Visible Investment Advisors

MSN on Advisors

2009-10-24T09:01:00.000-07:00

A nice video on the differences between stock brokers, independent investment advisors, and Registered Investment Advisors.

http://articles.moneycentral.msn.com/video/default-ap.aspx?cp-documentid=07327649-2827-45a8-989b-49f3e94d69f5

Advisor Risks

2009-10-17T09:10:00.000-07:00

You have probably know about the risks you face when investing: market risk, inflation risk, timing risk, concentratin risk, investment risk, sector risk, company risk, currency risk, event risk, political risks, etc.

One that you may not be as familiar with is Advisor or Manager risk. In this case we are talking about people who manage other peoples money (mutual fund managers), analysts (like S&P, Moody's, TV commentators, or newsletter writters), hedge funds, money managers, and personal advisors (investment advisors, financial planners, etc.).

Managers and Advisors are also risk-averse, just as they are with their own money and you are with your own. But they're averse to a different kind of risk - the risk of looking bad to the person who's paying you the fee. When they provide their investors their (daily, wekly, monthy or annual) reports, they don't waqnt to be holding investments that have recently done bad or not holding ones that have recently done well. That is not what you are paying them for.

This risk can incline them to buy high and sell low. Avisors then buy what has just gone up and sell after investments have gone down becasue it will make them look better. The problem is that over time, it will not maximize the wealth of their clients.

Lessons learned or lost?

2009-10-13T10:00:00.000-07:00

In 2007, Americans saved a total of $57.4 billion. That same year, we spent $92.3 billion on legalized gambling.

Gambling, after all, is about putting up a small amount of money in the hopes of winning a large amount of money. (We grant you that there's also an entertainment value to it.) It's a high-risk, high-reward game. Sounds a little bit like Wall Street ... and how Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) carried 25:1 leverage in 2007.

As the savings stats suggest, Main Street Americans took on too much debt without enough cash in the bank back during those heady housing boom years. We compounded the problem by taking unhealthy risks. We all know how that's turned out.

NOW
Sketchy "get rich quick!" infomercials are back in full force, data from online brokerages have shown that day traders are back in the market, and there's a new scheme that individual investors are trying out: currency trading.

...currency trading has big-time appeal to small-time investors. As the Journal noted recently: "Investors are typically attracted to currency trading because of the vast leverage available -- as much as 500 to 1. That allows an investor to put up just a few hundred dollars of capital to make a bet of tens or hundreds of thousands of dollars."

While [there] is some serious upside, consider this: The vast majority of currency trades are made by hedge funds, large corporations, and central banks. In other words, your counterparty in a currency trade is likely to be someone who is -- and this is important --vastly more qualified to make currency trades than you are.

Your broker, however, will not tell you this. (Shocker.) The Journal notes that Citigroup(NYSE: C) and Deutsche Bank, among others, now have products to entice retail investors.

VIA:
1. If you are concerned about the value of the dollar, there are positions 'investors' can take to diversify their dollar holdings (everything you own that is denominated in US dollars). Even 401(k) plans often have low cost options for this diversification.

2. If you are tempted to use currencies (and their leverage) to take advantage of the current trends, or you want to use the leverage they provide, don't. The risks of short term loss as a result of fluctuations of highly leveraged assets can be hazardous to your wealth.

3. VIA has no recommendation to buy, sell or trade currencies, as our view it is a hedge for companies that do business internationally, and a speculation not an investment for individual investors.

Contact us if you want to develop a strategy to deal with markets these volatile markets. We are especially well qualfied to help if you are within 10 years of retirement or in retirement.

Read the entire article on fool.com

Housing surprises

2009-10-11T08:11:00.000-07:00

THE sudden rise in home prices suggests that the psychology of the market has shifted substantially.

This year’s [home-buyer] survey coincides nicely with the upturn in home prices, the sharpest change in direction [the survey has] ever seen. The suddenness of this shift surprised [Robert Shiller]..."the new data are startling."

Given the abnormality of the economic environment, the sudden turn in the housing market probably reflects a new home-buyer emphasis on market timing. For years, people have been bulls for the long term. The change has been in their short-term thinking. The latest answers suggest that people think the price slide is over, so there is no longer such a good reason to wait to buy. And so they cause an upward blip in prices.

The sudden turn could signal a new housing boom, but is more likely just a sign of a period of higher short-run price volatility.

VIA Comments:

We share this article not to agree or disagree with the survey's findings, but to illustrate what we have always believed that the future is unpredictable.
Nothing in this article and survey should be used to guide your investment decisions in housing, stocks or anything else.
Assets have increased in value at a very rapid rate in the last 7 plus months. If you did note benefit from this increase, you need the help of a qualified investment advisor.

NY Tines article by By

ROBERT J. SHILLER

Outsmart your emotions, cut your fees, keep it simple -- and reap higher returns.

2009-10-10T17:35:00.000-07:00

The Hulbert Financial Digest estimates that mutual fund investors lost $42 billion more than they should have during the 12-month period that ended last May.

How could this have happened? The simple answer is that emotion, not logic, usually rules our investing habits. In many ways we're predisposed not just to buy high and sell low, but to cling to losing investments we should sell, ignore threats to our wealth and follow the investing herd off a cliff again and again.

But just recognizing our mental kinks won't help us undo them, experts say. "I don't believe it's possible to change behavior that's really hard-wired into our biology," says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering. But "Homo sapiens can do what we've always done: adapt. We don't have wings, but we can fly. So we develop tools to protect ourselves from these emotional shortcomings."

The silver lining to the recent bear market is that painful experiences remain in our memories for a long time and provide lessons for the future. So let's review the past few years through the eyes of experts in investor psychology and behavioral finance, studying events not as a financial roller coaster, but rather as an emotional one.

As a result of the recency effect, says Davies, "what's most recent in our minds stands out." For instance, "if investments have been going up for a while, I start seeing them as less risky. I start thinking, Well, my budget for risky investments isn't full -- I can put more in there."

For many people, plunging portfolio values became too much to bear, and they just wanted the pain to end. So they sold. According to the Investment Company Institute, the greatest net monthly outflow from stock funds in the past two years -- $25 billion -- came in February 2009. The timing couldn't have been much worse for those who sold then. As it turned out, stocks bottomed on March 9 and surged about 50% over the ensuing six months.

So, if you recognize yourself in some of the actions (or lack thereof) we've just described, now's the time to take steps to make sure you don't suffer the same mental miscues in the future. You may not be able to change your behavior in trying times, but you can change your investing strategy to neutralize negative impulses.

One bold idea: If you handle your own investments and you find that emotions are tripping you up, hire an adviser. A good adviser should help you avoid those impulses-which typically stem from short-term fluctuations in the value of your investments-and keep you focused on meeting long-term goals. The extra cost could be worth the money.

Read the article at Kiplinger's

analysts frequently head in the wrong direction

2009-10-04T17:32:00.000-07:00

From a Bloomberg article

10 years of data...suggests that the stocks analysts love the most usually do poorly.

From 1998 through 2007, the four stocks rated highest by brokerage-house analysts at the beginning of the year dropped 1.7 percent, on average, in the ensuing 12 months. The four stocks they rated lowest gained 2.2 percent. Neither group beat the Standard & Poor’s 500 Index, which had an average annual gain of 7.2 percent.
The pattern doesn’t hold true every year, but it is more than coincidence. The problem... is that analysts are drawn to companies with strong and improving operating results. Generally, they aren’t fussy about how expensive a stock is when they recommend it.

Stocks advance when a company exceeds prevailing expectations. The higher the expectations, the more difficult they are to exceed. No wonder that stocks favored by hoards of analysts do badly.

How to you deal with your emotions?

2009-09-30T09:01:00.000-07:00

One of the important services that an investment advisor performs is helping clients deal with their emotional ups and downs as a result of market movements and news.

Columnist Jason Zweig has been looking at this important issue and in the video below, has found that man's makeup (DNA) is partially to blame. Although the impulse react to your emotions can be controlled, it takes a strong will and lots of discipline.

What you can learn from Warren Buffett?

2009-09-21T17:10:00.000-07:00

Warren Buffett can no better tell you his secrets then Tiger Woods or Albert Einstein can tell your theirs.

It's not they are hiding anything. His intelliect, and the way he processes info is different then the rest of us- he sees a ‘3D color movie’ while others see a ‘B&W text.’ He has conviction to act in the face of uncertainly with great commitment.

The advantage that the average investor has is to buy BRK and find other similar managers with whom you can participate.

Buffett also points out in is Graham and Doddsville talk that the superinvestors use multiple strategies (they all didn't buy the same things). This is another advantage for the individual investor - invest with super investors with different specialties reducing volatility and increasing returms thru diversification.

More than one-third of Vanguard's 401(k) investors didn't lose money in 2008

2009-09-07T10:30:00.000-07:00

For workers who are young, newly hired or lower-paid, falling market values are counteracted by the new cash pumped in with each payroll contribution. More than one-third of Vanguard's 401(k) investors didn't lose money in 2008, while 10% or less. These people were barely scathed by the stock-market crash.

In a UCLA study, a large sample of investors who filled out a risk-tolerance questionnaire for a major 401(k) provider. Only 7% described themselves as aggressive; yet 33% invest as if they are, putting 80% to 100% of their 401(k) into stocks.

Among the more than three million 401(k) participants served by Vanguard Group, 17% were 100% in stocks in 2007; at year-end 2008, 16% still were
Of the 11.2 million participants served by Fidelity Investments, 15% still have every penny in their 401(k) invested in stocks, including 14% of those between the ages of 60 and 64.
The share of U.S. households that own stocks in any account has fallen from 53% in 2001 to around 45% in 2008
Since 2007, 401(k) investors at both Fidelity and Vanguard have lowered the rate of new contributions they are putting into stocks.

"We had the most drastic market decline since the Depression, we nearly had a total collapse of the global financial system, and all that caused most people not to do much at all."

If you were one of the unfortunate few that sold low, if you relieved that the market has come back but question how to move forward from here, or if you just want a second opinion, the 401(k) Optimzer is for you.

Read the WSJ article

The growth illusion

2009-09-07T09:33:00.000-07:00

When investors pick the countries they want to back, they tend to be guided by economic growth prospects. The faster an economy grows, they reason, the faster corporate profits will grow in the country concerned, and thus the higher the returns investors will achieve.

Alas, this is not the case.

going back to 1900, there was actually a negative correlation between investment returns and growth in GDP per capita
no statistical link between one year's GDP growth rate and the next year's investment returns

Why might this be?

growth countries are like growth stocks; their potential is recognized and the price of their equities is bid up to stratospheric levels.
a stock market does not precisely represent a country's economy - it excludes unquoted companies and includes the foreign subsidiaries of domestic businesses.
growth is siphoned off by insiders - executives and the like - at the expense of shareholders.

What does work?

Over the long run (but not the short), it is valuation.

As we always point out, the past is not an indicator of the future, but these facts do support the Visible Investing principle that you must get a good value for anything you buy - stock, bond, home, TV, or anything else.

Visible Investment Advisors feel it is important for most investors to have international assets in their portfolio, but taking the route most discussed by the gurus on TV and newspapers will (like it always does), be hazardous to your wealth.

Read the entire Economist article

Are investors too optimistic?

2009-09-06T09:59:00.000-07:00

Ever since the financial meltdown, and throughout this recession, people keep asking us if we're optimistic about the future.

Conversations reveal that people are less optimistic then they had been, but want to be more optimistic and are looking for some outside reinforcement.

A lot of research has been done about optimism and the impact it can have on people's lives (read Dan Ariely & The Curious Paradox Of `Optimism Bias’).

Researchers have found that when people judge their chances of experiencing a good outcome–getting a great job, having a successful marriage, or financial security–they estimate their odds to be higher than average. And when they contemplate the probability that something bad will befall them (a heart attack, a divorce, a parking ticket), they estimate their odds to be lower than those of other people.

We usually ask when doing a 401(k) seminar the following questions:

1. How many people feel they will accumulate the nest egg they need to support their desired retirement lifestyle? – usually more 50% feel they can.
2. How many people know how much money they will need at retirement or know where they stand today in relation to their goal? – of course, most do not know, and when pressed to guess how they stand today, they acknowledge they're probably behind and will have to work longer then they anticipated.

This can be a huge problem:

chances of hitting your target nest egg when you don't know what that amount is, is extremely low
not knowing where you stand in relation to wealth accumulation, can cause errors in the investment decisions you make

Both have the consequence of hurting your chances for the retirement at a time and in a manner of your choosing.

Oh, and are we optimistic about the future–extemely. Lot's of money has been lost (and lots of money has not been gained) by betting against (or not investing in) America.

For this reason, we've created an extremely low cost investment advisory service – the 401(k) Optimizer program to help you know how much you will need and how you should monitor and invest your 401(k) to reach the retirement security you've earned. Contact us if you need some information.

Do you want a 3rd party rating of your company's 401(k) plan?

2009-08-24T09:30:00.000-07:00

BrightScope is a nice new website that quantitatively rates 401k plans and gives plan sponsors, advisors, and participants tools to make their plans better.

