"He with a full cup cannot drink from the better wine." -- Chinese Proverb
Our office continually educates individuals on better ways to structure their portfolios for long-term financial success. We do this by removing as much volatility as possible and increasing the certainty of returns by using more alternative investments.
When I talk to people who are "sophisticated" investors, who know all about P/E ratios, correlation co-efficients, increased alpha, derivatives and other "important" measures, I have the most difficult time explaining the simple concept of alternatives. That is because "sophisticated" investors have a cup of knowledge that is very full. Unfortunately, few individual investors have mastered the basic information about investing. The ratios and pie charts are clouding the whole reason why we invest.
In retirement, we invest for future security and income. These are two things that should not be gambled with in my opinion. I have the "luxury" of being able to work for many more years, but retirees are posed with a completely different problem. What happens if the stock market has another ten years just like the most recent ten? The market has not even kept up with inflation - that spells trouble when it comes to income. And the volatility over the past ten years has removed all sense of security for any investors. So this seems to indicate that the equity markets are not good investment choices for retirees.
Our offices subscribe to the Rule of 100, which tells investors to subtract their current age from the number 100; the remainder is the only percentage amount of the portfolio that should be at risk. For example, take a 66 year old retiree : 100 - 66yrs old = 34%. This means that she should have at least 66% of her portfolio secured and a maximum of 34% in volatile/risk based assets. If she is less risky, then she could have a higher percentage in secured investments and less in the volatile basket. This provides stability and future security.
Why do we like alternatives to the traditional assets of stocks, bonds and cash. To start off, the idea that asset allocation should only involve stocks, bonds and cash came from the Nobel Prize winner Harry Markowitz in 1952. His work became known as Modern Portfolio Theory (MPT). But his studies never included some of the world's greatest assets, including the asset class that has created more millionaires that any other class - real estate. Now, I'm not talking about the crazy real estate market that is imploding right now. I'm talking about the land underneath every McDonald's, which has made Mickey D's the world's second largest landholder (second only to the Catholic Church). Or the buildings that the Federal Government or FBI leases for operations. These types of real estate are owned by individuals just like you.
Other high profile alternative investments could include owning the Walmart building, HCA nursing home or the Lowe's and Home Depot buildings and have them pay you rent. Everyday investors have these opportunities at their fingertips. Do you? Yes! Do your homework and learn from the Yale University Endowment, which has nearly 84% of it's own money in alternatives. They have done remarkably well with their portfolio (if you think 17.2% is good!). They are smart enough to secure and grow their portfolio; can you be smart enough to follow their lead?
We focus our investors on the alternatives that are fully collateralized and secured by real assets that produce real income. An example would be to take the failed company Enron. When Enron went bankrupt the stock holders got nothing back; the preferred stock holders got nothing back; the general obligation bond holders got nothing back; the only people that got their money back were the smart investors that owned bonds secured by the real assets of Enron, like the physical pipelines and property. Now that is security! They got money back from a bankrupt company!
Recently Barclays just bought Lehman Brothers after Lehman failed. Barclays paid $1.8 billion dollars for Lehman, and $1.3 billion of it was specifically for the real properties, real assets, and real equipment. So what type of investor do you want to be? The type that owned Lehman stock, or the smart investor that owned the real assets (which are considered alternative investments) and got paid back? Every day you have the ability to make that choice.
If you have questions about alternatives, please contact me. And be sure your cup of knowledge is not too full to drink the better wine!
Tuesday, September 30, 2008
Friday, September 26, 2008
Lack of Confidence is a Serious Problem
As congressional leaders debate the merits of the historic bailout package, which
many fear could jeopardize its passage, analysts worry that the country’s economic
fundamentals are deteriorating rapidly. Indeed, many are calling this the worst crisis
since the Great Depression.
With the media latching onto every scintilla of bad news, and the presidential campaign,
by its very nature, highlighting and dramatizing the fallout from a decade of financial
gambling, it’s easy to conclude that the country’s economic underpinning—the very
foundation—is in the process of imminent collapse.
While it’s becoming increasingly clear that we will not avoid recession, it is possible
with appropriate fiscal and monetary response to staunch the severity and duration of
the downturn that is threatening both the consumer and corporate America. Moreover,
the global economy is also in the throes of recession, inhibiting the export boom which
markedly helped fuel U.S. growth. The situation has evolved into a crisis of confidence,
as much as the underlying credit crisis that caused the initial financial dislocation.
The Great Depression, which engulfed the nation’s most intrinsic psyche, produced an
unemployment rate of 25 percent, a mortgage foreclosure rate of 50 percent, and three
generations of Americans who were afraid to spend money, so convinced that prices could
only spiral downwards. Confidence was destroyed, and the collective deflationary mindset
kept optimism at bay. Today, the foreclosure rate, while climbing, is less than 3 percent,
and the unemployment rate, while also set to rise, stands at 6.1 percent.
