Are you on the verge of committing financial suicide?

Let's talk about selling – when should you sell and when should you stick? Specifically, we're talking about three very different and distinct variations on the question. The first is capitulation. This is when you sell and go to cash because your view of the market is so negative or because the emotional pain of being in the market is so great that you feel compelled to sell stocks and hoard cash - financial suicide.

The second is market timing. This is when you try to shift your money between asset classes based on your opinion about what's going to happen in the future. And the third is changing the investments within your asset allocation, which isn't selling, so long as the new asset has a similar potential for gain.

When I hear people talking about selling their portfolio and going to cash now, very often it is accompanied by a statement to the effect that the period we are in is somehow different. This is something Nick Murray (one of my favorite writers) has come to call the "illusion of terminal uniqueness." This particular instance of it is marked by the almost ritual repetition of the phrase “the worst economic crisis since the Great Depression.”

(Remember, just because they say it doesn't mean it's true. What newspaper or news network ever attracted eyeballs by blaring the headline, "Tomorrow Will Be Sunny and 80°"?)

Now don't get me wrong. I am not trying to minimize the severity of the current economic downturn. But I am trying to highlight the human tendency, when we are faced with events that shake us to our core, to see them as being impossible to solve because this time is somehow different than anything we have experienced before.

Try to remember, if you can, what it was like in this country after September 11th. The phrase of the day was “This is our generation's Pearl Harbor.” We were absolutely certain that this was World War III,  more attacks were coming any day and that the economy could never recover from such a staggering blow. Heck, that day, seven days or so after the attack, or whatever it was, when they tried to open the stock market …  no one was even sure that they could get it open. That was the extent of the disarray at the time, remember?

Think back. I remember it very clearly. I remember everyone talking about how everything in our lives had changed and that we would never feel safe again. I am sure I felt That way too.  I remember saying to my husband how weird it was. How I felt like I was swimming in Jell-O. Everything was just so foreign. But there is a difference between feeling it and acting on it. That's the difference between a successful investor and an unsuccessful investor.

Similar to what I'm doing today, I used all of my radio advertising on KRLD to urge investors to buy when the market finally reopened, not sell. I told them I was going to be a buyer on the open and I was. When my clients called and asked if they should continue the Snider Method, my answer was unequivocally yes. And when they said, “But surely this is different. Are you out of your mind?” I said, as I do today, "This time is never different." Now here we are, and isn't it amazing how all the catastrophic consequences we worried about in the aftermath of September 11th have, for the most part, never materialized?

While the circumstances were certainly different, both created the same psychological effect – "the illusion of terminal uniqueness" – and when this happens, we lose our ability to put events into any kind of rational context. We overreact.

 In fact, many of the very things voters so recently pilloried George W. Bush for, were knee-jerk reactions that seemed very reasonable at that time, in that moment of gripping, all-consuming fear. But we look back today and think better of it. In retrospect, those gut reactions led us to do some things, as a nation, we regret.

If you want an example of an economic crisis, Think back to the early 80s. We had had a decade and a half of stagflation, something many economists said was impossible until it happened. The consumer Price Index tripled while the Dow Jones industrial average went nowhere fast. Inflation was accelerating, unemployment and interest rates were rising, incomes were declining and poverty was increasing.

In 1979, the Iranian revolution led to a tripling of oil prices. In a slap to our national pride and sense of well-being, hostages were taken and held at the U.S Embassy in Tehran.

Organized labor staged crippling strikes. Business Week ran a cover story titled - wait for it - "The Death of Equities", which reminds me of the head of the patent office, in 1840, saying everything which could be invented has been invented!

Gold priceswent up to $860 an ounce which would, by the way, be the equivalent of gold at something like $2150 an ounce in today's dollars . The yield on the 30 year treasury was north of  14.6% and unemployment peaked at 10.8%.

It's not important how this, "unprecedented and therefore terminally unique  and therefore insoluble crisis," was solved. The relevant point is that it was,  as was every economic and financial crisis before it and since.  The other important point is if being in cash, during a period that the risk free rate of return on cash was double-digits was the wrong answer, it is an even worse idea today when the risk-free rate is zero!

