Investing

Why Settle for Average?

With the recent flood of Wall Street Journal articles about passive investing, now is a good time to review the space.  Money is pouring into firms like Vanguard and iShares, the leaders in the indexing revolution.  Investors are seeing that despite perennial declarations of a “stock-picker’s market”, active managers consistently trail their benchmarks and charge large fees for the privilege of doing so.   You’ll see below that I am an advocate of passive investing, but only when it’s done correctly.  There are plenty of opportunities to use passive incorrectly or to get ripped off by a non-fiduciary product seller. What is passive?  A passive investment is just a rules-based strategy.  Technically, there should be a corresponding index.  For example, if the rule is to weight the investment based on the number of vowels in the company’s name, there should be a high-vowel index that the strategy would use as a…


Eight Years Ago

Eight years ago, we were in the midst of financial crisis.  Warren Buffett penned an op-ed in the New York Times encouraging investors to “Buy American, I Am”.  So did you buy American?  Too many investors were scrambling to do the opposite. On the front page of the New York Times from that day is a big picture of Joe the Plumber and a chart of oil prices shooting up to $140/barrel and then down to $70.  Inside, economist Paul Krugman lambasted the Federal Reserve and predicted a nasty, brutish, and long economic slump.  Who in their right mind would buy stocks in that environment? The S&P 500 fell another 30%, hitting bottom on March 9th, 2009.  Had Warren Buffett lost his touch?  No.  Since October 17, 2008, the S&P 500 has gained over 150% (over 13%, annualized).  The S&P 500 is up over 250% (over 18%, annualized) since the…


The Angels’ Share

As a whisky (whiskey here in the States) matures, it loses about 2% of its volume to evaporation each year.  Distilleries call this The Angels’ Share.  They fill oak casks with a precious liquid knowing that each year part of their hard work will simply disappear.  I can’t help but think of the angels’ share when I look at expense ratios.  An investor sets aside a certain amount of money, let’s say $100,000.  They pay a money manager to invest that money – I’ll use the S&P 500 as an example.  When the investor looks at their statement, they should see that their investment returned the same amount as the index, less whatever the expense was, right?  Looking at the annualized returns, yes, that’s approximately right.  Looking at actual dollars, we see something different.  A portion of the returns evaporates, escaping the pockets of both investor and money manager. This chart…


The Bull and the Swan

Preparing for the swan, it’s possible to miss out on the bull.  In my monthly commentary for Fairway, I asked “What does a 20% gain feel like?”  Spoiler alert: it feels like right now.  The S&P 500 is up about 20% since the bottom in February.  However, no sales people were calling my office 6 months ago to pitch me on how to make the most of the next 20%+ market move to the upside.  Pitches were framed entirely around disaster scenarios or worse… a sideways market (heaven forbid investing turn boring).  The financial product industry has spent the last 7 years pitching products to survive the next Black Swan event (or more accurately, to beat the previous Black Swan), but what happens when the next Black Swan turns out to be a Bull? What is a Black Swan, anyway?  It’s an unexpected event as outlined in Nicholas Taleb’s book…


Fed Minutes

On Wednesday, the Federal Reserve released the minutes from its latest meeting.  The minutes of these meetings are basically a form letter now with the Fed relaying its thoughts on the economy and rates via tweaks in the vocabulary used.  Changing “modestly strong” to “strong” can move markets.  There is a cottage industry of folks who live to parse the Fed minutes.  There are hedge funds using computer algorithms to receive, read, and trade on the Fed minutes faster than it takes you to hit reload on the Federal Reserve’s website.  They are obviously a big deal. Here’s what the Fed minutes mean to you: Nothing. Should you be scrambling to reposition your portfolio ahead of the next Fed meeting?  No.  Should you be scrambling to reposition your portfolio in reaction to a Fed meeting?  No. The great Federal Reserve word hunt is the latest in a long line of…


The Tyranny of the Calendar

We are all beholden to the tyranny of the calendar.  Monthly or quarterly account statements tie a nice bow on a period of time, but can lend false significance to a time period’s returns. If you’ve got a brokerage account or 401(k), you probably got a statement ending on 6/30/2016.  As of the quarter end, the S&P 500 was up 3.99% over the past 12 months and 12.09% annualized over the past 5 years (77.02% cumulative). What if we look at the same performance, but ending a month later on 7/31/2016?  As of the end of July, the S&P 500 was up 5.61% over the previous 12 months and 13.37% over the past 5 years (87.36% cumulative).  What a difference a month can make! If statements were cut on 8/5/2016 we’d see an even bigger leap.  As of Friday, the S&P 500 was up 6.29% over the last 12 months and 15.18% over the past 5 years…


Where’s Your Parade?

Cleveland toasts the NBA champion Cavaliers today.  The victory parade marks the end of a grueling season filled with ups and downs.  There were challenges on and off the court.  Some were very real (making a coaching change partway through the season).  Some were manufactured (the drama around Kevin Love from selfies to Banana Republic modeling).  In the end, the team came together and won the whole damn thing, ending Cleveland’s championship drought.  We face similar challenges as investors.  We won’t win every game (and sometimes the folks with the “best” records come up short when it counts).  We will run into challenges real and imagined.  There will be 20%+ drawdowns in the stock market.  The media will do its best to worry us, giving low probability hypothetical disasters unwarranted exposure.  At the end of your investing journey, where’s your parade?  It ain’t coming. There’s no parade.  There’s no medal.  You don’t…


Red Flag - peer to peer lending

Peer to Peer Lending

Fear is an investor’s constant companion.  We are supposed to be greedy when others are fearful and fearful when others are greedy.  However, fear seems to loom largest when the markets are down and fades away when markets are up.  Pain of past losses gives birth to new fears that what happened in the past will happen again.  While fear was helpful to our ancient ancestors, it is less helpful in investing. One of the most insidious fears is fear of missing out – sometimes abbreviated as FOMO.  Fear of missing out is why everybody and their brother threw money at any stock with ‘.com’ in their name in 2000.  Fear of missing out is why your brother-in-law suddenly got into the house-flipping game in 2007.  Fear of missing out tells us that this is a once in a lifetime opportunity and if we get in on the ground floor, we…


This market has taken wing.

Happy Anniversary

  Yesterday marked the anniversary of the market’s lowest point during the financial crisis, the birth of our current bull market.  A quick recap:   From its previous peak on 10/10/2007, the S&P 500 dropped 55% through 3/9/2009. From 3/9/2009, the S&P 500 gained 237% (almost 19% annualized), including dividends through 3/9/2016.   Today, there are plenty of people on TV who “called” the peak before the financial crisis.  They never tire of patting themselves on the back, saying it was clear to them that there was a bubble and obvious that we were on a road to ruin. This is bullshit, of course. The wizards on TV who “warned you all” are largely perma-bears who predict a new stock market crash every year, a case of a stopped clock being right twice every day.  Some of them pull out data like the CAPE ratio, saying it showed an extremely…


The regal ostrich, un-sexy majesty

Serious Investors Value the Un-Sexy

Most of us think that we are above average drivers.  Likewise, I have never heard anyone say they are bad at investing.  After experiencing negative returns, the market is to blame or maybe the President of the United States is to at fault if they belong to the “wrong” political party.  After positive returns, I only hear about how great the person is at picking stocks.  Here’s the thing: most people don’t actually know how their investments are performing. I have yet to see a brokerage statement that showed meaningful information.  The typical statement has something like this on one of the first pages: Month starting balance Income Withdrawals/Contributions Value change Month ending Balance The following pages don’t give much more information – usually a list of positions and transactions – so you can see if you had more or less than you started with last month, but how does that compare to…