As never before, Wall Street and Main Street are joined at the hip. The financial
engineering that took the $1.3 trillion subprime mortgage market, and leveraged it up to
$31 on the dollar, has imploded and spread to other asset groups dependent on consumer
health. Auto loans, home equity loans, commercial loans, and student loans also became
fodder for Wall Street engineers. As consumers come under pressure, these assets become
part of the “write down/de-leveraging” process, and the collateral damage continues to
spread, eroding balance sheets and confidence. The vicious circle thrives.
Commercial lending, which sits at the very heart of our economy and is used for paychecks and purchasing capital equipment, is seizing up, impeding the most basic functions of business.
Treasury yields are historically low, manifesting the fear of risk. Americans are worried about the health of money market funds, which hold $3.4 trillion. Fear and risk are functions of confidence.
The economy is at a crucial inflection point. With a recession unfolding, we can endure a mild recession, or something much more severe. During the last 60 years, the longest recession was 18 months. Crucial for Wall Street and the consumer is the housing market. Mortgage rates must come down and housing prices must stabilize. How quickly the housing market recovers will determine how severe the downturn is.
That the Wall Street landscape has been fundamentally altered is a given, a consequence of risk-taking gone bad. But now is not the time to test economic theory. Now is the time for pragmatic solutions that alleviate the economic pain lurking around the bend. Economic conditions are vulnerable, but remarkably solid given the circumstances.
The stock market, perhaps the most leading indicator of all, is watching carefully and prepared to give its vote. Sometimes we have to accept the lesser of evils, the less elegant of solutions as the cure to restoring confidence. Wall Street and Main Street alike are waiting, but the clock is ticking.
Are your assets fully secured to help cushion the blow of the upcoming recessionary period. Maybe you should explore some alternatives to the traditional investments in your portfolio. Do your homework - you'll thank me later.
many fear could jeopardize its passage, analysts worry that the country’s economic
fundamentals are deteriorating rapidly. Indeed, many are calling this the worst crisis
since the Great Depression.
With the media latching onto every scintilla of bad news, and the presidential campaign,
by its very nature, highlighting and dramatizing the fallout from a decade of financial
gambling, it’s easy to conclude that the country’s economic underpinning—the very
foundation—is in the process of imminent collapse.
While it’s becoming increasingly clear that we will not avoid recession, it is possible
with appropriate fiscal and monetary response to staunch the severity and duration of
the downturn that is threatening both the consumer and corporate America. Moreover,
the global economy is also in the throes of recession, inhibiting the export boom which
markedly helped fuel U.S. growth. The situation has evolved into a crisis of confidence,
as much as the underlying credit crisis that caused the initial financial dislocation.
The Great Depression, which engulfed the nation’s most intrinsic psyche, produced an
unemployment rate of 25 percent, a mortgage foreclosure rate of 50 percent, and three
generations of Americans who were afraid to spend money, so convinced that prices could
only spiral downwards. Confidence was destroyed, and the collective deflationary mindset
kept optimism at bay. Today, the foreclosure rate, while climbing, is less than 3 percent,
and the unemployment rate, while also set to rise, stands at 6.1 percent.
As never before, Wall Street and Main Street are joined at the hip. The financial
engineering that took the $1.3 trillion subprime mortgage market, and leveraged it up to
$31 on the dollar, has imploded and spread to other asset groups dependent on consumer
health. Auto loans, home equity loans, commercial loans, and student loans also became
fodder for Wall Street engineers. As consumers come under pressure, these assets become
part of the “write down/de-leveraging” process, and the collateral damage continues to
spread, eroding balance sheets and confidence. The vicious circle thrives.
Commercial lending, which sits at the very heart of our economy and is used for paychecks and purchasing capital equipment, is seizing up, impeding the most basic functions of business.
Treasury yields are historically low, manifesting the fear of risk. Americans are worried about the health of money market funds, which hold $3.4 trillion. Fear and risk are functions of confidence.
The economy is at a crucial inflection point. With a recession unfolding, we can endure a mild recession, or something much more severe. During the last 60 years, the longest recession was 18 months. Crucial for Wall Street and the consumer is the housing market. Mortgage rates must come down and housing prices must stabilize. How quickly the housing market recovers will determine how severe the downturn is.
That the Wall Street landscape has been fundamentally altered is a given, a consequence of risk-taking gone bad. But now is not the time to test economic theory. Now is the time for pragmatic solutions that alleviate the economic pain lurking around the bend. Economic conditions are vulnerable, but remarkably solid given the circumstances.
The stock market, perhaps the most leading indicator of all, is watching carefully and prepared to give its vote. Sometimes we have to accept the lesser of evils, the less elegant of solutions as the cure to restoring confidence. Wall Street and Main Street alike are waiting, but the clock is ticking.
Are your assets fully secured to help cushion the blow of the upcoming recessionary period. Maybe you should explore some alternatives to the traditional investments in your portfolio. Do your homework - you'll thank me later.
Wednesday, September 24, 2008
Do You Remember?
Ask yourselves this – Do you really remember the past crisis like the Asian Flu, New York City’s BK, Mexican Debt Default then devaluation of the Peso?
