Kimmunications

We don't have enough time to buy and hold

Market commentator and analyst Barry Ritholtz has recently posted on his blog about the big divide between the pundits and the public over the state of our economy. Or, as he puts it, “the disconnect between reality and the Pervasive Pollyannas of Prosperity.” Most of the analysts you see on CNBC, he says, are touting the strength of the economy, or at least its potential to turn around soon. The public, he says, sees the situation very differently – they’re expecting more rough seas ahead.

Barry says the pundits have just gotten ridiculous:

How absurd has the Panglossian cheerleading become? On my pal Larry Kudlow's show last night, several of Candide's descendants talked about how great stocks are if you hold them for 30 years. That's right, the holding period for equities according to this crowd is three decades. Of course, this means every pullback is a buying opportunity. Words such as these can only be spoken by someone who has never worked on a trading desk or managed assets professionally -- or if they did, they lost most of their clients' money.

Barry illustrates very clearly here the problem with the strategy of buy-and-hold. It’s true that the U.S. stock market has returned on average 10-12% annually over long periods of time. To take advantage of the long-term growth, you’d need to buy when the market is down. To a buy-and-hold investor, the current market downturn is a perfect buying opportunity.

But investing isn't just about knowing when to buy. The problem with buy-and-hold isn’t the “buy” part. It’s the “hold.” To get the long-term 10-12% return, you potentially have to hold for a really, really long time.

The Wall Street Journal is calling this “The Lost Decade.” From Dec. 31, 1999 to December 31, 2007, the return of the U.S. stock market was practically zero (1469.25 in 1999; 1468.36 in 2007). Here we are in the middle of 2008, and the S&P is below 1300. For us to get back to the 10-12% average, we would have to experience a very long period of above-average returns. The question is, how long? Nobody knows. It could take 10, 20 years or longer. History tells us there have been 20-year periods in the past where the average return of the stock market was less than 2%.

If you’re in your 50s, your retirement time horizon may be 40 years (10 years pre-retirement; 30 years in retirement). 20 years is a long time to wait for the market to even itself out.

That’s why buy and hold doesn’t work for most of us. We don’t have time for it!

This is precisely why I am a cash-flow investor. My goal is to exchange the long-term 10-12% annual returns of the stock market for something more tangible in the short-term. If I focus on generating cash in the short run, the ups and downs of the market over time don't tend to bother me as much.

I admit, investing in the stock market this way is a bit of a paradigm shift. You have to think of your stocks not as an appreciating asset, but as a means to an end. Once you view your stocks this way, it’s a little easier to endure the market slowdowns. 

SOURCES:

1. Ritholtz, Barry. "Persuasive Pollyannas of Prosperity," The Big Picture, 02 July 2008. http://bigpicture.typepad.com/comments/2008/07/more-on-the-pub.html

2. Browning, E.S. "Stocks Tarnished By 'Lost Decade'," The Wall Street Journal. (accessed 02 July 2008)

---

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. Click here for performance statistics of the Snider Investment Method and a discussion of yield vs. total return.

Guest column: The "R" Word

I am traveling this week, so I decided to take a bit of a shortcut and run a guest column by one of my favorite writers, Nick Murray. Many people have been writing me in recent weeks about the possibility of a recession and what changes they should make to their portfolio.

We believe you never make changes to your portfolio based on what you think the market or economy will do. You only have a 50-50 chance of being right. For every economist, journalist or Chief Market Strategist who says Armageddon is coming, there is another one who says the exact opposite. Or, as the Nobel prize winning economist Paul Samuelson said, "The stock market has forecast nine of the last five recessions."

Personally, I have no opinion about whether we will go into recession or not or, if we do, how deep or long-lasting it will be. I have no control over it and I wouldn't do anything different if I knew the answer. So for me, there is no point wasting brain space on it.

