Things are getting pretty ridiculous. The inexperience of professional money managers is showing now. Sadly, I suppose that the money managers who are older than me are starting to retire and younger ones are filling their shoes. Well, something happened along the way. These younger money managers do not know what they are doing apparently. They get scared easy.
Sell. Sell. Sell. This must be the new mantra of young money managers. A few short months ago, they were all claiming that stocks were overvalued. Now, they are undervalued yet, they continue to sell. They are making the classic investing mistake of overselling.
The problem with selling stocks is that this raises cash and that cash needs to be put back to work at some point. When is that? When is the bottom in the stock market? When is the right time to go back in? Most money managers have no clue. They are just guessing. However, when they sell, at least it makes them feel better like they have done something to protect client assets. Odds are that they will sell at an inopportune time and buy back in at another inopportune time.
It is usually good to sell if you plan to make a sector replacement. Like sell Technology and buy Utiliities, for example.
Well, you may be asking, "What did you do Mr. Smarty Pants?" On November 28th, I sold out of Sovereign Bonds, half of my Intermediate Corporate Bonds positions and all of my Technology positions and raised about 18 - 20% in cash . The bonds have come back some since then, but trust me, they will roll back over to the downside starting tomorrow most likely after the Fed raises interest rates. Technology is off about 7% since I sold it. Of course, nobody will ever give me credit for that decision.
I have some other thoughts on putting the 18 - 20% cash back to work, but with these young, inexperienced money managers making dumb December decisions (DDD), I think I might wait until January. I'm pretty sure that these young money managers will get all their selling done before year end. They are pretty predictable in their ignorance. 👍
Tuesday, December 18, 2018
Tuesday, December 11, 2018
Marco Polo Johnson
It is tough when you lose a family member. Dogs, for most people, are considered family members and that was certainly the case for our family. December is a tough month for our family every year anyway, because my first son Reese died on December 6th and my brother David died on December 12th, late at night. This past Sunday, December 9th, our Rat Terrier, Marco Polo, who was 16 and 1/2 years old, passed away from complications related to a stroke.
It had been a long time for me since I personally lost a dog. The last time was my Old English Sheepdog named Bogie who died when I was in my 20's. It was really traumatic back then in the 1980's when Bogie died and even more so this week when Marco Polo Johnson died. You never want to see animals suffer, but you accept that this is the circle of life. You can only give thanks to God that you were blessed with this little guy for so long.
My wife and I are very sad to see him go as is my son and daughter. In dog years, he lived a long 115 1/2 years and trust me, he was in complete control for most of his days. He was crazy about my wife and kids, but he didn't like it if I hugged my wife. He would get jealous and bark at me! I loved him. The little stinker. We all did.
It had been a long time for me since I personally lost a dog. The last time was my Old English Sheepdog named Bogie who died when I was in my 20's. It was really traumatic back then in the 1980's when Bogie died and even more so this week when Marco Polo Johnson died. You never want to see animals suffer, but you accept that this is the circle of life. You can only give thanks to God that you were blessed with this little guy for so long.
My wife and I are very sad to see him go as is my son and daughter. In dog years, he lived a long 115 1/2 years and trust me, he was in complete control for most of his days. He was crazy about my wife and kids, but he didn't like it if I hugged my wife. He would get jealous and bark at me! I loved him. The little stinker. We all did.
Wednesday, November 21, 2018
Failed Thinking of The Federal Reserve
Investing is really about looking into the future and trying to determine the direction of the markets in the short and long term. The Federal Reserve does this along with individual investors. There are a couple of reasons as to why things have changed as far as the global markets are concerned. One reason is that the Federal Reserve is no longer buying bonds on the open market which was commonly considered stimulus to the U.S. economy. Instead, the Federal Reserve has quit buying bonds on the open market and let the bonds that they bought previously just mature in a normal and orderly schedule. This action by the Fed causes significantly less demand for bonds and with less demand comes higher interest rates. They have over four trillion to unwind from their balance sheet. That is close to 20% of the U.S. debt.
The second reason why things have changed is because the Federal Reserve has been raising interest rates. The failed thinking of the Federal Reserve Board of Governors is that "this is the way it has always been done." They justify raising rates to keep a lid on inflation, because this is the way it has always been done. In the Fed's mind, inflation is a bigger risk than the U.S. debt.
When you add these two reasons together, then you kind of have a double whammy on the economy that will stifle growth.
As I look back in my lifetime, I can remember Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen and now Jerome Powell. Did any of these people do their jobs in an exceptional manner? In my opinion, no. It is a fallacy to believe that the Federal Reserve Chairman or Chairwoman can actually control the United States economy like the CEO of a business. They all made the same mistakes. They continued the failed policies of their predecessors with a "this is the way it has always been done" mentality.
My question would be this. If we owe close to 22 trillion in debt and the Federal Reserve raises interest rates on that debt, then wouldn't that increase the total debt at a faster clip? The answer of course is yes.
