Long Term Thinking and Discipline Wins!

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

There is even more conversations about ‘safe’ investments. ‘Guaranteed’ is often used to describe their ‘solution’.

There are an increasingly amount of ‘experts’ extolling the underperformance of ……………….. for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.  These ‘experts’ are using recent history as a sales gimmick. You will hear ‘look I would not have as much ………… or ………… will underperform for some time to come’. Or both.  As you can see the underperformers are interchangeable. (As well as the solutions.)

True investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success. It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’.  ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

In his 1993 letter to shareholders of Berkshire Hathaway, Warren Buffet counseled; “By periodically investing in a ‘passive’ fund….the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” He repeated the advice 10 years later in the 2003 letter. Mr. Buffet, in my opinion, was saying that trying to stock pick, market time and track record investing was ‘dumb’.

Over the long term the properly coached investor will outperform the ‘sophisticated’ investor. These ‘sophisticated’ investors believe because of their wealth they will receive special advice. This may work over the short term. However over the long term the properly coached investor will prevail.

To be successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory.

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work.  Most importantly we must believe in our strategy and remain disciplined.

We must own equities….. globally diversify ……. rebalance.

The Future Is Unpredictable!

Each day the media focuses on a new prediction. Each day the media develops a new concern for investors. Their audience is continually searching for new predictions. Their audience is continually looking for stories that have a negative impact on their investments and their lives.

What will happen next? What is the new hot asset class? Where is the best place to put my money?

Lately the political arena has been a hot bed of concerns. Who will be the next Supreme court justice? How will we handle immigration? This list seems endless. There will always be pontification from both sides.

The question becomes how will any of this affect you directly? Can you really predict how any of these predictions will affect your/our world?

Everyone wants to believe the side they agree with.

Everyone wants to have the best investments, only making money and avoiding all losses. This futile exercise will only add anxiety to your life. No one can consistently predict the future.

When someone is right on a prediction it is a matter of luck and not skill or knowledge.

Free markets are unpredictable.

Free markets left to their own devices set prices better than any individual or committee. They incorporate all of the knowable and predictable information in the present, as well as knowable information about the future.

Only unknowable future news and information can change prices going forward.

Rather than attempting to predict the future use your time and resources to improve your skills, either career or life.

You can also spend your time with friends and family. Because we can predict the future and we cannot control the future.

 

Your investments are best allocated by owning equities, globally diversify and rebalance. Follow these three simple rules and you will succeed in reaching your long term goals.

Greed Kills…..

Many investors have told me their advisor recommends large cap stocks only because of their stellar return as of late. They were told avoid small stocks because interest rates are going up. This market timing plays to the greed of investors and advisers as well. These advisers will use any ‘trick’ to make investors move their money to them.

As explained below Greed kills. Because right now small stocks are out performing large stocks. When this will change I have no idea.

What needs to be understood is the equity markets are random and unpredictable.

Below is an article by Fred Taylor that helps us understand why Greed Kills your investment returns.

Perhaps the greatest coach of all time in any sport, John Wooden (UCLA Basketball for those unfamiliar), had many simple rules for success not only on the basketball court but life as well. In this regard, one of his rules for success and life was: “be quick but don’t hurry!” This certainly applies to investing where discipline and patience are absolute requirements for long-term success as an investor. Don’t be in a hurry for investment “success.” Follow the advice of one of the greatest investors of all time: John Templeton — “get rich slowly!”

BTW, investment fear ain’t too good either!!

To avoid killing your returns you need to own equities with the correct amount of high quality short term fixed income….remain globally diversified….and rebalance.

Factors That Determine Portfolio Performance..

Many investors ask me how do I choose my investments? Is there a system you follow? How can I improve the performance of my portfolio? What factor or factors do I need to consider to improve my portfolios performance?

All good questions. I will discuss seven broad elements that typically determine the overall performance of your portfolio.

  1. Security selection. Or stock picking. This has proven not to be a good determinant of portfolio success. When you find a manager with great results. There is no reason to believe they will continue. Actually there is zero correlation between past performance and future results.
  2. Costs and expenses. This one is tough. Cheapest is not always best. My grandpa told me don’t buy the cheapest and don’t buy the most expensive. The best value is somewhere in the middle.
  3. Asset allocation. This is probably the most important technical determinant of portfolio success. Modern Portfolio Theory has proven to be a very effective tool in developing a successful portfolio. However, it’s development must be done correctly. And strictly enforced. In that, there needs to be periodic rebalancing.
  4. Valuation and year of birth. This is a determination of risk.
  5. Longevity and starting early. This also a determination of the level of risk you are comfortable with. However, 4 and 5 are just part of the equation. Each individual is different. Therefore, the generalization that these are the only determinates of risk is false.
  6. Humility and learning. If you google investment you will find millions of items to review. The Wall Street bullies have convinced most that someone has the holy grail of investing. They have convinced us that they and they alone can help you pick stocks, get into and out of the market at the right times and can find the best money managers to ‘beat’ the market and make you ‘rich’. Nothing could be further from the truth. The only ones getting rich are these on Wall Street. This is primarily because they make money on every trade you make. It does not matter whether you make money or not.

