This is a question I have pondered for more than 25 years of investing. While I don’t believe I will ever know the exact answer to this question, there are some things that seem obvious to me. The first is greed. Most of us would never admit to being greedy, but our actions towards investments many times say more than our words. Regardless of whether you hire an advisor or do it yourself the base motivation is the same. This one driving emotion will trump any logical explanation concerning investing. Greed will creep into your investment portfolio at every profit. There is always the potential for more and in reality greed in and of itself creates ‘bubbles’ in the market. The old adage of – “it’s different this time” continues to introduce itself into our investment vocabulary. It is important to learn what turns your greed factor higher and avoid it. Put into place disciplines to keep your outlook in check and keep your money safe from the disease.
In addition we make it hard by thinking there has to be a faster way of getting there (more money). The reality is time versus timing the markets have always proven to be successful. There are numerous examples of this fact and yet we continue to try and beat the odds. Simple investment education would go a long way in avoiding this getting it faster syndrome. This is actually the cousin to greed. We fail to educate ourselves about even the most basics of investment acumen. As I wrote in a previous post, if all you did was take the major indexes and develop a simple discipline to managing your money you would be successful over time. John Bogle has stated for years the simplicity of long term index investing. Warren Buffet has shown the advantages of owning quality companies producing quality products and services over the longer term are the key to financial success. The challenge is we procrastinate the starting point and therefore we are now trying to make up for lost time and that in and of itself introduces higher risk into the equation.
Speaking of risk, understanding risk management is imperative in conjunction with managing your money. I refer to this as a disciplined investment strategy. It has taken me years to learn there is no right way or wrong way to invest money. But, it is essential you have a discipline strategy to managing your money, monitor your portfolio and adapt to the markets to achieve your goals over time. Do this and you will find investing a simple process. From my view it will rid you of unnecessary headaches, not to mention lost money.
Last, the greatest asset is self understanding which lends to being a better investor overall. Learning what you can and cannot tolerate relating to risk is vital to the investment process. In other words, actions that increase our emotions and lead to irrational or reactive decisions create the most harm. Therefore, learning our own investment psychology goes a long way in achieving investment success and our financial goals.
Making it hard is not necessary. In fact, keeping it so simple that you can do it, is imperative to success.
Friday, April 11, 2008
Tuesday, April 8, 2008
Simplify Your Portfolio
When it comes to investing your money you have to learn to play by the rules. Those rules are ultimately determined by you the investor and no one else. They are built through the experience of putting your money into various investments under different scenarios and learning from what happens. In other words, experience really is the best teacher. In all the conversations I have had with investors over the years I hear similar war stories of how they did something stupid and learned a valuable lesson. Those stupid decisions many times are doing things they didn’t understand or taking risk that didn’t equate to their psychological profile. This is why I try to tell investors everyday – KISS, Keep it So Simple! In fact, Keep It So Simple – You Can Do It! The process of investing can get as complicated as you want, but for the average investor simple is better. Here are some simple rules I follow everyday in my own portfolio and in advising other investors:
- Manage Risk in your portfolio! I cannot say this loud enough or strong enough. When markets get volatile like they have for the last nine months reduce the risk in your portfolio. Raise cash to buffer the volatility. Owning cash is not a sin! I promise you will not read that anywhere other than your mind. Use stops to prevent your emotions from taking over and creating larger losses.
- Watching the game sometimes is more interesting than playing. Watching the markets churn is better than playing. Sometimes taking a break is winning. You can learn a lot from sitting back and watching what is going on versus having money in the game. I am a big football fan. I have learned that betting on the game creates too much stress. I have also learned they are not paying me to be the coach. So it is more fun to sit in the stands and watch the game for the entertainment value it is. The market sometimes is better observed than played.
- Volatility versus Information. Investors react to news or information and that in turn creates volatility. I have learned to evaluate the news source relative to the investment. Learning that most investors are lemmings and they follow the crowd is important. Sometimes it is better to be a salmon and swim upstream. Know what you want, know why you have it, and make your own decisions how to play it.
