but rather a mentor who will help you with both sides of the equation?

 

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.

Are You Navigating or Just Drifting?

I've been reading a management book titled "Mastering the Rockefeller Habits" by Verne Harnish. The central premise is how to create alignment in an organization. Alignment can best be understood as everyone and everything working together toward a defined objective.

 

I am attracted to the Rockefeller Habits because Harnish has created a step-by-step system for managing a small but rapidly growing business, much like the Snider Investment Method™ is a complete system for managing your investments. Like the Snider Method, there are steps to be followed, one after the other and always in the same sequence. Also like the Snider Method, there are worksheets to keep up with all the data and metrics to track performance.