The Courageous Investor

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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.

Don't second guess

Ignoring the temptation to second guess investment decisions improves results. Here is an example.

 

The stock-picking newsletter, Closed-End Country Fund Report, stopped issuing new recommendations in mid-2004. But because the editor said he might resume publishing at some point in the future, Hulbert's Financial Digest left its last picks active in their database. For those of you unfamiliar with Hulbert's, it is a service of Dow Jones that has tracked newsletter performance since the mid-1970s.

 

A funny thing happened. The dormant newsletter's picks have gained 139% since it stopped publishing, it was one of the top performers of 2006 and it has the best five year performance among all newsletters tracked by Hulbert.

 

There are important lessons here for individual investors. Amateurs and professionals alike are affected by fear and greed. When you decide to change course, in mid-stream, it is rarely a logical decision. More likely you are being driven by fear or greed. Fear and greed make terrible portfolio managers.

 

Mark Hulbert, the found of Hulbert's Financial Digest (and a previous guest on my radio show) does an exercise to prove this point. Each year, he takes the picks of newsletter writers at the beginning of the year and figures out the return if they had stuck with those picks rather than fine-tuning throughout the year. In every year, the newsletter writers would have done better by going with their original game plan.

 

In 2006, for example, the average newsletter portfolio gained 11.35%. Had they stuck with their picks from the beginning of the year, their results would have been 12.15%. When you factor in the tax consequences of the transactions, the results would have been even more favorable if they had gone with their original plan.

 

Similar exercises have been done for mutual fund managers and individual investors with similar results. Time and time again, study after study says fear and greed cause us to buy high and sell low. We become convinced that we could do better elsewhere and we get the exact opposite result.

 

An article by Mark Hulbert on MarketWatch recognizes the difficulty we all face:

 

None of these results denies that doing nothing can be psychologically difficult. Holding a stock that is falling takes courage, just as it can seem irresistible to jump on a stock that has already risen.

 

If it was easy, we would all make a lot more money and they would have to take very few coaching calls at Chronim Advisors. I don't think anyone, especially me, is suggesting you completely ignore your portfolio. That can be equally bad. But you have to strike a middle ground.

 

But what these results do suggest is that we should place a large burden of proof on making a change in our portfolios. Unless the arguments in favor of such a change are particularly compelling, we probably should simply do nothing.

 

The most important thing you can do as an investor is to be consistent. In other words, you must make investment decisions when you are sane - when you have not put any money at risk - and stick with them when you become clinically insane - which is the moment you invest a dollar in a security. From that point on, you are not competent to make logical decisions.

 

The way to circumvent that is to make all the decisions up front and never on the fly. Now you might be thinking to yourself, but what if new information becomes available that I didn't have in the first place?

 

Remember, 99% of what you hear is noise, not signal. Pros may be able to distinguish between noise and signal but you can't. The probabilities will work in your favor if you can teach yourself to ignore it.

 

Throughout the history of financial markets, the investors that have done best are those that can manage their portfolio, and their emotions, with unflinching discipline. If you listen to noise, change course mid-stream, and constantly second guess your investment decisions, you will probably not be very successful as an investor.

 

But the good news is this is a learned skill. If managing your portfolio well is a priority for you - and who can afford for it not to be given our need to fund a thirty year retirement - moving from a fly by the seat of your pants mentality to a disciplined approach will make a big difference.

 

SOURCE: (Direct quotes are highlighted)

 

1. Mark Hulbert, "The Value of Doing Nothing"; MarketWatch.com; 19 Jan 2007

http://snipurl.com/mktw_nothing

 

 

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.

