Category Archives: Investments

“Investing- Easier Than Golf”

Steps 2, 3, and 4 are recurring themes is this blog and if you go back and read my post dated November 10, 20ll you will find what you need.  The “fundamentals” spelled out there are worth repeating over and over again.

Mastering the “fundamentals” in every aspect of life is essential for success.   I have recently come to the realization that I am now old enough to take up golf.  (Prior to this I only enjoyed sports that allowed contact or created some element of danger.)  Taking my ego out of the process I hired a true professional to teach my wife and me how to play the game.

In our first lesson, he kept stressing two things:  one, there is a lot of variance among great golfers in their game; their grip, the arc of their swing, their stance etc. etc.  I won’t bore you with the details but he pointed out that every great player in the world had three fundamentals in their swing that are the same.  If they forget these fundamentals they will not be successful.

The analogy to investing hit me all at once.  Many of the best Financial Advisors I have worked with have written excellent investment books, the most recent being Kim Foss.  Some are lengthy with lots of great detail about the Financial Services Industry, economics, statistics etc. while others were short and concise using real world examples.  As I was reading Kim’s book it occurred to me that every single one of these different books focused on the same two fundamentals, diversification and discipline. I can assure you, that if you forget these fundamentals you will be setting yourself up for a lot of investment double and triple bogeys.  Fortunately “investing par” is a lot easier and less time consuming than par in golf.

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Who’s Keeping The Dream Alive??

Last week well known USA Today columnist John Waggoner was commenting that while mutual fund performance over the past 4 years has been good, it is his belief that (based on the fees charged) money managers should be able to give you good returns in both up and down markets.  He is right regarding the fees charged by most money managers, but does he really believe that a money manager could do such a thing consistently?  I hope he is not that naive!

John, if anyone had such a magical crystal ball would they really be managing a mutual fund?  Why would they?  They would have the secret to infinite wealth.  And that is what their wisdom would be, a secret.  For obvious reasons the Financial Services Industry continues to promote the idea that they can “see” the future and deliver superior returns, but they can’t.  Don’t take my word for it, just look at their record.  They love to compete and to show their performance relative to their peer group, but their peers are not any better than they are at forecasting the future accurately.

Investors find this hard to accept for some reason and continue to chase the dream that they will find a “money manager” who can provide them good returns without taking any risk.  It was that “dream,” which Bernie Madoff exploited, to cheat people out of a few billion dollars.  (I would not be surprised if Bernie is sitting in prison with a big grin on his face remembering how supposedly bright, successful people fell for it.)  Bernie was guilty of fraud, plain and simple.

But is the Financial Services Industry guilty of misleading investors to believe in the “dream?”  How they market their expertise may not be illegal but does that make it right?  That small print at the bottom disclosing that “past performance is no guarantee of future returns,” protects them as they continue to strongly imply that past performance is a good indicator of what the investor can expect in the future.  And the dream is oh so pleasant until it turns into a horrible nightmare like many experienced in 2008.

If you have capital to invest you need to stop “dreaming” and learn to accept the reality that forecasting the future accurately is not possible.  Once you do, you will have taken the first step towards becoming a successful investor.  My next post will give you Steps 2,3 and 4.  It is really very simple!


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Is It Really That Simple?

I wasn’t planning to write about discipline and diversification again but an article in Bloomberg Businessweek over the weekend caught my eye.  The article (Investor, Heal Thyself) is about CalPERS, America’s largest public pension fund, and how the fund’s total value is back to pre-recession levels.  And how was this accomplished?   According to Joseph Dear, CalPERS Chief Investment Officer, it was “discipline.”  “We believed the markets were going to come back and we held our allocation.”

Give Joseph and his staff the credit they deserve for staying focused on the long-term.  And according to this article, their returns were almost as good as the S&P 500.  So I was thinking, “How many investment professionals does it take to earn the returns of the S&P 500?”  Maybe one part-timer!