This is the danger of the four most dangerous words in the English language – this time is different. When we are in the middle of these crises, we always think they're different. We always think the fundamental rules of investing,  finance and economics have been suspended. That's because the exact facts and circumstances surrounding them are always different.

But here is what is never different: Regardless of your political or economic views, the one constant is this country's resilience. No matter how messed up we are, either as the result of our own doing or someone else's, we always have and always will rise to the occasion.

And how does this translate into whether to sell your portfolio and hide in cash? To sell now and hoard cash is to be gripped by irrational fear and as Franklin Roosevelt said those many years ago, “The only thing we have to fear is fear itself.”

Couldn't have said it better myself.

PROPS:
Muray, Nick. "The Illusion of Terminal Uniqueness." Nick Murray Interactive March 2009: 1,2.

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The opinions expressed should not be construed as financial, legal, tax or other advice and are provided for informational purposes only.  All investments involve risk including possible loss of principal.  Our goal is your financial success.  Individual results may vary. Complete information can be found on SniderAdvisors.com or by calling 1-888-6SNIDER.

 

The Five Biggest Mistakes Investors Make and How to Avoid Them - (Part II)

A month or so ago, I gave a talk to a group of investors. We were standing around waiting for everyone to arrive and I was chatting with one of the attendees. Given the recent market conditions, the subject of our emotional response to events seems to come up a lot. Try as I might, I could not convince him of the role our emotions play in investing. Fortunately for me, several of the guests that night gave me perfect examples of some of the very behaviors I was trying to help him see.

In part one of this article, I gave the first three mistakes. They are: expert bias, stock picking and market timing, and staying in a bad investment until it gets back to break even. In part two, we will cover the other two: buying high and selling low and ignoring probabilities.

The Performance Paradox

During the Q&A session, one of the guests asked my opinion of gold. "I have been hearing a lot of commercials on the radio for gold," he said. "I have all these mutual funds that have lost money. I am planning to sell them and get into gold. What do you think?"

What I think is those commercials remind me of the Sports Illustrated jinx. As soon as a hot team appears on the cover of Sports Illustrated, their winning streak has probably about run its course. Remember when Time Magazine named Jeff Bezos, the CEO of Amazon, Man of the Year in 1999? Should have been a dead give away.

Nowhere else do we flock to something when it is expensive and shun it when it is cheap like we do with our investments. The fear of loss is deeply rooted in our survival instincts, as is the pleasure of gain. This creates what I call the Performance Paradox. The Performance Paradox says the more you chase performance and seek to avoid losses, the farther away you will get from your intended result.

Study after study validates this phenomenon. The most widely quoted is the Quantitative Analysis of Investor Behavior by Dalbar, Inc. The Dalbar study offers conclusive evidence that the average investor underperforms their investment by a wide margin precisely because they sell things when they go down and buy them when they go up.

"I don't believe in market timing," I told the gentleman. "But if I was going to do anything, I would be selling gold and buying stocks, not the other way around."

What to do about it:  Base your investment decisions on how well an investment fits your objectives, your tolerance for risk, and your time horizon - not the performance of the investment. Never change investments unless one of these criteria change, which should, by definition, be very infrequently. Never react to news. By then it is too late.

Fooled by Probabilities

One of the guests was a big proponent of mutual funds. He spent all kinds of time searching for the "best funds". I think anything other than an index fund is a total scam.

"But I pick the good funds."

"The data says it is impossible to pick 'the good funds' because their returns are random."

Our brains are notoriously bad at dealing with randomness and probability. My friend Terry Burnham, in his wonderful book, Mean Markets and Lizard Brains uses two puzzles to illustrate the point. Here's the first puzzle:

Chinese families place a high value on sons, yet the Chinese government exerts extreme pressure to limit family size. Let's assume that that the chance of having a girl is exactly 50%, but every couple stops having babies once they have a son. So some families have one son, some have an older daughter and a son, some two older daughters and a son, and so on. In this scenario, what percentage of Chinese babies will be female?