Nonetheless, I thought this piece by Nick Murray might give you a different viewpoint than the one so prevalent in the press these days. Food for thought …

	The "R" Word, by Nick Murray (Originally published in Nick Murray Interactive - Vol. 8, Issue 2, February, 2008 As a measure of how utterly debased and stupid the rhetoric about the alleged imminence of a recession has been of late, nothing compares to a comment mined from an AP wire "story" that appeared in mid-January. In it, the chief market strategist for a foreign financial institution which shall be nameless – a chap who apparently has no background in economics, and/or to whom English is a second language – opined that "it's possible that the recession may only last one quarter." And you know that this is an accurate quote, because you know that neither I nor anyone else could make it up. Herewith, some rational observations about the economic phenomenon called "recession." The first, as in any rational discourse (thereby excluding all journalism on the subject), is of course a definition of the term: a method of calibrating it, which is a bit different from a method of screaming apocalyptically about it in the cadences of Chicken Little. A recession, as defined by the National Bureau of Economic Research – and therefore by anyone who has actually taken an entry-level college course in basic economics, as opposed to financial reporters who are former weather girls of either gender from a television station in Ames, Iowa – is two consecutive quarters of negative GDP growth. That is, a recession is a minimum six-month period in which the economy actually contracts. A "one-quarter recession" is therefore – like a water landing, a short-sleeve dress shirt, or a new tradition – actually an oxymoron. (A "growth recession," on the other hand, is a period of economic growth that is slower than the previous period of economic growth. Since the latter is nowhere near scary enough for use by former weather girls of either gender, journalism has adopted the term "growth recession.") The National Bureau of Economic Research will also be happy to disclose to you that there have been ten such episodes since the end of World War II. The average lasted approximately ten and a half months, and carried the economy down slightly less than two percent. (Over the last quarter century, as the economy has deepened, and our monetary tools for fighting slowdowns have improved, the time lapse between recessions has lengthened, and both their duration and depth have moderated. Indeed, since November 1982, the economy has only been in recession for 16 months out of about 300. But never mind that. It smacks too much of good news – or, as it is sometimes referred to, "truth.") A ten-month, two percent contraction on an average of every six years suggests that recessions punctuate – on average – economic expansions occupying the other 60-odd months. Forgive me, but this seems to me to be a very small price to pay for an accretion of national wealth which is ongoing, and which has produced the wealthiest society that ever existed on the earth. It is, in other words, nothing more or less than a part of the cycle, and the net effect of that cycle is the unprecedented betterment of humankind. (Why, even Americans on food stamps have 44-inch plasma TVs and are morbidly obese. Think of it: this society is so rich that even its poorest members eat too much! But I digress.) Once again: there either is or is not going to be a recession in this country. (As I write, the Chairman of the Federal Reserve is expressing to a congressional committee the Board's opinion that there is not, but what does he know?) The Fed has unequivocally declared its intention to fight such an occurrence with all the monetary weapons at its command. And both the legislative and executive branches have expressed strong interest in implementing some sort of fiscal stimulus. This is in keeping with the obvious truism that the more advance warning a recession gives you – as opposed to the last one, spawned by the sudden bursting of the tech bubble – the easier it becomes to fight it off. If there is a recession, on average the equity market – being a discounter of the future, rather than a reflector of the moment – will turn up about halfway through it, while journalism is trumpeting each new negative statistic to the skies as evidence of deepening Armageddon. Thus, the people who panicked out in fear of a looming recession will – by the time it's officially declared over – have to buy their portfolios back at higher prices than those at which they sold. With the obvious exception of the deity Himself, the stock market is the universe's ultimate ironist. And if there is a recession – and I, along with Dr. Bernanke, hereby repeat that I don't believe there will be – you may rest assured that its proximate cause will not have been oil, or subprime mortgage write-downs, or any of the usual suspects, all of which are quite adequately discounted in a 1350 S&P. It will, I'm perfectly convinced, have been journalism. I expect journalism to be alarmist, declinist, economically illiterate, repetitive, stupid and single-mindedly devoted to demonstrating that not only is the glass half-empty, but that this time it's irreparably shattered into a million pieces. But journalism's "coverage" of the economy and the markets in the last several months has been something altogether new in my 40-year career. It's made Chicken Little look like Pollyanna. And it may yet succeed in frightening the whole country into sitting down hard on its wallet. Thus, if we do have a recession, I hope journalism will have the minimal grace to report it as what it will surely be: a self-fulfilling prophecy. © 2008 Nick Murray. Reprinted with permission. Nick's lovely little book for investors, Simple Wealth, Inevitable Wealth, is available on his website www.nickmurray.com, click on "Books." We warmly recommend it.)

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. Individual performance depends on individual savings, investment time frame and market conditions. Diversification does not ensure a profit or protect against loss in a declining market.

