Renminbi redux.
The Chinese finally decided to let their currency, the renminbi (or yuan), "float" against the U.S. dollar. (For background, please see my prior post: Renminbi revaluation). I put the word float in quotes because it will be highly controlled and not a float in the free market sense.
Political leaders the world over, but especially in the U.S., have been pushing for this revaluation for some time. I doubt it will generate the outcome such leaders hope for. My expectation is higher interest rates and commodity prices in the long run that will eventually make our problems here and abroad worse instead of better.
An interesting question to ask, then, is: why did the Chinese finally do what everyone wanted them to do?
The most obvious answer, and the one that will satisfy most political leaders, is that China bowed to U.S. or international pressure. I doubt that's the case. Right now the rest of the world depends on China as much as or more so than the other way around.
Another suggestion, mostly from political thinkers, is that China is assuming its position on the world stage and having an independent currency is part of that. Although more feasible than caving to pressure, I think this argument misses the mark, too. I believe China desires a prominent position in the world, but I don't think it would sacrifice a piece of its low cost edge in order to get it.
No, I think the real reason behind revaluation is inflation in China.
In fighting financial problems over the last decade, the U.S. Federal Reserve has printed a lot of dollars. That printing has led to higher prices, especially for food and the key inputs to production (copper, iron ore, oil, etc.).
This impacts first world countries much less than third world countries. The first world spends somewhere around 20% of their income on such things as food. The third world, including China, however, spends much closer to 60%.
When the price of an apple doubles and it's less than 20% of your income, you complain a bit, but it doesn't cause a significant problem.
When the price of food doubles and it's 60% of your income, you riot in the streets.
That's the situation I think China is facing. They'd like to keep their currency on par with the dollar to maintain their low cost competitive advantage (with significant margin to spare), but not at the expense of having inflation cripple its poorest people.
I believe China's goal is to grow to first world standards of living without causing a revolution. That's a very delicate goal to achieve, especially with centralized planning and in the short time period they want to achieve it.
They won't get there if their economy slows too much, or if they have high inflation.
I don't think China is caving to pressure from the west or seeking the prestige of an independent currency. I believe they are walking a tight rope, and inflationary threats were making them lean way too far in one direction.
Revaluation, for them, is a practical economic matter, not purely a political one.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Tuesday, June 22, 2010
Friday, June 18, 2010
Look east, young man...
In trying to read the economic Tarot cards, most are focused on the U.S. and Europe.
At first glance, this is quite understandable. The European economy is the largest in the world, followed closely by the U.S. But, that's not where the action is.
Indeed, the world economy increasingly turns on the axis of #3: China.
If you want to know where things are going, look east.
I say this for two reasons: 1) markets have been increasingly led by action in China, and 2) fundamental economic reality is being driven most by China.
When the economies and stock markets of the world turned positive in 2008 and 2009, it happened first in China.
All other markets are reacting to what happens in China, too. When China hints they may let the renmimbi appreciate, markets shout "how high?" When China hints its trying to subdue real estate speculation, markets shutter the world over.
The simple fact of the matter is markets are reacting increasingly to news from China.
You may think of markets as being speculatively fueled, but a look at underlying economic reality provides a basis for these flighty reactions.
China is the world's third largest economy, passing Japan within the last two years.
The Chinese economy is--by far--the fastest growing large economy.
China became the world's largest export economy, passing the former #1, Germany, just last year.
Demand from China is driving the markets for the most basic inputs to production. Watch the price of shipping, iron ore, copper, steel, oil, or almost anything else, and you'll most likely find news from China caused prices to jump or dive.
China has become the manufacturer to the world. You can't consume what hasn't been produced, so China is holding the economic cards, now. If you don't believe it, watch Chinese workers striking Honda or demanding hiring wages from purchasers like Apple and Hewlett Packard. This wasn't happening a year ago because China didn't hold the cards. They do right now.