Good investment professionals (and you know CalPERS can afford the best) know how important it is to remain disciplined.  What they also know is the benefit of simple “passive strategies.”  But unfortunately for them, it’s a job killer.  Don’t expect that to change any time soon.

But you don’t have to worry about that.  You can get the benefits of both discipline and passive management without anyone losing their job.  (Well maybe your broker/financial consultant.)

It always amazes me how difficult it is to convince people, even while showing them overwhelming evidence supporting this simple strategy.  Years ago an advisor attending one of our London conferences gave me a quote from Leo Tolstoy that helps explain the challenge.  I am passing it along to you.

“I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truths if it would oblige them to admit the falsity of conclusions with which they have delighted in explaining to colleagues, proudly taught to others, and which they have woven, thread by thread, into the fabric of their lives.”

I call it the “foolish ego!”  But isn’t it nice to know you can do just as well, if not better, than CalPERS with your investment portfolio just by getting your ego and the egos of others out of the process.

Note:  A great quote from Tolstoy that would never survive in our Twitter World.


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“Experience is the Best Teacher”

But the lessons learned can be very expensive.  As you could see from my last post, the performance of the stock market over the past five years created a huge opportunity for investors.  Sadly for many people the opportunity was missed as the market “took them to school.”  Perhaps this time the lesson has been learned, that discipline is fundamental to successful investing.

This is not the first time, (nor will it be the last), when the “market” gives us all the chance to learn.  When I began my practice in the late 80’s I had the “crash of 87,” (and recovery) as a clear example of the need for discipline.  Near the end of the Century, the bursting of the “tech bubble” drove home the message that you must stay well diversified.

And now we have the best example (lesson) yet, showing us not only the need to be disciplined but that investing requires a long-term perspective.  A lot of investors and advisors may not have memories regarding the “crash of 87” and even the huge losses in tech stocks 12 years ago seems to have been a lesson “not learned” by many.  But the current lesson is hard to ignore.

I promised to provide a simple example for the under 55 gang showing how costly this last lesson may have been.  Two investors:

Both investors had $1,000,000 at the beginning of 2008 and both were planning on investing $50,000 at the end of each coming year.

With the “market” down 38.5% by the end of the year, Investor A decided to get out of the market and move to cash and like so many others, waited to get back in the market at the end of 2012.  Investor A continued to save $50,000 a year and kept all the money safe in “cash.”

Investor B stayed in the market and continued to put $50,000 in the “market” at the end of each year.

Here are the results as of the end of 2012:

Investor A Investor B
1/1/08 Investment $1,000,000 $1,000,000
2008 Return -38.50% -38.50%
12/31/08 Total 615,000 615,000
Added Investment 50,000 50,000
Total 665,000 665,000
2009 Return 0% 23.50%
12/31/09 Total 665,000 $821,000
Added Investment $50,000 $50,000
Total $715,000 $871,000
2010 Return 0% 12.80%
12/31/10 Total $715,000 $982,000
Added Investment $50,000 $50,000
Total $765,000 $1,032,000
2011 Return 0% 0%
12/31/11  Total $765,000 $1,032,000
Added Investment $50,000 $50,000
Total $815,000 $1,082,000
2012 Return 0% 13.40%
12/31/12 Total $815,000 $1,227,000
Added Investment $50,000 $50,000
Total $865,000 $1,277,000


$400,000.00!  THAT’S PAINFUL!  You can do you own analysis but you will obviously come to the same conclusion.  Investing is about sticking to the fundamentals and not making mistakes.



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Is Now the Right Time To Invest?

Yes—and so was yesterday, and the day before that, and the day before that, and so on—you get the idea.  If you have money you will not need over the next five years, you believe in capitalism and you are saving for your future, you should invest now.  And more importantly, you should have been investing all along the way.  Looking at the performance of the stock market over the past 5 years you immediately see what I am talking about.


