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Warren Buffett

Is This The Right Time To Invest in Stocks?

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Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, few, if any investors are able to do this with any consistency.

Logo of the United States Federal Financial In...
Logo of the United States Federal Financial Institutions Examination Council. (Photo credit: Wikipedia)

We tend to make our investment decisions based on recent past events and how we feel about those events.

 

If the market has done well lately, we are comfortable buying stocks. If the market has done poorly, however, we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return. Once we feel “comfortable” with the market, we have usually already passed up large potential gains. The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle.

 

Remember, Warren Buffet is a buyer and NOT a seller.

 

There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic. The large financial institutions make money when you trade in and out, making money on every trade. The media encourages sensationalism because it sells advertising.

 

You should own equities…globally diversify…rebalance and believe that America and the capital markets will recover. We as a country have been thru much worse and we recovered and became stronger.

 

Not all sectors of the economy will recover or come back to where they were prior to 2008.  Other sectors will recover quickly and new sectors will emerge and thrive.  The problem is no one can consistently predict what will happen and when.

 

I find it curious that ‘crashes’ of the past are seen as buying opportunities. While current and future ‘crashes’ are seen as risk.

 

Since 1946 every downturn of 10% or more experienced a subsequent recovery. The average recovery time was 111 days. Of course, this is the past and some recoveries were much longer while others very short. We must also understand that past performance is no indication of future results.

 

The real message here is that equity markets around the globe experience down turns some more extensive than others. But there has been recoveries and many times very quick recoveries.

 

As an investor we cannot deal with this volatility alone. Our emotions will take over and we will sell low and buy high.

 

We need the help of an investor coach/fiduciary adviser.

 

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Long Term Thinking and Discipline Wins!

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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.

The New York Stock Exchange, the world's large...
The New York Stock Exchange, the world’s largest stock exchange by market capitalization (Photo credit: Wikipedia)

There are an increasingly amount of ‘experts’ extolling the underperformance of international and small equities for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.  These ‘experts’ are using 2014 as a sales gimmick. You will hear ‘look I would not have as much small stocks’ or ‘international stocks will under perform for some time to come’. Or both.

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’.

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.

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The Wall Street Bullies Are At It Again!

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The Wall Street bullies are relentless is their pursuit of convincing investors that they can predict the future and help you ‘beat’ the market. After each failed attempt investors continue to seek out the next ‘hot’ stock or asset class or strategy. They continue to seek the ‘answer’ to their investment problems. They continue to seek out the formula to earn stock market returns with Treasury bill risk.

English: The corner of Wall Street and Broadwa...
English: The corner of Wall Street and Broadway, showing the limestone facade of One Wall Street in the background. (Photo credit: Wikipedia)

What they end up with is Treasury bill return, if they are lucky, with stock market risk.

Right now investors are seeking an increase in rate of return. Since the interest rates continue to remain low investors must look elsewhere. And the Wall Street bullies again have an answer. Buy high dividend paying (value) stocks and receive the dividend AND an increase in share prices. Seems like the perfect answer to all investors’ problems.

Remember GM paid a dividend until the day they went bankrupt.

This is another example of buying the ‘hot’ asset class. Remember in the mid to late 90’s when large cap growth stocks were surging year after year, especially if the stock had a .com attached? Everyone wanted to own all large cap growth with mostly .com stocks.

Then the inevitable, the tech bubble devastated this asset class.

A great comparison is that of Warren Buffet who is really a value stock investor. In 1999 when the large cap growth .com stocks were earning double digit returns some as high as 100% Warren Buffet suffered a 15% loss. Some said he was washed up but when the tech bubble burst Mr. Buffet and his ‘value’ stocks flourished. It turns out Mr. Buffet was far from washed up.

Many may ask why not just own Warren Buffet’s Berkshire Hathaway fund? That would be great except for the fact that this fund is more volatile than the Standard & Poors 500 itself.

Most investors are unwilling to experience this kind of volatility.

What is the ‘answer’ then? Unfortunately there is no answer to earning a high return with low risk. Our best alternative, in my opinion, is to:

  • Own equities and fixed income
  • Globally DIVERSIFY
  • Rebalance

Earning market returns is actually a superior return.