- Risk and time go hand-in-hand. Know what your goal is! This is vital to investing. The old adage of sell hope and buy despair works more than you think. Link the amount of risk you are willing to take to the timeframe you are willing to hold.
- Don’t fall in love. Emotions are the number one enemy to investing. Having a disciplined strategy means having an entry price, stop price, and target price. This allows you to manage your position proactively versus reactively.
- Ready, Fire, Aim. Every trade/investment must be accompanied by an exit strategy. This is risk management 101. Don’t rationalize holding your losses. Ban the phrase, “I will sell it when I breakeven.” What about those who held Enron stock. As I stated at the beginning knowing what you want is key, knowing how you are going to go about getting it is equally important. Strategy.
You are the solution to your portfolio. Too often we want others to tell us what to buy or sell. The challenge with that is you don’t know what their strategy is. Only you can control the strategy for your money. For example, have you ever read a prospectus for a mutual fund? Inside they describe the objective of the fund. Read one sometime and tell me if you really understand the strategy of how they are going to manage the money invested in the fund. Therefore, you have to have a strategy based on the historical statistics of the fund. Notice I didn’t say the historical performance. I am interested in the historical statistics of alpha, beta, r-squared, standard deviation, etc. Why? It tells me how the fund performs under various market conditions. Then I can make a decision on how to invest in the fund to achieve my goals. Remember the role of financial institutions is to get you to give them your money, for as long as possible, so they can make as much as possible, returning you as little as possible. (Joke) My point here is simple…take control of your chosen investments and build your portfolio based on your goals and objectives. This will lead most of you to building simple portfolios that you can understand and control. You can always learn to make investing more complex if you understand the fundamentals. Learning to walk is imperative to learning to run. Investing is no different.
When you look at your portfolio of investments if you cannot state why you own each one and what the strategy is behind each one, you are not in control. It’s your money - manage it. Learn to keep is so simple – you can do it.
Friday, April 4, 2008
Fear of Investing
Is fear holding you back from making a decision to invest? The challenge is all the news seems to be focused on the negative. The media instills fear as it jumps on these points and beats them to death. CNN’s famous around the world in 30 minutes. That means that 48 times a day they are telling the same stories and 90% of them are negative. Imagine the impact on your psyche. CNBC, FOX Business and Bloomberg are doing the same thing with the financial news. Web pages have headlines, and if the markets move enough the general news channels have headlines. No wonder volatility in the market is a daily occurrence. You, the investor, have to deal with all this noise in order to accomplish your goals for investing.
Step back take a deep breath and ask yourself:
Do I have a goal for this investment? Visualize it.
- How specific is the goal? The more specific the better.
- How clear is it in my mind?
- How do I intend to reach it? What needs to happen?
- What discipline do I need in place? Entry, stop, target, etc.
- What obstacles are in my way? Fear, Greed, etc.
In the case of investing use your emotions to lead you to success versus defeat. Fear is one of the most intense emotions on the planet. It doesn’t have to be in control, it can be used to push you forward. One key element of fear, that is a positive, is the awareness it creates both mentally and physically. It creates focus and leads to action. Good or bad it will lead to action. You need to use it to take positive action versus negative reaction. If you have done your homework (research) and you are confident in your decision, take action. In other words be proactive based on your knowledge and plan. Even if it doesn’t work out, you know that you tried based on your knowledge at the time. If an investment doesn’t pan out according to your plan, use it to learn. The learning from doing is more powerful than learning passively. Emotions of doing are a powerful teacher. Without a plan the mistake can create paralysis next time around. The fear of experiencing the same thing all over again will keep you from putting your money to work.