How about the S&L crisis, 1987 market crash, the Y2K non-event, 2000 tech bubble crash?
Or recall the LTCM fiasco, 9/11 market crash, Russian Debt Default?
Most of the events involved huge amounts of public money to avert disaster and Congressional hearings to assign blame. For the most part ordinary people in the U.S. don’t even remember the particulars because they didn’t end up in a soup line like my Grandparents did in the Depression.
In a widespread crisis of confidence almost nothing works except Time, Time to sort what things are worth and let cooler heads prevail. What is insidious about this particular failure is the way in which declining values have created a vicious cycle of further write downs and failures so the Feds step in and assert a Command and Control economy temporarily.
As I’ve stated before – the Greatest Portfolio is one with a lot of strong “things” that are not correlated to each other. The alternative investments I continually speak about have returned a benchmark average of 10.31% this week - and will continue to pay that 10.31% each week for the remainder of the year. Do your homework - you'll thank me later...
How about the S&L crisis, 1987 market crash, the Y2K non-event, 2000 tech bubble crash?
Or recall the LTCM fiasco, 9/11 market crash, Russian Debt Default?
Most of the events involved huge amounts of public money to avert disaster and Congressional hearings to assign blame. For the most part ordinary people in the U.S. don’t even remember the particulars because they didn’t end up in a soup line like my Grandparents did in the Depression.
In a widespread crisis of confidence almost nothing works except Time, Time to sort what things are worth and let cooler heads prevail. What is insidious about this particular failure is the way in which declining values have created a vicious cycle of further write downs and failures so the Feds step in and assert a Command and Control economy temporarily.
As I’ve stated before – the Greatest Portfolio is one with a lot of strong “things” that are not correlated to each other. The alternative investments I continually speak about have returned a benchmark average of 10.31% this week - and will continue to pay that 10.31% each week for the remainder of the year. Do your homework - you'll thank me later...
Tuesday, September 16, 2008
Wall Street Giants Collapse!
I have been fielding hundreds of calls over the past couple of days because of the panic that has gripped the equity markets.
The market closed down over 504 points on Monday afternoon - the worst decline since the day after the 9/11 bombings in the heart of our financial system in New York. What is all of the concern about?
Well, there is a lot to be concerned with. Lehman Brothers and Merrill Lynch were pillars of the Wall Street empire - they were partly responsible for the naming of New York as "the Empire" state. Now Lehman has gone bankrupt after 158 years of remarkable success. Merrill Lynch, the most highly revered brokerage house on Wall Street turns out to manage money quite poorly, and will be acquired by Bank of America in an attempt to save any part of the brokerage house. This is a sad day for capitalists everywhere.
But the most frightening new failure by far is the insurance giant AIG. AIG had a credit rating of AAA, which is the highest possible credit rating for a financial institution - and they have still fallen. This really casts an ominous cloud over the whole financial market fallout. If the most secure insurance companies can collapse, who is really safe from the volatility and confusion?
I'll tell you... Look for alternative investments that focus on buying the high quality assets from these credit crunched banks for pennies on the dollar. These are not stocks - they are direct ownership investments that are fully secured, offer dividends in the 7-13% range right now, and never fluctuate on your statement. These best investments are no-loads or commission free and have a maturity of between 3-7 years depending on the fund. Almost anyone can get them.
If you cannot find information regarding these types of alternatives, please do not hesitate to send me an email! As always, do your homework... you'll thank me later!
The market closed down over 504 points on Monday afternoon - the worst decline since the day after the 9/11 bombings in the heart of our financial system in New York. What is all of the concern about?
Well, there is a lot to be concerned with. Lehman Brothers and Merrill Lynch were pillars of the Wall Street empire - they were partly responsible for the naming of New York as "the Empire" state. Now Lehman has gone bankrupt after 158 years of remarkable success. Merrill Lynch, the most highly revered brokerage house on Wall Street turns out to manage money quite poorly, and will be acquired by Bank of America in an attempt to save any part of the brokerage house. This is a sad day for capitalists everywhere.
But the most frightening new failure by far is the insurance giant AIG. AIG had a credit rating of AAA, which is the highest possible credit rating for a financial institution - and they have still fallen. This really casts an ominous cloud over the whole financial market fallout. If the most secure insurance companies can collapse, who is really safe from the volatility and confusion?
I'll tell you... Look for alternative investments that focus on buying the high quality assets from these credit crunched banks for pennies on the dollar. These are not stocks - they are direct ownership investments that are fully secured, offer dividends in the 7-13% range right now, and never fluctuate on your statement. These best investments are no-loads or commission free and have a maturity of between 3-7 years depending on the fund. Almost anyone can get them.
If you cannot find information regarding these types of alternatives, please do not hesitate to send me an email! As always, do your homework... you'll thank me later!
Thursday, September 11, 2008
Bank Failures - FDIC Watch List Grows to 117 Institutions
IndyMac Bancorp—once the nation’s 10th largest mortgage lender—has gone belly-up, leaving approximately 10,000 uninsured depositors high and dry. These guys will be lucky to recover 50% of their uninsured money.