Finally, China's economy is the only large economy whose government isn't in a fiscal straight jacket. The U.S., Europe and Japan are all hand-cuffed by borrowing and spending too much. China's government is almost certainly making uneconomic investments, but they have the ability to invest whereas the other large economies' governments are out of ammunition (or soon will be).
If you want to know where things are going economically, look east.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
In trying to read the economic Tarot cards, most are focused on the U.S. and Europe.
At first glance, this is quite understandable. The European economy is the largest in the world, followed closely by the U.S. But, that's not where the action is.
Indeed, the world economy increasingly turns on the axis of #3: China.
If you want to know where things are going, look east.
I say this for two reasons: 1) markets have been increasingly led by action in China, and 2) fundamental economic reality is being driven most by China.
When the economies and stock markets of the world turned positive in 2008 and 2009, it happened first in China.
All other markets are reacting to what happens in China, too. When China hints they may let the renmimbi appreciate, markets shout "how high?" When China hints its trying to subdue real estate speculation, markets shutter the world over.
The simple fact of the matter is markets are reacting increasingly to news from China.
You may think of markets as being speculatively fueled, but a look at underlying economic reality provides a basis for these flighty reactions.
China is the world's third largest economy, passing Japan within the last two years.
The Chinese economy is--by far--the fastest growing large economy.
China became the world's largest export economy, passing the former #1, Germany, just last year.
Demand from China is driving the markets for the most basic inputs to production. Watch the price of shipping, iron ore, copper, steel, oil, or almost anything else, and you'll most likely find news from China caused prices to jump or dive.
China has become the manufacturer to the world. You can't consume what hasn't been produced, so China is holding the economic cards, now. If you don't believe it, watch Chinese workers striking Honda or demanding hiring wages from purchasers like Apple and Hewlett Packard. This wasn't happening a year ago because China didn't hold the cards. They do right now.
Finally, China's economy is the only large economy whose government isn't in a fiscal straight jacket. The U.S., Europe and Japan are all hand-cuffed by borrowing and spending too much. China's government is almost certainly making uneconomic investments, but they have the ability to invest whereas the other large economies' governments are out of ammunition (or soon will be).
If you want to know where things are going economically, look east.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, June 11, 2010
Tipping Point?
The next crisis we face may be much worse than the housing crisis. It's what I've talked about in the space before: sovereign subprime or too much government debt.
This may seem like a problem facing far-off Greece or Hungary, but it's bigger and more problematic in the developed economies. Here, I'm talking about the big economies we typically associate with stability: Japan, Germany, France, Britain and the United States.
The issue is that such developed economies have borrowed too much money, like subprime borrowers, to live high on the hog today. This borrowing is going and has gone to generous social programs, defense, and, most insidiously, growing interest payments.
When the burden of paying debt, both interest and principal payments, get too high relative to incoming money (taxes) or an economy's size (GDP), you get to a tipping point where there's no where to go but down.
This problem is exacerbated by two additional issues: who did you borrow from and when do you owe them principal.
If you borrow from your own citizens, you're in a better situation than when you borrow from foreigners, especially when those foreigners aren't your best friend (hello, China).
If you borrow the money short instead of long term, you face the same problem as paying off a credit card versus a home loan--no credit card will give you wiggle room while you get your financial house in order.
Japan and Britain borrowed mostly from their own citizens. The U.S. borrowed mostly from Japan and China. Japan and Britain predominantly borrowed long term, the U.S. borrowed short term and must roll over most of its debt over the next several years.
The U.S. has an advantage over Japan, Britain, France and Germany, though: our economy grows faster and so does our population (both organically and from immigration). This gives us some wiggle room they don't have.
Back to the tipping point issue. When interest payments get too high relative to economic production or tax revenues, those who lent you money want a higher interest rate. Guess what a higher interest rate does to those interest payments? Yep, higher and higher.
You can see why there's a tipping point--once you reach a certain threshold, people start to doubt you can pay and want higher interest payments (or won't lend you money), which creates a vicious cycle.