Using the S&P 500 to measure stock market performance look at the performance over the past 5 years.  Now, guess when far too many investors choose to sell or buy.  (Referring to these people as investors is a bit of a stretch for me.)  If you were smart, investing (saving) on a periodic basis, you can see how well you would have done.

Last year there were more redemptions than purchases of equity mutual funds even though the S&P 500 was up more than 13%.  Looking back, there were not a lot of bullish forecasts from the so-called “experts.”  But now we are seeing numerous articles declaring that “now is the time to get back in the market.”  As a result, we are seeing record purchases of equity mutual funds this month.  When investors declare they are waiting for “things to be clearer” it’s like betting on your favorite team when they are up by 3 touchdowns at halftime.  The only difference is that if you were coaching the team, you would not get to carry that 3 touchdown lead in to the second half.  You would be starting with zero points on the board.  Makes no sense to me, but that is exactly the behavior we see all to often with people saving for their future.

My advice, it’s time to take responsibility for yourself and stop listening to all the peddlers of financial products.  Their self-interest is not aligned with yours, and the sooner you realize that the more successful you will be as an “investor.”

Next I will tell you why this market over the past 10 years created a huge opportunity for the under 55 crowd.  You may have missed it, but with a little courage and common sense you won’t be left behind next time.


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“The Smartest Guy Joe Biden Has Ever Met”

Watching YouTube clips of Joe Biden praising Jon Corzine would be hilarious if it wasn’t so sad.  Jon Corzine was a big contributor/fund raiser for Obama and Biden four years ago, and all the lavish praise was given before Corzine destroyed MF Global in his six-month tenure as CEO last year.  He gambled away over a Billion Dollars of client money and cost 1,700 employees their jobs.  As you will see in the videos, Biden claims that Jon Corzine is the smartest man he has ever met.  “He’s the first person I call when I have a problem!”  I would hate to think he actually believes that, but the ringing endorsement of Corzine was obligatory.  Corzine had paid for it with the money he had raised for the Obama campaign.

This sort of theatre is common in politics, but I wonder if politicians ever consider the collateral damage caused by their actions and words.  Of course the Board at MF Global would want such a visionary and brilliant leader, as their CEO.  And why wouldn’t investors want to do business with his firm.  Their confidence was high, but terribly misplaced, and now they realize that all they had was a sophisticated con man at the helm.

At this time it appears that Corzine may never be held accountable for his actions.  He may have violated security regulations but apparently that is not a criminal offense.  His friends on Wall Street and in Politics will probably insulate him from any meaningful punishment.

This isn’t about Republicans vs. Democrats; or the Right vs. the Left, it’s about right and wrong.  The lack of true leadership in both the Public and Private sector has a “trickle down effect” that does little to give us confidence in our future.  J.F.K. said 50 years ago, “Ask not what your country can do for you, but what you can do for your country.”  What a contrast with all the promises today’s politicians make about what the government will do for us.

Americans are hungry for real leadership, leaders with a vision of the future.  Leaders who are able to inspire and motivate others to do their best.  History has shown us that great leaders seem to emerge when all else seems to be lost.  Lincoln, Churchill, Kennedy, Reagan, they all had one thing in common:  they put country before self.

We have all experienced the power of great leadership in our personal lives.  You may have been motivated and inspired by a loving parent, a great teacher, a coach, or a historical figure.  The individual experiences may differ but the result is the same.  We were inspired to do better, to do something meaningful, to make a difference.  And great leaders never ask for anything in return other than our best effort.


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Ethics and Responsibility

Among professionals in the Financial Services Industry, Doctors are known for their lack of success as investors.  While Doctors are probably brighter than the average investor, their lack of success is attributable to the non-existent courses regarding personal finance as part of their curriculum.  My friend and former client, Dr. Michael Chapman, led the Orthopedic Department at the U.C. Davis School of Medicine, and before his retirement he often spoke of the need for such an addition to their curriculum.  Michael would often ask me to hold an informal class on the fundamentals of investing for those in residency at the School.