Now is a difficult time to invest due to all the negative news. Headline in the USA Today newspaper read, “Where’s the bottom? NO end in sight!” The date was October 10, 2002. The Dow closed at 7,286, coincidentally that was the closing low as the market moved into a five year bull rally with the Dow hitting a high of 14,093 on December 12, 2007. There are similar headlines in the newspaper and on the news today. So it would seem history teaches us when everything is doom and gloom it is the best time to start looking for what to buy. On SectorExchange.com we are in the process of building long term positions in various sectors. Why? For the simple reason no one knows where the bottom is and if we look forward five years the question is, “Will it be higher than it is today?” The best answer would be “Yes”. Therefore, after pulling back to a recent low of 11,740 the outlook longer term is for a bottom to be formed. Our goal is to ladder into these positions through dollar cost averaging and not trying to pick the bottom. In other words, we have a strategy on how we are building these positions. We have a disciplined approach and that takes the emotions out of the decision process. For the last 25 years this approach has worked more times than not which gives me confidence versus fear. We also know with the proper stops in place our downside is protected. In other words we have done our homework, set in place a disciplined strategy, and we are following the strategy based on past experience. This takes fear out of the picture, or at least puts in the corner where it can be monitored and dealt with when it tries to come out.
I saw an article on “Post Traumatic Trade Syndrome” recently and at first I thought it was a joke. Then I realized as I read it that there really is such a thing and psychologists have studied the impact on investor’s psyche. The basic cause of this stress is when individuals trade without experience, plans or a strategy, and stops to prevent excessive losses. While I am not a psychologist by trade, I can tell you more times than not that when individuals have an innate fear towards investing one or all of these events have taken place at one point in their lives.
Don’t look back on the current opportunities in the market and say “if only”. Turn those into “I did” by approaching the market with a disciplined strategy to accomplishing your goal. You have everything you need to achieve your desired objectives. If not, take the time to learn, but experience is the best teacher. Get the experience you need by putting yourself out there to learn and develop a disciplined strategy that works for you. You’ll be glad you did.
Tuesday, April 1, 2008
It's Just Like Riding a Bike
“It’s just like riding a bike!” This common phrase is used frequently to describe situations or tasks we think are easy. Of course my sadistic brain thinks, “what if you never learned to ride a bike?” That would mean you have no frame of reference from which to draw. Too often this describes investors I talk with when teaching disciplined investment workshops. I will make reference to the S&P 500 index as if everyone knows what it is and how it functions. At times I will even go as far as to make the joke that it is not a Nascar Race. While that brings a laugh from some, others are confused and don’t even know what Nascar is or stands for. So with that rambling introduction, being in control of your money is a vital step in the process of investing. The phrase, “It’s Your Money – Manage It!” I use all the time. This is my mantra so to speak. If you don’t take control of your money and manage it, who will? Who cares more about your money than you do? No one – so you owe it to yourself to take control of your money.
The greatest challenge in managing your money is dealing with the unknown – the market. When it comes to understanding the investment markets it can become very complex. Therefore, we need to adopt another of my philosophies, “KISS – Keep It So Simple, You Can Do It!” Why make investing your money harder than it needs to be? You need to define a simple discipline for managing your money. When my daughter wanted to learn how to dive into our swimming pool, she first had to learn the simple task of falling into the water versus jumping into the water. The point is she needed to learn the simplest of tasks first. This gave her the confidence she needed to go to the next step. At each interval she could make it more and more complex if she so desired. You as an investor have to learn the simple steps first and then add complexity. I have been investing money for nearly 30 years and I still like to keep it simple. The simpler the better from my perspective, because it affords me the ability to understand and that understanding in turn gives me confidence when investing my money. Just as my daughter learned that keeping her head down and falling into the water avoided the ever famous – belly flop, you too can learn to invest your money with confidence.
Here is a simple strategy you can try and see how it works for you. Take the S&P 400, 500, 600 indexes, investing in each will give you exposure to the small, mid and large cap stocks in the US stock market. Then add the EAFE index which introduces the international markets and last add the Shearson Lehman Bond Index for fixed income (bonds). For simplicity sake, let’s put 20% of our money into each position. This allows you to diversify your money and track five indexes. This is important from a time management view as well as money management. If one of the indexes moves into a downtrend you will trigger a stop (an exit/sell at a predetermined point) and the money will be put in a money market. We can then wait for the index we exited to return to an uptrend and invest our money again. This is a simple enough strategy to follow. All you have to understand is what the indexes are, how to look at a chart of each to determine if the trend is up, down or sideways, and last determine how much risk you are willing to take in each investment, then setting a stop or exit point accordingly. Most investors could learn this in short order and take complete control of their money. In doing so they would also understand what is happening with their money and gain confidence as time goes by. You can then learn to add complexity if your desire, this is simply a starting point. From there you can learn to dive off the 35 meter platform and do triple flips with backward twists. You can make the dive as complex as you are willing to learn or you can simply dive off the side of the pool and enjoy the swim.