Your time horizon may be longer than you think

When choosing your investments, there are four things to consider:

 

1. Your investment objectives

2. Your risk tolerance

3. Your time horizon

4. Your temperament

 

Once you've chosen an investment that satisfies these criteria, you shouldn't make major changes to it unless one of those criteria changes. I've written a lot on my blog about several of these criteria, but today I want to focus on No. 3: your time horizon.

 

Many of us were taught that there are two phases to investing: The accumulation phase, when you can take more risk by investing primarily in equities, and the income phase, when you put more of your assets into lower risk investments such as bonds. The thinking is that your primary time horizon for investing is up until the day you retire; then you switch to living off what you've built.

 

This line of thinking is a bunch of bunk. Your time horizon for growth doesn't end when you retire; it continues for the rest of your life. (And income investing and growth investing don't have to be mutually exclusive; income reinvested is growth, but that's a topic for another day.)

 

I got to thinking again about our time horizon last week at one of our Snider Method information sessions. I had just described our investment method as a long-term approach when an audience member asked, "But I'm almost 70, and I'm already retired. Shouldn't I focus more on the short term?"

 

I told him that even 70-year-olds have a long-term investment horizon. The reason is life expectancy. If your goal is to sustain your standard of living for the rest of your life, you need to look at how long you can expect to live.

 

A recent article in USA Today detailed the life expectancy of men, women and couples who planned to retire this year at age 62. Citing data from the American Academy of Actuaries, the article said that the joint life expectancy for a 62-year-old couple is 90.7 years. There’s a 58% chance that one of them will live to age 90, and a 29% chance that one will reach 95.

 

This means that my 70-year-old guest has at about a 20-25 year time horizon for his investments -- maybe even longer. His challenge is to invest so his portfolio can sustain his standard of living for that long, taking into account inflation and the rising costs of health care.

 

Considering that the cost of living increases an average of 3.5% a year, and health care costs are rising at twice that rate, his rate of return needs to be higher than that obtained by the bond-heavy portfolio usually recommended to someone in his age group. The only way to generate that kind of return is to have a significant portion of his portfolio invested in stocks.

 

I'm sure most 70-year-olds would balk at the idea of being heavily invested in stocks. Too much risk, they'd say. But market risk is more of a concern in the short term. For the long-term investor holding a diversified portfolio, stock market risk is much less of a concern.

 

The stock market has historically been a great creator of wealth and protector of purchasing power for the investor holding a portfolio of America's greatest companies over long periods of time. Many investors don't realize that their time horizons are much longer than they think -- even my new 70-year-old friend who's already enjoying retirement.

 

SOURCE: Sandra Block, "Boomers' Eagerness to Retire Could Cost Them," USA Today, Jan. 14, 2008. http://www.usatoday.com/money/perfi/ retirement/2008-01-13-turning-62-cover_N.htm

 

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, including the Snider Investment Method™ are subject to risk, including possible loss of principal. Growth refers to growth of portfolio income, not necessarily growth of net asset value. Growth assumes some portion of income is reinvested. Yields do not include unrealized losses or gains.

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.

All We Can Know About the Stock Market

Way back in the day, when I used to trade for a living, I probably placed nine bets that a stock or index would go down in the near future for every time I placed a short-term bet on up. It is just my natural bias.

 

Some people look at a chart or a news story and their brain reaches for why this should go up. Mine goes instantly to why it will go down.

 

But as an investor, and someone who teaches others to invest, I believe you CANNOT make money betting AGAINST the U.S. stock market.

 

The data is overwhelmingly convincing on this point. Since 1926, the U.S. Stock Market has averaged 10.4% per year (Ibbotson). Bonds, in general, have averaged 5.4% over the same time period, while U.S Treasuries have barely outpaced inflation at 3.7%. Inflation is running at 3% a year. Again, these are all averages.

 

No one would argue that stocks do not carry risk in the short term. That is why, as a trader, with a four hour time horizon, I used to bet on stocks going down all the time - and win (sometimes).

 

Even over longer time horizons, stocks will go down. Looking back over time, it is reasonable to expect a losing year every couple years. More frustrating, even when markets in general are going up, individual stocks of perfectly good companies will go down, often for no apparent reason.

 

Take yesterday for example. The market went up 117 points. 2,110 stocks on the New York Stock Exchange went up and 1,188 went down. 164 stocks made new 52 week highs. An even greater number, 203, made new 52 week lows.