Remember, you don’t have to know everything about investing to be successful but you do need to know the right things.

 

  1. Behavior and discipline. This is by far the most important determinant of portfolio success. The Wall Street bullies use your emotions against you. They convince you that if you don’t act now you will miss out on ‘the opportunity of a life time’. Most, if not all of us need an investor coach to guide thru the maze of investment choices and keep us disciplined to meet our goals.

He Who Trades Less…..Wins!

Prior to the new fiduciary rule. The Wall Street bully brokerage firm would use their payout structure to their brokers to generate more trading. They would pay a higher fee for the stock portion of a clients portfolio. For example, pay 1% on the stock portion and 0.50% on the fixed income portion.

This would result in their brokers using higher risk portfolios for their clients. Naturally they get paid more for a riskier portfolio. When there was a downturn in the market their clients realized more volatility than was right for their situation.

This issue may have been corrected with the fiduciary standard. However, right now, there is debate about ‘watering’ down the fiduciary standard

Not sure where the fiduciary standard is going within our industry. But I believe the Wall Street bully brokerage firms will find ways to generate more fees by trading more stocks within their clients’ portfolios.

A broker’s “job” is to get you to buy and sell as much as possible.  That is the primary way he or she gets paid.  This is a huge conflict of interest because what is good for you is bad for the broker.

The Wall Street bully brokerage firms do not make money buying the right stocks at the right time. This is a great misperception by the investing public. They believe the brokerage firms have the right information to ‘beat’ the market.

This is wrong. Because, like you, they cannot predict the future.

These brokerage firms make money when you trade stocks. There is a spread that they earn on every trade plus a commission. For example the bid is the amount someone is willing to pay, say $10 and the ask the amount someone is willing to sell, say $12. When the trade is completed the brokerage firm earns the $2 difference plus commission.

Therefore being an active trader in the long run will cause you to lose money.

By employing a scientifically designed strategy and remaining disciplined to that strategy, over the long term you will win.  Remember you portfolio is like a bar of soap, the more you touch it the smaller it gets.

Own equities….globally diversify…….rebalance.

Refuse To Be A Victim!!

Every day we hear more news, usually bad.  The media has a belief that if “it bleeds it lead”. Somehow people enjoy hearing bad things happening to other people. How many times have you heard, “I’m glad that I do not have to deal with this generation”? “They are lazy, with no work ethic, no ambition, entitled…….”

I believe everything generation does not approve of the next generation. Think about it, what did your parents generation say about you and your generation?

What we have to accept is that every generation is different, thankfully. We must believe that the free markets work and the next generation will figure it out.

Unfortunately, the free markets do not guarantee anything. Some will win and some will lose. However, losing is not the end. It only determines what does not work for you.  Losing is only final when you give up.

No matter how much we believe that the free markets work and how much faith we have in the underlying system there will be stress in our lives about the future.

We must refuse to be a victim.

In his book former General Electric CEO, Jack Welch points out that feeling sorry for ourselves in one of the most destructive and energy sapping behaviors you can engage in. yes, it’s unfair that the markets are insane and some people are unreasonable.

We must accept this for the reality that it is and move on.

Every minute engaged in self-pity is one too many.  In the words of Jack Welch, “Refuse to be a victim”.  Develop a scientific strategy for investing and we believe that the “bad times” will not last forever.  Believe it or not we must also remember that “good times” will not last forever.

Remember the only thing that does not change is that things change.

To succeed in investing for the long term we must own equities…..globally diversify …rebalance!

Happy Memorial Day!!

For regular readers of my messages you will recognize this message from past years. I am repeating it for two reasons. One, it is a great message and two, I am a bit lazy this week. So, enjoy!

As we celebrate Memorial Day 2018 let us not forget those who fought and died for us and those who continue to fight for us. To protect our freedom.

You will never know how much it cost the present generation to preserve your freedom! I hope you will make good use of it!! – John Adams

This week will be a short message. Please remember and honor those who fought and continue the fight for our ability to seek the American dream. Every one of us has the ability to seek the American dream, however it involves sacrifice. There are no short cuts to prosperity.

The free markets are part of the reason our veterans fought. It does not involve speculation but rather prudent investing. The American dream is not a get rich scheme. It requires sacrifice, hard work and planning.