“It’s just like riding a bike!” First you have to learn how to ride a bike and control the balance of two wheels while peddling. Once you learn this you can take it to whatever level you desire. The challenge for some us is we want to go down the ramp like they do on ESPN extreme sports and jump doing wheelies and landing perfectly at the end. If you don’t learn how to ride first you will be on the highlight reel from ABC sports – “the thrill of victory and the agony of defeat.” You will be the later part – the agony of defeat in this instance is losing your hard earned money because you made it more complex than you were ready to deal with or understand. Keep It So Simple, You Can Do It!
The greatest challenge in managing your money is dealing with the unknown – the market. When it comes to understanding the investment markets it can become very complex. Therefore, we need to adopt another of my philosophies, “KISS – Keep It So Simple, You Can Do It!” Why make investing your money harder than it needs to be? You need to define a simple discipline for managing your money. When my daughter wanted to learn how to dive into our swimming pool, she first had to learn the simple task of falling into the water versus jumping into the water. The point is she needed to learn the simplest of tasks first. This gave her the confidence she needed to go to the next step. At each interval she could make it more and more complex if she so desired. You as an investor have to learn the simple steps first and then add complexity. I have been investing money for nearly 30 years and I still like to keep it simple. The simpler the better from my perspective, because it affords me the ability to understand and that understanding in turn gives me confidence when investing my money. Just as my daughter learned that keeping her head down and falling into the water avoided the ever famous – belly flop, you too can learn to invest your money with confidence.
Here is a simple strategy you can try and see how it works for you. Take the S&P 400, 500, 600 indexes, investing in each will give you exposure to the small, mid and large cap stocks in the US stock market. Then add the EAFE index which introduces the international markets and last add the Shearson Lehman Bond Index for fixed income (bonds). For simplicity sake, let’s put 20% of our money into each position. This allows you to diversify your money and track five indexes. This is important from a time management view as well as money management. If one of the indexes moves into a downtrend you will trigger a stop (an exit/sell at a predetermined point) and the money will be put in a money market. We can then wait for the index we exited to return to an uptrend and invest our money again. This is a simple enough strategy to follow. All you have to understand is what the indexes are, how to look at a chart of each to determine if the trend is up, down or sideways, and last determine how much risk you are willing to take in each investment, then setting a stop or exit point accordingly. Most investors could learn this in short order and take complete control of their money. In doing so they would also understand what is happening with their money and gain confidence as time goes by. You can then learn to add complexity if your desire, this is simply a starting point. From there you can learn to dive off the 35 meter platform and do triple flips with backward twists. You can make the dive as complex as you are willing to learn or you can simply dive off the side of the pool and enjoy the swim.
“It’s just like riding a bike!” First you have to learn how to ride a bike and control the balance of two wheels while peddling. Once you learn this you can take it to whatever level you desire. The challenge for some us is we want to go down the ramp like they do on ESPN extreme sports and jump doing wheelies and landing perfectly at the end. If you don’t learn how to ride first you will be on the highlight reel from ABC sports – “the thrill of victory and the agony of defeat.” You will be the later part – the agony of defeat in this instance is losing your hard earned money because you made it more complex than you were ready to deal with or understand. Keep It So Simple, You Can Do It!
Wednesday, March 26, 2008
Too many New ETFs?