 

But that is the short run. Let's look at the long-run.

 

Over any given five-year period, stocks have lost money just 10% of the time. Stocks have beaten the return of bonds and cash equivalents in about 80% of all rolling five-year periods. And stocks have beaten bonds and cash in all rolling 20-year periods since 1926.

 

To borrow from Nick Murray:

 

"There are really only a few things we can know about the market. Fortunately, they're the only things we ever need to know. (1) It will continue to reflect the growth of the leading companies in the world's most innovative, most flexible, most transparent economy. (2) Because of its inherently higher volatility, it will always provide significantly higher returns than do less volatile asset classes like bonds. (3) No matter what the market is doing today, nor what you fear it may be doing tomorrow, ten years from today you will wish you had invested in it every dollar you could have laid your hands on."

 

SOURCE:

 

1. Nick Murray. "It Goes To Show You Never Can Tell," Financial Advisor, November 2007; p45, 46, 175 <No on-line version available>

 

 

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. Diversification does not protect against market losses in a declining market. 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.

It's All In How You Look At It

Look at the ballerina below. Is she turning clock-wise or counter-clockwise?

I see her turning clockwise, which is supposed to mean I am more right brain. Most people will see her turning counter-clockwise, which means you are more left-brain. But the cool thing is you can change which way she turns.

 

Focus on her turning the other way. Sometimes I have to look off the screen to get her to change. Sometimes it is really hard. Can you do it?

 

It just goes to show it is all in how you look at it. I had a caller on my radio show on Saturday who said he had pulled all of his money out of the stock market because he was afraid of terrorism. In other words, he was afraid of the risk. I, on the other hand, always have all of my money IN the stock market (by way of the Snider Investment Method™) because I too am afraid. Only I am afraid of running out of money.

 

Some people focus on short term risks that cause temporary market declines and opt for cash or bonds to manage risk. I focus on longer term risks like inflation and longevity and opt for generating cash flow from stocks to manage risk. Both of us see the same set of facts but interpret them differently.

 

Who is right? I guess it depends on how you look at it.

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. Diversification does not ensure a profit or protect against loss of in a declining market. All investments are subject to risk, including possible loss of principal. 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.

A different perspective on market volatility

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

 

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

 

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

 

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

 

From Nassim Nicholas Taleb², in Fooled by Randomness:

 

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

 

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

 

From Ed Easterling³, in Unexpected Returns:

 

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

 

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

 

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

 

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

 

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

 

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

 

We have taught 3009 investors how to:

 

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

 

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

 

 

 

 

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

 

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

 

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

 

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

 

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

Jim Cramer on Market Manipulation

I suspect many of you have seen this video because several people emailed me the link. If you invest money in the stock market and you haven't seen it yet, you MUST.

 

It is approximately ten minutes in length and it is the most candid conversation I have ever seen recorded about the manipulation of stock prices. I have heard these conversations over dinner but never in front of a microphone or video camera.

 

 

UPDATE (3/23/2007): YouTube has taken down the video but you can still view it on TheSteet.com. Thanks James for tracking that down.

 

Amateur investors want to believe that stock prices are a function of the fundamental value and future prospects of a company. They are not - at least not in the short run.

 

Amateur investors believe the news they read on the companies they own and think it means something. It does not.

 

Amateur investors desperately want to believe you can look at historical price, fundamentals and news and figure out which way a stock is going to go.

 

If this video doesn't fundamentally disabuse you of this notion, I don't know what will. And this is just talking about one tactic used by one group - hedge funds. There are many others, like window dressing and marking the close, all going on simultaneously.

 

Amateur investors, meaning people like you and me who do not run billions of dollars of institutional money, have only two choices. The first is to try to play the trading game against the pros. I am here to tell you it can't be done profitably over long periods of time - no matter how many seminars you take, newsletters you subscribe to, or pieces of software you buy.

 

The movement in prices is random. There is no ability to predict what is going to happen next. If you don't have the financial ability to move the price, you don't have a chance as a trader over the long run.

 

The other option is to take the VERY long view. You buy companies that you would be happy to own for many, many years because over the long run, the market machinations don't matter. While you own them you generate income from them, let them sit, whatever. If your investment premise is correct, and you are buying financially sound companies with good long-term prospects, the long time horizon cancels the noise and leaves you with nothing but signal.

