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Investment Commentary, Education, & Insight.
Sunday, December 15, 2013
Sell Draper, Buy Bogle
Saturday, November 9, 2013
Miserable Money - 11/8/13
Miserable Money
My Dad has a saying, “Money might not buy happiness, but it sure makes misery a lot more fun.”
Few would disagree that money is an important factor in our lives. I’ve heard it described in many ways: a tool, a blessing, and a curse among them. When it comes to my and clients’ savings, I consider money an employee.
I expect it to work toward producing value for the future. So when it comes to “hiring” an investment portfolio, I look for characteristics that increase the probability of a successful investing experience.
I want money employees that will produce consistently and predictably in return for the fee I’m paying – keeping in mind all employees will disappoint at times.
Another attribute is how well the candidate will fit in with the culture. When hiring humans it is difficult to determine in advance if they will play well with others.
When it comes to hiring the players in our investments though, we have a leg up on this. There are known and measurable characteristics in investing that tell us these things.
Early in my career I had the opportunity to study briefly under Dr. Eugene Fama, who was awarded the Nobel in Economics a few weeks ago.
I’m not name dropping here. If we passed each other at the mall he’d have no idea who I am. But I would know who he was…and I’d stop him…and then probably embarrass myself.
Anyway, Dr. Fama introduced me to the world of academia as it relates to structuring market portfolios. Decades ago his work led to the development of The Three Factor model. It’s super simple:
for more click hereDon’t freak out, chances are you already understand what this equation bears out.
1) The Market Factor: Stocks make more than bonds. Stocks are riskier than bonds.
2) The Size Factor: Small company stocks make more than large company stocks. Small company stocks are riskier than large company stocks.
3) The Value Factor: Value company stocks (usually distressed companies) make more than growth company stocks (usually companies with strong financials and market positions). Value companies are riskier than growth companies.*
Though the science of investing is in its infancy, these factors address the most important investor question: how many baskets do I need and how many eggs should go into each one?
Factor investing employs a methodology of predicting how our portfolio employees will perform on their own and with each other over time. Money may belie misery, but if employing it is a guessing game, it may compound it. Miserable money.
As time has gone on other beneficial factors have been revealed. I recently attended a lecture given by Mark Carver, a Director of Factor Strategy for Ishares. His work entails identifying “statistically persistent anomalies” within asset classes.
Before you fall asleep, this is the same thing drug companies do when testing a new medicine. If the drug kills a bunch of people (a persistent negative anomaly) it doesn’t go to market and vice versa (hopefully).
Cause and effect…simple. Mark has helped identify other factors, such as quality, in a portfolio.
For a 2 minute explanation click here and play the video..
Wiser investors (portfolio bosses) always have an eye on increasing efficiency, and that is what the science of investing is all about. I talked with Mr. Carver after his presentation and sent him a copy of my new book.
Should we ever pass in a mall, with any luck he’ll know who I am too.
I welcome your questions and comments,
Marc Becker
Accredited Investment Fiduciary
Managing Partner, Wiser Financial Coaching, LLC
Wiser Financial Coaching, LLC, is a Registered Investment Advisor Firm
*The Factors as summarized above consider the entire asset class of stocks vs. bonds, small stocks vs. large stocks, and value stocks vs. growth stocks. These factors are neither applicable or predictive of individual securities performance nor are a recommendation for any investment in securities. Each factor stated is in reference to the asset classes noted “as a whole.”
Monday, October 14, 2013
Default Among Friends 10/12/13
Default Among Friends
Unless you are living under a rock you've been hearing about the shutdown and default...and nothing but…again. It’s enough to make us want to jump out of our skin, and our portfolios.
While a temporary solution appears forthcoming, I would remind investors this game of D.C. chicken seems to be turning into an annual event. To date, leaving our portfolios alone has been the prudent and successful course.
But If you're feeling every time we face these issues is scarier than the last, you're right. Because that’s the media’s job.