As John Adams said above “I hope you make good use of it!!”

Honor our veterans, past and present, by making good use of it.

Free Markets Work!!

Each day the media focuses on a new prediction. Their audience is continually searching for new predictions. What will happen next? What is the new hot asset class? Where is the best place to put my money?

Everyone wants to have the best investments, only making money and avoiding all losses. This futile exercise will only add anxiety to your life. No one can consistently predict the future.

When someone is right on a prediction it is a matter of luck and not skill or knowledge.

Free markets are unpredictable.

Free markets left to their own devices set prices better than any individual or committee. They incorporate all of the knowable and predictable information in the present, as well as knowable information about the future.

Think of all the changes that have taken place over the last twenty years. Who of you would have acted on the prediction of  the cell phone phenomenon, or  the driverless car, or artificial intelligence(think Alexa….), or any change to our society.

The free markets drive innovations, they drive change. Unfortunately, most of us are resistant to change. How would you finish…. if it looks too good to be true it probably………  ? But sometimes new things are true. Free markets drive that change, even if it looks too good to be true.

Just because there was a cause and effect in the past does not mean it will repeat in the future.

Only unknowable future news and information can change prices going forward.

Rather than attempting to predict the future use your time and resources to improve your skills, either career or life. Your investments are best allocated by owning equities, globally diversify and rebalance. Follow these three simple rules and you will succeed in reaching your long term goals.

The free markets as a whole will continue to move forward. However no one can consistently predict what will happen next in any particular sector.

In fact, there are sectors that we have never heard of……. yet. But the free markets will find them.

Do You Have All The “Facts”?

When you read a daily financial publication like the Wall Street Journal you find an enormous amount of facts.

These facts can lead to vastly different conclusions. I wager that each day, with the exception of 2008-9 (even then I could find some facts supporting an up day), I can find 5 reasons the market will go up and 5 reasons it will go down. All of these facts occur in the same day.

Have you ever had someone tell you something and they told you the reasons why? Only to find out they left out something that changed the entire situation. Well the financial media does this every day.

These Wall Street bullies play on our emotions every day.

You can justify almost any imprudent investment decision with “facts.”  Information is filtered by our emotions to create “fact” that support our decisions or beliefs. Without outside guidance, it is impossible to tell when and how this happens.

Truth in the field of investing is elusive.

Remember the Wall Street bullies make money when we, the public, move money from one investment to another. Your broker has a vested interest in moving your money. They make more commission each time you move. The banking system loves to feed the fear.

If you are really interested in earning a good return on your investment dollars stop empowering the Wall Street bullies. Develop a sound, prudent portfolio, based on YOUR risk tolerance level and remain disciplined to that strategy. Jumping from one investment to another will cost you money and make tons of money for Wall Street.

As I have mentioned a number of times, NO ONE can predict the future. When you ask your broker what is the best stock for now? Or, when should I get in and out of the market? Or, who is the best fund manager(s)?  You are essentially asking them to predict the future.

A globally diversified portfolio eliminates the need to predict and allows you to relax and be assured you are properly invested to reach your long term goals.

One of the main attributes investors need as well as advisers is discipline.

Equities are one of the greatest wealth creation tools available, if properly used. To reach you long term financial goals own equities…..globally diversify….rebalance.

What Will Happen Next In The Stock Market?

There continues to be volatility in the markets around the world. Currently the media is focusing on the potential trade war with China. Or is it corporate earnings?  Or is it potentially raising interest rates? Who knows?

With all this ‘potential’ negative news what should an individual investor do? Go to cash? Buy gold? Buy real estate? Buy bitcoin? Buy annuities? Buy CDs? The list goes on and on.

‘Experts’ can make a case for each of these. You should buy….because of….  Don’t forget these ‘experts’ make these cases because this is what they have to offer. They will profit if you buy…..

What asset class will perform best over the short term? No one can consistently predict what the markets will do.

When analyzing this there are two groups of people, those who don’t where the market is going and those who don’t know they don’t know where the market is going.

No one knows if the next 20% movement will be up or down, but the next 100% movement will be up.

That said, markets fluctuate widely in the short term.  Fortunately, every major crash has a recovery, with stocks regaining all of their losses, given enough time.  Similarly, while the stock market has seen many 100% gains, it has never suffered a 100% loss.

It is curious why investors see ‘crashes’ of the past as buying opportunities, at the same time they see ‘crashes’ of the future as risk. Interesting…

Arguably, only a global catastrophe such as nuclear war, asteroid collision, or other extinction-level event could cause such as disaster.  In that case, your portfolio would be the least of your worries.

Free markets will prevail.  Capitalism will prevail.  To succeed in investing for the long term you should own equities…..globally diversify…..rebalance.