 

The hard part, of course, is that while you own the stock, you have to train your brain to ignore the noise. It is easy to let our emotions take over and assign some meaning to the short term movements in price. But a reaction based on noise is, by definition, going to result in a poor decision.

 

	TAKEAWAYS:   1. The stock price does not reflect the fundamental value of a company in the short run.   2. News has no predictive value either.   3. Unless you have the ability to move markets, your only rational choice is to take a long-term approach to investing and ignore what happens in the short run.

 

I would love to hear your thoughts on this topic. Specifically, what are your takeaways from it? Does this change your approach to investing in any way? Does it clear things up or muddy the waters? 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.

Short Term View Sabotages Results

We know, from study after study, the average investor return is far less than the return on the investment they hold, much less the market itself. The Quantitative Analysis of Investor Behavior (QAIB), for example, shows us the average equity mutual fund investor has gotten a return of only 4% over the last 20 years while the average mutual fund has returned 9.3% and the market itself has gone up about 12%.

 

Dalbar has been doing this study for thirteen years and it not only quantifies investor returns, as opposed to investment or market returns (which many people incorrectly assume to be one and the same) but also the behaviors that produce those returns.

 

The terrible performance of investors all boils down to one simple thing: we are human and our decisions are not driven by logic but by emotions. Over and over again we shoot ourselves in the foot. We consistently, over a period of many years engage in behaviors that result in buying high and selling low.

 

One of those behaviors is judging the performance of our portfolio based on what is happening right this minute versus taking a long term view of performance.

 

Let's take two hypothetical investments. Over time, the first one has an average return of 5% and a standard deviation of 11%. Average return is the measure of performance. Standard deviation is the statistical measure of risk. The higher the standard deviation, or the wider the distribution of returns, the more risk.

The second investment has an average return of 10% and a standard deviation of only 5%. Clearly, from a purely empirical point of view, the second one is the better investment. It provides a much higher return over time with much lower risk.

Now imagine a husband and wife each had $10,000 to invest in their IRAs. Jane chooses to put her money in the first investment and Joe in the second. After two years, Jane's return has averaged 11% and Joe has only averaged 5%. Joe is in the superior investment, in spite of his short term results. But it would be almost impossible to convince Joe of that.

Joe will look at his result and compare it to Jane's. Unless Joe is much smarter than the vast majority of investors, he will sell his investment and buy Jane's. Over time, the likely result is that he will do that over and over again, every time his investment doesn't "feel" good, resulting in a repetitive pattern of buying high and selling low.

 

Joe is sabotaging his performance. He is making two classic mistakes: 1) he is judging performance based on what is happening today, rather than what is likely to happen over time; and 2) he is making the decision because of regret, not logic.

 

All the data suggests we do this. We all know we do it. And yet, we are almost powerless to stop doing it.

 

Consistency is the key to building wealth. You pick an investment, or basket of investments, based on their ability to meet your long term objectives and the risk-reward profile. The only time you should change course is when either your long-term objectives or your risk-reward profile change. Period. Short term results are irrelevant because all investments are cyclical. They all have good years and bad years. It is long term results across your entire portfolio of investments that counts.

 

If you are doing it any other way, you are doing it wrong. That's what I think. What do you think? Agree? Disagree? Leave your thoughts below.

 

SOURCES:

 

1. Jack Bogle. "The Emperor's New Mutual Funds." The Bogle eBlog 15 March 2006.

http://snipurl.com/mfreturn

 

2.  "QAIB 2006 Highlights." Dalbar, Inc. 2006.

http://www.dalbarinc.com/pages/QAIB2006Highlights.pdf

 

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.

 

Hedging Your Biggest Risks

Our paycheck protects us against all sorts of risks. You are in a much better position to absorb unexpected bills, divorce, a lawsuit, or a 20 year bear market when you are employed and have a steady and dependable source of income. A paycheck also hedges you against inflation. Typically, your W-2 income will rise over time to account for increases in the cost of living.

 

Our biggest financial risk is not losing assets or market value. It is losing our source of income.

 

According to a paper published by the Center for Retirement Research, more than three-quarters of adults age 51 to 61 experience financial shocks over a 10-year period. They include widowhood, divorce, job layoffs, health problems, or the onset of frailty among parents or in- laws. Health problems and layoffs dominate at this age. They also find the incidence of financially disruptive events increases with age.