Since no one can tell you when to buy and when to sell there is no need for:

  • Stock picking
  • Market timing (getting in and out of the market at the right time)
  • Track record investing

We all get frustrated when markets go down. No one enjoys watching their investments decline. Our emotions may get the better of us when we hear the financial media predict the end of the capital markets. Many of us panic and sell during these downturns. Downturns are a component of risk.

Without risk there will be no return.

To succeed in investing seek the help of an investor coach. You do not have to know everything about investing but you do need to know the right things.

Your investor coach will be your guide.

Your investor coach will provide the process and the discipline to guide you on your long term successful financial journey.

Your coach will protect the future you from the current you.

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Location…Location….Location.

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Location…location….location is the real estate path to success. During discussions with many investors the subject of real estate comes up repeatedly. Many believe that real estate carries no risk or very little risk.

Real Estate
Real Estate (Photo credit: allan.hane)

During a recent conversation with a successful business person we discussed equities in a portfolio. This investor said he would not invest in stocks because he did not want to lose 30 or 40 or 50% as seen during the 2008-9 crash. He held his wealth in land, as in raw land.

This conversation represents many investors, although most deal with commercial real estate with a steady cash flow. What these investors do not realize is that the value of their real estate did go down during this recent crisis. I believe the reason more people make money in real estate than in the equity markets is that they cannot see the value of their holdings on a daily or hourly or even by the minute.

The only way to compare the two investment classes is to have an independent professional appraisal done at least monthly. Naturally this is unreasonable and a very expensive solution. There have been numerous studies on this subject and the common conclusion is that real estate follows the equity markets whether up or down.

On the residential real estate side, a house in my neighborhood was put up for sale in 2008. It remains unsold. It is a very nice home on a golf course. Is it because there are no buyers? Or is the seller unwilling to lower their price? Or both?

Even for those with commercial holdings with a steady cash flow. If the equity markets were to go down and stay down this cash flow would dry up. Many of the expenses would not go away if the cash flow would end.

The question needs to be asked, why do investors focus on the long term when dealing with real estate and then focus on the short term when dealing with the equity markets?

Could their emotions be guiding them? No one asked how much did you lose in your real estate holdings during the 2008 crisis. However many panicked when the equity markets were down 38% and sold at the low. The transparency of the equity markets makes your investments visible for all to view. Your ego will be bruised when the equity markets are in a ‘bear’ market.

Investors need to understand that the equity markets are actually the greatest wealth creating tool on the planet.

Like any tool, equities need to be managed correctly.

Warren Buffet has been a successful investor for a very long time and he has two basic rules: “Don’t listen to forecasts, and don’t try to time the market”. Your focus when investing in the equity markets must be long term.

Please do not misunderstand, I do not think real estate is a bad asset class. It is an asset class like all others, with positive and negative components. Real estate can be a valuable part of your overall portfolio.  It should only be part of your diversified portfolio.

With the help of an investor coach you can build a prudent portfolio that is best suited for you and your unique situation. It is not about, what is the best stock today?  Or should I be in or out of the equity markets?

It is about developing YOUR prudent portfolio and remaining disciplined.

Because of the attention the media pays to the equity markets you will need help in controlling your emotions. This is true in both down and up markets. Many will try to concentrate their portfolio in the ‘hot’ asset class. Only to be disappointed and discouraged when this ‘hot’ asset class suffers losses.

You will need an investor coach to build the right portfolio and keep you disciplined.

To succeed long term in the equity markets you need to follow three simple rules:

  • Own equities
  • Globally diversify
  • Rebalance
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Cramer and His Colleagues Are Killing Your Returns

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The Wall Street bullies want you to continuously trade your money. It’s ok if you want to gamble and speculate with your investment money. However, trading will and does result in very poor results. Keep in mind there will be a select few that succeed and earn a spectacular return. This is a matter of luck and not skill. No one can consistently earn superior returns. The market rate of return is there for the taking, take advantage and succeed, long term.