The developed economies of the world are entering that vicious cycle over the coming years. We stand on a knife's edge and can chose, now, to stay on the good side or go to the dark side. And, we don't have much time to chose.
If you tip to the dark side, what do you have to do? Theoretically, you can grow your way out of trouble, lower your interest payments, get bailed out by someone else, cut spending and jack up taxes, print money (inflation) to pay back loans, or default (also known as restructuring, repudiation, rescheduling, etc.).
The U.S. has been growing its way out of trouble for over 200 years. Unfortunately, when government spending grows to a certain percentage of the economy, your growth rate slows dramatically. We're reaching that point, so we need to allow a lot of immigration, cut government spending, and reduce taxes to increase growth. I'm guessing the chance of any of those three happening is as great as finding a snowball near the sun's core.
Is there any way we could lower the interest rate on our debt? You'll have to ask Japan and China on that one, but don't count on it.
Is it possible that any country in the world is capable of bailing out the U.S.? Please see snowball reference above.
Can we cut our spending and raise additional taxes? We could, but in a populist environment like we're in, that will probably work as well as it has in Greece (please see riot footage as reference).
Can we inflate? This is the most likely outcome, and it won't be a lot of fun for those who lent us money or for those on a fixed income here in the U.S.--and, by the way, that's a lot of people!
Can we default? Like inflation, we can do it, but it won't be pretty and will likely be a disaster for many.
Standing on the knife's edge and looking at those six options, I would chose to knuckle down now, so we don't have to go down the path of the six. I'm not optimistic that will happen in a democracy, so I'm planning on inflation.
So should you.
(I think we'll still experience slight inflation/deflation over the next couple of years, but the turning point is hard to predict because our lenders will get to chose the timing).
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The next crisis we face may be much worse than the housing crisis. It's what I've talked about in the space before: sovereign subprime or too much government debt.
This may seem like a problem facing far-off Greece or Hungary, but it's bigger and more problematic in the developed economies. Here, I'm talking about the big economies we typically associate with stability: Japan, Germany, France, Britain and the United States.
The issue is that such developed economies have borrowed too much money, like subprime borrowers, to live high on the hog today. This borrowing is going and has gone to generous social programs, defense, and, most insidiously, growing interest payments.
When the burden of paying debt, both interest and principal payments, get too high relative to incoming money (taxes) or an economy's size (GDP), you get to a tipping point where there's no where to go but down.
This problem is exacerbated by two additional issues: who did you borrow from and when do you owe them principal.
If you borrow from your own citizens, you're in a better situation than when you borrow from foreigners, especially when those foreigners aren't your best friend (hello, China).
If you borrow the money short instead of long term, you face the same problem as paying off a credit card versus a home loan--no credit card will give you wiggle room while you get your financial house in order.
Japan and Britain borrowed mostly from their own citizens. The U.S. borrowed mostly from Japan and China. Japan and Britain predominantly borrowed long term, the U.S. borrowed short term and must roll over most of its debt over the next several years.
The U.S. has an advantage over Japan, Britain, France and Germany, though: our economy grows faster and so does our population (both organically and from immigration). This gives us some wiggle room they don't have.
Back to the tipping point issue. When interest payments get too high relative to economic production or tax revenues, those who lent you money want a higher interest rate. Guess what a higher interest rate does to those interest payments? Yep, higher and higher.
You can see why there's a tipping point--once you reach a certain threshold, people start to doubt you can pay and want higher interest payments (or won't lend you money), which creates a vicious cycle.
The developed economies of the world are entering that vicious cycle over the coming years. We stand on a knife's edge and can chose, now, to stay on the good side or go to the dark side. And, we don't have much time to chose.
If you tip to the dark side, what do you have to do? Theoretically, you can grow your way out of trouble, lower your interest payments, get bailed out by someone else, cut spending and jack up taxes, print money (inflation) to pay back loans, or default (also known as restructuring, repudiation, rescheduling, etc.).