Here's the second puzzle:

Imagine that you are a doctor and one of your patients asks to take an HIV test. You assure her that the test is unnecessary as only one in a thousand with her age and sexual history is infected. She insists, and sadly the test result indicates viral infection. If the HIV test is 95% accurate, what is the chance that your patient is actually sick?

Apparently, we all get this wrong, at least most of us do - unless you're an actuary like my husband Jim.

Don't believe me? When doctors and staff at the Harvard Medical School were asked the question about the HIV test, the most common answer they gave was a 95% chance that the patient was sick. The correct answer is a less than 2% chance that the patient is sick!

The same is true of the Chinese baby puzzle. As long as the chance of having a baby girl and each pregnancy is exactly 50%, the population will also have 50% girls. This is true regardless of any rule on when to stop having babies. But most people will answer differently.

So our brains are not built to do mathematical calculations. And yet, every investment really boils down to probabilities and mathematically determining the optimal trade-off between quantifiable factors such as risk and return.

Most people see a fund which has beaten the market averages over the last five years and infer from that that the fund manager has some uncanny stock picking skill. However, random chance would suggest that about 3% of all mutual funds, at any given time, should be beating the average over five years. The fact is less than 3% do, which would seem to imply the opposite - that fund managers have an uncanny lack of skill!

What to do about it: Do some reading. Awareness is the best defense against being fooled by randomness and probabilities. I would highly recommend three books: Mean Markets and Lizard Brains by my friend Terry Burnham, Fooled by Randomness by my friend Nassim Taleb, and the investment classic, A Random Walk Down Wall Street, by Dr. Burton Malkiel.

If reading isn't your bag but you really want to learn more about the mistakes investors make and how to avoid them, I encourage those of you in the Dallas Fort Worth area to attend our upcoming Investor Briefing on Tuesday evening, December 9th. It’s called, How to Solve Your Biggest Investment Challenges. I will discuss the recent trends making the job of the Family CFO so difficult and offer up my solutions. You can register on our website at snideradvisors.com.

For those of you who cannot attend the Investor Briefing because of time or distance, we now have an online version as well. You can register here.
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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. This article is not a complete discussion of the benefits and risks of the Snider Investment Method®. For a complete discussion, read the Snider Investment Method® Owner's Manual, available by calling 888-6SNIDER. Please read and consider carefully before investing. All investments, including the Snider Investment Method® are subject to risk, including possible loss of principal. Income is objective and not a guarantee. Dollar cost averaging does not guarantee you will not experience capital losses.

The Five Biggest Mistakes Investors Make

I was doing a program the other evening for a group of employees from one of the larger DFW area employers. Before it started, I was talking with one of the attendees about how your emotions are what make investing so difficult. We had a really nice conversation but, try as I might, I don't know think he was totally convinced of the impact our emotions have on us as investors.

 

Given that “emotions are your worst enemy” is one of the six fundamental tenets of my investment philosophy, I was somewhat frustrated by my inability to help him see something which to me is so plainly obvious. Then a funny thing happened. As the night wore on, the attendees themselves demonstrated each of the mistakes I was trying to get the gentleman to understand. Sometimes, a picture really is worth a thousand words.

 

Expert bias

 

I spoke with one woman who told me she appreciated my talk very much but had no interest in managing her own investments. I asked what she was investing in currently. She wasn't really sure.

 

"How do you know whether the investment is the best one for achieving your objectives?"

 

"I don't,” she replied, “I am really not happy with my investments. I’ve been investing with him for fifteen years and I don't have anything to show for it."

 

When I asked why she didn't manage them herself, she seemed shocked at the notion.

 

"That would be like doing surgery on myself," she said.