 

If our biggest risk is losing our paycheck and the safety net it provides, how do we hedge or insure against that risk? We build an investment portfolio that generates a steady and consistent source of cash flow. The goal has to be to generate enough inflation-indexed income to replace our W-2 income at a moments notice.

 

Investing solely for growth is not adequate to insure against these risks. Paper gains are fleeting. Assets that must be sold are too risky. And contrary to conventional wisdom, stocks are not a good hedge against inflation.

 

When do we lose our job? When the market and the economy are booming? No. The more likely scenario is we lose our job when the economy is slow, profits are being squeezed and stock prices are down.

 

I believe the job of our portfolio is 1) to protect us against financial risk; and 2) to create wealth. These two things are not mutually exclusive. If you accept my definition of wealth, which is the ability to maintain a certain standard of living indefinitely over time, then wealth is not measured by the number at the top of your statement. It is instead, measured by the inflation-indexed income your portfolio can generate.

 

It is my deeply-held belief that your focus should not be on how to grow your portfolio, although that is certainly a by-product of income re-invested. Rather, "How do I create MORE sustainable, inflation protected income?"

 

What do you think? What is your definition of wealth? Has it changed as you approach retirement? Does the ability to maintain an agreeable standard of living indefinitely without worry make sense to you as a definition of wealth? Leave your thoughts and comments below.

 

SOURCE:

 

1. Richard W. Johnson, Gordon B.T. Mermin, and Cori E. Uccello. "When the Nest Egg Cracks: Financial Consequences of Health Problems, Marital Status Changes, and Job Layoffs at Older Ages" Working Paper Center for Retirement Research at Boston College, Number 18; Released December, 2005.

http://www.bc.edu/centers/crr/papers/wp_2005-18.html

 

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.

 

All is well with the world right?

The Dow and S&P 500 continue their push into loftier heights. Your portfolio is going up in value. So, all must be right with the world, right?

 

Well, not so fast.

 

Investors are notorious for focusing on the narrowest of time frames -- today, this week, this month, even this year. But you simply cannot look at it like that. To make decisions based on a slice in time is what causes the performance of individual investors to be so lousy, as is well-documented.

 

In keeping with our recent dead money theme, let's look at the bigger picture. The Dow may be making new highs, but I’ll bet you dollars to doughnuts your portfolio isn't. Take out your contributions since 2001 and add back your distributions. See where you are? Chances are it isn't an all-time new high.

 

You have been sitting on dead money all this time. You haven't earned a single penny in over five years. And you think the new highs in the Dow and S&P are cause for celebration? I think they are an opportunity to cash out of something that hasn't worked for you and get in to something that makes more sense, like cash flow investing.

 

It is clear market timing, stock picking and even buy and hold have some fundamental flaws in a world where we often need to tap our investments because we lost our job, became disabled, or want to quit working and must fund 30 years of retirement. Cash flow investing gives you the best of both worlds -- income to act as a safety net and long-term participation in stock market gains.

 

The key to making money is buying when everyone else is selling and sell when everyone else is buying. Right now, everyone else is buying. What are you going to do?

 

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

 

What is dead money?

Dead money is money that is earning its owner nothing. Examples of dead money include:

 

1. Money buried in your backyard or stuffed under your mattress

2. Equity in your home

3. Money invested in an asset that is under water and produces no cash flow

 

The opposite of dead money is money that is actively working. Examples include:

 

1. Interest bearing investments - CDs, money market funds, bonds

2. Cash flow investments - rental properties, dividend stocks, REITs, royalty trusts, etc.

3. Money invested in an asset worth more than you paid for it and still rising

 

I believe a fundamental rule of managing money is to avoid dead money like the plague. Your money is a tool. It has to work for you every single day. In this day and age, it has to work harder than ever because you face more risks than ever before.

 

Look at the first list up above. The old way of thinking about money encourages dead money.

 

The old way of thinking says to buy a house and put as much money down as possible. Make extra mortgage payments if you can. Get your mortgage paid off before you retire.

 

Today's reality is you cannot afford to have hundreds of thousands of dollars tied up in a mortgage. You are very likely going to need that money at some point along the way. Mortgages, home equity lines of credit and reverse mortgages have to be used as a strategic tool for financial planning today.

 

The old way of thinking says buy and hold. Stock prices go up over the long run.