The U.S. has been growing its way out of trouble for over 200 years. Unfortunately, when government spending grows to a certain percentage of the economy, your growth rate slows dramatically. We're reaching that point, so we need to allow a lot of immigration, cut government spending, and reduce taxes to increase growth. I'm guessing the chance of any of those three happening is as great as finding a snowball near the sun's core.
Is there any way we could lower the interest rate on our debt? You'll have to ask Japan and China on that one, but don't count on it.
Is it possible that any country in the world is capable of bailing out the U.S.? Please see snowball reference above.
Can we cut our spending and raise additional taxes? We could, but in a populist environment like we're in, that will probably work as well as it has in Greece (please see riot footage as reference).
Can we inflate? This is the most likely outcome, and it won't be a lot of fun for those who lent us money or for those on a fixed income here in the U.S.--and, by the way, that's a lot of people!
Can we default? Like inflation, we can do it, but it won't be pretty and will likely be a disaster for many.
Standing on the knife's edge and looking at those six options, I would chose to knuckle down now, so we don't have to go down the path of the six. I'm not optimistic that will happen in a democracy, so I'm planning on inflation.
So should you.
(I think we'll still experience slight inflation/deflation over the next couple of years, but the turning point is hard to predict because our lenders will get to chose the timing).
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, June 04, 2010
Judging expertise--the right way!
I was simply dumbfounded.
I was having breakfast with a good friend, recently, when she explained the good qualities of her financial advisor. Specifically, she referred to her advisor's a) ever-present volunteer activities in the community and b) diligent hobby fly-fishing on every possible occasion.
First, let me highlight that my friend is no dummy. She's one of those people that is fiercely dedicated to her job, an expert in all the important areas of her work, and possesses a mind-numbing amount of information about her interests. This is one smart cookie.
Second, I have nothing against volunteer activities or fly-fishing, or long walks on the beach for that matter.
Third, I'm not an unbiased observer. I am, after all, an investment advisor myself.
With all that, why on earth would you judge your financial advisor based on their presence in the community or their various hobbies!
When I look for a doctor, I don't care if she sings in a barbershop quartet, or if she likes to play bridge. All I care is if she is an expert in her medical specialty. I want to know she reads the latest journals and works diligently to improve her results over time.
When a fireman comes to pull my unconscious body from my burning house, I don't care if he enjoys flower-arranging or Internet chat rooms, I just care if he can carry me down a flight of stairs and then put out the fire with minimum property damage. I want to know that he can squat 300 pounds and studies fire damage to figure out how best to put them out in the future.
And, when I look for an expert in investments, I don't give a hoot if they volunteer and fly-fish, all I care is that they are expert at what they do.
Personally, I want that doctor, fireman and financial advisor to be a neurotic, obsessive/compulsive individual so dedicated to their field that they seldom have time for much else.
So why was my friend so excited that her financial advisor was always volunteering and trying to fly-fish? I don't get it.
Doesn't she realized that when her advisor is doing something other than being an expert in their field, she's the one losing. Doesn't she realize that every hour volunteering or fly-fishing is another hour when the advisor's competition is finding ways to get better returns, better plan for her future, or broaden their knowledge?
There's a right and a wrong way to judge expertise. You don't judge it based on ancillary interests or good intentions in the community. You judge it based on best practices, proper education, diligent improvement, and long run results.
And one more thing while I'm on my rant: when your advisor regularly calls you to suggest you make changes to your portfolio, and he's compensated based on commissions, he's not calling to help, he's generating sales so he has more time to fly-fish while your portfolio is floundering.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I was simply dumbfounded.
I was having breakfast with a good friend, recently, when she explained the good qualities of her financial advisor. Specifically, she referred to her advisor's a) ever-present volunteer activities in the community and b) diligent hobby fly-fishing on every possible occasion.