Get a single number score that reveals the quality of your plan
Find out which companies offer great 401k plans
Learn what you can do to improve your plan

I found some of the info to be out of date, but they even provide you the opportunity to update the info.

http://www.brightscope.com/

The risk in your risk profile

2009-08-18T16:31:00.000-07:00

Every investment website (and even some investment advisors) use questionnaires to help uncover the amount of risk you can take.

We all know:

the way a question is worded has a lot to do with the way you answer it,
your answers are heavily influenced by your current state of mind and circumstances,
it is virtually impossible to measure something as dynamic, transitional, and fleeting as the emotions involving risk.

If you've taken used a questionnaire that asked how you would react to a 50% decline (and most did not because it was unimaginable before it happened), think about how you felt and reacted this year when it actually happened.

For those that are interested there's a nice article on the subject at moneytwatch.

If you need to measure, understand or position your portfolio for risk, contact us or visit our website.

Can "butter in Bangladesh" predict the market?

2009-08-09T07:20:00.000-07:00

How about the superbowl indicator, seasonality, back-testing strategies (this is hot now with the online trading brokers). You may have a fovorite of your own, but does knowing what happened in the past help you predict the future?

One of VIA's favorite writters, Jason Zweig, wrote a great article in the WSJ (the outcome of which you undoubtably know if it is a post by VIA) and video on this subject that I highlight below:

"The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns -- by coincidence alone. This sham is known as "data mining."

Every year, billions of dollars pour into data-mined investing strategies. No one knows if these techniques will work in the real world. Their results are hypothetical -- based on "back-testing," or a simulation of what would have happened if the manager had actually used these techniques in the past, typically without incurring any fees, trading costs or taxes.

Those assumptions are completely unrealistic, of course. But data-mined numbers can be so irresistible that, "they are one of the leading causes of the evaporation of money, especially in quantitative strategies."

Over history, humans have become the ultimate "pattern recognition machines" which served us well when we had to hunt for our food in the wild, but doesn't work in the financial markets.

We have added Nerds on Wall Street: Math, Machines and Wired Markets to our reading list. Light reading. Enjoy.

Do fast growing economies provide better investor returns?

2009-07-26T19:18:00.000-07:00

The Emerging Markets index has gained 45% so far this year, versus 9% for the U.S., and investors have noticed, pouring $10.6 billion into emerging-markets mutual funds so far this year, more than 34 times the total they added to U.S. stock funds.

Based on decades of data from 53 countries, studies have found that the economies with the highest growth produce the lowest stock returns, by an immense margin.

Stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually.

If you think about this, it's not surpiring after all. In stock markets, value depends on both quality and price. Economic growth is high, but stock valuations are even higher, eve though they should be much cheaper than U.S. stocks, because they are far riskier.

High growth draws out new companies that absorb capital, bid up the cost of labor and drive down the prices of goods and services. That is good news for local workers and global consumers, but it is ultimately bad news for investors.

The role of emerging markets is to provide diversification, not to add to returns. Like all performance chasing, this latest investing binge is doomed to disappoint the people who don't understand what they are doing.

Note: history should not be used to predict future returns.

The unemotional investor

2009-07-04T09:34:00.000-07:00

It is sometimes said "be an intelligent investor, you must be unemotional." That isn't true - you should be inversely emotional - see the enthusiasm of others as a yellow caution light, and their misery as a sign of hope.

The true investor would be pleased, rather than discouraged, when the market is down allowing for the investment of new savings on very satisfactory terms. During the accumulation period (your working life) investors would be "fortunate" to benefit from the "advantages" of a long bear market.

Does dollar-cost averaging ensure long-term success? This policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions. For that to be true, the dollar-cost averaging investor must be a different sort of person from the rest of us, not subject to the emotions of exhilaration and deep gloom that have accompanied the gyrations of the stock market.

This doesn't mean that you can't resist being swept up in the gyrating emotions of the crowd (or the pressures of your spouse) - it means that few people can. To be an intelligent investor, you must have confidence that can only comes from a deep understanding of the value of what you are invested in.

Don't let the crowd lead you to buying and selling and the wrong time. Contact us to help you balance your risk tolerance and return objectives.

Tame Inflation Before It Strikes

2009-07-04T09:01:00.000-07:00

You may feel you don't need any insurance against a rise in the cost of living. Inflation, as measured by the Consumer Price Index, is running at negative-1.3% over the past 12 months; with oil and real estate down drastically, there are few signs of rising prices in daily life.

But the cost of living might not fall for much longer. So it is a good time to look at inflation insurance, in the form of U.S. Treasury Inflation-Protected Securities, or TIPS. The principal value of TIPS increases or decreases with the cost of living. Unlike normal bonds, TIPS don't get hammered when inflation rises.

A TIPS fund should be something you invest in for insurance, not for income.

TIPS offer baseline insurance against a rise in all the costs of living. However, TIPS aren't customizable. The official inflation basket consists of

housing costs (43%),
food (16%),
transportation (15%),
health care (6% ),
and recreation (6% ),
apparel (4%)
education, communication and "other" (3% each).

If the basket of goods and services that you pay for is significantly different from the CPI, then TIPS won't fully insure you.

So think about what makes up your personal inflation mix. If you don't want inflation to ravage your retirement plans, contact us a call to discuss an investment protection plan for your portfolio.

Read the entire article by JASON ZWEIG in the WSJ

Why it's hard to make a good decision

2009-07-02T08:57:00.000-07:00

Recently The Wall Street Journal ran an article entitled, “Training the Brain to Choose More Wisely.” It opened with the sentence, “The human brain is wired with biases that keep people from acting in their best interest.” In the last forty years a field of inquiry has emerged called behavioral finance that has shed new light on how we make investment choices.

Adults tend to think of ourselves as sound decision makers; we make hundreds of decisions each day. Yet we are busy people in a complex world and cannot possibly give in-depth consideration to every choice.

The current financial mess affords no shortage of examples of poor decision-making. Didn't we learn anything from our mistakes in the dot-com era? Many people believed real estate values would keep going up as they had for many years; they were convinced that real estate was still a good investment. This belief, based on a prior set of conditions which turned out not to be sustainable, constituted a biased assessment of risk.

Many investors wanted to buy more property because it appeared that everyone else was making money at it. They were motivated in part by a bias to follow the herd. Now, investors may have a hard time selling investments that have declined in value, even though lower prices may also present better opportunities for buying. Investors in this case may have loss aversion.

A biased assessment of risk occurs when the brain takes a shortcut in evaluating a risky situation.

People do like to go along with the crowd. Yale professor Robert Shiller talks about social contagion. Most people come to think the optimistic view is correct just because everyone else seems to accept it as true.

When it comes to investment decisions, others often influence us, even when following in their footsteps is not necessarily rational or in our best interest. Upon seeing others do something, we tend to ask whether the same might be good for us. We hear that our neighbor got out of the market last November and think maybe we should do the same.

It should come as no great surprise that people hate losses. Loss aversion, however, can elicit unproductive and irrational behavior. People have an extremely hard time selling a stock or fund that has sustained a loss. Recognizing a loss is equivalent to acknowledging having made a mistake. This leads to the crafting of excuses. We cling to the fond hope that the investment will return to its previous value. If it could just get back to where it was when we bought it, then we would sell. We hope the market will validate the original purchase.

People tend to make poor decisions because they fear losing or giving up something, even though change is very much in their best interest.

Knowing oneself is a vital aspect of successful investing. Investing entails risk. Knowing our own temperament for risk (and that of our spouses) will lead to knowing the returns you will get.

Don't Count on TIPS

2009-06-21T21:49:00.000-07:00

Treasury inflation-protected securities may rank as today's most over-hyped investment product. To hear their proponents talk, TIPS will shelter you from the ravages of inflation, which does seem likely to worsen. But they forget to mention that TIPS are Treasury bonds, which are almost certain to fall in value as inflation heats up.

TIPS protect you from inflation with one hand, but they punish you with interest-rate hikes with the other.

If you buy TIPS directly from the Treasury and hold them to maturity, you'll receive the full CPI increase. If you invest through a regular mutual fund or an exchange-traded fund, you're at the mercy of the market's expectations for the CPI.

TIPS probably won't lose money when inflation heats up, but they're unlikely to make much, either. It's pure fantasy to think that putting 10% or 20% of your assets in TIPS will insulate your portfolio against inflation.

Investors Are Getting Killed In ETFs

2009-06-21T21:07:00.000-07:00

A new analysis by Vanguard Group founder John Bogle indicates that investors are generally making poor decisions when buying and selling exchange-traded funds.

Bogle compared the returns of 79 ETFs in a variety of major asset categories over the past five years to the returns of the average dollar invested in those ETFs over the same time period. It’s a common statistical practice in mutual fund analysis, allowing investors to see whether they’re buying at the bottom and selling at the top, or vice versa.

While investor returns typically trail fund returns by some margin, Bogle expressed surprise at the degree to which investor returns suffered in ETFs.

“These numbers … are unbelievably consistent,” said Bogle. “Out of 79 ETFs we covered, 68 had investor returns that were … short of the returns earned by the funds themselves. “

And by no small margin. The degree of investor-lag ranged from 0.4% per year for large-cap value funds to -17.9% per year for financials ETFs. Investors seemed to do the worst in high-profile and volatile sectors like emerging markets, financials and REITS.

“So we have evidence—strong evidence—that exchange-traded funds, because of the timing that goes on in them, are not acting in the best interest of investors. Or, that investors are not acting in their own best interests, which may be a better way to put it.”

Click here to view a full replay of the Bogle webinar.

Read more Journal of Indexes and IndexUniverse.com

Paralysis of Analysis

2009-06-16T21:36:00.000-07:00

By Dr. Robert Cialdini

"Usually, a communicator’s purpose is to develop and send a message that alters the attitudes, decisions, or behaviors of recipients. The critical question, of course, is how best to arrange it... the best indication of how much change a communication will produce lies not in what it says but, rather, in what the recipient says to him-or herself as a result of receiving the message.

Because people frequently disengage their critical thinking/counterarguing powers and defer to expert advice, communicators who can lay claim to relevant expertise would be fools to fail to make that expertise clear early in the messaging process.

besides projecting our expert standing into the consciousness of an audience, it is as important to protect that status by conveying our background, experience, and skills honestly without exaggeration or fabrication."

YOU DON’T HAVE TO BE A DUPE TO BE DUPED

2009-06-16T21:24:00.000-07:00

LESSONS FROM THE MADOFF AFFAIR

Excerts from Dr. Robert Cialdini

"By now, we’ve all been exposed to varied analyses of the highly publicized Ponzi scheme that Wall Street player Bernard Madoff is charged with orchestrating. While some analysts have focused on certain remarkable aspects of the fraud such as its size ($50 billion by most estimates) and its duration (going undetected for decades), I’ve been impressed by another remarkable feature: the level of financial sophistication of many of its victims. The list of those taken in by Madoff is rife with the names of hardheaded economists, seasoned money managers, and highly successful business leaders. With Madoff, it wasn’t another case of the fox outwitting the chickens; this guy bamboozled the other foxes. How’d he do it?
The Power of Persuasion under Conditions of Uncertainty
Under conditions of uncertainty like those Madoff cultivated, a pair of principles of social influence gain special traction: Authority and Social Proof. Let’s take each in turn and examine how they were commissioned by Madoff to advance his persuasive success.
Authority. When people are uncertain of what to do, they don’t look inside themselves for answers; all they’ll see there is vexing ambiguity. Instead, they look outside. One prominent place they look is to the counsel of experts, credible authorities on the topic. And, by any measure, Bernard Madoff certainly had the look of a credible authority in financial matters. He possessed expert credentials from long years in the investment industry. Beyond expertise, Madoff spent substantial time and money establishing a reputation for possessing the second element of credible authority—trustworthiness.
Social Proof. Besides authorities, do people seek any other source of external information when uncertain of how to choose? They do. They look to—and then follow—what most people just like them are doing. Here, the proof of a correct choice isn’t based on knowledge or logic or empirical evidence; it’s based on social evidence of what one’s peers and those in one’s social network have decided to do. For instance, if the evidence were clear that your friends and coworkers were flocking to a new restaurant for lunch, you’d likely follow suit.
Implications for Ethical Influence in Times of Uncertainty (Like Now!!)
What lessons can be gleaned from the Madoff case for those who want to be influential but who refuse to tumble to Mr. Madoff’s ethical level in the process? Honestly informing prospects, customers, clients, superiors, or coworkers of the views of legitimate authorities and/or the choices of comparable others is a both a potent and ethical route to persuasive success. But, to maximize the effect of these two sources of influence, there is one additional aspect to consider: They will have particularly strong impact under conditions of uncertainty, when people are looking outside rather than inside themselves for answers.
Thus, when things are uncertain, the judgments and actions of authorities and of comparable others can provide a goldmine of persuasive resources. And that mine is…well…a terrible thing to waste."

Jim Cramer DOW 6500 Bottom Call Myth

2009-06-11T17:55:00.000-07:00

On June 1, 2009 Jim Cramer gave a summary on his show of what he saw to call a bottom on the stock market at DOW 6500 by saying "the worst is over, the downside was over and the time was ripe to buy."