Educational institutions training professionals in other fields have had gaping holes in their curriculum as well.  But unlike the Doctor making bad investments, the lack of a complete curriculum for Business School students has created an environment that has all of us living on the edge of a financial cliff.

And the class not required–“Ethics and Responsibility 101.”  Unless you’ve been away on a 20-year wilderness safari or have an insatiable appetite for reality TV, you have witnessed (and been the victim of) ill-conceived business models, illegal scams, and irresponsible speculation with OPM.

And sadly, it’s all driven by some of the best and brightest graduates from our leading Business Schools.  Whatever role bankers played in the near collapse of the financial system in 2008, it would appear that nothing much has changed four years later.

Just this past year alone, we have had startling examples of the irresponsible (and perhaps dishonest) behavior of some of the most talented bankers in the world.  Whether it’s Robert Diamond manipulating LIBOR; Jamie Dimon investing in derivative based products without any understanding of how they worked; or Jon Corzine misplacing several hundred million dollars of clients’ money, the culture continues to manifest as bad behavior.  I wonder what revelations are yet to come.

I have written about the Wall Street culture in the past.  “Never accept responsibility when things go wrong if you can find a good scapegoat.”  “Ethics don’t matter if the actions are legal.”  “Everyone else is getting rich doing it so why not me?”  “We make the rules, not those rubes down in D.C.”  “Who needs regulation, we know what we are doing.”

I have to agree that they know what they are doing, and the rewards they reap are huge.  But what are the consequences for the rest of us.  Since the repeal of Glass-Steagall in 1999 we have seen one financial crisis after the other, and while bankers do not bear all the blame, they have played a major role.  Since 1999, the annual return from the S&P 500 has been around 2%.  During the prior 13-year period the annual return was 18%.  Hmmmm—has to be some connection.

“Trust” is an asset that must be earned.  Whatever trust bankers may have had in the past, it has all been squandered.  Banks play a huge role in our economy, but we are going to have to treat them like children who need rules before they can be trusted.


To be continued–

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How Wealth Is Created

As investors we all expect a return on our investment but first we need to understand how wealth, the source of that return, is created. If no wealth is being created, there will be no return on our investments. (Paul may get rich by robbing Peter but that is a zero-sum game that does not create any new wealth.)

To create wealth you need a growing economy and for an economy to grow, you need the following:

1. Skilled Labor

2. Natural Resources

3. Intellectual Capital (people with creative ideas, leadership abilities etc.)

4. Financial Capital

You bring these four inputs into a “market” economy and wealth is created. As investors, providing the financial capital, you are entitled to your share of that increase in wealth. It’s what we call the “capital market rate of return.”

When the economy is strong and growing, the return for all four of these inputs will be greater, than when the economy is weak. In the U.S., the return on “financial capital” for the past 100 years has averaged around 10% per annum, but as we all know too well, we have periods when the capital market rate of return is much less, or even negative. Since 2000, the capital market rate of return has been close to zero.

I could interpret these recent numbers as a good sign for higher returns in the future, but I am not here to make a forecast. What I am telling you is that, as investors, we need to pay closer attention to the costs of investing. Wall Street cannot survive for very long in a world where the capital market rate of return is close to zero. They expect more and the only way to get it is to take a chunk of everyone else’s share of the increase in wealth. When the capital market rate of return drops significantly, you never see an equivalent drop in fees.

What you do see, is pressure on the Wall Street sales force to sell high cost products, and the fees end up consuming a much larger share of your return. Losing 2 or 3 percent of your capital each year in fees, has an enormous negative impact on your long-term investment gains. Fortunately lower cost alternatives do exist. Using ETFs, index funds, discount brokers etc. will, in my opinion, always be the better option.