There are new ETFs slated to open throughout the year and with the approval of the ‘alpha’ ETF format the numbers could grow even larger. Chances are you should ignore most of them. The streamlined approval system proposed by the Securities and Exchange Commission could expand the numbers faster. The challenge for you and me as investors is the evaluation process. Much like the daunting issue facing investors when it comes to mutual fund research the ETF marketplace is becoming just as crowded and confusing. It is a shame we have allowed something that provided simplicity to take on complexity. This could make the process time-consuming and difficult for the average investor.
The big issue is how much better will you and I as investors be served by all these new products? This is not an unusual phenomenon in the financial services industry. In 1983 there were 893 mutual funds and most investors thought that was too many. Today there are more mutual funds than individual stocks listed on the New York Stock Exchange. The assets have ballooned to more than $3 trillion. Those assets are regularly under attack by various products being developed throughout the industry. From my perspective we haven’t mastered the regulation on mutual funds and they have been around a lot longer than ETFs. Opening the door to everything imaginable will only make the task more difficult.
Many of the new products are designed on theory or hypothetical scenarios. The test for many will be that reality stands somewhere in-between theory and hypothetical. While these may work looking backwards, they will need adjustment as reality is determined. This leaves me not wanting to necessarily be the guinea pig for the process. I am willing to let them establish themselves first and then make any determinations from there. It is important to remember as an investor – it is your money. The job of the financial institutions is to get you to give it to them. They want your money for as long as possible, so they can make as much as possible in fees. I am all for everyone making money, especially me. Therefore, keep the focus on what you are trying to accomplish with your portfolio in relation to your financial goals. If these new products work to fill that void great otherwise, next.
Historically ETFs have been index funds which trade similar to stocks. This has made them attractive to investors as they allow intraday access for trading and investing. Lower fees have been an additional plus for ETFs, but many of the index mutual funds have negated that advantage with recent developments. I like the structure of ETFs for building a portfolio and knowing exactly what you own due to the transparency of the structure. This is not true of mutual funds, they disclose holdings periodically and generally at least 30 days in arrears. Thus, the transparency is clouded by the delay. The index ETFs allows you the ease of investing your money in the sectors of the market where your research leads you. This is the reason behind SectorExchange.com, allowing you the investor to determine which pieces of the market are moving and then capture them through the use of ETFs.
Investing overall is a challenge due to the shear size and number of products in the financial services arena, not to mention the differences of opinions as to which bests suits each need. I have found in my years of experience in dealing with both my own money as well as those of investors, that simple is usually better. KISS – Keep It So Simple, You Can Do It!
The big issue is how much better will you and I as investors be served by all these new products? This is not an unusual phenomenon in the financial services industry. In 1983 there were 893 mutual funds and most investors thought that was too many. Today there are more mutual funds than individual stocks listed on the New York Stock Exchange. The assets have ballooned to more than $3 trillion. Those assets are regularly under attack by various products being developed throughout the industry. From my perspective we haven’t mastered the regulation on mutual funds and they have been around a lot longer than ETFs. Opening the door to everything imaginable will only make the task more difficult.
Many of the new products are designed on theory or hypothetical scenarios. The test for many will be that reality stands somewhere in-between theory and hypothetical. While these may work looking backwards, they will need adjustment as reality is determined. This leaves me not wanting to necessarily be the guinea pig for the process. I am willing to let them establish themselves first and then make any determinations from there. It is important to remember as an investor – it is your money. The job of the financial institutions is to get you to give it to them. They want your money for as long as possible, so they can make as much as possible in fees. I am all for everyone making money, especially me. Therefore, keep the focus on what you are trying to accomplish with your portfolio in relation to your financial goals. If these new products work to fill that void great otherwise, next.
Historically ETFs have been index funds which trade similar to stocks. This has made them attractive to investors as they allow intraday access for trading and investing. Lower fees have been an additional plus for ETFs, but many of the index mutual funds have negated that advantage with recent developments. I like the structure of ETFs for building a portfolio and knowing exactly what you own due to the transparency of the structure. This is not true of mutual funds, they disclose holdings periodically and generally at least 30 days in arrears. Thus, the transparency is clouded by the delay. The index ETFs allows you the ease of investing your money in the sectors of the market where your research leads you. This is the reason behind SectorExchange.com, allowing you the investor to determine which pieces of the market are moving and then capture them through the use of ETFs.