Let's take the reverse of this thinking. What if we let the economy grow at 4% for an extended period of time? In reality, it will never grow at 4% for an extended period of time, because eventually consumers will get tapped out and the economy will slow down. However, let's assume we let the economy grow at 4% for an extended period of time. If the economy is growing, then that is better than if it is not growing. You don't have to be too smart to figure that out. A growing economy is good. A shrinking economy (recession) is bad.
If consumers' incomes are rising, then they will spend more and pay more in taxes. If consumers are spending more, then corporations are making profits. If corporations are making profits, then they are paying more in taxes. If they are paying more in taxes, then the deficit will come down. Do we want the deficit to come down? Apparently, no one at the Federal Reserve cares about the deficit coming down.
Look it is not that complicated. The Federal Reserve's convoluted way of thinking is that inflation is a killer and because of Jimmy Carter days, we have to get a handle on it and keep it in check. Otherwise, these Fed Governors think we will see a repeat of 18% interest rates. This is so idiotic it is not even funny. We are never going to see 18% interest rates again. That was an anomaly.
The Fed believes it is better to kill economic growth, because we cannot have 18% interest rates again. This is such a stupid way of thinking! The Fed would rather increase interest rates and thus increase our deficit.
If the economy were allowed to grow, it would reduce the deficit and burn itself back down. By that I mean, if you got a raise and bought a new house, then bought new furniture and a new car, then you are tapped out. Six months from now, you are not going to move to a new bigger house, buy more new furniture and trade in your six month old car for a new more expensive one. The Fed thinking is that yes you will do all that and they want to stop you by raising interest rates. This is stupid thinking. The economy will slow down on its own, because people will slow their spending at some point. Specifically, after they have purchased their new house, their new furniture and their new car. Mortgage rates will have to come down to attract buyers. Furniture companies will have to offer deals to get you to buy new furniture and appliances. Car dealers will have to offer incentives like lower interest rates to get you to trade in that car you bought six months ago.
Don't you see? We are never going to see 18% interest rates again. Consumers will stop it before it ever happens. Economic growth is a good thing and it will make things better for all of us. Too bad the Federal Reserve is stuck with the failed thinking of "that's the way it has always been done."
The second reason why things have changed is because the Federal Reserve has been raising interest rates. The failed thinking of the Federal Reserve Board of Governors is that "this is the way it has always been done." They justify raising rates to keep a lid on inflation, because this is the way it has always been done. In the Fed's mind, inflation is a bigger risk than the U.S. debt.
When you add these two reasons together, then you kind of have a double whammy on the economy that will stifle growth.
As I look back in my lifetime, I can remember Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen and now Jerome Powell. Did any of these people do their jobs in an exceptional manner? In my opinion, no. It is a fallacy to believe that the Federal Reserve Chairman or Chairwoman can actually control the United States economy like the CEO of a business. They all made the same mistakes. They continued the failed policies of their predecessors with a "this is the way it has always been done" mentality.
My question would be this. If we owe close to 22 trillion in debt and the Federal Reserve raises interest rates on that debt, then wouldn't that increase the total debt at a faster clip? The answer of course is yes.
Let's take the reverse of this thinking. What if we let the economy grow at 4% for an extended period of time? In reality, it will never grow at 4% for an extended period of time, because eventually consumers will get tapped out and the economy will slow down. However, let's assume we let the economy grow at 4% for an extended period of time. If the economy is growing, then that is better than if it is not growing. You don't have to be too smart to figure that out. A growing economy is good. A shrinking economy (recession) is bad.
If consumers' incomes are rising, then they will spend more and pay more in taxes. If consumers are spending more, then corporations are making profits. If corporations are making profits, then they are paying more in taxes. If they are paying more in taxes, then the deficit will come down. Do we want the deficit to come down? Apparently, no one at the Federal Reserve cares about the deficit coming down.
Look it is not that complicated. The Federal Reserve's convoluted way of thinking is that inflation is a killer and because of Jimmy Carter days, we have to get a handle on it and keep it in check. Otherwise, these Fed Governors think we will see a repeat of 18% interest rates. This is so idiotic it is not even funny. We are never going to see 18% interest rates again. That was an anomaly.
The Fed believes it is better to kill economic growth, because we cannot have 18% interest rates again. This is such a stupid way of thinking! The Fed would rather increase interest rates and thus increase our deficit.
If the economy were allowed to grow, it would reduce the deficit and burn itself back down. By that I mean, if you got a raise and bought a new house, then bought new furniture and a new car, then you are tapped out. Six months from now, you are not going to move to a new bigger house, buy more new furniture and trade in your six month old car for a new more expensive one. The Fed thinking is that yes you will do all that and they want to stop you by raising interest rates. This is stupid thinking. The economy will slow down on its own, because people will slow their spending at some point. Specifically, after they have purchased their new house, their new furniture and their new car. Mortgage rates will have to come down to attract buyers. Furniture companies will have to offer deals to get you to buy new furniture and appliances. Car dealers will have to offer incentives like lower interest rates to get you to trade in that car you bought six months ago.