 

This is what is called "expert bias." It is very strong and it can be very dangerous. In the medical field, researchers attribute many of the errors in patient medication, for example, to a blind deference to authority. Take the rather comical story of a physician who ordered ear drops be given in the right ear of a patient with a painful ear ache. Presumably to save time, the doctor wrote, "Place in R ear." Upon reading the prescription, the on-duty nurse promptly put the required number of drops in the patient’s rear!

 

Clearly, treating an earache through the backside makes no sense at all. But apparently neither the nurse nor the patient questioned it. The moral of this story is, when someone we perceive as an expert gives instructions, we take leave of our own powers of critical thinking, even when it directly contradicts what we know to be true. As an investor, this is a very costly mistake.

 

What to do about it: Do not assume that just because someone is a financial advisor, regardless of the letters behind their name, they know what they are talking about or are putting your best interests ahead of their own. The only way to avoid what I call the tax on the uninformed is to know enough to, at a minimum, be able to participate in all decision-making related to your financial future. An even better solution is to manage your own money.

 

Stock picking and market timing

 

Another gentleman was a trader type. He bought and sold constantly. I asked him how he was doing. "Not very well right now," he said. "But that's just because I don't have enough time to pay attention to it." If only I had a dollar for every time I have heard those words.

 

Here’s the deal. Stock picking and market timing are incredibly seductive. 20/20 hindsight gives you the false impression that both should be fairly easy. So if you fail at it, or your advisor fails at it, the natural response is to make up some excuse for why they failed.

 

Here is the real skinny on each. Let's start with stock picking. Stock picking is the misguided idea that through either fundamental or technical analysis we can pick the "best" stocks. So let's think rationally about this. In theory, who should be the best judge of whether or not this is really possible?

 

Mutual fund mangers, right?

 

Isn't that what they get paid millions of dollars a year to do? To pick the stocks which will go up more than the market? Or to pick the stocks that will not go down as much in a bear market?

 

But an objective viewing of the evidence shows us that stock picking can't be done. Two-thirds of actively managed mutual funds under-perform the market in any given year. In other words, if the market goes up, they go up less. If the market goes down, they go down more. And the ones that do outperform are different from year to year which tells us the ones who outperform do so not from skill but rather from luck.

 

What about market timing? Market timing is the practice of getting in or out of an asset before an anticipated move up or down. So in its most basic form, a market timer would go to cash when the market was trending down and be fully invested in the stock market while it is trending up. Again, the evidence says it can't be done. Many studies have been done of the market timers, and none are able to consistently beat the market over any length of time.

 

Why is it that something which seems so easy is so hard? Here is what no one tells you. Most of the market gains and losses occur in a very small number of days. For instance, if you missed just the five best days during the ten year period ending December 31, 2006, your return would have dropped from 8.5% to 5.5%. If you miss the twenty best days, your return would be negative! The clincher is those days typically don't occur in the middle of a cycle but at the beginning or end when the market timer is sitting on the sidelines waiting for the new trend to be confirmed.

 

What to do about it: A fundamental truth about investing is that prices are random. Until you understand that, your brain is always going to be able to trick you into believing that you can predict the future direction of price. There are two things you have to do to avoid this mistake: 1) stay invested all the time - even when it feels bad and 2) tie the achievement of your investment objective to the amount invested, not the market value, which will fluctuate a lot during market cycles.

 

Staying in a bad investment until it gets back to break even

 

The guy I was talking to originally was really funny. At the end of the evening, after I had pointed out all these emotional mistakes, he laughed and said, "You are right. I guess emotions really do play a large part in our success or failure as investors." I was relieved. Finally I was making some headway. At which point he said, "I really like the sound of your program. But I wouldn't want to sell what I am in while it is down."

 

Perfect. Another teaching opportunity!

 

What I wanted him to understand was that this was yet another example of the mind playing tricks on us. Psychologists tell us the pain of loss is much stronger than the possibility of pleasure. As a result, we will often do harm by trying to avoid the pain of loss at the expense of a greater reward.