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The Toughest Challenge–Discipline

Once again we find ourselves with a market that generates more frustration than returns. The cover of the current issue of Bloomberg Businessweek expresses the current mood of investors with a very clever visual you might want to check out. A little sadistic humor may help, but what is needed, as always, is a look back at past markets in order to put things in perspective.

As painful as it may be, at the moment, it will be a lot more painful if you fall prey to the siren’s call of “market timing.” What a wonderful world it would be if we could move to the sidelines, before market declines, and back in before the market turns up. It’s very seductive and there is a plethora of newsletters and brokers who will tell you they can see the future. They can’t! They make a living selling subscriptions or earning commissions as investors move money in and out. They would not need your money if they had the ability to time markets successfully.

Market timing is speculating, not investing. But all too often, people fail to understand the difference. Success as a speculator is dependent upon an accurate forecast regarding future prices. (Jon Corzine and Jamie Dimon would no doubt be quick to agree.) It is not the same with investing.

Successful investing is about diversification, discipline, minimizing costs and a proper time horizon. It is not about trying to guess the future. I have always said that if you don’t have at least a 5-year time horizon, you have no business owning equities. Why? Because we have no way of knowing when another 2008 or 2000- 2002, will happen. With hindsight it always looks obvious as to what caused the market to decline but hindsight is of little value. The only way to deal with this uncertainty is to stay focused on your long-term goals, and that requires discipline.

You can look at every bad market in the past and see the losses suffered by people who got out when the market was down, and waited until the market recovered to get back in. Look at the market over the past three years, a perfect example. It’s crazy, but that is what happens when emotions drive investment decisions.

And think about this—if you get out of the market today, in order to mitigate your stress and fear, ask yourself how long it will be before you feel the stress of trying to decide when to get back in the market.


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“Diversification Is Your Buddy”

One of the great benefits of my association with DFA was the opportunity to work with some of the brightest Financial Economists in the world. Perhaps the best and the brightest was Noble Laureate Merton Miller who was brilliant but very humble, at the same time. After his long distinguished career studying financial markets he was always quick to say, “the only thing we know for certain about investing is that diversification is your buddy.”

As an investor, or a financial advisor, we need to remind ourselves of this basic rule of successful investing from time to time. It’s not all that difficult because the market always gives us useful lessons to reinforce the message. I am talking about all those “unanticipated events” which define the future. Sometimes it’s a natural disaster such as Katrina. Or perhaps industrial disasters; such as the BP oil rig fire; the Exxon Valdez spill; the Union Carbide Chemical Plant fire in India. And other times, it is simply fraud, (think Enron) perpetrated by “cooking the books.” Last but not least, the incompetence of senior management.

A couple of weeks ago the market gave us another surprise which caught the “experts” off-guard. J. P. Morgan is, (or was), the LeBron James of Wall Street Banks. The perfect model for Wall Street, which demonstrated how a large financial institution can: (1) be a commercial bank, (2) an investment bank and (3) a hedge fund, without risk to the financial system. Surprise! J. P. Morgan announced a “trading loss” of up to $7 Billion, speculating in a market they did not fully understand.

Years ago, when I was studying for my MBA, nobody wanted to be a banker. It was a good business but incredibly boring. As an auditor with Arthur Andersen you never wanted to be assigned to a bank audit, all the action was in real estate and technology. But not today! If you’re lucky, banking can give you the opportunity to speculate (gamble) with other peoples’ money. And the potential monetary rewards are off the charts.

What does all this have to do with diversification? In spite of audits and regulations, do you think that the shareholders really know what these banks are doing? Apparently, the top management of these banks haven’t a clue, so how could you or I? So what is the answer? We diversify! Going forward, J.P. Morgan and the other Wall Street Banks may do very well, or they may not. I have no way of answering that question. But the great thing about diversification is, I don’t have to know the answer.

I am more than happy to earn the “capital market rate of return” from my passively managed “well diversified” portfolio. I can’t predict the future, but I can manage the risk that comes from all the surprises that await us.


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