Investing

Realistic

This is the fourth in a series of posts about my investing philosophy – Realistic.  Investors should be realistic about their expectations and the nature of the markets. No one can predict the future. After hearing 10 years of “The easy money has already been made”, it’s clear that most can’t even predict the present. It sure didn’t feel easy at the time. While no one knows the returns or risks in advance, investors with a reality-based approach to investing can craft a long-lived investment process. Realistic Market Expectations Expect markets to go up over the long term. This is not optimism or a leap of faith. It’s realism. Humans will continue to innovate and seek to put their capital to work. Not every asset class will go up at the same time forever, but that’s what diversification is for – to eliminate the need to predict what asset classes will go…


Elegant

This is the third in a series of posts about my investing philosophy – Elegant.  The investment process should be elegant, efficient, and low-friction. Before diving into what that means, Tadas at Abnormal Returns has collected posts that remember investing legend Jack Bogle, founder of Vanguard, who recently passed away.  If you’ve invested money in the last 40 years, you have more money in your pocket than past investors because of Jack Bogle.  Skim the headlines and pick a couple to read.  It will be worth the time. Elegant If you were to build your portfolio from scratch today, would it look like what you own right now? Are the investments in your portfolio pieces of a larger financial plan or accumulated trinkets of an investment collection? When tempted to overthink a portfolio, I remember an urban legend from the space race. While NASA spent $1 million developing zero-g pen. the Soviets…


Focused

This is the second in a series of posts about my investing philosophy – Focused.  It can be difficult to keep an eye to the big picture without getting distracted by all the different ways to invest.  Focus is about maintaining perspective, understanding why we invest and measuring the success of those investments. Think Left of the Decimal Spend more time/energy on the things that have a true impact and less time/energy on low-impact items. It’s worthwhile to examine whether your portfolio should have a 60% or 70% allocation to Equities, but if you’re torn over adding a 0.5% exposure to a single country ETF, you’re overthinking things. This goes for all things investing. Get the big things right. Avoid errors caused by forgetting what you are really trying to do. You don’t have to be a great investor, just don’t be a bad one. Marginal Utility Understand when you’ve won the…


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…