 

"Let’s imagine your portfolio was $500,000 but now it is down to $350,000. Let's assume that your current portfolio will average 5% return over the next thirty years, but some new investment you are considering would average 6%." I was just making up numbers for illustration purposes. "You can either sell the existing portfolio and put it all in the new investment or you can hold the old investment until it got back to $500,000, then sell it and put it in the new investment. Which will give you more money at the end of thirty years?"

  

He smiled. "Well, when you put it that way."

 

With perfect knowledge of the future, the obvious answer is to sell and purchase the better-performing investment. He will have more, over any timeframe, by putting it in the new investment sooner.  Of course, these are just made up numbers and we never really know how any two investments will do in the future.  But the point is, like so many of the decisions we make about money, this one is emotional – not rational.

 

What to do about it:  You chose your investments based on how likely they are to meet your stated investment objectives and tolerance for risk over a given time horizon. Whether to sell or hold an investment has nothing to do with the price you paid for it. That is done - in the past. The only thing that matters now is what is likely to happen in the future.

 

There are two more tricks our brain plays on us as investors. One is our propensity to buy high and sell low over and over again. The other is sticking with something that worked once even though the probabilities of it working long term are low. A sports analogy would be the six foot seven inch center in basketball who takes a long range, three point shot and makes it. He then spends the rest of the game shooting outside jump shots when his odds of repeating the feat are dismally small. It costs his team the game. In the interest of space, I think I will save these last two for the next newsletter.

 

In the meantime, if you would like to learn more, I encourage those of you in the Dallas Fort Worth area to attend the upcoming briefing on Thursday evening, November 13th. It’s called, What to Do When You Can't Trust Wall Street - or Washington.   I will discuss the recent trends making the job of the Family CFO so difficult and offer up my solutions. You can register on our website at snideradvisors.com.

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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. This article is not a complete discussion of the benefits and risks of the Snider Investment Method®. For a complete discussion, read the Snider Investment Method® Owner's Manual, available by calling 888-6SNIDER. Please read and consider carefully before investing. All investments, including the Snider Investment Method® are subject to risk, including possible loss of principal. Income is objective and not a guarantee. Dollar cost averaging does not guarantee you will not experience capital losses.

Warren Buffett is Buying

Part of our investment approach includes the idea that the most successful investors are those who can fight their emotions and buy when others are irrationally selling and sell when others are irrationally buying. I have often cited many historical examples. Here is an example in real-time. If you haven’t read Warren Buffett’s op-ed  in the New York Times about why he is buying U.S. Stocks today for his personal account, it is quite informative and a very short read.

SOURCE:

Buffett, Warren E. “Buy American. I Am..” The New York Times 17 Oct 2008. 20 Oct 2008 <http://www.nytimes.com/2008/10/17/opinion/17buffett.html>.

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.

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.

Financial Advisor Double Whammy

Academics are slowly peeling back the curtains on the financial services industry to expose some serious shortcomings. One groundbreaking study, which I've referenced before, found that commissioned financial advisors don't bring any appreciable value to investors. It found that the mutual funds recommended by traditional advisors severely underperform the market as a whole.

No real surprise there, since the vast majority of the funds are expensive, actively-managed funds that typically pay the advisor fat commissions.

Now there's a study that shows that clients of commissioned financial advisors severely underperform within those same investments. In other words, not only does the mutual fund underperform the market, the investor underperforms the fund!

The reason, according to the authors, is that clients of traditional (commissioned) financial advisors are more likely than self-directed investors to try to time the market:

Our results sound a warning to fund investors who are considering whether to attempt market timing, either on their own initiative or through their broker's advice. On average, active investing leads to underperformance relative to a passive dollar invested in the fund. In addition, the use of an investment professional to trade shares is correlated with even worse investment timing performance.

The study, "Investor Timing and Fund Distribution Channels," is written by Mercer Bullard of the University of Mississippi, Geoff Friesen of the University of Nebraska-Lincoln, and Travis Sapp of Iowa State University. The authors studied 6,164 funds between 1991 and 2004.