Illusory Correlations

An article by Mark T. Finn and Johnathan Finn, published in John Mauldin's Outside the Box E-Letter points out one of the more difficult aspects of economic decision-making - that is that we are constantly fooled by randomness:

 

Consider a classic experiment done in 1948 by B.F. Skinner. Paul Slovic describes the experiment as follows:

 

Skinner found that hungry birds, given food at brief random intervals, developed very idiosyncratic, repetitive actions. The precise form of this behavior varied from bird to bird, and Skinner referred to these actions as superstitions. What happened to these birds can be described in terms of the concept of positive reinforcement. The delivery of food increased the likelihood of whatever form of behavior happened to precede it. Food was then presented again. Because the reinforced behavior was occurring at an increased rate, it was more likely to be reinforced again. The second reinforcement caused a further increase in the rate of this particular behavior which improved its chances of being reinforced again, and so on. After a short while the birds were found to be turning rapidly counter clockwise about the cage, hopping from side to side, making odd head movements, etc. Because such behaviors are reinforced less than 100 percent of the time during learning, they persist even when reinforcement stops altogether. Animals trained in this way have been known to make many as 10,000 attempts to obtain a reward that was no longer forthcoming.

 

(Psychological Study of Human Judgment: Implications for Investment Decision Making, Paul Slovic, The Journal of Finance, Vol. 27, No. 4, Sep., 1972)

 

With only partial tongue in cheek we would point out a strong similarity between Skinner's experiment and investing in the stock market. There is the fertile ground of overwhelming data from which illusory correlations can be drawn. The outcome is expected to be positive (an increase in wealth). That expected positive outcome is associated with positive reinforcement (good performance) that is at least intermittent if not random. There are few statistically valid analyses provided as systematic feedback that would refute an illusory correlation.

 

I see this time and time again among investors. Imagine I bought 10 different stocks and all the stocks whose company name begin with A go up in price while the others all go down. The heuristics, or logical shortcuts in our brain's operating system cause us to leap to an illusory correlation between the company name and rising stock prices. Consequently, I start buying more stocks that begin with A. A random distribution of returns in a rising market would suggest, incorrectly, that stocks beginning with A go up more often than not. With an ever-increasing percentage of stocks in my portfolio beginning with A, I cannot see that stocks that begin with other letters go up in equal percentages.

 

You may say that is ridiculous. Admittedly, I made the example extreme to illustrate the idea. But make it somewhat plausible and people do it all the time without realizing.

 

Let's take technical analysis as an example. If I buy several stocks when they rise above their 20 day moving average and I make money on them, I will create an illusory correlation between the two. As long as I can spot the pattern sometimes and make money on it, which reinforces the correlation in my mind, I will continue to look for it and bet on it. It doesn't matter that the pattern often fails to hold true. I will continue to believe in the correlation.

 

The problem is that to make the correlation in our minds is very easy. It only requires a tenuous association between an event and a reward. But to disprove the correlation is hard. Few people are going to sit down and calculate the correlation coefficient between price and the 20 day moving average!

 

One other thing I find interesting is the link between these behaviors and addictions. What makes something really addicting is when we receive intermittent variable reinforcement.

 

"The interesting thing that Skinner discovered about intermittent reinforcement and maybe one of Skinner's most important discoveries was that behavior that is reinforced intermittently is much more difficult to extinguish than behavior that is reinforced continuously."

 

A slot machine is a perfect example. We put money in and occasionally money comes out - not always and the amount varies. This is intermittent variable reinforcement. It is this characteristic that makes something really addictive.

 

Email is another example. Do you know anyone who constantly checks email? Why do they do it? Intermittent variable reinforcement. You are not sure what you will get each time, or if you will get anything at all, so you keep checking.

 

Of course, the leap from gambling to investing is not a big one. Like gambling, investors get random, or intermittent reinforcement (profits) that vary in size and frequency. Do you think it is a coincidence that most investors don't buy bonds (not variable or intermittent) even though portfolio theory says you should have a substantial percentage of your portfolio in bonds?

 

I think one of the most beneficial things an investor can do is to study these sorts of behavioral issues in finance. In fact, I think it is time far better spent than studying stock charts and trading strategies. Only if we can understand our behavior and that it is far more complex than we probably realize can we hope to overcome our shortcomings as investors. For many of us, it isn't our lack of knowledge of investing that screws us up. It is our lack of knowledge about how our own brain functions.

 

What do you think? Leave your thoughts and comments below.

 

PROPS:

 

Thanks to Snider Method, alumni Dr. Andrew Lipscomb, for giving me the heads up on this article.

 

If you would like to subscribe to John Mauldin's newsletters (free and highly recommended) you can find them here.