Investing overall is a challenge due to the shear size and number of products in the financial services arena, not to mention the differences of opinions as to which bests suits each need. I have found in my years of experience in dealing with both my own money as well as those of investors, that simple is usually better. KISS – Keep It So Simple, You Can Do It!
Wednesday, March 19, 2008
Inflation – Real or Not?
Consumer Price Index (CPI) was announced recently and the data showed no change for the month of February and 2% for the year over year data. While this was pleasing to Wall Street it seemed a little odd to me. In fact it got me to thinking about how the last time I went to the gas station the price of regular unleaded gas was $3.25 per gallon. That same gallon of gas one year ago was $2.20 per gallon. That would equate to an increase of 47.7% according to my calculator. A 2% increase would be $2.24 per gallon? While I am not trying to question the government calculations or how they come up with these statistics, I am asking to live in the country they got the data from.
Inflation has impacted everyone at every level of their daily lives. When I was in high school and passed my test to receive my drivers license (1975) gasoline was $0.32 per gallon. Of course, when my oldest daughter got her drivers license it was $2.10 per gallon. This made me remember all the times my dad ranted about how cheap things were when he was a kid. I now find myself in the same boat with my children. Inflation is real and impacts us slowly over time or does it? The additional challenge is if you are retired; what you thought would be plenty of money to last you the rest of your life, isn’t? This is the real world. I hear more and more retirees say they can’t live on what they have. In other words, what they thought would be plenty of money, no longer is enough. This is a real problem and unfortunately one without many solutions.
So why am I bringing up this depressing topic? So you and I can think long and hard about what we need to do to avoid this situation. When I learned about inflation and all the ramifications of this disease in college it was always talked about in average rates of growth over long periods of time. In other words, it would be stated that for the last 30 years inflation has averaged 3% per year. What I have since realized is inflation doesn’t quite work that way in reality. What it does is creep up on you and then explodes over a short period of time. If we were to look at the 50’s and 60’s there was virtually no inflation. In fact in the 50’s we had disinflation. But, then along comes the period of 1973-78 and boom big inflation. This is similar to what is happening now. The 90’s were a low inflation period and so was the period 2000-2005, but then we hit this cycle and boom—big inflation. That would explain our present situation. The next big impact of inflation is happening right before our eyes. Property taxes have more than doubled in the last three years. Gasoline is up nearly 60%. Milk is up more than 100% and the list goes on. My point here is simple; we are all going through the next phase of sticker shock in this country. The challenge is how long will it take wages to catch up? They will catch up eventually making it easier to afford today’s lifestyle, but how long will it take. The challenge is the two don’t increase at the same rates during the same periods. This creates adjustment periods similar to what we are in now. The end result is we have to make adjustments by cutting back on spending. Wow – could that be a recession?
This leads me to the conclusion that it is not so much the recession that determines what consumers spend, but hyper periods of real inflation (real cost of goods) that leads to slower economic periods and less consumer spending during the adjustment phase. It is also interesting to note the two hardest hitting periods of these hyper inflationary periods both coincided with escalating energy costs. Maybe it isn’t a coincidence that the Fed takes energy and food cost out of the Consumer Price Index?
So as we look forward for ideas of how to best invest our money in order to have enough to last us a lifetime, we need to take this into consideration. In fact, we need to look at what is on the horizon now as we invest our money. It is important to look at energy prices. Are they leveling or receding in price? If not, then look for more of what we have been experiencing at the consumer level with the real cost of living moving higher and impacting the amount of discretionary income the consumer has to spend. We won’t be out of the woods until this happens. It took major tax cuts and capital incentives last time this happened to put the economy back on its feet. So far it doesn’t look like Washington is going to do any of that type of cutting in the near term. In actuality, we are going to let the last tax cuts expire in 2010 which means a tax increase to many taxpayers. This could exacerbate the situation further. It is all about the economy and we need to watch this closely looking forward in order get the most out of our investment portfolio versus blindly believing it will get better soon. It may not; so pay attention and watch for developments to give you insight into what is on the horizon economically for the U.S. markets. If you are one of the retired individuals I referred to earlier you may need to change your approach in order to attain the lifestyle you want. Stay tuned as this is getting interesting.