I don't say that flippantly. The media is paid by advertisers. If the media can't keep our attention, it doesn't get paid. You may have heard the journalism adage, "if it bleeds it leads."
For those unfamiliar, this means you put the most shocking stories first to keep the attention of the audience. As journalism seems to have evolved into a form of reality TV, perhaps the adage should be updated:
"If it doesn't bleed, make it."
In economic terms, no time we reach indecisiveness that could cripple the full faith and credit of the United States is worse than any other time. In real life, when these instances occur time after time, each is worse than the last because the negative effect compounds.
Once every decade or two and we seem to be having a tiff. Do it every year and our government is sending the message that we can barely keep our car in the road.
The irony in this is, our politicians erode the "full faith and credit" of the United States each time they encourage such occurrence whether or not we actually default on our obligations. Don't believe me?
Earlier this week China, a communist country* that happens to own 13 TRILLION in U.S. Treasury bonds, globally chastised the U.S. for the way in which we are running our democracy.**
I'm not saying actually defaulting wouldn't be worse. What I'm saying is repeatedly threatening the people you owe money that you might sends a similar message.
Saturday Night Live did a great job of expressing how one in China's position might feel. It's short and well worth watching here.
The good news for investors is each time we go through this we understand what it means a little better. Further, as uncomfortable as it is to live through, it is this kind of uncertainty and volatility that provides inflation beating returns over time.
So if you want to change something, forget about moving your investments around. Write your congressman and tell him or her to stop using the credibility and future livelihood of this country as fodder for negotiation.
Following is an excerpt from an article here regarding the debt ceiling and default. Though the dates and amounts are specific to the current situation, the result of shutdown/default remains static whenever we invite a "Fiscal Cliff." Remember that one?
This is the opinion and perspective of Moody’s:
Moody’s on the Debt Ceiling and Default:
Two issues now affect the outlook for US government finances: the government shutdown and the debt limit. The government shutdown began 1 October and resulted from Congressional inaction to authorize spending through either a budget or a continuing resolution. The US government (Aaa stable) reached its statutory debt limit of $16.7 trillion on 19 May. Since then, the US Treasury has used “extraordinary measures” to raise funds and pay government expenditures. Treasury estimates that it will exhaust those measures on 17 October and government expenditures will have to be reduced. Below, we address key questions stemming from the US government shutdown and the failure to raise the debt limit.
How does the government shutdown affect US creditworthiness?
The shutdown has no effect on the government’s ability to pay interest and principal on its debt obligations, and therefore does not directly affect the government’s creditworthiness. The shutdown prohibits discretionary spending, but not mandatory spending or debt service, such as interest and principal on Treasury securities, which the US government will continue to be able to pay.
Will the government default after 17 October if the debt limit is not raised?
We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact. The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.
What is the pattern of US interest payments after 17 October?
Interest payments on Treasury bonds and notes are due twice monthly, on the 15th and the last day of every month. After 17 October, the first interest payment date is 31 October, when a relatively small $5.9 billion is due, and the next is 15 November, when $30.9 billion is due.
Why are only interest payments potentially affected and not principal?
The statutory debt limit is a limit on the amount of debt outstanding. As debt matures, it can be refinanced with new Treasury issuance without affecting the total amount of debt (principal). Interest, by contrast, is an expenditure and could be included among the expenses that the Treasury could decide not to pay.
Is the situation worse now than it was in 2011, the last time that the debt limit was an issue?
No. The budget deficit was considerably larger in 2011 than it is currently, so the magnitude of the necessary spending cuts needed after 17 October is lower now than it was then.
Sunday, September 22, 2013
Psychology Vs. Serenity
Psychology vs. Serenity
Last year I wrote a series focused on psychological barriers investors face. The conclusion was the way we are wired to think lends itself to poor investment performance. Interestingly, it’s the same wiring that kept us alive for millennia.
