Investing

Dry Powder

I’ve got some dry powder set aside for a situation just like December.  During a bear market (when the market drops 20%), the plan is to deploy half of it into equities.  The S&P 500 fell 19.4% from September through Christmas Eve.  It was chaos on CNBC.  This was the big one…  And I turned up my nose because it was half a percent short of a formal bear market.  I was not ready to buy until that last 0.6% bled away.  It didn’t hit the magical 20% number.  Since this bear kiss, the S&P 500 is up 9.6%.  Oops. Eddy Elfenbein of Crossing Wall Street (great follow on Twitter) has a quick hit this morning “What if the Bear Market is Already Over?” that is a great reminder that the market doesn’t care about our arbitrary mindsets.  Usually, I think about this in relation to the calendar.  The market…


Risk-Aware

This is the first in a series of posts about my investing philosophy – Risk-Aware.  Risk is the permanent impairment of capital. While risk is often viewed as something that happens to a portfolio, it can also be created through the actions of a portfolio’s manager/owner. Be compensated for Risk There is no such thing as risk-less return, but there is such a thing as return-less risk. While the risks and returns of asset classes are not necessarily related, the relationships that do exist are constantly changing and not linear. Behavior You are always compensated for your behavior, especially if it is bad. Luck Luck plays a bigger role than anyone wants to admit. One aspect of luck lies within sequence of returns risk. Buying and holding a 60% S&P 500 / 40% Barclays Aggregate portfolio (60/40) would have lost 22% during the ten years following March 1999 (I am cherry-picking…


Happy New Year

To kick off the new year, I’m sharing my investing philosophy.  Some concepts are simple while others more complex.  They are not immutable rules or laws or instructions, just context I use for investing.  Whether I’m doing due diligence on a money manager or listening to a pundit talk his book on CNBC, it’s being processed through this filter. Most of my philosophy is derived from the folks I work with.  There is a kind of collective gut feeling around most of these concepts that we have, but I like to put things like this in writing and keep it where I can see it.  It can act as a refresher (“oh yeah, that’s why we do that”) and as a record of how my thinking on investing has evolved. Investing should be done in a manner that is:     Risk-Aware – Know yourself and prepare for what’s likely.   …


The Price of Admission

Everything is down this year except cash and municipal bonds. Headlines are dismal.  Volatility is rampant.  This isn’t some freak event.  It’s the price of admission. Taken as a whole, yes it is unusual to have almost every asset class down in a calendar year.  What’s not unusual is the negative movements themselves.  Stocks go down.  Bonds go down.  Commodities go down.  Real estate goes down.  They will also go back up.   While the S&P 500 only got a bear kiss (down 19%, not a full 20% bear), we’ll eventually see another full-on bear market.  The longer we go without one, though, the more hysterical the news will be.  Each year that passes without a bear market is a year that experienced, seasoned folks retire and bright-eyed neophytes file in.  We’ve had ten years of this.  If your financial advisor is younger than 32, they haven’t navigated a bear market. …


Scoring Points

In the short-term, the market is like Whose Line Is It Anyway, the show where everything’s made up and the points don’t matter.  Yes, the points don’t matter just like the nutrition facts on a Happy Meal.  If you’re looking for proof, check out October.  More than 80% of S&P 500 companies beat their earnings estimates, yet the index was down almost 7% for the month. Not only are earnings strong, but unemployment is incredibly low and the economy is doing much better than the experts told us was possible.   Just like the pictures of food on a Denny’s menu, that doesn’t matter.  Day-to-day, the markets are linked to the whims of an irrational crowd of humans.  There are already plenty of irrational reasons (ETFs, “trade wars”, and politics) for the October decline, but just like the Do Not Disturb sign on your hotel room door none of these really matter….


Investing in Relationships

Investors must believe that investments will continue to rise in value.  There is no guarantee this will be the case.  It’s a leap of faith.  There is a rational reason why stocks should go up in the future – the objective of a business is to make money and that should create value for shareholders.  However, in the short-term stock price is based on the irrational passions of the market.  We can even cherry-pick cases like Japan or time periods like March 2009 to show that sometimes even the long-term isn’t a sure bet for stocks.  Why would you bet your hard-earned money on something that’s not guaranteed to work? Why do we date?  Get married?  Have friends?  Adopt pets?  In the short-term, all of these relationships can cause us stress.  Try explaining how cheeseburgers work to an 8 year-old who wants a cheeseburger for dinner, but “without meat”.  These…


Stop, Drop, and Roll

There are many milestones on the path to adulthood: turning 18, graduating from school, landing that first job, having a baby.  There are also less tangible markers of adulthood such as a shift in our perception of threats.  Saturday morning cartoons implied that quicksand would be a real and ever-present obstacle to daily life.  School assemblies left us wondering just how often we’d be catching fire.  Hollywood warned us about the Commie Reds invading our neighborhoods and training montages.  All of these threats were overblown.  Quicksand and catching on fire are extremely remote issues.  As we all know, Head of the Class planted the seeds of the Soviet Union’s destruction when they traveled to Moscow in 1988.  The USSR only lasted 6 months after the last episode of America’s favorite classroom comedy in 1991. Adult Problems Now that we’re older, we worry about adult things like jobs and babies.  One item…


I Blame SportsCenter

The market was down 3% yesterday although you’re more likely to see this as DOW PLUMMETS OVER 800 POINTS.  I don’t know why it’s down, but neither does anyone else.  No one knows what it will do from here, either.  However, I do know how things will play out on CNBC as every perma-bear in New York City is wetting their pants waiting for their booking agent to tell them what time to arrive on set.  I expect doom n’ gloomers making victory laps and appealing to our baser instincts. It’s All SportsCenter’s Fault The golden age of ESPN was wall to wall SportsCenter and actual sporting events.  Today it’s talk shows and even SportsCenter is less focused on actual sport and more story-driven.  Why?  Drama sells.  The WWE is basically soap operas for rednecks and you’re smarter than a redneck, right?  ESPN is the WWE of sports.  What’s really…


Your Bad Taste in Music Isn’t Helping You Invest

Spotify’s algorithm recently uncovered a gem (to me, anyway) from my youth, adding Gilby Clarke’s “Cure Me Or Kill Me” to one of my playlists.  I admit that this is not a great song, but seeing as how our musical tastes are developed in our teenage years, this track scratches an itch for me.  It brings me back to laying in bed, headphones cranked too high, listening to 106.9’s Top Ten at Ten.  Tremor Christ, Volcano Girls, Counting Blue Cars, Loser, Andres – all on ROCK ONE OH SEVEN WRQK, CANTON’S ROCK STATION!!! Like our taste in music, our perspective on risk can be overly influenced by our early investing experiences.  Vanguard found that Millennials who started investing with them after the global financial crisis were more than twice as likely to hold zero-equity portfolios as those who started investing before.  They also found that older investors held more equities…


Can’t Trust’em

It pays to be skeptical of financial product pitches.  Investments that are sold rather than bought are often inferior and loaded with fees.  Marketing (even for good funds) is filled with cherry-picked data, but that’s the job of the marketing folks – make the product look good.  However, sometimes a pitch comes across my desk that goes beyond marketing and makes me wonder whether the money manager is dishonest or just incompetent.  Either way, they get filed under ‘Can’t Trust’em’. The latest entry into my ‘Can’t Trust’em’ file is a manager that absolutely crushed the S&P 500 over the last 10 years.  They lost a ton less than the index during the crisis and were up over 60% in 2009.  Returns for other years were pretty middling, but they shined when it counted the most, right?  I looked around on their website a bit and found a document called ‘BACKTEST’. …