SectorExchange.com
Inflation has impacted everyone at every level of their daily lives. When I was in high school and passed my test to receive my drivers license (1975) gasoline was $0.32 per gallon. Of course, when my oldest daughter got her drivers license it was $2.10 per gallon. This made me remember all the times my dad ranted about how cheap things were when he was a kid. I now find myself in the same boat with my children. Inflation is real and impacts us slowly over time or does it? The additional challenge is if you are retired; what you thought would be plenty of money to last you the rest of your life, isn’t? This is the real world. I hear more and more retirees say they can’t live on what they have. In other words, what they thought would be plenty of money, no longer is enough. This is a real problem and unfortunately one without many solutions.
So why am I bringing up this depressing topic? So you and I can think long and hard about what we need to do to avoid this situation. When I learned about inflation and all the ramifications of this disease in college it was always talked about in average rates of growth over long periods of time. In other words, it would be stated that for the last 30 years inflation has averaged 3% per year. What I have since realized is inflation doesn’t quite work that way in reality. What it does is creep up on you and then explodes over a short period of time. If we were to look at the 50’s and 60’s there was virtually no inflation. In fact in the 50’s we had disinflation. But, then along comes the period of 1973-78 and boom big inflation. This is similar to what is happening now. The 90’s were a low inflation period and so was the period 2000-2005, but then we hit this cycle and boom—big inflation. That would explain our present situation. The next big impact of inflation is happening right before our eyes. Property taxes have more than doubled in the last three years. Gasoline is up nearly 60%. Milk is up more than 100% and the list goes on. My point here is simple; we are all going through the next phase of sticker shock in this country. The challenge is how long will it take wages to catch up? They will catch up eventually making it easier to afford today’s lifestyle, but how long will it take. The challenge is the two don’t increase at the same rates during the same periods. This creates adjustment periods similar to what we are in now. The end result is we have to make adjustments by cutting back on spending. Wow – could that be a recession?
This leads me to the conclusion that it is not so much the recession that determines what consumers spend, but hyper periods of real inflation (real cost of goods) that leads to slower economic periods and less consumer spending during the adjustment phase. It is also interesting to note the two hardest hitting periods of these hyper inflationary periods both coincided with escalating energy costs. Maybe it isn’t a coincidence that the Fed takes energy and food cost out of the Consumer Price Index?
So as we look forward for ideas of how to best invest our money in order to have enough to last us a lifetime, we need to take this into consideration. In fact, we need to look at what is on the horizon now as we invest our money. It is important to look at energy prices. Are they leveling or receding in price? If not, then look for more of what we have been experiencing at the consumer level with the real cost of living moving higher and impacting the amount of discretionary income the consumer has to spend. We won’t be out of the woods until this happens. It took major tax cuts and capital incentives last time this happened to put the economy back on its feet. So far it doesn’t look like Washington is going to do any of that type of cutting in the near term. In actuality, we are going to let the last tax cuts expire in 2010 which means a tax increase to many taxpayers. This could exacerbate the situation further. It is all about the economy and we need to watch this closely looking forward in order get the most out of our investment portfolio versus blindly believing it will get better soon. It may not; so pay attention and watch for developments to give you insight into what is on the horizon economically for the U.S. markets. If you are one of the retired individuals I referred to earlier you may need to change your approach in order to attain the lifestyle you want. Stay tuned as this is getting interesting.