Don Harrold says Cramer is "perpetuating the myth". This is an excellent video by Don Harrold showing how bearish Jim Cramer was at the bottom of the bear market.

Humans can't think clearly

2009-06-11T17:15:00.000-07:00

From Raise the Hammer

We can discover our illusions through careful study, but we cannot stop ourselves from experiencing them, even when we understand that they are illusions.

Below is a well-known picture of two tables of apparently different lengths:

These two images are the same length. No, seriously. (Image Credit: Cool Optical Illusions)

Both tables are the same length - measure them for yourself. The interesting thing is, even after you measure and find them the same, when you take your measuring device away, you will not be able to accept it. It's impossible to overcome the sense that the table on the left is longer.

So we can take our illusions into account, but we cannot free ourselves from experiencing those illusions.

Cognitive illusions operate in an analogous manner. Not only are our cognitive illusions bigger and more serious than our optical illusions, but they are harder to demonstrate since we cannot simply hold a ruler up to the errors in which we process data and form conclusions.

Manipulating Choices

Using a comparison of European countries over rates of organ donation shows that the way questions are formed - especially questions over intellectually or morally complex issues - has a huge influence on which choices people make.

In the case of organ donations, European countries are divided into a few with extremely low rates of donors and countries with nearly 100 percent donors. The difference is not social or cultural and is not related to incentives. Instead, the difference is that in some countries, citizens need to check a box on a form to authorize organ donation, and in the other countries, citizens need to check a box on a form to opt out of organ donation.

The issue is so complex, that people opt to go with the default choice - whatever that default happens to be - rather than figure out what to think about it.

It gets more interesting. Given a choice between an all-expenses paid trip to Paris or Rome, respondents are roughly evenly split. However, by adding a third choice - a trip to Rome where all expenses are paid except for a morning cup of coffee - a majority of respondents choose the trip to Rome including coffee.

Adding a slightly inferior version of the Rome trip makes the full Rome trip look even better than the Paris trip by comparison.

One of my favorite quotes is by Stuart Chase, quoted in S.I. Hayakawa's classic Language in Thought and Action:

Common sense is that which tells us the world is flat.

As a society, it's high time we start to cultivate a lifelong habit of questioning our assumptions, revisiting received wisdom, subjecting our hypotheses to vigorous empirical testing, and openly debating public policy not based on conformance to this or that narrow ideology or dogma, but to demonstrable and repeatable evidence.

We need to cultivate as part of this is a willingness to be proven wrong. Instead of wasting our time seeking to 'safe face' by stubbornly defending ridiculous, indefensible positions, it would be great if we could all step back and learn from intellectually honest debate.

Another favorite quote is from John Maynard Keynes, recently back in fashion among economists:

When the facts change, I change my mind.

What do you do, sir?

Money can buy happiness

2009-06-01T11:45:00.000-07:00

In a recent article in MIT Technology Review, studies found that losing money intensifies physical and emotional pain and gaining money can appease both of these sensations. The experiments conducted suggest that gaining financial resources diminishes both physical and emotional pain.

It is also interesting to note that merely thinking about having or losing money, without any actual change in resources had the described effects, since the experimenters didn’t award (or take) the subjects’ money.

Recent advancements in Behavioral Economics (sometimes called Neuroecomonics) have shown that it is often beyond a person’s ability to control their emotions and act rationally (in their own best interests). These inherent shortcomings are known to media and markets that use them to take advantage of the individual investor.

Remember, the ‘market return’ is the average of all investor returns. Every time you hear about investors that are beating the market (Warren Buffett, Yale's Endowment, CALPERs, etc.) you have to realize that there are others (often individual investors) who are underperforming to an equal extent.

As Benjamin Graham taught Warren Buffett “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

If you need some help with the emotional side of your investing decisions, contact Visible Investment Advisors.

Following the headlines can be lethal to your finances

2009-06-01T09:00:00.000-07:00

In times of great stress, like when your equity portfolio is down 60% as it was in the beginning of March 2009, people are anxious and in search of information that can satisfy their horrendous feelings.

Unfortunately, news sources who are willing to provide that information are just as likely to provide the wrong information as the right information – how can you tell which to follow? Luckily, most news advice is ignored, but when published by a credible source, it is too often mistakenly followed.

Such was the case on March 6, 2009 (the absolute low of the market – perfect timing) when the Los Angeles Times reporter Joe Queenan provided his opinion in Panicked by the stock market.

“I decided that the time had come to panic… This is the time for hysteria.”

What do Visible Investors observe about this writing?

Joe’s “401(k) is now about half the loaf it once was” – taking more risk than he could stand to take (most individual investors think they can withstand a lot of risk in times when times are good) f.orced him into action he will later regret.
Newspapers are for entertainment, not actionable information. Joe was confused by the information he was getting from his own sources, and even quoted pundits and “well intentioned journalists’ advice” but fell into the same trap he was warning about in his article.
Joe felt there was more risk in his portfolio when it was down 50% than when it was at its high – exactly the opposite of the reality.
Joe did not have cash reserves available to take advantage of the opportunities that panicked investors presented him with.
By the way, who is Joe Queenan and why was he qualified or given the right to write this article? And what about a follow up piece to apologize to all of the individual investors that were harmed when they followed his advice? (In the following days “Letters to the Editors,” people actually thanked Joe for getting them out of the market – can you imgine what those people are thinking today? And can you believe this that his latest article is a ‘who done it’ book review).
Buying high and selling low is a formula for disastrous investment returns.

If you are confused or panicked, you are not in position to make a decision that will affect your quality of life your 30+ years of retirement.

Contact Visible Investment Advisors for an individual solution to your current situation.

Limited memory and limited thinking capacity

2009-05-20T13:29:00.000-07:00

From an article in Physcology Today by Dan Ariely

"It’s hard to displace a global economic crisis from headlining the news, but the pigs did it.... The media jumped on this new new new crisis, the politicians around the world thanked providence for something to distract voters from their ethical lapses and the opportunity to pad their budgets..."

We have limited memory and limited thinking capacity; to manage it we shift our attention depending on outside information. Or, in non-academese, we pay attention to what’s happening now: things that are recent and things that are repeated often get more attention, even if they are not that important. Because the news focus on the negative (it’s their business model) we keep hearing about the cases discovered, and not about the millions of people who were exposed and didn’t get sick.
We overweigh new risks relative to comparable risks we are accustomed to. Around 100 people per day died in US roads in 2008, an enormous improvement over previous years but still. People obsessing about spending 5 minutes in elevators with others (an infinitesimal chance of contagion) will blithely cross the street against the light to have a artery-clogging triple cheeseburger with fries and then smoke a pack of cigarettes. These things have much higher risks, but because we have grown accustomed to them, we don’t think of the risks. They are not, in the technical term, salient; but they are much more dangerous. Still, their dangers are dry statistics and people are not good with statistics.
Brains are wired to work well with stories. And there are many stories one can make from the news reports: pandemics amplified by airport air recycling and global travel; mass extinction followed by anarchy and mayhem; terrorism taking advantage of the burden on the health system; the flu as prelude to alien invasion from Alpha Centauri. Ok, the last one only works around the MIT Media Lab. But we love stories, and forget that the plural of anecdote is not data. Statistics, dry as they may be, give a lot more information than stories.

Read the entire article

Why do we take the risks we do?

2009-05-20T10:25:00.000-07:00

Sometimes we just can't help ourselves from doing dumb things. And it's not really our fault.

In his recent book, Your Money & Your Brain, author Jason Zweig discusses why we're motivated by the prospect of reward.

"Our brains reflexively light up when we're presented with the possibility of big financial gains, regardless of the odds. (Zweig humorously points out that the brain scans of someone high on cocaine and someone who's thinking about making money look identical.) And if you hit it big, even just once, you'll still keep trying to strike gold again. That explains why people buy lottery tickets and why jackpot winners keep buying more."

"Letting your base instincts rule probably won't lead to successful results."

If you suffered more losses than you are comfortable with, you probably can benefit from having an Visible Investment Advisor on your side.

How does this bear market compare?

2009-05-19T15:42:00.000-07:00

The 4 major bear markets in the 100 years

The "crash" of 1929, which lasted 34.2 months (from 9/3/1929 to 7/8/1932)
The "oil shock" of 1973, which lasted 20.7 months (from 1/11/1973 to 10/3/1974)
The "tech bubble" of 2000, which lasted 30.5 months (from 3/24/2000 to 10/9/200
The "housing meltdown" of 2008, which lasted 19.3 months so far (from 10/9/2007 to ?)

Bull and bear markets since 1871 | 4 major bear markets | Bear market rallies | Inflation | Stocks versus bonds

As Warren Buffett says "In the business world, the rearview mirror is always clearer than the windshield."

If you need some help dealing with the current market, contact Visible Investment Advisors.

Did you buy high and sell low?

2009-05-18T08:38:00.000-07:00

Buying high and selling low is a formula for awful returns.

Many investors thought they could take risk before they had experienced the pain of the recent losses. Panicked investors then rushed to safety.

"I thought: I can't afford to lose it all so, I recently reduced the 40% of my portfolio that was in stocks, to just 10% - the rest is in cash, bonds and federally insured certificates of deposit."
"I cashed out of my individual retirement account in early March to help pay the $1,200-a-month maintenance costs on my unsold home."
"When the $100,000 turned into $60,000 late last year, I worried we would lose our children's college money if we didn't get out of the market."
"But, we had to get out emotionally - math and the mind don't always add up."
"My folks need income, they need to know they can pay their bills....There was no waiting time for things to come back around."
"What if the DOW was selling at 3000 now? Selling at 6500 would have been brilliant. And you don't know that at the time of the decision."

"Their timing was almost perfectly bad!"

They were not alone. Professionals and newsletter writers were equally wrong:

Bob Brinker's advice (one of the most highly rated market timers that called the 2000 bubble and 2003 advance) made the following calls since January 2008:

Mid 1400 on the S&P 500, he called it a "gift horse buying opportunity"
Market rallies back to 1400's in 2008 and he bashes the "Cassandras" (people predicting the market crash)
Market bottoms in 2009 at 676 and he has no buy or advice to dollar cost average in his newsletter just days before.
Market rallies significantly and he is a buyer on "weakness"

Most investors take more risks than they need to take, can afford to take or can stand to take.

Visible Investing is about seeing and understanding the risks you are taking and the returns you are seeking to achieve.

Contact an advisor for a complimentary discussion of your current situation.

Our mistaken expectations

2009-05-14T10:39:00.000-07:00

When you make an investment, you are basing your decision on an expectation that the investment will go up (if you buy) or down (if you sell short). Our beliefs about what will happen are often wrong.

How do you make this decision? Do you have all the information or enough information? Is it intelligence or emotion that helps you make the right decision? Why do so many smart people make the wrong decisions?

If you don't know how much your mutual fund management fee is, but you clip coupons to save money at the grocery store, you will enjoy listening or watching.

Find out how your decision making process works.

You'll see some surprising tests and experiments that you can also try on yourself.

Watch through to the end for a sparkling Q&A.

Personalized advice to 401(k) participants

2009-05-09T06:09:00.000-07:00

The 401(k) has become the primary savings vehicle for 60% of workers.

Changes Coming for the 401(k) Plan - the proposed legislation gaining momentum in the House and Senate would require:

the industry will have to break out 401(k) fees on investors' statements.
repeal regulations allowing mutual-fund companies to offer personalized advice to 401(k) participants in the plans the companies manage.
establishment of a program in which all workers would be automatically enrolled in employers' retirement plans. Now, in most cases, they must opt in to participate.
employers that don't offer a retirement plan would be required to enroll their employees in a direct-deposit individual retirement account.

Many people are using "Target Date" mutual funds, and have found that they too have experienced large losses in the recent downturn. This is because many of these funds did not use appropriate asset allocation.

Visible Investors prefer to select an appropriate mix of asset classes using low cost index funds to accommodate the amount of risk they need to take and are able to take to meet their retirement goals.

Comments from Buffett and Munger

2009-05-08T08:26:00.000-07:00

Below are some of the notable comments from Warren Buffett and Charlie Munger at the 2009 Berkshire Hathaway and Wesco annual meetings:

Warren Buffett
“If you have a 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius. What’s most important is inner peace; you have to be able to think for yourself. It’s not a complicated game.”
(more at the Motley Fool)

Charlie Munger
Munger, who is seven years older than Buffett: “Sometimes I feel my sole function is to show shareholders that they’ll get another good seven years out of Warren.”

"Wall Street found every which way to make money short of robbery. A lot of it was a bunch of sleazy crooks, but if it worked, no one cares."

"Financial engineering needs to be held to the same high standards as mechanical engineering."

"Our best years were recession years. If you wait for the recovery, it's too late. Am I willing to invest long-term money at these prices? Sure. I'd invest long-term money in Wells Fargo. I'd invest long-term money in Coca-Cola (NYSE: KO). I don't know if it's right or not [in the short term] but you're entitled to hear my opinion."

On what to expect from the stock market: "To expect a lot is irrational. You're likely to be happier and gain felicity by aiming low."