There are now over 117 financial institutions on the FDIC watch list, which includes:
Lehman (LEH)
Washington Mutual (WM)
Fannie Mae (FNM)
Freddie Mac (FRE)
Corus Bank (CORS)
BankUnited (BKUNA)
Downey Savings (DSL)
Wachovia (WB)
Regions Financial (RF)
MBIA (MBI)
Ambac (ABK)
I want to draw your attention to the last two names on the list, MBIA and Ambac. If you own AAA insured bonds that are not U.S. Government bonds, then one of these companies is probably insuring that bond. If they were to fail, then you have no insurance on your bond. This really could spell trouble for the security of your investment portfolio if you bought the bonds simply because they were insured, rather than scrutinizing the company that issued them.
What can we learn about managing your money from the IndyMac failure?
Put simply, never put your eggs in one basket.
Limit accounts to FDIC maximums
The combined balance of your savings and checking accounts is federally insured for up to $100,000 per person, per bank (joint accounts for up to $200,000). IRAs are separately insured for up to $250,000.
Some depositors are losing money that was with IndyMac because they kept more than $100,000 in checking or savings accounts. If you need to keep more than $100,000 in checking or simple savings, open multiple accounts at different banks.
Invest in your employer carefully
Finally, never invest primarily in one company—especially if that company is your employer. Anytime a company tanks—and I’m sure IndyMac is no exception—loyal employees not only lose their jobs, but they lose their nest egg, too. No company is immortal and no investment is a sure thing.
While employee stock purchase plans may make it attractive to invest heavily in your employer, remember that any problem your employer encounters down the road is double trouble: your job and you investments are at risk.
As always, look for alternatives that can alleviate the extremely high volatility that we are seeing in the market today.
There are now over 117 financial institutions on the FDIC watch list, which includes:
Lehman (LEH)
Washington Mutual (WM)
Fannie Mae (FNM)
Freddie Mac (FRE)
Corus Bank (CORS)
BankUnited (BKUNA)
Downey Savings (DSL)
Wachovia (WB)
Regions Financial (RF)
MBIA (MBI)
Ambac (ABK)
I want to draw your attention to the last two names on the list, MBIA and Ambac. If you own AAA insured bonds that are not U.S. Government bonds, then one of these companies is probably insuring that bond. If they were to fail, then you have no insurance on your bond. This really could spell trouble for the security of your investment portfolio if you bought the bonds simply because they were insured, rather than scrutinizing the company that issued them.
What can we learn about managing your money from the IndyMac failure?
Put simply, never put your eggs in one basket.
Limit accounts to FDIC maximums
The combined balance of your savings and checking accounts is federally insured for up to $100,000 per person, per bank (joint accounts for up to $200,000). IRAs are separately insured for up to $250,000.
Some depositors are losing money that was with IndyMac because they kept more than $100,000 in checking or savings accounts. If you need to keep more than $100,000 in checking or simple savings, open multiple accounts at different banks.
Invest in your employer carefully
Finally, never invest primarily in one company—especially if that company is your employer. Anytime a company tanks—and I’m sure IndyMac is no exception—loyal employees not only lose their jobs, but they lose their nest egg, too. No company is immortal and no investment is a sure thing.
While employee stock purchase plans may make it attractive to invest heavily in your employer, remember that any problem your employer encounters down the road is double trouble: your job and you investments are at risk.
As always, look for alternatives that can alleviate the extremely high volatility that we are seeing in the market today.
Tuesday, September 9, 2008
A Nation of Speculators and Gamblers
In the famous Kenny Rogers song aptly named "The Gambler", he alludes to the fact that a good gambler must "know when to hold 'em; know when to fold 'em; know when to walk away; [and]know when to run." I find this to be a fascinating illusion to how investors view the stock market.
The Merriam-Webster dictionary defines Investment: noun; the outlay of money usually for income or profit. If you look at the definition of the word, most investors are not investors at all. They are seeking some magical riches from what Kenny Rogers would probably call gambling. At the very least they are speculators, trying to guess the right short-term play to get their "winner's high".
I hear people say "I'm getting out [of the market] when I get back what I put in," or "When my GE stock gets back up to $35, then I'll be happy," or "Surely Ford stock will go up from here!" These are all the sayings of gamblers - speculating with their retirement livelihood for the possibility of great riches.
I'm not a gambler. I never get the itch to find the buried treasure at the bottom of a slot machine or the craps table. But I really love Las Vegas! My wife and I have gone to Vegas several times and had an absolute blast. The best investment in yourself is a few uninterrupted hours at the pool at Bally's or the Ritz Carlton in Lake Las Vegas and then a great meal at Bobby Flay's Mesa Grill on the way to see Cirque de Soleil. I recommend "O", which is all done in water - it is amazing! My wife and I simple do not gamble, unless you are talking about an untested crab stand in Baltimore.