SectorExchange.com
Tuesday, March 18, 2008
The Trend is Your Friend
Why do trends matter? Why spend your time looking at or studying trends? It is for the simple fact that money tends to follow trends. In economics you are taught about trends and their impact on capital. It is no different in looking at the stock market. Pictures are worth a thousand words is the phrase made famous by Kodak. The same could be said for looking at charts in relation to stocks or sectors of the market. Pictures don’t lie. If we were looking at a picture of the NASDAQ from 1999 through 2000 we would see an uptrend which hit a top and then breaking that trend starting a new trend to the downside. That analysis alone would have said get out of the way saving the downside pain that followed. Thus, visualizing the markets is a vital part of the investment process. It alerts you to changes in the supply/demand equation and should lead you to study and review fundamental data and assumptions. This visualization permits us to examine and monitor several sectors of the market at a time. In other words it becomes time efficient. This is important due to the sheer size of the market overall. Trends matter because they reflect the value given to a specific stock, sectors or market overall. This would lead us to the conclusion the market is always right. Too often as investors we believe the market is wrong. In other words we are right and the market is wrong. This is hard to believe since the market has no emotions or reasoning in order to develop an opinion. Could it be we, the investors, are out of sync with the market? “Don’t fight the tape” is a common phrase among investors so if you own a stock and the market is going down and taking your stock with it, the market isn’t wrong, your opinion is wrong. The trend of the market is a compilation of votes cast by shareholders everyday. They make a decision to buy, sell or hold. The universal sum of those decisions is what will decide the direction or trend of the market over time. Therefore, if you are out of sync with the trend it doesn’t matter how right you think you are. My resulting conclusion is I would rather be right for the wrong reason, than wrong for the right reason, right? If trends are that important then a fair amount of our time should be spent on trend analysis. If trends can be seen then they can be acted upon. An example I like to look at is Starbucks. Who would have believed this would have become a nationwide trend? If you were to look at a chart of the stock you would have seen the trend developing based on the rising stock price. If fundamentally stocks rise over the long term because they make money for shareholders, then Starbucks is and was successful in developing a new trend for selling coffee. Had we noticed and bought into the trend we would have done very well as an investor. Stocks are the one way we can be a trend watcher and benefit from someone else’s brilliance. Let’s break trends down into three timeframes to make communicating about them easier. First there is the long term or major trend. This is determined by the time period of say six months to several years. These are the trends investors look at primarily due to their long term time horizon for investing their money. Second is the intermediate trend. This is determined by a time period of one to six months. Often investors refer to this as a correction period in a major trend. It could be also a trend within a trend. These trends offer different types of investment opportunities for those who track them. Long term investors use them to take advantage of ‘dips’ and add to their already existing long term positions. You can also trade these intermediate trends exclusively as your approach to managing your money. Third is the short term or minor trend. The timeframe determining this trend is days to weeks, but generally less than one month. This can be referred to as a correction or consolidation of a longer term trend. Short term traders use these trends for buy and sell signals. Intermediate or long term investors could use these trends to add to positions short term or play off their longer term positions. This explanation is oversimplifying the trend process, but it gives you a good starting place for watching and tracking trends. Trends help you answer some of the most commonly asked questions about the market or stocks. If the intermediate trend is down and the question is “Should you buy?” then you can now answer the question simply – no. In a downtrend the question is, are we at the bottom? Has the trend changed? If not the answer is no; if it has the answer is yes. Wow, this could really simplify the process for many of us. Remember the trend is your friend and until it is in your favor why fight it? The key is to spot the trend and be in unison with it. Keep it simple. You can make trend analysis as simple as you like or you can introduce supporting variables such as stochastic and MACD to make it more complex. The beauty of this is you are in control of your strategy. It is not a matter of what is right or wrong; it is a matter of you developing what you want to use to make your trading/investing right for you in managing your money. It is important to note though that the more variables you introduce into the equation the more challenging the process becomes as well as demands on time management. Too many variables can also make it difficult for the stars to align and make the analysis useful. From my view, KISS (keep it simple …) is always better and makes it easier for me to take action. Add variables that add value rather than stress. Focusing on entry, exit, targets and stops is more valuable than finding the absolute top or bottom. These variables keep you out of trouble both short and long term and more importantly keep you in tune with the trend. Remember, ‘the trend is your friend.’
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