On how to avoid 50% losses in the future: "It's in the nature of stock markets to go way down from time to time. There's no system to avoid bad markets. You can't do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go."

On stockbrokers: "Most stockbrokers are a disaster waiting to happen. If anyone ever promises you miracles, show them the door."

(more at the Motley Fool)

Investors have short memories

2009-05-01T15:09:00.000-07:00

Most investors I speak with tell me they made terrible mistakes that caused them losses during the past 12 months - thinking home prices would never go down, taking more risk then they could stand (80-100% in equities), chasing higher interest rates by buying junk bonds - are the 3 I hear most often.

"Unfortunately, many investors have short memories (emphasis added). It's easy to say that you'll never make the mistake of thinking a high-flying fund's returns justify its higher risk, given your experience from the past two years. Yet when the next bull market starts -- if it hasn't already -- those top performers will again try to tempt you away from the less compelling funds that did so well during the bear market."

"To be a successful long-term investor, though, you need to get past the short-term crazes that seduce less disciplined shareholders into making decisions they'll later regret. Once you make the smart decision to buy a fund based on its overall long-term track record rather than how it has performed in the past year or two (emphasis added), you still have to avoid the pitfall of dumping it when it's out of favor (emphasis added). If you can do that, however, you'll be well on your way to financial independence."

Article from the Motely Fool

Define Your Investing Style

2009-04-29T12:41:00.000-07:00

See the complete article from the Motley Fool

"... take this quiz to identify your natural inclinations (both good and bad) so you can find the methods, philosophies, and strategies that best match the way your brain is wired."

1. You're at the store and on the shelf is an array of options for the product you need. Which are you most likely to toss into your shopping cart?
A. The brand you've purchased in the past, even though it lacks the bells and whistles of some of the others.
B. A pricier brand you've always wanted to try because it's on sale for 20% off today.
C. A brand new product that promises revolutionary results.
D. A reasonably priced version that has not been FDA-approved, but has gotten favorable reviews from its customers.

2. You log onto your brokerage account. Which scenario are you happiest to see?
A. The market's up a whopping 10%, but your stock gained just 1% during the run-up.
B. One of the companies you own missed hitting its earnings target and is down 30% as a result, giving you the opportunity to buy more shares at fire-sale prices.
C. Over the past six months a stock in your portfolio has traded anywhere from $10 to $80. It's at the low end of that range right now, but you think it has the potential to double or even quadruple over time.
D. One of your stocks is up 15%, but there's no obvious reason why, so you'll have to do more research to find out.

3. Which activity are you most likely to choose at the theme park?
A. A spin on the Merry-Go-Round with your kids.
B. The newly revamped 3-D laser Zombie show.
C. The Nitro at Six Flags.
D. Forget the rides and head to the "Tastes of the World" food court.

4. How much information do you need to comfortably make buy, sell, or hold decisions?
A. You like to get regular company updates that are widely followed and analyzed by Wall Street, the media, and individual investors.
B. You prefer to check in on the business -- or its customers -- first-hand either in person or via online forums.
C. You regularly consult SEC filings, trade journals, and industry forums and do all your own analysis.
D. You're content with fairly regular coverage of the sector in which the company operates, even if news about your particular company can be spotty.

5. One of your companies is in the headlines today. Which event would not cause you to lose sleep tonight?
A. The company says it may have to temporarily suspend paying its dividend.
B. The launch of the company's next product has been delayed for at least several months.
C. The Board of Directors is making noises about ousting the CEO in order to install an industry veteran.
D. The currency of the country in which your company operates has taken a haircut.

6. If this were an "I'm a Mac/I'm a PC" ad, which company would you be?
A. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)
B. Buffalo Wild Wings (Nasdaq: BWLD)
C. Google (Nasdaq: GOOG)
D. America Movil (NYSE: AMX)

7. The business trajectory that most excites you is...
A. A stable, mature company with some room to grow via cost-cutting efforts, strategic acquisitions, and/or partnerships.
B. A newcomer that has not yet made a name for itself (and may not for many years) and has no heady expectations priced into the stock.
C. An innovative -- and often volatile -- company that challenges the status quo and has the potential to dominate (or create) a business niche.
D. A company that is ideally positioned to capitalize on fast-growing economies overseas.

8. What kind of volatility are you willing to endure on the road to wealth?
A. I'm not looking for massive growth -- I'm willing to settle for a couple of years of so-so returns just so I don't lose a lot of money.
B. I'm willing to endure a few white-knuckle periods until my investment hits the bull's eye.
C. I'll hold on for dear life -- even while everyone else is bailing -- if I truly believe that the long-term payoff will be big.
D. I can stomach volatility that is beyond the company management's control (e.g. currency fluctuations, political messes) if it means being in the right place at the right time.

"What's your investing temperament? Let's see how you're wired."

"Mostly A's: ...you're most comfortable limiting your exposure to risk. Patience is your investing virtue. Like the great Warren Buffett, you have the temperament to wait for a quality company to go on sale."

"Mostly B's: ...you're willing to look for things where few others dare to tread"

"Mostly C's: ...you seek companies that challenge the status quo"

"Mostly D's: In the pursuit of investment opportunities, you're not afraid to tread into foreign territory"

"A combination of A's, B's, C's, and D's: You simply seek a variety of opportunities to make your money grow."

Finally, consider that the stock market's recent gyrations may be influencing your answers.

See the complete article from the Motley Fool

Recoup losses sooner than you think...

2009-04-28T09:31:00.000-07:00

From the NY Times article by Mark Hulbert is editor of The Hulbert Financial Digest

"Historical stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn."

"But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low."

"Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market."

Deflation
"The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18 percent lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline."

Dividends
"When the Dow hit a low of 41.22 on July 8, 1932, for example, the dividend yield of the overall stock market was close to 14 percent, according to data compiled by Robert J. Shiller, the Yale economics professor."

The Dow vs. the Market
"Many researchers consider the overall market — defined as the combined value of all publicly traded stocks — as the best gauge of a typical investor’s experience. The Dow is made up of just 30 stocks, which are weighted in the index according to their price rather than their relative market capitalization."

"So when did the overall stock market really make it back to its pre-crash peak? Just four years and five months after its mid-1932 low, according to data provided to Sunday Business by Ibbotson Associates, a division of Morningstar."

"That seems remarkably fast, given that the stock market lost more than 80 percent of its value from its 1929 high to its mid-1932 low. But the quick recovery of the 1930s is consistent with the typical experience after other bear markets in the United States."

"...according to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972.

None of this, of course, guarantees that stocks will have a quick recovery from the market decline that began in October 2007. But it suggests that the historical record isn’t as bleak as it looks."

Visible investing principals show that by reinvesting dividends and continuing to dollar cost average during market downturns further decreases the time it takes to recoup your losses.
Contact us if you would like to see how you can shorten the time it takes to recoup your losses.

Buffett's metric says it's time to buy

2009-04-25T13:11:00.000-07:00

According to investing guru Warren Buffett, U.S. stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.

In late January, stocks the ratio was 75%.

FORTUNE MAGAZINE

"We try to price, rather than time, purchases." Warren Buffett

2009-04-25T12:55:00.000-07:00

"... it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable.

Why scrap an informed decision because of an uninformed guess? ...

We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist."

From 1994 Berkshire Hathaway Shareholder Letter

This Is Your Brain on Money

2007-10-21T15:03:00.000-07:00

Read entire Jason Zweig article here.

Here are five ways your brain can trick you into making financial blunders, and how to avoid them:

1. Familiarity breeds admiration, not contempt.
Psychological research shows that we're attracted to the familiar... "Whenever a stock, an industry, a market, a country, or an investing theme is familiar, you'll like it better. But familiarity is very dangerous."

2. The pattern you swear you see is probably an illusion.
The brain is built to detect patterns, even when confronted with an arbitrary occurrence. "A small streak of random luck looks to us like part of a longer pattern of reliable foresight." After someone learns a set of circumstances through which they made money, the brain will fire up with the pleasure chemical dopamine when those conditions occur again. "If you see something once, then twice, you automatically, involuntarily expect it a third time."

3. Everything is relative.
The brain will hook onto a number and then compare subsequent figures to the initial one, a phenomenon known as "anchoring and adjustment." Quoting Warren Buffett, who says he "always likes to look at investments without knowing the price, because if you see the price, it automatically has some influence on you."

4. Tune out the play-by-play.
If you're someone who obsessively monitors the prices of your holdings, watch out. Several studies by Princeton Nobel laureate Daniel Kahneman and other researchers have found that the more often people watch an investment move up and down, the more likely they are to trade in and out short-term -- and the less likely they are to earn a high return over the long term."

5. Beware of group-think.
"When the market gets really greedy or really fearful, basically everyone's brain starts to work the same way... That's why many people buy high and sell low." "To avoid following the herd, set your own financial policies and rules, and stick by them "The worst imaginable thing you can do is listen to Pied Pipers who tell you 'here are seven tricks to beat the pros at the game.' That game will make you miserable."

When possibility is in the room, probability goes out the window

2007-10-06T10:36:00.000-07:00

Humankind evolved to seek rewards and avoid risks but not to invest wisely.

Read the complete article: Your money and your brain
By Jason Zweig, Money Magazine senior writer/columnist

For most purposes in daily life, your brain is a superbly functioning machine, steering you away from danger while guiding you toward basic rewards like food, shelter and love. But that brilliant machine [your brain] can lead you astray when it comes to investing.

QUIZ

Is your brain wired for wealth?

In Year One, Weeds.com earns $ 2.50 per share. In Year Two, it earns $ 5 per share. In Year Three, it earns $ 10 per share. What is your best estimate of what Weeds.com will earn in Year Four? $20 $5 $15 or How on earth would I know?

We're beginning to get answers. Scientists in the emerging field of "neuroeconomics" - a hybrid of neuroscience, economics and psychology - are making stunning discoveries about how the brain evaluates rewards, sizes up risks and calculates probabilities.

With the wonders of imaging technology we can observe the precise neural circuitry that switches on and off in your brain when you invest. Those pictures make it clear that your investing brain often drives you to do things that make no logical sense - but make perfect emotional sense.

Your brain developed to improve our species' odds of survival. You, like every other human, are wired to crave what looks rewarding and shun what seems risky.

To counteract these impulses, your brain has only a thin veneer of modern, analytical circuits that are often no match for the power of the ancient parts of your mind. And when you win, lose or risk money, you stir up some profound emotions, including hope, surprise, regret and the two we'll examine here: greed and fear.

Understanding how those feelings - as a matter of biology - affect your decision-making will enable you to see as never before what makes you tick, and how you can improve, as an investor.

Greed: The thrill of the chase
Why is it so hard for most of us to learn that the old saying "Money doesn't buy happiness" is true? After all, we feel as if it should.

The answer lies in a cruel irony that has enormous implications for financial behavior: Our brains come equipped with a biological mechanism that is more aroused when we anticipate a profit than when we get one.

In Knutson's experiment, a display inside the fMRI machine showed me a sequence of shapes that each signaled a different amount of money: zero ($0), medium ($1) or large ($5). If the symbol was a circle, I could win the dollar amount displayed; if it was a square, I could lose the amount shown.

When Knutson measured the activity tracked by the scan, he found that the possibility of winning $5 set off twice as strong a signal in my brain as the chance at gaining $1 did.
Whenever I captured the reward, Knutson's scanner found that the neurons in my nucleus accumbens fired much less intensely than they had when I was hoping to get it. Our anticipation circuitry... acts as a "beacon of incentive" that enables us to pursue rewards that can be earned only with patience and commitment.

If we derived no pleasure from imagining riches down the road, we would grab only at those gains that loom immediately in front of us.

Thus our seeking system functions partly as a blessing and partly as a curse. We pay close attention to the possibility of coming rewards, but we also expect that the future will feel better than it does once it turns into the present.... Getting exactly what they wished for left investors with nothing to look forward to, "so they got out and the stock crashed."

Brian Knutson has found that while your reflexive brain is highly responsive to variations in the amount of reward at stake, it is much less sensitive to changes in the probability of receiving a reward...

When possibility is in the room, probability goes out the window.
It's no different when you buy a stock or a mutual fund: Your expectation of scoring a big gain elbows aside your ability to evaluate how likely you are to earn it. That means your brain will tend to get you into trouble whenever you're confronted with an opportunity to buy an investment with a hot - but probably unsustainable - return.

Fear: What are you afraid of?
Here are two questions that might, at first, seem silly.

1 Which is riskier: a nuclear reactor or sunlight?

2 Which animal is responsible for the greatest number of human deaths in the U.S.? a) Alligator b) Deer c) Snake d) Bear e) Shark

Now let's look at the answers. The worst nuclear accident in history occurred when the reactor at Chernobyl, Ukraine melted down in 1986. Early estimates were that tens of thousands of people might be killed by radiation poisoning. By 2006, however, fewer than 100 had died. Meanwhile, nearly 8,000 Americans are killed every year by skin cancer, commonly caused by overexposure to the sun.

In the typical year, deer are responsible for roughly 130 human fatalities - seven times more than alligators, bears, sharks and snakes combined. Deer, of course, don't attack. Instead, they step in front of cars, causing deadly collisions.