So if the stock market does not fit the definition of "investment" in the dictionary, it carries way too much volatility for the average investor, and the historical returns are not what people think they are, why would anyone bother with stocks? There are two reasons I can think of: 1) they are not aware of the secured investment (not speculation) options available to them, or 2) it is simple addiction to the thrill of the ride.
It is important to understand that there are no guarantees that stocks will offer profitable returns in the future - even in the long run. It really only takes one gigantic loss to collapse a dream. Unless your financial and retirement dreams are founded with a secure foundation, your dreams could end up a nightmare.
Do your homework on secured alternative investments that offer income and growth benefits. You will thank me later...
The Merriam-Webster dictionary defines Investment: noun; the outlay of money usually for income or profit. If you look at the definition of the word, most investors are not investors at all. They are seeking some magical riches from what Kenny Rogers would probably call gambling. At the very least they are speculators, trying to guess the right short-term play to get their "winner's high".
I hear people say "I'm getting out [of the market] when I get back what I put in," or "When my GE stock gets back up to $35, then I'll be happy," or "Surely Ford stock will go up from here!" These are all the sayings of gamblers - speculating with their retirement livelihood for the possibility of great riches.
I'm not a gambler. I never get the itch to find the buried treasure at the bottom of a slot machine or the craps table. But I really love Las Vegas! My wife and I have gone to Vegas several times and had an absolute blast. The best investment in yourself is a few uninterrupted hours at the pool at Bally's or the Ritz Carlton in Lake Las Vegas and then a great meal at Bobby Flay's Mesa Grill on the way to see Cirque de Soleil. I recommend "O", which is all done in water - it is amazing! My wife and I simple do not gamble, unless you are talking about an untested crab stand in Baltimore.
So if the stock market does not fit the definition of "investment" in the dictionary, it carries way too much volatility for the average investor, and the historical returns are not what people think they are, why would anyone bother with stocks? There are two reasons I can think of: 1) they are not aware of the secured investment (not speculation) options available to them, or 2) it is simple addiction to the thrill of the ride.
It is important to understand that there are no guarantees that stocks will offer profitable returns in the future - even in the long run. It really only takes one gigantic loss to collapse a dream. Unless your financial and retirement dreams are founded with a secure foundation, your dreams could end up a nightmare.
Do your homework on secured alternative investments that offer income and growth benefits. You will thank me later...
Monday, September 8, 2008
Real Rates of Return
I just received a release of how the stock market has faired over the past 20 years and thought the information was highly interesting.
Morningstar Reports (September 5, 2008)
United States Broad Stock Market
2008 Return so far -13.20%
1-Year return -12.94
3-Year return -1.26%
5-Year return +3.21% (which didn't even beat inflation of 3.36%!)
10-Year return -1.98%
20-Year return +3.28%
So who is making money in the stock market? Don't be sold by the Jim Cramers, CNBC, MSNBC, or anyone trying to sell a book! We may be repeating what the Japanese economy has done for the past 25 years - simply tread water...
On the other hand, the Yale Univeristy Endowment has averaged over 15.8% over the past 20-year period, and has beaten the stock market in every period of return by having 70% of its investment portfolio in alternative investments!
Do your homework! You'll thank me later...
Morningstar Reports (September 5, 2008)
United States Broad Stock Market
2008 Return so far -13.20%
1-Year return -12.94
3-Year return -1.26%
5-Year return +3.21% (which didn't even beat inflation of 3.36%!)
10-Year return -1.98%
20-Year return +3.28%
So who is making money in the stock market? Don't be sold by the Jim Cramers, CNBC, MSNBC, or anyone trying to sell a book! We may be repeating what the Japanese economy has done for the past 25 years - simply tread water...
On the other hand, the Yale Univeristy Endowment has averaged over 15.8% over the past 20-year period, and has beaten the stock market in every period of return by having 70% of its investment portfolio in alternative investments!
Do your homework! You'll thank me later...
Saturday, September 6, 2008
Can Warren Buffet's Investment Rules Be Good for Your Health?!
There is always someone talking about Warren Buffet, the world's best known investor. And there are a lot of reasons for it: he is down to earth; despite his billions, he lives in a modest $300,000 home in Nebraska; he is honest in an industry wrought with deceit and scandals; he gives billions to charity; he is an eternal optimist; and he has made fortunes for his investors. But of all the news stories and biographies about Buffet, I don't think that I have ever heard that his investment advice may actually be good for your health. But I may be on to something here...
Among Buffet's many great qualities is his ability to tell wonderful stories that teach lessons about investing. He talks about investing in a way that a small Nebraska farmer can understand. Being able to explain complex issues in a simple manner is a true sign of intelligence - it doesn't matter how much you know if you cannot communicate that information effectively. This is where most investors miss the boat - they never fully understand the information they are using to make investment decisions.
To simplify Mr. Buffet's investment philosophy even further, he only had two rules of investing!
Rule #1 - Never lose money
Rule #2 - Never forget Rule #1
As simple and tongue-in-cheek as these rules sound, they are possibly the greatest investment rules ever devised. Could it really be this simple? The answer is Yes. But do these simple rules only affect your investment portfolio?