Investment Conference
Investment Conference (Photo credit: Salmaan Taseer)

In his excellent book, Think, Act ,and Invest Like Warren Buffett, Larry Swedroe summarizes data indicating that individual investors achieve poor returns. This data shows individual investors who rely on brokers and others who claim to be able to “beat the markets” underperform market returns that are theirs for the taking. The only winners are the brokers who “advise” them and the advertisers on shows like Cramer’s, who do their best to convince you they have an expertise that doesn’t exist.Since Cramer appeals mainly to high-testosterone men, it seems logical to inquire about the investing prowess of this demographic. One study showed that men trade more and have lower returns than women. The underperformance was more pronounced when comparing single men and single women.

The authors concluded that overconfident investors place too much confidence in the information they are getting and overestimate their expected gains on trading. There appears to be an inverse relationship between the amount of confidence and returns. The more confident you are, the worse your returns. Maybe that’s why Cramer always seems so confident of his advice.

Since women outperformed men, how did they do against market and risk-adjusted benchmarks? The same study demonstrated they underperformed.

Maybe you watch shows like Mad Money with members of your investment club. Too bad. Another study of 166 investment clubs showed the average investment club underperformed a broad-based market index by more than 3 percent per year for the period examined.

Perhaps you’re thinking this data applies only to investors of “average” intelligence, which (obviously!) excludes you. According to Swedroe, a study of the performance of investment returns earned by the Mensa Investment Club between 1986 and 2001 showed returns of 2.5 percent per year. During the same period, the S&P 500 Index earned 15.3 percent. To qualify for admission to Mensa, applicants must demonstrate intelligence test scores in the top 2 percent of the population.

via huffingtonpost.com

If you believe the Wall Street bullies have your best interest in mind follow Cramer’s advice. These shows are for entertainment and to sell advertising not to help with your finances. Viewers have very short memories in that Cramer’s recommendations result in very poor performance. Fire your broker….hire an investor coach.

Please comment or call to discuss how this affects you and your financial future.

Posted via email from Curated 401k Plan Content

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Almost All Wall Street Got 2012 Wrong

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English: Morgan Stanley Building
English: Morgan Stanley Building (Photo credit: Wikipedia)

All of us are looking to avoid pain and that pain includes investment losses. Unfortunately investment risk is unavoidable, we just have to live with it. If you can think long term and ignore the short term volatility you will succeed in reaching your long term financial goals. Don’t empower the Wall Street bullies, hire an investor coach.

From John Paulson’s call for a collapse in Europe to Morgan Stanley’s warning that U.S. stocks would decline, Wall Street got little right in its prognosis for the year just ended.Paulson, who manages $19 billion in hedge funds, said the euro would fall apart and bet against the region’s debt. Morgan Stanley predicted the Standard & Poor’s 500 Index would lose 7 percent and Credit Suisse Group AG foresaw wider swings in equity prices. All of them proved wrong last year and investors would have done better listening to Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein, who said the real risk was being too pessimistic.The ill-timed advice shows that even the largest banks and most-successful investors failed to anticipate how government actions would influence markets. Unprecedented central bank stimulus in the U.S. and Europe sparked a 16 percent gain in the S&P 500 including dividends, led to a 23 percent drop in the Chicago Board Options Exchange Volatility Index, paid investors in Greek debt 78 percent and gave Treasuries a 2.2 percent return even after Warren Buffett called bonds “dangerous.”

“They paid too much attention to the fear du jour,” Jeffrey Saut, who helps oversee about $350 billion as the chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said by phone on Jan. 2. “They were worrying about a dysfunctional government in the U.S. They were worried about the euro quake and the implosion of Greece and Portugal. Instead of looking at what’s going on around them, they were letting these macro events cause fear to creep into the equation.”

via fa-mag.com

The Wall Street bullies understand that the investing public have very short memories. This is why they continue to make predictions and why investors continue to look for predictions. NO ONE can consistently predict the future.

Please comment or call to discuss how this affects you and your investment goals.

Posted via email from Curated 401k Plan Content

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Who Can Consistently Beat The Market?

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Understanding Financial Leverage
Understanding Financial Leverage (Photo credit: Wikipedia)

There have been countless times when someone has pointed out to me a great investment strategy or stock pick. Someone they know picked a stock that doubled or tripled or even more.  They contend that if only they could repeat this their money troubles would be over. Most may or may not realize that is is a matter of luck and not skill. Eventually the ‘lucky’ investment manager runs out of luck. Remember there is NO correlation between a stock pickers success in the past and their ability to repeat.