None of this means that nuclear radiation is good for you or that rattlesnakes are harmless. What it does mean is that we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost.

We're no different when it comes to money. Every investor's worst nightmare is a stock market collapse like the crash of 1929. According to a recent survey of 1,000 investors, there's a 51% chance that "in any given year, the U.S. stock market might drop by one-third."

In fact, the odds that U.S. stocks will lose a third of their value in a given year are around 2%. The real risk isn't that the market will melt down but that inflation will erode your savings. Yet only 31% of the people surveyed were worried that they might run out of money during their first 10 years of retirement.

If we were logical we would judge the odds of a risk by asking how often something bad has actually happened under similar circumstances. Instead, explains psychologist Daniel Kahneman, "we tend to judge the probability of an event by the ease with which we can call it to mind."

The more recently it occurred or the more vivid our memory of something like it in the past, the more "available" an event will be in our minds - and the more probable its recurrence will seem.

Fear: The hot button of the brain
Deep in the center of your brain, level with the top of your ears, lies a small, almond-shaped knob of tissue called the amygdala (ah-mig-dah-lah). When you confront a potential risk, this part of your reflexive brain acts as an alarm system - shooting signals up to the reflective brain like warning flares. (There are two amygdalas, one on each side of your brain.)

The result is that a moment of panic can wreak havoc on your investing strategy. Because the amygdala is so attuned to big changes, a sudden drop in the market tends to be more upsetting than a longer, slower decline, even if it's greater in total.

On Oct. 19, 1987, the U.S. stock market plunged 23% - a deeper one-day drop than the crash of '29. Big, sudden and inexplicable, the '87 crash was exactly the kind of event that sparks the amygdala.

The memory was hard to shake: In 1988, U.S. investors sold $15 billion more worth of shares in stock mutual funds than they bought, and their net purchases of stock funds didn't recover to pre-crash levels until 1991. One bad Monday disrupted the behavior of millions of people for years. There was something more at work here than merely investors' individual fears. Anyone who has ever been a teenager knows that peer pressure can make you do things as part of a group that you might never do on your own.

But do you make a conscious choice to conform or does the herd exert an automatic, almost magnetic, force?

People were recently asked to judge whether three-dimensional objects were the same or different. Sometimes the folks being tested made these choices in isolation. Other times they first saw the responses of four "peers" (who were, in fact, colluding with the researcher).
When people made their own choices, they were right 84% of the time. When the peer group all made the wrong choice, however, the individuals being tested chose correctly just 59% of the time.

Brain scans showed that when the subjects followed the peer group, activation in parts of their frontal cortex decreased, as if social pressure was somehow overpowering the reflective, or analytical, brain. When people did buck the consensus, brain scans found intense firing in the amygdala.

Neuroscientist Gregory Berns, who led the study, calls this flare-up a sign of "the emotional load associated with standing up for one's belief." Social isolation activates some of the same areas in the brain that are triggered by physical pain.

In short, you go along with the herd not because you want to but because it hurts not to. Being part of a large group of investors can make you feel safer when everything is going great. But once risk rears its ugly head, there's no safety in numbers.

Bill Miller is an example of "why Value Investors shouldn't work for Investment Companies"

2007-10-03T13:07:00.000-07:00

By definition, value investors buy assets for less than they are worth, and sell when they can get paid more than their assets are worth.

This process causes value investors to buy early and sell early - just because an asset is undervalued doesn't mean it can't become more undervalued and when it's overvalued, it can become more overvalued.

The above is made more significant in rising markets as value investors typically under-perform benchmarks in rising markets but outperform in declining markets. The longer holding periods of value investors makes up for temporary under-performances - making the long term performance of value investors generally better than average.

At the end of May, I posted some reasons why it will be tough for value investors to stay true to their discipline. The current trend is for investors, the media and most importantly INVESTMENT COMPANIES to evaluate performance on a quarterly basis, and on occasion, this causes investors to move money out of under-performing value funds.

There are many different value investing styles - all based on the premise of paying less (price) than what the asset is worth (value).

Bill Miller uses growth - companies he "knows" will grow their earnings sufficiently to make their current price a bargain (this is an approach of a minority of traditional "value" investors because they would say it's too hard to forecast growth in earnings even a few years into the future).

So, it’s my premise that VALUE INVESTORS CAN’T WORK FOR INVESTMENT COMPANIES whose only interest is the return on their capital (obtained by investor fees) not their investors' capital (return on investing).

Bill Miller’s current under-performance has to be causing outflows that are hurting Legg Mason’s fees and I’m sure he is bending to the pressure. They’d rather he match benchmarks all the time than under-perform even in the short term.

I don’t often predict the future (it’s “unknowable”) but I’d say it’s probable Bill will leave Legg Mason at the conclusion of his current contract.

Can CNBC help your investment decisions

2007-09-23T15:46:00.000-07:00

The following is a response to a post on Gurufocus.com

Warren E. Buffett on contrarian investing:

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."
"As far as I am concerned, the stock market doesn't exist. It is only there as a reference to see if anybody is offering to do anything foolish."
"For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get."

I never dismiss Buffett's comments. However, when you look at the context that CNBC presents Buffett's comments, you see they are meant for entertainment (increase ratings to increase advertiser revenue) and to drive investor actions (in support of their investment company advertisers).

The reason for the interview [www.cnbc.com] you refer to: "Buffett did the interview with us to draw attention to a $128 million donation given to a Pennsylvania school by the daughter of economist David Dodd, an early investor in Berkshire Hathaway and an important mentor to Buffett."

When he got "ambushed" [my interpretation] he "(Laughs strongly.) I represent a different view, maybe, than your other viewers. I don't think it makes any difference whatsoever to an investor in stocks what they do today. I don't care, I wouldn't care whether they raise the rate in terms of what I would do in stocks. If I knew exactly what they were going to do, I would not change a buy or a sell order that I have in."

Being the genius he is, he was able to then go back to the context of the interview and the message he came to deliver...

My point is, CNBC uses Buffett to their economic advantage, but you'd be hard pressed to find any support for his value based, long term, anti-wall street beliefs. And, I stand by my belief that if an investor makes decision based even on this quick Buffett comment, they are not investors at all.

Even David Dreman can be affected by Mr. Market

2007-09-21T12:57:00.000-07:00

This is a response to a post on Gurufocus.com on comments made by David Dreman and other posters that claim to be value investors:

Giving in to Mr. Market's price, entry points or bounce; prediciting market direction or "bottoms;" and taking a contrarian position, are all speculative.

Graham-Dodd-Buffett value investors buy when the stock is undervalued and sell when it becomes fully or overvalued. Actions based on any other criteria are just irrational.

I pity the poor people who get their advice or take action because of information they heard on CNBC.

New Book: Your Money and Your Brain

2007-08-24T05:15:00.000-07:00

Humankind evolved to seek rewards and avoid risks but not to invest wisely, by Jason Zweig

In the introduction to Ben Graham's Intelligent Investor, Warren Buffett writes, "To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework." This article and book will help you invest successfully.

"You buy high only to sell low. You try to time the market. You follow the crowd. You make the same mistakes again. And again. How come?"

"Your brain developed to improve our species' odds of survival. You, like every other human, are wired to crave what looks rewarding and shun what seems risky."

"To counteract these impulses, your brain has only a thin veneer of modern, analytical circuits that are often no match for the power of the ancient parts of your mind. And when you win, lose or risk money, you stir up some profound emotions, including hope, surprise, regret and the two we'll examine here: greed and fear."

"Our brains come equipped with a biological mechanism that is more aroused when we anticipate a profit than when we get one. "

"...learning the outcome of my actions was no big deal... Thus our seeking system functions partly as a blessing and partly as a curse. We pay close attention to the possibility of coming rewards, but we also expect that the future will feel better than it does once it turns into the present. "

"The anticipation of reward... is more important for memory formation than is the receipt of reward."

"your reflexive brain is highly responsive to variations in the amount of reward at stake, it is much less sensitive to changes in the probability of receiving a reward... When possibility is in the room, probability goes out the window. It's no different when you buy a stock or a mutual fund: Your expectation of scoring a big gain elbows aside your ability to evaluate how likely you are to earn it. That means your brain will tend to get you into trouble whenever you're confronted with an opportunity to buy an investment with a hot - but probably unsustainable - return."

"...we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost... the odds that U.S. stocks will lose a third of their value in a given year are around 2%. The real risk isn't that the market will melt down but that inflation will erode your savings. Yet only 31% of the people surveyed were worried that they might run out of money during their first 10 years of retirement."

"When people made their own choices, they were right 84% of the time. When the peer group all made the wrong choice, however, the individuals being tested chose correctly just 59% of the time... you go along with the herd not because you want to but because it hurts not to. Being part of a large group of investors can make you feel safer when everything is going great. But once risk rears its ugly head, there's no safety in numbers."

"Understanding how those feelings - as a matter of biology - affect your decision-making will enable you to see as never before what makes you tick, and how you can improve, as an investor."

Read the article, buy the book.

Nervous when the market drops 200+ points?

2007-07-26T17:51:00.000-07:00

Are you asking: " Why didn't I sell yesterday?"

Are you saying: 'I'm going to sell tomorrow!"

Then you probably speculating, not investing.

Speculators buy or own stocks they think, or should I say, hope will go up. When they don't, they question their decision to buy or own them.

Investors buy stocks because they are a good value. Based on a company's current and future earnings, investors conservatively estimate the company's intrinsic value to determine if the stock is priced appropriately.

Most stocks are priced appropriately most of the time. But momentum results in stocks, or the market, reaching levels of over- or under-valuation.

When the market becomes over-valued, speculators jump in "not wanting to miss the money making opportunities." When the market reverses and becomes under-valued, speculators sell fearing a loss of their investments.

The stock market provides the investor with the opportunity to take advantage of fear by buying at cheap prices, or greed by selling at high prices.

I like the way Warren Buffett puts it: "it's only when the tide goes out that you can tell who is swimming naked."

What you need to know about Morningstar Fund Star Ratings

2007-07-22T08:25:00.000-07:00

Morningstar clearly influences individual investors in their selection of mutual funds. Studies have shown that more than 90% of all money flowing into mutual funds goes into funds with 4 or 5 star ratings.

Morningstar has said from the very beginning that its star ratings are not predictive. In fact, it's fairly easy to find Morningstar analysts who suggest buying funds with low ratings or selling funds that get higher marks, but that hasn't stopped investors and financial advisers from wishing on their stars.

The consequences of large inflows of money into 4 and 5 Star funds include:

Style change because the Manager takes on more risk often causing lower returns or star ratings changes because the fund moves to another style category
Lower returns because the larger the amount of funds the Manager has to invest, the smaller the universe of potential investments
Higher capital gains distributions and associated taxes as the portfolio's turnover increases and the money flows from the fund causing redemtions.

If you need help selecting funds that will maintain their 4 and 5 star ratings, tax efficiency and beat 90% of the other funds, or for a free portfolio review, contact Visible Investment Advisors

Pension Protection Act of 2006

2007-07-21T11:56:00.000-07:00

401(k) plans have become the primary source of retirement income for many people. The Pension Protection Act of 2006 makes it easier for employers to offer automatic enrollment, which helps with universal participation.

Many of the Pension Protection Act's changes were the result of behavioral finance research, including default investment options and enabling employers to provide investment advice. Policymakers recognized that many plan participants lacked the time, expertise, or desire to get the investment education they need on their own.

Although the Pension Protection Act of 2006 represents a great step forward in improving retirement security, much is left to the individual investor to make the program work:

Asset allocation
Diversification
Fees and expenses
Risk
Timing
Rebalancing
Time horizon
Emotions

Visible Investment Advisors offers a one-hour employee seminar that provides independent advice on these topics and more. Contact us to learn more.

Ockham's Razor

2007-07-04T09:54:00.000-07:00

"All things being equal, the simplest solution tends to be the best one."

In other words, when multiple competing theories are equal in other respects, the principle recommends selecting the theory that introduces the fewest assumptions and postulates the fewest hypothetical entities.

Ockham's razor is a principle attributed to the 14th-century English logician and Franciscan friar William of Ockham. The principle states that the explanation of any phenomenon should make as few assumptions as possible, eliminating, or "shaving off," those that make no difference in the observable predictions of the explanatory hypothesis or theory.

Ockham's razor is an intelligent investor's best friend.

Why do smart people make big investment mistakes?

2007-07-01T12:39:00.000-07:00

"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." Warren Buffett

Investor mistakes can greatly reduce your returns. Below are some of the most common ones. Add additional ones through your comments.

Selling a security to protect your gain only to see it make a huge advance afterward.
Holding on to losing positions waiting for them to return to your purchase price so you don't have to realize a loss and admit that you made a mistake.
Resist buying a hot stock, market sector (like oil), or mutual fund, until it reaches heights you never thought possible and then you buy in—just in time for an immediate reversal down.
Losing money in the market and swear you'll never go back in.
Falling in love and buying at any price.
Hating a stock and not buying in at any price.
Selling early and watching the price continue to go up and not buying in again.
Feeling the stocks you know (local companies or large companies whose products you buy) are less risky?
Overly confident in your ability to outperform the market.
No calculating your returns or comparing them to appropriate benchmarks?
Not taking into account the cost of trading or taxes.
Delaying participating in your 401(k) or other retirement plan?
Acting on stock tips.
Believing that media and industry commentators give you information with your well being in mind.
Staying out of the stock market becuase it is too risky.
Keeping too much money in savings banks and CD's.