 

SOURCE:

 

Mark T. Finn and Jonathan Finn, CFA; "A Look in the Mirror"; Mauldin's Outside the Box E-Letter; 15 Jan 2007.

http://www.investorsinsight.com/otb_va.aspx?EditionID=453

 

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.

 

Wall Street Analysts

An opinion piece by John Dorfman, Bloomberg News columnist, may contain the best stock tip you'll ever get - ignore stock tips.

 

The four stocks that Wall Street analysts most despised at the beginning of 2006 posted an average 21 percent return for the year.

 

The four stocks they most loved returned only 2.4 percent, which was far worse than the return of almost 16 percent on the Standard & Poor's 500 Index.

 

In short, the despised stocks walloped the favored ones. Is that a freak result?

 

No, it is not.

 

For nine years, I have been studying the annual performance of the four stocks that analysts most unanimously recommend, and the performance of four stocks on which they issue an unusually large number of ``sell'' recommendations.

 

The analysts' darlings lost 3.7 percent a year, on average. The stocks they hated declined 0.2 percent.

 

Both groups of stocks did worse than the S&P 500, which returned 7.4 percent a year, on average, during the period of the study: 1998 through 2006.

 

Investment strategists, analysts and mutual fund managers get paid millions of dollars a year to evaluate stocks. All the evidence says they fail miserably. The rate of success falls squarely within that which we would expect given the laws of chance. Why on earth do we continue to believe in stock picking or market timing?

 

In the famous words of American financier and advisor to presidents, Bernard Baruch, "It can't be done except by liars."

 

SOURCES:

 

1. John Dorfman, "Wall Street Analysts Stumble on 2006 Stock Picks"; Bloomberg.com; 9 Jan 2007

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_dorfman&sid=a0RtSbI4S6a4

 

2. "Bernard Baruch"; Wikiquote.com; 19 Jan 2007

http://en.wikiquote.org/wiki/Bernard_Baruch

 

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.

 

Options Find a Place in Retirement Accounts

The traditional view of options can best be summed up in one word - risky. That has always frustrated me, mainly because it is such a persistent myth. Options can be risky, particularly when they are used to place a bet on the future direction of price. If that's what you want to do, why don't you just go to Las Vegas?

 

Increasingly though, options are being used in the way I believe they ought to be used, which is to manage risk and create portfolio income. Even more specifically, they are being used to generate portfolio income for retirement portfolios.

 

Charles Schwab did a survey of some of its options customers and were pleasantly surprised to find most of them were using options in this very conservative way. The Wall Street Journal reports:

 

The survey showed that 61% of them consider themselves to be risk takers, but only 40% think there are more gains to be made with options than with stocks and bonds, and only 31% agree that they like trying to outsmart the market with their option trades.

 

Instead, a far higher number -- 69% -- consider option trading "a great way to generate income" and perhaps most interestingly 56% say option trading is part of their retirement investment strategy.

 

That last figure is particularly interesting to Randy Frederick, director of derivatives at Charles Schwab. It wasn't long ago that option trading wasn't considered appropriate for retirement, he notes.

 

I have also noticed a trend toward much more widespread understanding and acceptance of options. In my talks I always ask how many people in the room are familiar with options. Back in 2001, I'd say only about 10% - 20% raised their hands. Today it is well over half. And they don't express nearly the amount of fear and trepidation about using them they once did. Most people now realize they are pretty mainstream and want to learn more.

 

"I can't teach you how to get rich quickly trading options," he hammers home to customers, Mr. Frederick said, but, "I can teach you how to protect what you have and get rich slowly."

 

That is really the key. Professionals know options are just a tool for achieving certain objectives. Getting rich quick isn't one of them. Highly leveraged, speculative bets using options almost never work out. But using options to manage risk and create portfolio income almost always does.

 

I'd like to thank Professor Frank Anderson, from UT-Dallas, for sending me the heads up on this article and I'd like you to weigh in with your thoughts. As always, you can leave your comments below.

 

SOURCE:

 

1. Mohammed Hadi, "Options Find Favor With Investors Seeking Strategies for Retirement." Wall Street Journal 3 Jan 2007; C2. (registration required)

http://online.wsj.com/article/SB116778575233765465-search.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.