It has been documented that the number one cause of stress in America is concern over finances. This makes sense - we all need to feel the security that we will have enough money to get us through our lives. Investing in volatile markets destroys that sense of security, but it may be even worse. Have you ever read what stress can do to the human mind and body? New studies have shown that stress may be the number one cause of depression, obesity, suicide, alcoholism, abuse, neglect, diabetes and heart attacks in Americans. That is a lot of bad stuff caused by stress!
If the number one cause of stress is uncertainty with financial matters, then eliminate the stress from your investment portfolio by reducing volatility!
To me, Buffet's rules aren't just for investing, but they are also rules for a happier and less stressful life.
Among Buffet's many great qualities is his ability to tell wonderful stories that teach lessons about investing. He talks about investing in a way that a small Nebraska farmer can understand. Being able to explain complex issues in a simple manner is a true sign of intelligence - it doesn't matter how much you know if you cannot communicate that information effectively. This is where most investors miss the boat - they never fully understand the information they are using to make investment decisions.
To simplify Mr. Buffet's investment philosophy even further, he only had two rules of investing!
Rule #1 - Never lose money
Rule #2 - Never forget Rule #1
As simple and tongue-in-cheek as these rules sound, they are possibly the greatest investment rules ever devised. Could it really be this simple? The answer is Yes. But do these simple rules only affect your investment portfolio?
It has been documented that the number one cause of stress in America is concern over finances. This makes sense - we all need to feel the security that we will have enough money to get us through our lives. Investing in volatile markets destroys that sense of security, but it may be even worse. Have you ever read what stress can do to the human mind and body? New studies have shown that stress may be the number one cause of depression, obesity, suicide, alcoholism, abuse, neglect, diabetes and heart attacks in Americans. That is a lot of bad stuff caused by stress!
If the number one cause of stress is uncertainty with financial matters, then eliminate the stress from your investment portfolio by reducing volatility!
To me, Buffet's rules aren't just for investing, but they are also rules for a happier and less stressful life.
Thursday, September 4, 2008
Where are the Customers' Yachts?
Some things never change. This script was written long ago, in Fred Schwed's humorous 1940 classic about Wall Street's insatiable greed. The message rings as true today as back then, when America was still smarting from Wall Street's disastrous 1929 crash. Schwed explains the origin of his title, in an "Ancient Story:"
"Once in the dear days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. "Look, those are the bankers' and brokers' yachts. 'Where are all the customers' yachts?' asked the naïve visitor."
So now, you know how Schwed got the title for his enduring classic: "Where Are the Customers' Yachts?" I was reminded of Schwed's intriguing question by a recent photo in Fortune magazine of "Utopia," the aptly named new megayacht owned by legendary mutual fund manager Bill Miller.
Likewise, "naïve" is an apt term for investors: It was apt in 1929, apt in 1940 and is still apt today. Actually more so: Despite the flood of high-tech data sources now available to America's 95 million investors, they're becoming more vulnerable, gullible and naïve by the day.
Schwed's story perfectly captures the relentless daily transfer of billions from the pockets of Main Street's naïve customers into the pockets of Wall Street's clever insiders: More than $200 billion annually is siphoned off the top of the $10 trillion we have invested in mutual funds.
Schwed's "Ancient Story" will be replayed to the end of time. Sure, "history is a great teacher." And "those who do not learn the lessons of history are doomed to repeat them." But experience tells us that naïve customers rarely learn.
Schwed's humor has drawn many laughs since 1940. But they're nervous laughs and the humor is dark because nothing changes. Naïve customers will never own yachts. Imagine a customer "plunking down" their entire retirement nest egg to charter one short day on Utopia, the superyacht! More likely, they'll be left standing on the dock with bewildered eyes and a childlike innocence in their voices, asking once more: "Where are all the customers' yachts?"
Ask yourself this - Do your mutual fund companies return the management fees if they lose your principal? Why not? The average US mutual fund charges around 1.5%. Let me clarify that this is not a conversation about high fees being bad - personally if something is performing well and fits my investment goals, I don't care what the fees are. All that matters to me is the "net" return after fees and expenses. But if your funds have lost your principal and charged you management fees for years, why do you own them? Do you like financing the brokerage firm's yachts?
America is breeding an infinitely renewable supply of naïve customers that will forever be chasing the herd, giving away billions in unnecessary fees that help herd-driven fund managers buy more yachts. Meanwhile, insiders do get the punch line in Schwed's gallows humor ... as they sail the high seas, laughing all the way, thankful and secure in knowing that every new generation of customers will be as naïve as the last, never learning the lessons of history.
"Once in the dear days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. "Look, those are the bankers' and brokers' yachts. 'Where are all the customers' yachts?' asked the naïve visitor."
So now, you know how Schwed got the title for his enduring classic: "Where Are the Customers' Yachts?" I was reminded of Schwed's intriguing question by a recent photo in Fortune magazine of "Utopia," the aptly named new megayacht owned by legendary mutual fund manager Bill Miller.
