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...
Monday, September 8, 2008
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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