Our brains are constructed to distinguish patterns and act on logical outcomes. Our emotions then come into play, reinforcing our rational conclusions. Markets, however, are wholly unpredictable, irrational, and only present a pattern long after the fact.
When considering our money our greatest challenge is to overcome innate psychological conclusions which tempt us to do the wrong thing at the wrong time. Below are summaries of common battles we face.
OVERCONFIDENCE
Studies show that people are exceedingly overconfident when it comes to assessing our ability compared to others. Nobody wants to be average…or worse…so most of us tend to believe we are above average even when we are not.
In a world where economic information surrounds us, many feel able to interpret this information in a useful way. In truth, anything we see in the media has already been priced into the market, so even if we are correct in predicting what is likely to happen, it is too late to profit from it.
RECENCY BIAS
Recency Bias is over-weighting the relevance of recent experiences in regard to what will happen in the future. Four years ago the DOW dropped to 6500. At the time, everyone in the media was predicting how long it would take to drop to 3000.
The tone and tenor was set by recent declines, and the interpretation was eventually we would get to 0. The DOW set an all-time high of 15,637 this week.
Our strongest feelings are around what is happening in the present. The valence can be so strong it seems that, for better or worse, those feelings (and the reasons for having them) will never end.
CONFIRMATION BIAS
Being a sentient species has its advantages; including a superior intellect capable of creation, empathy, and pattern recognition. But this also comes with pitfalls.
Humans tend to form conclusions long before all the relevant data is in. In fact, we draw conclusions within a few seconds of being presented with most situations. Because of our superior intellect, we know it is highly unlikely our first thought is wrong.
Confirmation bias is our natural inclination to seek and accept evidence that confirms our beliefs – the same beliefs we formed automatically. Because of this bias, we also reject evidence suggesting our conclusion may be inaccurate.
REGRET
People feel sorrow and even grief after having made an error in judgment. When things aren’t going as we want, we regret our decisions and actions that precipitated where we are in the moment.
Investors seeing their values decline will often regret not holding onto cash, even knowing the purchasing power of cash declines everyday due to inflation. Some will react and sell low, leading to further regret they weren’t invested when things rebounded.
THE PSYCHOLOGICAL ROLLERCOASTER:
The chart below is from investment author Frank Armstrong illustrating the cycle of emotions we feel as investors throughout unpredictable markets.
It is a wonderful visual to study and lock away in our cognitive (unemotional) mind. Armstrong writes:
“…under-performance quickly generates remorse and regret. These emotions in turn trigger an almost irresistible impulse to buy and sell at exactly the wrong moment.”
A simple way to avoid this outcome is to remember: The best time to invest, and stay invested, is always now. Acting on our biases and emotions generally doesn't result in an optimal outcome – in our out of investing.
Here is a checklist I use when feeling the need to take action:
1) Just because I want to know what’s going to happen, doesn't mean I do know what’s going to happen.
2) What I’m experiencing and feeling now will change.
3) I’m allowed to believe whatever I want, but that doesn't make it true.
4) Some of the greatest things in my life have come from things I previously regretted.
5) Serenity comes from the wisdom of knowing when to do nothing.
Congratulations to those who stayed invested and kept investing into a globally allocated portfolio. By staying on the coaster you have squashed bank interest rates. You have crushed gold. And most importantly you have outpaced inflation. You should be feeling pretty smart about now.
I welcome your questions and comments.
Marc Becker
Accredited Investment Fiduciary
Managing Partner, Wiser Financial Coaching, LLC
Wiser Financial Coaching, LLC, is a Registered Investment Advisor Firm
DOW - The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. This is not a solicitation or recommendation to purchase or sell any investment product or service, and should not be relied upon as such. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. The views and strategies described may not be suitable for all investors.
Monday, August 26, 2013
The Godfather Gets Robbed - 8/24/2013
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Monday, August 12, 2013
Investor Resolutions - 1/26/13
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Time to Hurry up and Wait? - 2/9/13
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