The truth is someone will always beat the market but it probably won’t be you.  Given a 20 – year period, only a small percentage of potential money managers ever beat the market. Unfortunately, no one knows in advance who it will be. Chances are you will be the 95% who lose to the market.

Many of you may remember Peter Lynch, who managed the Fidelity Magellan Fund from 1977 to 1990. He averaged a 29% return during that time. Unfortunately, investors did not know this until it was over. Mr. Lynch stated that most investors lost money in his fund because they bought during high periods and sold during low periods. No one knew he was going to be so successful until he retired.

Another example is the great Warren Buffet, few can argue with his success. However, many could not deal with his volatility. In 1999 during the peak of the tech bubble, tech stock funds earned 100% and sometimes 200%. During this same year Mr. Buffet’s fund lost 15%. Would you stay with him? Now be honest. Or in 2008 the S&P 500 lost 38% Mr. Buffet’s fund lost 48%. The main reason for Warren’ long term success is he had one process, the process he believed in and remained disciplined to that process throughout.

The independent research firm DalBar studies investor behavior with accounts at least $100,000. Their study for a twenty year period dending December 31, 2011 found the S&P 500 averaged 7.81% while the average investor, with or without an adviser, averaged 3.49%.

The lesson is, there only a very small number of managers that beat the market. And even then we do not recognize it until it is over,

You can be a successful investor by developing a prudent portfolio matched to YOUR risk tolerances and remain disciplined. This will reduce your anxiety and you will stop fretting about the short term market movements.

To succeed with investing own equities…..globally diversify….rebalance.

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Investors Get It Wrong — Again

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Warren Buffett with Fisher College of Business...
Image by Aaron Friedman via Flickr
Time and time again investors listen to the financial media and make changes based on fear and greed. Remember the financial institutions make mon ey when you move your money. They don’t really care whether you make money or not.

The latest example of investors behaving badly comes from Morningstar. Once again, the past few years saw investors going the wrong way, moving assets from equity funds into bond funds, causing them to miss out on one of the greatest bull marketsever. The following data presents the behavioral gap for the one- and three-year periods ending December 2010:

  • Domestic equity funds — 2.0 percent and 1.3 percent per year, respectively
  • International equity funds — 0.6 percent and 0.8 percent per year, respectively
  • Taxable bond funds — 1.4 percent and 0.5 percent per year, respectively
  • Municipal bond funds — 1.1 percent and 1.5 percent per year, respectively

Investor activity cost tens of billions a year. The only category where the gap was relatively minor was for balanced funds. For both one-year and three-year periods, the gaps were 0.1 percent per year. Perhaps this is an advantage of balanced funds — investors in these funds tend to pay less attention, which the evidence demonstrates is a good thing.

The evidence demonstrates very clearly that investors would benefit greatly from learning from Warren Buffett, who stated in Berkshire Hathaway’s 1991 annual report: “We continue to make more money when snoring than when active.” In other words, at least when it comes to investing, inactivity is usually the better strategy. Remember this the next time you’re tempted to alter your asset allocation in reaction to the market’s latest move.

via moneywatch.bnet.com

This is evidence that investors need an adviser’s help to reach their goals. It is not about picking the right mutual fund, annuity or other financial product but rather developing and following a disciplined strategy.

Please comment or call to discuss how this affects you.

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Should I Wait Until Everything Calms Down?

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Warren Buffett speaking to a group of students...
Image via Wikipedia

Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, few, if any investors are able to do this with any consistency.

We tend to make our investment decisions based on recent past events and how we feel about those events.

If the market has done well lately, we wish, we are comfortable buying stocks. If the market has done poorly, however, we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return. Once we feel “comfortable” with the market, we have usually already passed up large potential gains. The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle.

Remember, Warren Buffet is a buyer and NOT a seller.

There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic. The large financial institutions make money when you trade in and out, making money on every trade. The media encourages sensationalism because it sells advertising. You should own equities…globally diversify…rebalance and believe that America and the capital markets will recover. We as a country have been thru much worse and we recovered and became stronger.

Not all sectors of the economy will recover or come back to where they were prior to 2008.  Other sectors will recover quickly and new sectors will emerge and thrive.  The problem is no one can consistently predict what will happen and when.

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