Please add your investment mistakes through the comments dialog below.

Charlie Ellis On Playing "The Loser's Game"

2007-06-30T09:12:00.000-07:00

Charles D. Ellis, President of Greenwich Associates, wrote a seminal article entitled "The Loser's Game" in The Financial Analysts Journal for July/August 1975.

Ellis quickly offered a provocative and bold statement: "The investment management business is built upon a simple and basic belief: Professional managers can beat the market. That premise appears to be false."

He pointed out that over the prior decade, 85% of institutional investors had underperformed the return of the S&P 500 Index, largely because "money management has become a Loser's Game.…Institutional investors have become, and will continue to be, the dominant feature of their own environment … causing the transformation that took money management from a Winner's Game to a Loser's Game.

The ultimate outcome is determined by who can lose the fewest points, not who can win them." He went on to note that "gambling in a casino where the house takes 20% of every pot is obviously a Loser's Game."

Ellis went to the underlying economics of the matter: If equities provide an average return of 9% a year, and a manager generates 30% portfolio turnover at a cost of 3% of the principal value on both the sales and the reinvestment of the proceeds (a reduction in return equal to 1.8% of assets per year) and charges management and custody fees equal to 0.2% (low!), the active manager incurs costs of 2%. Therefore, he must achieve an annual return of +11% before these costs—that is, 22% above the market's return—just to equal the gross market return. (That 2% aggregate cost remains pretty much the same—although of a somewhat different composition—for mutual funds in 1997, 22 years later.)

While Ellis did not call for the formation of an index fund, he did ask: "Does the index necessarily lead to an entirely passive index portfolio?" He answered, "No, it doesn't necessarily lead in that direction. Not quite. But if you can't beat the market, you should certainly consider joining it. An index fund is one way."

In the real world, of course, few managers indeed have consistently been able to add more than those two percentage points of annual return necessary merely to match the index, and even those few have been exceptionally difficult to identify in advance.

Fortune: "Cost is the principal reason that investors are unable to outpace the market index"

2007-06-13T10:33:00.000-07:00

In July 1975, in an article entitled "Some Kinds of Mutual Funds Make Sense," Fortune's Editor A.F. Ehrbar concluded some things that seem pretty obvious today: "While funds cannot consistently outperform the market, they can consistently underperform it by generating excessive research costs (i.e., management fees) and trading costs.…It is clear that prospective buyers of mutual funds should look over the costs before making any decisions."

He concluded that "funds actually do worse than the market." He had little hope that the mutual fund industry would rush to fill the gap created by the new view that cost is the principal reason that investors as a group are unable to outpace the market index.

But Ehrbar described the best alternative for mutual fund investors: "a no-load mutual fund with low expenses and management fees, about the same degree of risk as the market as a whole, and a policy of always being fully invested."

Ehrbar's conclusion holds true to this day.

Quotes from Charlie Munger

2007-05-23T17:36:00.000-07:00

From the 2007 Wesco Financial Annual Meeting

"Don't wrestle with a pig, you'll both get dirty but the pig will like it."
"Charlie's favorite business analogy: the mouse who says 'let me out of the trap, I've decided I don't want the cheese."
"You've earned your retirement."
"To learn from a person, make then your friend - tie into their lives and personalities."
"The first rule is don't fool yourself, and you're the easiest one to fool."
"Always live below your financial means so you'll have money to invest."
"Invest in such a way so that you'll never be in a negative position -avoid the use of debt."
"Always seek the simplest most direct answer. Look at the problem backwards."
"You guarantee failure when you learn everything from you own experience rather than learning from others."
"To be a successful investor you need to understand your own psychology, if losing money makes you miserable, you should use a very conservative pattern of saving and investment."
"To understand a business figure out what results it is achieving, why it is getting those results and what could happen to change what is causing those results. If everyone can understand this, then you'll have to pay a lot of money, so you'll have to determine if the price is worth it."
"Americans are oversold on the benefit they receive from money managers and mutual funds. Save yourself a lot of time, money and worry and put your money into index funds."
"Why should investors care if someone else is doing better or worse, when he rationally knows that in the long term his results will be superior by reason of lower costs and the long term effects of compounding."
"In the process of not disappointing anyone, people must have the proper expectations and know what they are and are not getting."
"Stick to basic principles and be alert for opportunity. There are not an unlimited number of opportunities."

Note: If you haven't attended a Wesco Financial Annual Meeting, I recommend you do so. They are held in the middle of May (a few days after the Berkshire Hathaway Annual Meeting) in Pasadena, CA.

The retirement plan Uncle Sam has right

2007-05-20T15:28:00.000-07:00

Hard to believe but true:

The government offers employees a great plan, and you'd do well to emulate it

Money Magazine, By Walter Updegrave, Money Magazine Senior Writer, November 23 2006

Considering the mess that Social Security and Medicare are in, the federal government is probably the last place you'd look for insights about retirement planning.

But I've got to hand it to the feds: When it comes to investing their own money for retirement, they really know what they're doing. In fact, the Thrift Savings Plan - the equivalent of a 401(k) plan for members of Congress and other government employees - is one of the best retirement plans around.

Read the article

Get to know Visible Investment Advisors

2007-04-17T07:58:00.000-07:00

For those who are not familiar with Visible Investment Advisors, this should give you a better idea of our inner thinking and philosophy. We:

Have a bias towards equity,
Take all the risk we need to take, but not more risk than we can stand,
Are greedy when others are fearful and fearful when others are greedy,
Benefit along with the long term growth in the global economy,
Eliminate the chance of under-performing the markets we participate in,
Analyze our real returns - after expenses and taxes,
Invest our own life savings using Visible Investing Principles,
Remain independent of any broker, corporation or financial institution.

How much you REALLY need to retire!

2007-01-31T07:52:00.000-08:00

from the Fool.com

See if you can answer these retirement questions (answers are at the bottom of this page):

From 1926 to 2005, the S&P 500 returned an annual compound average of 10.4%, according to Ibbotson Associates. In how many of those 79 years did the stock market post a return between 10.0% and 10.9%?
How much after-tax wealth can you add to your portfolio by knowing which assets to put in your retirement accounts and which to keep out? A) 5% B) 10% C) 15% D) 20% ?
What percentage of workers have calculated how much they need to save for retirement?
At the age of 65, males have a 5% chance of reaching age 95; females have a 13% chance. What chance is there that one member of a married couple will reach age 95?
The average consumer in the 45-to-54 age group spends how much in relation to the average consumer in the 75-and-over age group? A) About two-thirds as much B) About the same C) About twice as much D) About three times as much?
What is the average annual Social Security retirement benefit?
Last year, a court ruled that a 61-year-old disabled man will not inherit his deceased wife's $1 million pension. Why not?
What percentage of households headed by people age 45 or older have a net worth of less than $25,000, excluding home equity?

With a few adjustments to your investments, estate planning, and tax planning, you can greatly increase your capital in just five years.

You can reduce your taxes dramatically, whether you're retired now or just planning for retirement.
You can help ensure that you have extra money for vacations every year. Maybe a second home. Or early retirement with a comfortable, steady income.
Even if you haven't put away your first penny toward retirement but you're already dreaming of hanging up the business suit for good, you can still retire in comfort. in 11 years by following a simple plan we've devised.

Answers to Questions above

Just once - In 2004, the stock market returned 10.8%.
15%
42%
18%
About three times as much
$11,508
Because the wife completed the beneficiary form 27 years ago when she was single, designating her sister as the person who would receive the money, and she didn't update the form after she got married 19 years ago.
About 40%

Wall Street's 'Weapons of Mass Manipulation'

2007-01-30T15:43:00.001-08:00

From Fox News, read the entire article

Are you sitting down?
Sorry investors, but you're at a distinct disadvantage. You're one of America's 94 million Main Street investors and the odds are 100:1 against you given the enormous firepower of Wall Street. And thanks to behavioral finance, it's getting worse, the gap's widening.

Can you hear the laughing and snickering?
On cable, in ads and sales pitches The Street panders to your ego: You're "the man," a "rational man." You can beat the averages, the indexes. But behind your back, they laugh; they know you're irrational when it comes to investment decisions. Moreover, they actually prefer a market filled with irrational investors. That way, they can manipulate you easily without you ever really knowing it.

Can you beat the Street?
Oh, they'll let you make modest gains, enough to keep you in line, to prevent a full-scale rebellion. But the playing field's not level and they're backed by an elite force of roughly a million in the financial-services industry — brokers, salesmen, advisers, analysts, talking heads, slick admen, slicker lobbyists — "foot-soldiers" armed with superior tools, advance data, huge monetary incentives and the protection of friendly legislators and regulators.

Is hope an investing principle?
In Robert Shiller's 2000 classic "Irrational Exuberance," Shiller says irrationality is simply "unjustified optimism ... wishful thinking on the part of investors that blinds us to the truth of our situation." Irrationality makes us our own worst enemy, and prey for sophisticated market predators.

In the 1990s our irrational exuberance blew a huge bubble. Then irrational pessimism popped it. It'll happen again. Because investors are irrational, cycle after cycle, day in/day out. That will never change. We are irrational investors.

Do you control your behavior?
Wall Street knows this, and thanks to their new behavioral-finance allies, knows how to capitalize on this weakness in the investor's psyche, use our naiveté and weaknesses against us and beat us in the market. Moreover, they have no incentive to share what they know; worse yet, they prefer we stay irrational!

Wall Street pros need "investors who are ... irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets." Get it? In order to succeed, Wall Street needs "irrational investors," that's spooky!

Is anyone on your side?
Business Week is quick to warn: "You and I can no more hope to do what [Wall Street] does than we can hope to rival such famously heroic stock-picking personalities as Warren Buffett and Peter Lynch. You and me and the rest of America's Main Street investors are outgunned and outsmarted in this game. We can't even speak their language, and what they do is cloaked in secrecy.

What can you do?
Very simple: Since you can't beat them, don't play their game by their rules. Build a lazy portfolio. Then leave it alone. Let it do its job automatically. Build wealth doing something you love in a business or profession you enjoy, and spend as much time as you can with family and friends.

Forget the irrational markets. With the quants now beefing up Wall Street, you're just wasting your time anyway ... surrender!

Want to build a bullet-proof portfolio? Contact a Visible Investment Advisor for a FREE consultation.

How did your 2006 performance compare?

2007-01-28T16:18:00.000-08:00

Did you get your 2006 investment statements?
Most investors have received their 2006 investment statements in the last couple of weeks. Do yourself the biggest favor - spend some time reviewing them.

Do you need help determining your portfolio performance?
You can do this yourself or ask your asset manager, stock broker or online discount broker for help quantifying your 2006 returns.

Did you match or beat the benchmark returns?
Determine you annal return by asset class (US equities, bonds, international, real estate, etc.) including capital appreciation and dividends, less all commissions and expenses.

How do you do compare?
Compare your returns to Visible Investor Performance (3, 5, 10 year returns):

US Equities: 15.5%
International Equities: 26.6%
Emerging Market Equities: 28.1%
Real Estate: 35.1%
US Bond: 4.3%
Blended Return (all asset classes): 17.0%

If you did not reach these returns or would like a Visible Investment Advisor to do a complimentary review of you year-end statement, contact us.

Excerpts from Vanguard's 2006 Year in Review

2007-01-12T21:30:00.000-08:00

A strong and growing economy and low interest rates provided the foundation for 2006's excellent market performance

The value sector of the market (high dividends, low p/e, low price to book) outperformed the growth for the 7th year in a row.

Because the market grew at a rate consistent with the fundamentals in the economy, the market remains fairly valued.

While there are risks in the market (rising interest rates and lower growth trends), with diversification in appropriate asset classes, individual investors can prosper.

Past performance does not guarantee future results. Each investors risk tolerance and return objectives are different. Contact us to discuss your 2007 portfolio strategy.

Buying and selling on emotions

2007-01-07T17:44:00.000-08:00

Warren Buffett is famous for reminding investors that their emotions are their worst enemy.

The safest way to make money is to buy an asset (i.e. stock, bond, real estate, or commodity) when its price is significantly below its real value and sell it when its price is significantly above... easier said then done.

Even in the bull market of the 1990's, both professional and individual investors significantly underperformed the market because their emotions made them take actions that were contrary to their own best interests.

While it's difficult to identify your own emotions, identifying their characteristics may prevent you from making some of the most common investor mistakes.

Love - asset price doesn't matter, valuation doesn't matter, recommendations don't matter, "I'll never sell."

Greed - asset price moving up rapidly, stock overvalued, on everyone's recommended list, buy at any price, "when the ducks are quacking, feed them."

Excited - asset price starts to rise, stock slightly overvalued, some positive some negative recommendations, planning to buy on a "pull-back."