 

Where Fools Rush In

Regular readers will be intimately familiar with my theme of buying when everyone else is selling and selling when everyone else is buying. This is a cornerstone of the way I invest. Another cornerstone is that no one can consistently time the market or pick stocks. That means finding a long-term investment strategy and sticking to it irrespective of short term events.

 

An article by Michael Mauboussin, Chief Investment Strategist for Legg Mason and author of the book "More Than You Know: Finding Financial Wisdom in Unconventional Places" in the December issue of Time discusses our proclivity for buying at highs and selling at lows.

 

That proclivity is best illustrated by Dalbar's Quantitative Analysis of Investor Behavior which I quote often. According to Dalbar (Mauboussin attributes it to Jack Bogle but he is quoting Dalbar) in the 20 years ending in 2005, the S&P 500 index rose 11.9% annually and the average mutual fund 9.7%, but the average investor realized only a 6.9% return. (See update at the bottom of the page for more on this.)

 

Mauboussin points to two concepts to explain our behavior. The first is recency bias. Recency bias causes us to put more empahsis on what has happened most recently and minimize, or even ignore, facts and long-term data.

 

He also suggests that we pay little attention to nagging details but instead let the stories spun by Wall Street or the financial press capture our attention. He cites the recent run-ups in real estate and energy as examples saying, "More often than not, once a sizzling sector comes to the attention of an individual investor, the opportunity is gone."

 

We are hard-wired to be poor investors. That is the gist of behavioral finance. But what you have to be aware of is that Wall Street uses that to its advantage. Quoting Mauboussin:

 

If you think the investment industry is there to protect you, think again. Many firms see a hot sector as an opportunity to gather assets. Before the tech-stock peak in 2000, the industry marketed nearly 500 technology, telecom and Internet funds. It's the same story now, only the actors have changed. In October 2004, 180 hedge funds were dedicated to energy and commodity investments. Today there are 525.

 

There's nothing new about bad timing and Wall Street's willingness to accommodate it. In fact, poor timing may be one of the most systematic and predictable errors investors make. Famed portfolio manager Bill Miller has dubbed it the "five-year psychological cycle." Investors want to own today what they should have owned five years ago. Currently, investors are pining for energy and commodities, but they should have owned them in the early 2000s, when they were cheap and unloved. Instead, investors coveted the high-flying tech and telecom stocks, which would have been smart purchases in the mid-1990s--except that investors were busy chasing bank stocks, which would have been shrewd purchases in 1990. You get the idea.

 

People not only do this with hot sectors and hot stocks, they also do it with asset classes. The time to jump in the stock market is not after it has risen 20%. And the time to sell stocks and buy bonds or go to cash isn't after it has fallen 20%.

 

This is the idea behind portfolio rebalancing, a simple but fundamental aspect of portfolio management that very few individual investors do.

 

I am curious what your thoughts are on this topic. Are you inspired to agree? Disagree? Do you have an example? Feel free to share. Comments are welcome in the comment section below.

 

UPDATE: (11/29/06) I received an email from Michael Mauboussin. I said the numbers in the second paragraph should be attributed to Dalbar, not to Jack Bogle. I was wrong. He tells me he WAS quoting Bogle, not Dalbar. Apparently they come up with different numbers. Although the message in them is the same I think. Sorry Michael for the mistake. Thanks for taking the time to set me straight on that one.

 

SOURCE:

 

1. Michael Mauboussin. "Where Fools Rush In." Time 6 November 2006, A44.

http://www.time.com/time/insidebiz/article/0,9171,1552055-1,00.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.