 

But what about the short run? The new highs in the Dow notwithstanding, money invested in stock has been dead as a doorknob since 2001. It may still be dead. Dollars to doughnuts says if you remove any contributions you have made in the interim and add back any distributions, your portfolio value is less than it was.

 

Sorry to burst your bubble, but it's true.

 

The new way of thinking says losses in market value are unavoidable. Markets are cyclical and can't be timed. Cash flow is king. The only way to make money work consistently in the short run is for it to generate cash flow.

 

As long as I have sufficient cash flow, I can afford to hold for the long run because in the short run I have the income to deal with the unexpected without selling assets while they are down.

 

Many smart people believe these market highs are very temporary. They predict a recession is approaching. A lot of other really smart people say this is just the beginning of a new period of prosperity. I am just smart enough to know none of them know for sure. Flip a coin. It could go either way.

 

I always ask "what if?" I think a family CFO must plan for the unexpected. The way you do that is by asking "what if?"

 

What if I became ill and couldn't work. What if I lost my job or my business went under? What if housing prices fall - a lot? What if I can't flip this real estate investment I bought? What if 2007 is the start of another recession? What if the market loses 35% of its value over the next few years and takes another five to get back to current levels?

 

What if? And then -- what next?

 

The time to buy is when everyone else is selling and the time to sell is when everyone else is buying, not the other way around. These new highs are an opportunity to cash out and move to investments that will work for you even if "what if" happens. The key is to always plan so that no matter what happens, you'll still be OK.

 

Agree? Disagree? Leave 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.

10-25-2006 - Items of Interest to Family CFOs

This short paper, "Will Reverse Mortgages Rescue the Baby Boomers?", from the Center for Retirement Research, gives a wonderful explanation of reverse mortgages and how they can be used to tap equity in your home without selling it. It also explains the limitations and the risks. The best part is, the CRR is totally unbiased. They are academics looking at the problem of creating enough cash flow to rescue a generation unprepared for retirement. We are working to get one of the authors on the radio show very soon. (http://www.bc.edu/centers/crr/issues/ib_54.pdf)

 

Barry Ritholtz, offers this from The Big Picture. The chart is originally from the New York Times. Lest we are tempted to forget, in the short run, markets don't always go up. When they go down, they create long periods of dead money for the capital appreciation investors. That is why I chose to invest my money for cash flow in the short run and growth as a secondary objective over the long run.

 

 

 

The average Wall Street employee made close to $300,000 last year. That is about 5X what the average person in this country makes. According to the CNN Money article, top traders and investment bankers are commanding compensation in the tens of millions per year. Wall Street is making more than ever while your portfolio has made little or nothing for the last five years. (See the chart above.) Do you feel they earned what you paid them? http://money.cnn.com/2006/10/17/news/newsmakers/bc.financial.wallstreet.pay.reut/index.htm?section=money_topstories

 

It is impossible to continue indefinitely with your cash outflows exceeding your inflows. There is only so much home equity to be tapped and so much credit to be had. Yahoo columnist Laura Rowley has a good piece on the rising gap between income and expenses in this country. She offers five suggestions for averting the disaster that always comes eventually when you live above your means.

http://finance.yahoo.com/columnist/article/moneyhappy/11094

 

Thoughts on any of these? Feel free to leave 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.

No Irrational Exuberance?

A BusinessWeek Online article suggests, even though the last time the market made all time highs, it signaled a dramatic decline, this time is different. The bull scenario is this time blue-chip stocks are being driven by strong earnings and reasonable P/E ratios.

 

That may or may not be true. Only time will tell. The statement I found pretty telling though was this one: There's none of the "irrational exuberance" of the tech bubble. In other words, this isn't 2000.

 

Really? The fact that CNBC had James Glassman on last week, author of Dow 36,000, for the first time since the go-go years ended, isn't an indicator that we have gone over the top?

 

My way of investing precludes me from making bets on the future direction of price. I am market ambivalent. But if I were, that would be a sure sign. When Glassman starts crawling out from under his rock, that has to be as good a contrarian sentiment indicator as I have ever seen.

 

I believe you sell when everyone else is buying and buy when everyone else is selling. That is how you make money over the long run.

 

What do you think? Does anyone out there see other signs of "irrational exuberance?" Leave your thoughts and comments below.

 

SOURCE:

 

1. Marc Hogan, "After the Dow Record: Gloom or Boom?" BusinessWeek Online; 09 October 2006