Apathy - "dead money," asset price moving "sideways," fairly to slightly overvalued, no recommendations, looking for something else to buy.

Disgust - "cut your losses," asset price starts to move down after a period of apathy, fairly priced, some positive some negative recommendations, planning to sell when stock returns to predetermined price.

Fear - stock falling rapidly, lots of negative recommendations, sell at any price, "there's blood in the street."

Hate - stock price doesn't matter, valuation doesn't matter, recommendations don't matter, "I'll never buy."

Quoting Buffett, "you pay a high price for a cheery consensus."

Given the same asset, the time to buy is when everyone fears and hates it, and the time to sell is when everyone is in love with it. You can pick up on the emotions from the media, analyst recommendations, and, yes, blogs.

If you can't determine the value of an asset or if you can't control your emotions (buying when there is fear or selling when their is greed), get the help you need from an advisor that can.

Eddie Lampert is no Warren Buffett

2007-01-02T15:26:00.000-08:00

Have you heard the comparison between Eddie Lampert and Warren Buffett. Well, let's take a look...

- Buffett doesn’t like retailers unless they have an economic moat - of which neither Sears nor Kmart has one (Buffett owns Wal-Mart, Target and his beloved Nebraska Furniture Mart - all of which have growing moats at the expense of Sears and Kmart).

- Unlike Lampert, Buffett doesn’t get directly involved in the management of his companies, he just allocates the capital they generate.

- I think Buffett would consider Sears/Kmart a “cigar butt” investment - trying to get one last puff before it goes out. While he does make those kind of investments, it is not his primary style.

- Lampert is generating cash by selling assets and intellectual property. Buffett never wants to sell assets and intellectual property - his holding period is forever.

- What is similar, is what Buffett would probably consider one of his failures. Lampert had a large investment before Kmart went into bankruptcy, and rather than seeing that investment go down the drain, he salvaged it by taking control and throwing more money at it. The best comparison to Buffett is the purchase of General Re, using additional capital to turn it around.

Eddie Lampert's Hedge Fund has a great track record with 29% annual returns. But, you can not compare Lampert (or any investor) to Buffett based on their returns alone, you have to compare them on style and their styles seem quite different.

If your hear of a manager that describes himself as a Buffett investor, let's talk.

Bill Miller's amazing track record?

2006-12-29T20:20:00.000-08:00

Truly one of the greatest investors of all time.

Miller's Legg Mason Vakue Trust fund has beaten the S&P 500 every year since 1991
Over 15 years, it achieved an average annual rate of return of 15.8% compared with 11.9% for the S&P 500 benchmark
Miller's fund grew from $750 million of assets in 1990 to over $21 billion in 2006
Manu Daftary, who has the second-longest streak of beating the S&P 500 at eight years, is also struggling - up only 5.6%

How does the Visible Investor see this performance?

Beating the market is not easy or probable - only 2 professional managers out of thousands have done it consistently for 8 years or more
Year to date, Bill Miller's Legg Mason Value Trust had a total return of 5.9%, trailing the 15.8% gain of the S&P 500
Most people didn't recognize Bill Miller's outstanding performance unitl the most recent 5 years, a period in which he under-performed the market
If you took away his 3 best years of market beating performance, his results would be only slightly better than the S&P 500
Shares of Legg Mason (the public investment company that Bill Miller works for) have declined 20 percent this year

Seeing the future...

As indicated by the facts above, their are very few professionals that consistently beat the market, and there is no reason to think that will improve in the future.
If the professionals with all their resouces can't beat the market, there is little chance that the individual investor can either beat the market or pick a fund that can.
The individual investors best investment is to buy the market in a low cost index fund, where he would have beaten Bill Miller (and 94% of professional and individual investors) over the last 5, 3 and 1 year periods.

If you'd like some Visibility into your portfolio, find out more about Visible Investing.

Wolf in sheeps clothing

2006-12-23T15:05:00.000-08:00

Many so-called active fund managers and stock pickers are really "closet indexers."

Let's take a look at some mutual fund shenanigans...

Many of the top performing mutual funds are small as measured by assets under management. In their small stage, funds take large positions in just a few stocks, seeking exaggerated performance from the volatility that results from lack of diversification.

If the volatility brings exaggerated downside performance, the mutual fund company will close the fund (merge it into a larger fund). If the volatility brings exaggerated upside performance, the mutual fund company will publicize it heavily, attracting new funds.

As the successful fund's assets under management reach critical mass, the fund begins to diversify to mimic the performance of their benchmark index. Their goals change from attracting new assets to retaining existing assets (as long as they have close to benchmark performance, withdrawals will be limited)-closet indexing.

What's the problem with closet indexing? It costs you money!

Since actively managed funds, on average, charge almost 5 times what an comparable index fund charges in fees (1.15% versus 0.25%), on a $400,000 portfolio, the difference is $3,600 each year. Over 10 years (assuming you could have gotten 10% on that money) closet indexing can cost you $57,375 in added fees.

Visible Investing enables you to see the outcome of your investment decisions BEFORE you make them. We conduct seminars that help employees manage their 401(k)'s, develop independent investing solutions, and manage client assets. Contact us to discuss your personal situation.

Used Stock Salesman

2006-12-21T20:11:00.000-08:00

In the recent USA TODAY/Gallup Poll

measuring honesty and ethics among 23 occupations,
only 17% rated stockbrokers "High" or "Very High"
just behind lawyers (at 18%) and above U.S. Senators (at 15%).

What investors need to know is that stockbrokers are:
salespeople - selling you on activity;
make their money on fees from the actions their clients' take;
must put their employer's interests ahead of their clients' interests;
only need to insure their clients are buying and selling "suitable" investments, not the investments that are in their best interests;
are under no obligation to disclose conflicts of interest (i.e. making a commission on a mutual fund or how much commission they make on a bond transaction - although if you ask, they will give you the information).

Used Stock Salesman make money on your transactons whether you buy or sell, or make or lose money.

See the breaking news about a Long Island used stock salesman.

The market's overvalued bias

2006-12-13T16:49:00.001-08:00

Let's take a look at why most publicly traded securities are either fairly valued or overvalued by the market, and why there are so few undervalued opportunities.

The price of a security changes often, some being repriced several thousand times each day. Investors continually monitor price fluctuations with the most sophisticated technology, immediately identifying price momentum and valuation trends. As security prices move, momentum investors act to take advantage of the price direction continuing - extending and exaggerating the trend, while value investors act to take advantage of the valuation anomaly -returning the security's price to its norm.

The efficiency of this system of checks and balances works differently for rising and falling prices. Because of the inherent risks of shorting, most momentum investors are monitoring rising price trends while most value investors are searching for undervalued securities. The combination of these two situations provides an overvaluation bias in the market.

Let's examine the example of good news that comes out on a stock, raising its price. Momentum investors and technicians react by buying the stock, sending the price higher. Even as prices reach levels which value investors can clearly identify as overvalued, they are generally reluctant to sell the stock short, for the risks generally outweigh the benefits. If, on the other hand, a stock's price is driven down by bad news to a point of undervaluation, value investors are quick to buy in, reversing the price trend.

How can an individual investor use this to his or her advantage?

Be cautious about buying securities in a rising market. You will probably be buying into an overvalued situation. While that can continue for quite a while, it always ends badly.
Due to a more efficient correcting mechanism, finding undervalued securities happens very infrequently. If you try to make it happen too often, you'll find yourself with more risk and lower returns than you expect.

In our next article, I'll discuss how you can find those rarest of rare undervalued securities.

Visible Investing enables you to see the outcome of your investment decisions BEFORE you make them. We conduct seminars that help employees manage their 401(k)'s, develop independent investing solutions, and manage client assets. Contact us to discuss your personal situation.

Index Funds Out-performance Continues

2006-11-20T17:28:00.000-08:00

Low cost index funds outperform market averages.

The chart below compares the returns of all US stock funds and the Vanguard Total Market fund as of 11/17/06.

Other things to consider:

Survivorship Bias
The 3, 5 and 10 year annual returns for "all" mutual funds are actually overstated. Each year between 3% and 15% of funds go out of existence (end and return money to investors or merge into another fund). These are typically the lower performing funds (otherwise why would they go out of business) that if included would bring the average down and make the relative performance of the index funds even better.

Tax Consequences
Most of the funds in the average are actively managed with higher turnover than index funds. Turnover causes short and long term capital gains and their associated tax consequences.

The chart below conservatively estimates the impact of survivorship bias and taxes and compares the returns.

The results are similar when comparing all of the international stock funds with the Vanguard Interantional stock fund index (VGTSX) below:

What effects the price of a stock?

2006-11-04T11:49:00.000-08:00

Did you ever hear a "stock pickers" rational for picking a stock?

Have you heard the "efficient market theorists" say you can get the same (or better results) by throwing darts at a newspaper?

Well, the reality is closer to the dart thrower's version, but not because the markets are efficient - because the future is unpredictable.

Below is a list of just of few of the risk factors that will determine a stock's future price. How many of them do you think are predictable?

Market trends
Industry trends
Political events
Business issues
Technological changes
Geological (i.e. earthquakes)
Weather (hurricanes, cold or heat spells)
Cost of energy
Product
Materials
Management error or bad decisions
Competition from traditional or non-traditional sources
Interest rates
Inflation rates
Value/obsolescence of inventory
Condition of manufacturing equipment
Value of buildings and land
Access to and cost of insurance
Theft or dishonesty
Regulations by government
Political risks
Currency risks
Labor shortage and relations
Stockholder activists (proxy)
Brand erosion
Consumer fads
Credit ratings
Winning new or losing existing customers

The quatifiable stuff - discounted cash flows and dividend discount models, liquidation value, going concern value - those are easy, but provide just a portion of the information you need.

The tortoise and the hare all over again

2006-10-28T16:50:00.000-07:00

Compare 2 investment strategies over 5 years:

Bob (the hare) invests $100,000 and takes more risk to get a higher return; he gets a 12% return for 4 years but loses 12% one year, and ends up with $138,469.

Sally (the tortoise) invests $100,000 and takes less risk to get a moderate return, but has less chance of losing money; she gets an 8% return every year for 5 years, and ends up with $146,933.

Bob would have felt a lot better than Sally for 4 years.

It would, in fact, take a lot of willpower for Sally to stick with her investment strategy, but if she did, she would have a 22% better return then Bob!

Losing money can be devastating to your investment returns.

Things that risk averse investors keep in mind:

The future is unpredictable.
You must protect against unpredictable adversity.
In the short run anything can happen. In the very long run, everything will happen.
While loss avoidance is not an investment strategy, it must be a foundational investment principle.
Setting an investment goal or specific rate of return is, unfortunately, not achievable. Unlike working for an hourly wage where you can work harder or longer to increase your returns, it is all but impossible to work smarter to increase your investment returns.
The price you pay determines your risk : return ratio. Those that buy in when there is optimism pay a very high price, and even a small miscalculation can cause a loss.

Contact Visible Investment Advisors to see if your investment portfolio is adequately protected from loss.

Finding Bargains

2006-10-27T16:47:00.000-07:00

The cheapest investment in an over-valued market may not be a bargain.
The complexity of technology companies and financial institutions makes finding bargains difficult.
Having to be fully invested makes it hard to wait for bargains.
Having too much money makes it hard to find bargains.
Most stocks are priced fairly or too high. You need patience to find stock bargains.
Greed forces to you act on stocks that are not bargains.
Envy of others' gains forces you to buy even though the others may have gotten the bargain.
Lack of business sense to evaluate if a stock is a bargain prevents you from finding them.
In trying to find a bargain, investors cannot know all there is to know. Even if they could, they could only know it about the past and present. The future is unpredictable.
You need to understand not only that the stock is a bargain but why it is a bargain. There may be a good reason for the price being down.
Why do stocks become over or under valued? Supply and demand, investors do not know how to value a stock, margin calls, year end tax loss selling, stock moving into index and index fund buying, window dressing, momentum investing.
Forces that cause stock bargains are temporary.

Whose looking out for you?

2006-10-10T13:35:00.000-07:00

When selecting an advisor, broker or online trading company, conventional wisdom is to use a large, publicly held, brand name investment firm. Like most things in investing, the conventional wisdom is wrong. These firms have conflicting interests, and the individual investor suffers.

Investment companies in the news

The mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system. They make illegal after-hours trades and improperly exploit market swings in ways that harm ordinary long-term investors.

Merrill Lynch's investment advice tainted by conflicts of interest. A core issue was whether or not analysts were being truthful and fair...

ING had made payments of as much as $3 million per year as inducement to endorse and promote ING group annuity plans with biased investment advice. ING will also pay $30 million.

Prudential Equity Group investigation revealed that the company’s brokers defrauded at least 50 mutual funds and their investors and will pay $270 million in restitution to injured investors.... [and ] a penalty of $330 million.

Waddell & Reed permitted illegal trading of its funds, agreed to pay $50 million in restitution to investors and make fee reductions totaling $25 million over the next five years.

H&R Block Company steered hundreds of thousands of customers into IRAs with hidden fees and low interest rates. "In addition to designing a flawed product with hidden fees and marketing it fraudulently to unsuspecting customers, senior management steam-rolled conscientious employees who objected to the fact that clients were losing money."