Investors in load funds lagged the performance of the funds by 1.82% on average annually. Those invested in legal no-load funds (funds with no commission and a low 12b-1 fee) lagged their funds' performance by 1.91%. And those involved in Class B fund shares underperformed by 2.28%. The only investors who didn't underperform were those in pure no-load index funds.

This study shows that traditional financial advisors are no better than anybody else when it comes to timing the market. And they don't seem to do anything to curb the behavior of their clients who think market-timing is possible:

One potential explanation is that brokers seek to justify their compensation not only by helping their clients pick funds, but also by demonstrating their active monitoring through market timing advice. If this is the case, the evidence suggests that this advice, on average, is less than helpful. Another possible explanation is the well-documented psychological tendency of investors to overweight recent performance. Although investment professionals presumably are more aware of, and less, susceptible to, a short-term performance bias, their clients might be more susceptible to this bias than self-directed investors. … A third explanation is that some brokers may be able to appeal to their unsophisticated clients' short-term performance bias in order to increase sales compensation. Thus, brokered shares may show evidence of (bad) timing because of client pressure, the broker's financial incentives, or both. [emphasis added]

The authors were especially critical of advisors who put their clients in Class B shares.

Why do Class B shareholders fare so much worse? One reason might relate to questionable conduct by brokers. Class B shares often are an inferior choice for investors and have been the subject of a number of enforcement actions alleging misleading sales practices. Sales of Class B shares can provide higher compensation to a broker than other shares and therefore present an economic incentive to steer clients toward these shares.
…
It is possible that a broker who recommends Class B shares in order to maximize compensation may also tend to emphasize recent returns in order to allure investors. More prudent advice would instead tend to emphasize long-term performance, but on this count Class B shares fare poorly.

I think the biggest takeaway from this study is this: Ask yourself if your advisor is providing any value. Did you hire them because of their expertise? Their access to better investments? Their potential to keep you from making dumb mistakes? If they aren't providing any value, why are you still paying them?

SOURCES:
1. Bergstresser, Daniel, John Chalmers, and Peter Tufano, 2006, Assissing the costs and benefits of brokers in the mutual fund industry, Working paper.
2. Bullard, Mercer, Friesen, Geoffrey C. and Sapp, Travis, "Investor Timing and Fund Distribution Channels" (December 2007). Available at SSRN: http://ssrn.com/abstract=1070545

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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.

Guarantees and Generalizations

This week, I want to do things a little differently. Instead of writing my usual article, I sat down with newsletter editor (and radio show sidekick) James Pecht and discussed some feedback we received from our recent "Red Flag" articles. It's an audio file about 14 minutes long, and you can download it to listen from your computer or move it to your mp3 player.

Click here for the audio Kimmunique (Hi - 128k | Lo - 24k)

Notes:
0:00 Introduction
2:00 What we mean by the statement "If a financial advisor constructs a portfolio with an expected return of less than 10 percent, that's a red flag"
4:40 Why that statement did not reflect a guarantee but rather a goal
5:45 Generalizations in the articles -- why I use inflexible rules
8:25 About the information session scheduled for Saturday, May 31. (After my talk, we'll head over to Boston's the Gourmet Pizza on 635 and MacArthur in Irving to broadcast the weekly radio show live on location. Then we'll stick around to answer questions and talk to folks one-on-one.)
10:45 New virtual office hours -- a twice-weekly conference call.

Details on the office hours: 

• Wednesdays 5 p.m. - 6 p.m. Central Time
• Thursdays Noon-1 p.m. Central Time

Ask anything that's on your mind about the Snider Method, personal finance, the economy -- you name it! We have a special toll-free conference call line -- you can call in and ask your questions, or just listen in to what others are asking. The office hours have an online component, too -- the technology we're using allows me to show you calculations, visit websites, etc. It's like you're sitting right beside me, looking at my computer screen together.

To join me, here's what you do:

1. Call 1-888-617-3400 and enter the access code 791564.
2. (Optional) Go to https://www1.gotomeeting.com/join/597893666.Please note: Attendance is limited for the online component, and you may be prompted to download some software the first time you log on.

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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.

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.