Likewise, "naïve" is an apt term for investors: It was apt in 1929, apt in 1940 and is still apt today. Actually more so: Despite the flood of high-tech data sources now available to America's 95 million investors, they're becoming more vulnerable, gullible and naïve by the day.
Schwed's story perfectly captures the relentless daily transfer of billions from the pockets of Main Street's naïve customers into the pockets of Wall Street's clever insiders: More than $200 billion annually is siphoned off the top of the $10 trillion we have invested in mutual funds.
Schwed's "Ancient Story" will be replayed to the end of time. Sure, "history is a great teacher." And "those who do not learn the lessons of history are doomed to repeat them." But experience tells us that naïve customers rarely learn.
Schwed's humor has drawn many laughs since 1940. But they're nervous laughs and the humor is dark because nothing changes. Naïve customers will never own yachts. Imagine a customer "plunking down" their entire retirement nest egg to charter one short day on Utopia, the superyacht! More likely, they'll be left standing on the dock with bewildered eyes and a childlike innocence in their voices, asking once more: "Where are all the customers' yachts?"
Ask yourself this - Do your mutual fund companies return the management fees if they lose your principal? Why not? The average US mutual fund charges around 1.5%. Let me clarify that this is not a conversation about high fees being bad - personally if something is performing well and fits my investment goals, I don't care what the fees are. All that matters to me is the "net" return after fees and expenses. But if your funds have lost your principal and charged you management fees for years, why do you own them? Do you like financing the brokerage firm's yachts?
America is breeding an infinitely renewable supply of naïve customers that will forever be chasing the herd, giving away billions in unnecessary fees that help herd-driven fund managers buy more yachts. Meanwhile, insiders do get the punch line in Schwed's gallows humor ... as they sail the high seas, laughing all the way, thankful and secure in knowing that every new generation of customers will be as naïve as the last, never learning the lessons of history.
Sell Your Loser Stocks and Get off the Rollercoaster
Short video that explains why to sell your losing stocks.
Wednesday, September 3, 2008
The Truth? You Can't Handle the Truth!
When reflecting on the equity markets, I couldn't help but use the famous line from Jack Nicholson's character, Colonel Jessup, in the classic movie A Few Good Men. Colonel Jessup was referring to the fact that the military is a tough place for tough soldiers and most of us civilians would have a hard time understanding what it takes to make it in that environment. The "truth" was that sometimes things get a bit out of hand and people get hurt.
The financial industry is a lot like Colonel Jessup, trying to cover up the fact that in the financial markets sometimes things get a bit out of hand and people (investors) get hurt. Having been in the financial industry for nearly a decade, I can honestly say that equity markets can be every bit as dangerous as the military. And the real truth is that most people should not be in equity markets.
Let me get this out - I am not a cynic. But the American people have been misled for nearly 50 years by the sales tactics of the financial industry. Mutual fund companies are some of the worst entities on the planet for hiding the truth that the stock market really doesn't work well for the average investor. How do I know? Each year Dalbar, a Boston based investment research company, puts out the QAIB (Qualitative Analysis of Investor Behavior) which tells us how the investor fairs versus how the investment fairs. The results speak for themselves.
While the average equity mutual fund has averaged about 10.7% over a twenty year period, the average mutual fund investor has earned less than 3.7%. The investor return barely kept up with inflation, which averaged 3.5%. But this is before taxes! After taxes the investor did not even keep up with inflation despite the "market" average of nearly 11%!
Why does this happen? Can you handle the truth?! It happens because we are human. Warren Buffet talks about Fear and Greed, but it is more simple than that. We humans get excited about opportunities, but we are really more driven by the possibility of loss. Thousands of studies have been done on the subject, and they have a very similar outcome - volatility and loss are bigger motivators than potential gains.
Look for options to secure your savings and beat the average investor returns by avoiding volatility. You will be a happier person and there is a higher chance you will be a wealthier person.
The financial industry is a lot like Colonel Jessup, trying to cover up the fact that in the financial markets sometimes things get a bit out of hand and people (investors) get hurt. Having been in the financial industry for nearly a decade, I can honestly say that equity markets can be every bit as dangerous as the military. And the real truth is that most people should not be in equity markets.
Let me get this out - I am not a cynic. But the American people have been misled for nearly 50 years by the sales tactics of the financial industry. Mutual fund companies are some of the worst entities on the planet for hiding the truth that the stock market really doesn't work well for the average investor. How do I know? Each year Dalbar, a Boston based investment research company, puts out the QAIB (Qualitative Analysis of Investor Behavior) which tells us how the investor fairs versus how the investment fairs. The results speak for themselves.
While the average equity mutual fund has averaged about 10.7% over a twenty year period, the average mutual fund investor has earned less than 3.7%. The investor return barely kept up with inflation, which averaged 3.5%. But this is before taxes! After taxes the investor did not even keep up with inflation despite the "market" average of nearly 11%!
