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
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
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 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
A new analysis by Vanguard Group founder John Bogle indicates that investors are generally making poor decisions when buying and selling exchange-traded funds.
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
"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." LESSONS FROM THE MADOFF AFFAIR
Excerts from Dr. Robert Cialdini
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.
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?
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.
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)
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.
The following is a response to a post on Gurufocus.com
Warren E. Buffett on contrarian investing:
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.
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.
"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.
Please add your investment mistakes through the comments dialog below.
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.
From the 2007 Wesco Financial Annual Meeting
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.
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.
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.
In the recent USA TODAY/Gallup Poll
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.
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?
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.