 

11-1-2006 - Items of Interest to Family CFOs

Saving and Budgeting

 

Money Magazine gives us 25 Rules To Grow Rich By. These cover the gamut -- from what remodeling will give you the biggest return when you sell your house, to how much company stock you should hold, to extended warranties. Each has its own calculator or resource box to go with it. While I don't agree with every one of them, they are good food for thought. (CNNMoney)

 

The Economy

 

The AP reports the median new home price fell 9.7 percent in September -- the largest amount in 35 years. That doesn't mean they fell everywhere, of course. The median is the midpoint. Half sell for more and half sell for less. Some areas, particularly those that have been hot in recent years, are harder hit than others. (Yahoo Finance)

 

Here is some more information, courtesy of Barry Barnitz, about falling home prices. "For two years running the S&P/Case-Shiller Home Price Composite Index has steadily shown tapering annual returns from its peak in July 2004. Not only do we continue to see shrinking gains but actual declines in most cities." (Financial Page)

 

The Wall Street Journal suggests the Goldilocks Economic scenario being suggested by many just got eaten. Eight days ago, the markets were pricing in a pretty rosy scenario. A slew of reports has (including the two above) changed all that. "It's prodded [the market] further into saying a slowdown of some magnitude is coming," says Mr. Ader. "People are thinking about a harder landing than they thought about two weeks ago." (The Big Picture)

 

Investing And Retirement

 

The vast majority of homeowners with adjustable-rate mortgages are worried their interest rates will rise, according to a Wells Fargo & Co. survey. But more than half think they'll be able to avoid a painful rise in their monthly payments by refinancing before things get too bad. 72 percent of homeowners said their home equity was their most important investment. That makes falling home prices and rising interest rates a bigger concern than ever before. (AP in Yahoo! Finance)

 

New numbers from S&P confirm what academics preach all the time: indexing continues to beat stock picking and market timing. Over the five years through the end of the third quarter only 29.1 percent of large-cap funds beat the S.& P. 500. 16.4 percent of mid-cap funds beat the S.& P. 400 index of mid-cap stocks, and 19.5 percent of small-cap funds beat their benchmark, the S.& P. 600 index of small-company shares. (New York Times, The Big Picture and Barry Barnitz)

 

John Markese, president of The American Association of Individual Investors, was interviewed by MarketWatch about creating portfolio income for retirement. He discusses maximum sustainable rates of withdrawal, a major shortcoming in my opinion, of the traditional asset allocation model. (MarketWatch)

 

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.

David Swensen's Unconventional Success at Yale

David Swensen, is one of the most successful money managers on the planet. The Yale University endowment, which he manages, has returned 16 percent over the 21 years since he took the reins. It has grown from $1.3 billion to over $18 billion. His advice for investors? Do as I say, not as I do.

 

Swensen wrote a book, published in 2005, titled "Unconventional Success: A Fundamental Approach to Personal Investment." The premise of the book is that you can't achieve the sort of results Swensen achieves with the Yale Endowment but there are things you can do to make sure you get the best possible result given your limitations as an individual investor and the investment products available to you.

 

David Swensen is very critical of actively managed mutual funds, for all of the reasons I have discussed for years. The high fees and inherent conflict of interest in actively managed mutual funds make your chances of outperforming the market with them 1 in a 100. "Overwhelmingly," Swensen writes, "mutual funds extract enormous sums from investors in exchange for providing a shocking disservice."

 

Like anyone who doesn't make a commission off your investments, Swensen eschews stock picking and market timing. It can't be done except by liars and charlatans. "Sensible investors avoid the brokerage community," he writes. Instead, he suggests discipline is the key to investment success. Find an approach that works, given your life objectives, and stick with it.

 

A big reason for David Swensen's success as manager of the Yale endowment has been the inclusion of alternative investments. Swensen was a pioneer in the use of alternatives. Prior to 1985, when Swensen took over, Yale held the majority of its money in U.S stocks, bonds and cash. Swensen thought that was a mistake. Today, Yale and many if not most of the successful college endowments take an absolute return approach to investing. But at the time he suggested it, the idea was quite revolutionary.

 

I tried to get David Swensen to appear as a guest on my radio show when his book came out last year. We had a nice exchange of emails back and forth. (He is an amazingly approachable guy considering what he does.) But in the end, he told me he just couldn't spare the time. We will keep trying. Who knows. Maybe some day we'll get him. But in the meantime, you might want to consider his ideas.

 

If you believe, as I do, in finding people who are achieving the results you want and figuring out what they are doing that you aren't, David Swensen is a pretty good place to start.

 

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.