Don't you see? We are never going to see 18% interest rates again. Consumers will stop it before it ever happens. Economic growth is a good thing and it will make things better for all of us. Too bad the Federal Reserve is stuck with the failed thinking of "that's the way it has always been done."
Tuesday, September 25, 2018
Diversification Does Not Work
This is one of those times where it is tempting to conclude that diversification does not work. Most diversified portfolios are kind of flat to slightly up on the year 2018. It makes you think you are doing something wrong. However, you would be wrong about that. Diversification does work. The people who conclude that it does not work are only looking at the upside and not the potential downside risk. Over a normal period of time when the markets are up and down, the diversified portfolio will typically win out most all of the time or at a minimum be close in performance to a higher risk portfolio.
Let's look at an example case. For simplification purposes, let's assume Investor A invested 100% in the stock market and made 12%, 15% and 20% for the last three years. Assuming $100,000 invested, Investor A's account would have grown to $154,560. In year 4, the market drops 20% and now Investor A ends up with $123,648.
Investor B is diversified and invests the same $100,000 and earns 8.4%, 10.5% and 14%. At the end of three years, Investor B's account would have only grown to $136,551.48. However, because Investor B is diversified, he/she is not as affected in a market decline. With a 14% decline because Investor B is only taking 70% of the risk of Investor A, Investor B ends up with $117,434.27.
Well, Investor A wins right? Maybe, maybe not. What does every investor do when they look at their accounts? They remember how high their accounts were. Investor A will remember that their account was $154,560 and it lost $30,912 in one year! Thirty thousand, almost thirty one thousand dollars! This is what they will focus on. Then they will look at their financial advisor like he or she is an idiot for losing nearly thirty-one thousand dollars and look for another financial advisor and repeat the same process all over again. Or, perhaps, they will be an even worse fool and think they can invest it better themselves.
Investor B's account only dropped $19,120.21 which is 14% when the overall market lost 20%. They will feel as though they made out better than the overall stock market and they will be glad that they were diversified. They will thank their financial advisor for keeping them diversified and on track towards their financial goals. Investor B also knows that if the following year, the market goes down again, then they will be close to the performance of Investor A without all the headaches.
The problem with diversification is that everyone wants immediate gratification. They assume that the stock market is always going to go straight up and never go sideways or down. Plus, when they do comparisons, they make faulty assumptions about the future direction of the stock market.
The truth is that investing needs to incorporate both up and down markets and there is really only two ways to do this. One is to try and jump in and out of the markets which is a fools errand. The other is to be diversified and sacrifice a little return in exchange for having a plan, a process and a professional, my three P's of investing.
You never thought about diversification this way, did you? Perhaps you should.
Let's look at an example case. For simplification purposes, let's assume Investor A invested 100% in the stock market and made 12%, 15% and 20% for the last three years. Assuming $100,000 invested, Investor A's account would have grown to $154,560. In year 4, the market drops 20% and now Investor A ends up with $123,648.
Investor B is diversified and invests the same $100,000 and earns 8.4%, 10.5% and 14%. At the end of three years, Investor B's account would have only grown to $136,551.48. However, because Investor B is diversified, he/she is not as affected in a market decline. With a 14% decline because Investor B is only taking 70% of the risk of Investor A, Investor B ends up with $117,434.27.
Well, Investor A wins right? Maybe, maybe not. What does every investor do when they look at their accounts? They remember how high their accounts were. Investor A will remember that their account was $154,560 and it lost $30,912 in one year! Thirty thousand, almost thirty one thousand dollars! This is what they will focus on. Then they will look at their financial advisor like he or she is an idiot for losing nearly thirty-one thousand dollars and look for another financial advisor and repeat the same process all over again. Or, perhaps, they will be an even worse fool and think they can invest it better themselves.
Investor B's account only dropped $19,120.21 which is 14% when the overall market lost 20%. They will feel as though they made out better than the overall stock market and they will be glad that they were diversified. They will thank their financial advisor for keeping them diversified and on track towards their financial goals. Investor B also knows that if the following year, the market goes down again, then they will be close to the performance of Investor A without all the headaches.
The problem with diversification is that everyone wants immediate gratification. They assume that the stock market is always going to go straight up and never go sideways or down. Plus, when they do comparisons, they make faulty assumptions about the future direction of the stock market.
The truth is that investing needs to incorporate both up and down markets and there is really only two ways to do this. One is to try and jump in and out of the markets which is a fools errand. The other is to be diversified and sacrifice a little return in exchange for having a plan, a process and a professional, my three P's of investing.
You never thought about diversification this way, did you? Perhaps you should.
Subscribe to:
Posts (Atom)