Why does this happen? Can you handle the truth?! It happens because we are human. Warren Buffet talks about Fear and Greed, but it is more simple than that. We humans get excited about opportunities, but we are really more driven by the possibility of loss. Thousands of studies have been done on the subject, and they have a very similar outcome - volatility and loss are bigger motivators than potential gains.
Look for options to secure your savings and beat the average investor returns by avoiding volatility. You will be a happier person and there is a higher chance you will be a wealthier person.
Harvard Learns to Earn!
When talking about alternative investments the conversation usually steers toward the Yale University endowment. The investment committee at Yale have allocated over 70% of its portfolio to alternatives and have performed remarkably. But they aren't the only smart guys on the block.
In the Common Sense section of today's Wall Street Journal it was reported that the Harvard Endowment has earned between 7% - 9% on their portfolio, even though the official numbers have not been released yet. They did this over the same time period that the S&P 500-stock index has been down over 15%. That is a minimum of a 22% difference!
Harvard reports that it has 33% of its overall portfolio in real assets, which kept the fund from having a treacherous year. The total of alternative investments in the portfolio is reported at 62%.
The most thrilling piece of news is what the author, James B. Stewart, says about his own investment style - Mr. Stewart is also a columnist for Smart Money Magazine and SmartMoney.com. He writes "...I've been moving in the Harvard direction for some time... So far, it's benefited my portfolio just as it has Harvard's."
Take action to learn about alternative investments today! Your portfolio's future may just depend on it!
In the Common Sense section of today's Wall Street Journal it was reported that the Harvard Endowment has earned between 7% - 9% on their portfolio, even though the official numbers have not been released yet. They did this over the same time period that the S&P 500-stock index has been down over 15%. That is a minimum of a 22% difference!
Harvard reports that it has 33% of its overall portfolio in real assets, which kept the fund from having a treacherous year. The total of alternative investments in the portfolio is reported at 62%.
The most thrilling piece of news is what the author, James B. Stewart, says about his own investment style - Mr. Stewart is also a columnist for Smart Money Magazine and SmartMoney.com. He writes "...I've been moving in the Harvard direction for some time... So far, it's benefited my portfolio just as it has Harvard's."
Take action to learn about alternative investments today! Your portfolio's future may just depend on it!
Remember the 70s?
Where is the economy heading? I hear it all the time... My crystal ball has been broken for quite some time, but there is something strangely familiar about the current market conditions.
I remember! It feels a lot like the period of 1970-1980. There are uncanny similarities: 1) there was a war going on, 2) inflation was out of control, 3) the dollar was sinking, 4) there were political problems, 5) oil prices were very high, and 6) the stock market volatility caused many people to lose money.
What is really interesting is how different assets performed during this period of time:
If you had invested $10,000 in each of these assets in 1970, then 10 years later AFTER INFLATION it would be worth:
Stocks (S&P 500) - $9,870
Cash - $8,953
Bonds - $8,254
S&P Utilities -$8,090
All of these numbers assume you STAYED INVESTED and didn't jump ship when you got nervous or worried. If you did jump out, there is a high percentage chance that you lost even more money!
In all of the above examples you would have lost purchasing power because of the high rate of inflation, which averaged 7.8% during the 1970s. This is the template for how the current economic situation is stacking up.
If you had invested $10,000 in stocks (S&P500) on December 31, 1998 - a full decade ago - you would have lost -2.14% annually after inflation over the past decade. This is a real problem if you retired a decade ago and have been living off of your savings!
Alternatives to these traditional investments include real estate, commodities, raw land and timberland, among many others. These are called "real assets" because they are tangible assets that you can own to protect yourself from higher inflation and volatile markets.
Do your homework and you can beat inflation in the upcoming economic environment.
I remember! It feels a lot like the period of 1970-1980. There are uncanny similarities: 1) there was a war going on, 2) inflation was out of control, 3) the dollar was sinking, 4) there were political problems, 5) oil prices were very high, and 6) the stock market volatility caused many people to lose money.
What is really interesting is how different assets performed during this period of time:
If you had invested $10,000 in each of these assets in 1970, then 10 years later AFTER INFLATION it would be worth:
Stocks (S&P 500) - $9,870
Cash - $8,953
Bonds - $8,254
S&P Utilities -$8,090
All of these numbers assume you STAYED INVESTED and didn't jump ship when you got nervous or worried. If you did jump out, there is a high percentage chance that you lost even more money!
In all of the above examples you would have lost purchasing power because of the high rate of inflation, which averaged 7.8% during the 1970s. This is the template for how the current economic situation is stacking up.
If you had invested $10,000 in stocks (S&P500) on December 31, 1998 - a full decade ago - you would have lost -2.14% annually after inflation over the past decade. This is a real problem if you retired a decade ago and have been living off of your savings!
Alternatives to these traditional investments include real estate, commodities, raw land and timberland, among many others. These are called "real assets" because they are tangible assets that you can own to protect yourself from higher inflation and volatile markets.
Do your homework and you can beat inflation in the upcoming economic environment.
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