Founders of PBHG, a leading mutual fund family, personally pay more than $120 million in restitution to investors and accept a lifetime ban from the securities industry.

Robertson Stevens managers and executives knew that arrangements with market timers were contrary to claims made in the company's prospectus and harmful to long-term investors.

Invesco Funds Group will pay damages of $215 million and a penalty of $110 million for entering into "special situations" resulting in billions of dollars of rapid-fire transactions which damaged typical long-term investors.

Banc One investigation found that preferred investors were allowed to engage in improper, frequent short-term trading of Banc One mutual funds while diluting the funds’ returns to shareholders and has agreed to pay $10 million in restitution.

MFS, the nation's 10th largest mutual fund retailer to resolve charges that the company permitted certain customers to engage in improper trading activity that cost typical investors at least $175 million.

Putnam mutual funds' fee structure has benefitted management companies at the expense of investors.

Choosing an investment manager or advisor

2006-10-08T08:15:00.000-07:00

Warren Buffett seeks three character traits in the managers that work for him: "integrity, intelligence and energy. If a person doesn't have the first, the other 2 will kill you."

Choose a manager who is independent, consistent, communicates well, measures his or her success by his clients' performance, teaches rather than tells, has low fees, and with whom you are comfortable.

Managers and advisors that are independent of investment company products and pressures can better align with their clients' interests.
A consistent investment philosophy is a critical success factor for providing long term performance. If the manager abandons a philosophy that is not working (selling low) to move to one that is hot (buying high), you are doomed to under-perform.
Communication (listening and responding) includes understanding clients' unique objectives and tolerances, reporting (understandable) results to them on a timely basis, and meeting periodically to answer client questions and concerns - making adjustments that meet changing personal and tax situations.
A manager or advisor should measure his success by his clients' performance - relative to their individual objectives and comparable benchmarks.
A fee only manager or advisor that charges low fees, minimizes the costs that must be overcome for the value they add.
Common sense investing is not common. Investing sense must be taught by the advisor and learned by the client. It is the only way to facilitate communication, trust, and to evaluate performance. It takes an educated person to evaluate the amount of risk they are taking, the returns they are getting compared to their risk, comparable benchmarks returns after fees and taxes, and determining if they are on track to meet their objectives.
Clients must be comfortable enough to confide their hopes (objectives) and fears (risk aversion), and the advisor must candidly discuss success and failure. Is this a person you like (would you do something social with) and trust (is there transparency)?

Common mistakes in selecting investment managers and advisors:

Referrals: The best method to identify potential advisors is through referrals. However, most people don't know how to evaluate their own manager because they are blinded by their relationship, or because they lack the understanding of how to do a quantifiable analysis.
Is he or she rich: Successful investors, advisors and managers get rich from their returns over time due to the power of compounding. Rich managers get rich from client fees (perhaps a run of luck attracted a lot of new client funds). While being "poor" should be a disqualifier, having a rich advisor doesn’t mean you’ll end up that way too.
Large amount of assets under management: The amount of money under management often hinders performance (the law of large numbers and the impact of cash flows) rather than helps, as evidenced by some managers and advisors closing to new clients when they get to a certain size.
Works for a large brokerage, bank or investment company: Brokerages, banks and investment companies put their business first (generating profitable returns) and the profession second (meeting client needs). In recent years most of these financial institutions have come under scrutiny and been fined for acting against the interest of the individual investor – check your advisor’s history.
Has other clients in your economic bracket: Managers and advisors that specialize in a certain economic bracket often develop a one size fits all solution, which will not serve all their clients well.
Has a large number of clients: A large number of clients may inhibit the advisors ability to respond to (new or smaller) client needs.
Use an accountant or lawyer: Accounts and lawyers will not have the knowledge, time and commitment to manage and advise clients about their investments (most successful ones use an investment manager themselves).
Use your stockbroker: A commission based stockbroker, by law, only has to make sure his recommendations are suitable for his clients. A manager or advisor has the fiduciary responsibility to put this clients’ interests ahead of his own, a much higher hurdle that better aligns their interests.
Use a certified financial planner: Certified financial planners have neither the time or expertise to be proficient in all aspects of your financial life (investments, insurance, estate planning, etc.). They should oversee your entire financial program, participating with you as your interact with the manager or advisor to insure your objectives are understood and help you evaluate the results to insure you are on track to achieving them.

Questions that can indicate if you need an investment manager or advisor or need to make a change from your current one.

How do you respond to under-performing the market for a week, a month, a quarter, a year or 3 years?
How did you handle the 2000 to 2003 market downturn? Have you participated in the market sufficiently since 2003?
Does market volatility keeps you up at night, make you delay financial decisions, or make you spend inordinate time 'watching' your portfolio?
Do you trade in and out of securities often and at the wrong times?

If you had the knowledge to properly evaluate a manager, you could be your own manager.

In money managers and advisors, you don't get what you pay for.

In this blog, we are trying to establish dialog on which you can learn about our integrity, intelligence and energy.

The 3 Best Stock Ideas

2006-10-07T09:07:00.001-07:00

Gurus are always asked for their "3 best stock ideas."

What gets a top performer to the top are the results of all their stock picks. Every top performer has lots of good and bad ideas, but they don't know which will be good or bad before they make them.

While top performers learn a lesson from every security selection they make, the lessons from the bad ideas don't prevent them from making bad investment decisions in the future.

If you took Warren Buffett's top 10 investment ideas away, his results would be about average. When he makes an investment, he believes it is his best idea (he says "why would I put money into my second best idea if I had a better one?"). If Warren Buffett makes (a rare) bad investment, what chance does the average investor have?

It is the sum total of all investment ideas that makes a top performer, and taking any subset is a random game of chance.

The next time you hear a guru's "best ideas," the only thing you should be is entertained.

Open letter to the CNBC Squawkbox Team Re:Top Performing Mutual Funds

2006-10-05T08:09:00.000-07:00

Now we know you know!

Squawkbox team:

You do a real disservice to the individual investor with your selection of the best mutual fund that you highlight each day.

My top 10 reasons why:

1. Identify them as a sector or focused fund (which is intrinsically more risky). Many times they out-perform because their sector is hot at the moment. You further mislead when you ask for their outlook - what do you think their outlook is when they are focused, have to be long and can't invest in anything else?

2. You do not compare their performance to a benchmark (large cap to S&P 500, small cap to Russell). Most are not outperforming their benchmark.

3. You do not put up a chart of last 10 years. Most people could not take the volatility and would sell at a low before the sector came into favor.

4. You do not point out their return in the last 3 months and how that affects their 1, 3, 10 year performance. If their most recent performance were taken out they would probably not have achieved the above average level of performance you are rewarding them for.

5. You do not show an after tax return. Most do a lot of trading and generate short term gains. Also, you do not ask about the level of short and long term gains of the underlying holdings and project out the tax consequences to an investor of buying the fund today. Most would under-perform with taxes factored in.

6. You do not expose the expenses and loads indicating the hurdle the fund intrinsically has to overcome to have even a market average performance.

7. You do not ask the portion of the manager's wealth invested and where the balance of their funds are invested if less than 100% (most do not take the risk of their own funds).

8. You do not identify the growth in assets and how they are generated (a billion dollar fund that grew from 100 million from investing success is a lot different than a billion dollar fund that raises a 1,100,000,000 from investors).

9. You do not identify manager or investment company conflict of interests. You need to identify the background of the manager(s) and how it can create conflicts (did they work for companies in the past that they invest in today? Probably yes.).

10. How you selected the fund for the show. They are not always the 'best' nor do they have the highest 'Morning Star' rating (which you also do not explain, nor show the performance of funds after they achieve the 'Star' rating') exposing YOUR conflicts.

We are in serious times when the individual investor shoulders almost all of the responsibility for their retirement, etc., and your actions above are hurting not helping them. There is no impact on the professionals that watch your show too, they know this stuff.

I know the corporate and commercial pressures you face making the above difficult to do, but at some point you have to look in the mirror and determine if you are a good guy or bad.

Truly,

An advocate for the retiring baby boomer (of which I am one)

PS, I couldn't let this go, sorry....

11. When a manager says he runs a value fund (how many people use the name Graham and Dodd and Buffett and you let this go unchallenged?) you come back and ask about GROWTH. I'll make the assumption that you don't understand the difference between how and why value portfolios appreciate, the historical out-performance of value, and the fact that the categories of value and growth is an academic factor-all stock should be bought because it has value and is expected to grow (a subject for another top 10).

Editor's note: When you watch and listen to financial news or advertisements, be aware that all is not what it appears to be.

Understanding Asset Classes

2006-09-24T13:28:00.000-07:00

90% of investment returns are determined by your asset allocation.

Core Asset Classes
Core Asset Classes	Returns	Inflation	Alignment	Characteristics
Domestic Equities	Highest over time	No protection short term, some long term protection	Somewhat aligned with company management, investment fees	Liquid, regulated, diversified
Foreign Equities	Same as domestic with currency fluctuation	No protection short term, some long term protection	Same plus political risk	Same with less governance
Emerging Market Equities	Higher risk, return, volatility	No protection short term, some long term protection	Same plus political and governance risk	Small, less liquid, less governance
US Treasuries	Interest and principle guaranteed (if held to maturity)	The longer the term, the greater the erosion of interest and principle returns, plus principle risk	No conflict (government has reason to inflate slowly	Large liquid market
TIPS	Interest and principle tied to inflation and guaranteed if held to maturity	Best hedge against inflation	Same	Same with less liquidity
Real Estate	Higher return than bonds, lower than equities	Good long term hedge against inflation	Same as equities with higher fees	Less liquid and less diversified than domestic equities

“The most powerful force in the universe”

2006-04-24T20:12:00.000-07:00

Albert Einstein, who knows a lot about powerful forces, is credited with recognizing that "The most powerful force in the Universe is compound interest."

Take a look at the effect of compounding over time on an investment of $1,000:

Annual Rate of Return	Number of years
Annual Rate of Return	5	10	20	30	40
2%	1,104	1,219	1,486	1,811	2,208
4%	1,216	1,480	2,191	3,243	4,801
6%	1,338	1,791	3,207	5,743	10,285
8%	1,469	2,159	4,661	10,063	21,725
10%	1,611	2,594	6,727	17,449	45,259
12.5%	1,802	3,247	10,545	34,243	111,199
15%	2,011	4,046	16,367	66,212	267,864
17.5	2,240	5,016	25,163	126,222	633,162
20	2,488	6,162	38,338	237,376	1,469,772
23.5*	2,873	8,254	68,130	562,353	4,641,713

*Warren Buffett has a 23.5% compound annual return over 40 years.

If you delay retirement investing for 10 years (start your retirement investing at 35 instead of 25), you reduce your investment return by 61.5% (based on a 10% annual return until age 65).
If you reduce your return by 2% because of trading or mutual fund loads (getting 8% instead of 10%), over 30 years you reduce your return by 44.9%.

If you would like to see the impact of compounding on your investment portfolio, contact Visible Investment Advisors for a free consultation.

When money meets experience....

2006-04-17T10:20:00.000-07:00

…it's the money that ends up with the experience, and the experience that ends up with the money.

If you have some money that you want to invest for your future retirement, children's education, or other important goal, you probably read the financial sections of newspapers, watch CNBC and other business news shows, and even watch the Wall Street gurus on Late Night Talk shows.

These experienced market pundits all have incredible insight to the current market conditions - able to explain in great detail why the markets are acting the way they are.

They all can point to their foresight with examples of stock selections or sector weighting that perfectly aligns with current market conditions, was a successful position they are just getting out of, or one that is poised to do well in the next 6 to 12 months.

This experience makes it all seem so easy, so intuitive, so predictable. You wonder how you can hook your wagon to the success that this experience brings.

In an attempt to leverage this experience, you buy the recommended stocks you hear about, subscribe to their newsletters, watch their TV shows, and buy their mutual funds.

When you look back at the results of your actions, you see that there has been a transfer of wealth – your money transferring to them directly in the form of fees (your purchase of their newsletters and mutual funds), and indirectly from you pushing up the price of the positions they recommend or the advertising fees they earn.

To see if your money is providing an experience or an appropriate return, contact Visible Investment Advisors for a free consultation.

There are 2 times in life when you shouldn't take investment risks.

2006-04-10T08:08:00.000-07:00

When you can't afford to take risks, and
When you can afford to take risks.

If you start early, save enough, and invest wisely, you 'll have the time to take the risk that lets you sleep at night and reach your investment objectives.

If you start late, don't save enough, or invest inappropriately (taking to much or to little risk), you'll need to make greater sacrafices or take greater risks than you can tolerate, which can further hurt your chances of reaching your investment goals.

* How much risk can you take based on the amount of time you have to invest?

* How much risk are you able to take before you start losing sleep, or making investment decisions at the worst possible time?

* How much risk do you need to take to reach your investment goals?

It's only when these situations become visible that you can deal with them in an optimal manner.

To see how much risk you can take, are able to take, and need to take, contact Visible Investment Advisors for a free consultation.