First, let me highlight that my friend is no dummy. She's one of those people that is fiercely dedicated to her job, an expert in all the important areas of her work, and possesses a mind-numbing amount of information about her interests. This is one smart cookie.
Second, I have nothing against volunteer activities or fly-fishing, or long walks on the beach for that matter.
Third, I'm not an unbiased observer. I am, after all, an investment advisor myself.
With all that, why on earth would you judge your financial advisor based on their presence in the community or their various hobbies!
When I look for a doctor, I don't care if she sings in a barbershop quartet, or if she likes to play bridge. All I care is if she is an expert in her medical specialty. I want to know she reads the latest journals and works diligently to improve her results over time.
When a fireman comes to pull my unconscious body from my burning house, I don't care if he enjoys flower-arranging or Internet chat rooms, I just care if he can carry me down a flight of stairs and then put out the fire with minimum property damage. I want to know that he can squat 300 pounds and studies fire damage to figure out how best to put them out in the future.
And, when I look for an expert in investments, I don't give a hoot if they volunteer and fly-fish, all I care is that they are expert at what they do.
Personally, I want that doctor, fireman and financial advisor to be a neurotic, obsessive/compulsive individual so dedicated to their field that they seldom have time for much else.
So why was my friend so excited that her financial advisor was always volunteering and trying to fly-fish? I don't get it.
Doesn't she realized that when her advisor is doing something other than being an expert in their field, she's the one losing. Doesn't she realize that every hour volunteering or fly-fishing is another hour when the advisor's competition is finding ways to get better returns, better plan for her future, or broaden their knowledge?
There's a right and a wrong way to judge expertise. You don't judge it based on ancillary interests or good intentions in the community. You judge it based on best practices, proper education, diligent improvement, and long run results.
And one more thing while I'm on my rant: when your advisor regularly calls you to suggest you make changes to your portfolio, and he's compensated based on commissions, he's not calling to help, he's generating sales so he has more time to fly-fish while your portfolio is floundering.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, May 28, 2010
Skill vs. Probability.
Lucky, or good? This question gets asked a lot, but few realize how important it is.
Having just finished Michael Mauboussin's book, Think Twice, I couldn't help but reconsider this question across a range of areas.
It turns out to be crucial in sports, business, politics, investing, and even parenting!
The basic issue is that the outcomes we see are one part skill, and one part probability, (i.e. luck). Where we get wrapped around the axle is when we assume that bad luck means bad skill, or, more frequently, that good luck means good skill.
Sports seems like the most obvious example. People assume hot and cold streaks are due to controllable skill, when they're much more likely due to good and bad luck. A 60% free throw basketball shooter has a 7.8% chance of making 5 in a row; a 40% shooter has a 1% chance of 5 in a row. But, that doesn't mean that on any given night the 40% shooter won't shoot better than the 60% shooter. Sorry, that's just probability.
A better example is the Sports Illustrated jinx. Teams or athletes tend to do worse after they appear on the cover of Sports Illustrated. Luck or skill? They were probably on the cover because they had skill and a streak of good luck. The did worse afterward because they had skill and a streak of bad luck. Fans will probably claim otherwise, but it's more likely a change in luck than skill.
The same phenomenon occurs in business. Companies and managers that appear on the front of Business Week, Forbes and Fortune tend to under-perform afterward (both their stock and underlying performance metrics). Were they on the cover because they were terribly skillful, or because they had skill and were a bit luckier than average? This doesn't bode well for Apple, Google or Hewlett Packard that have graced a lot of magazine covers recently.
You can see the same thing in a business's underlying performance. If a company is shooting the lights on in sales and profits, it's part luck and part skill. A company with terrible performance may be terrible, but it's also likely to be partly bad luck. The statistics show that performance tends to regress to the mean over time--the good get worse and the bad get better.
Politics and entertainment are also good examples. Was Bush purely to blame for 9/11 and hurricane Katrina, or was he unlucky? Likely, he was both unlucky and unskillful, but he's frequently blamed as if it were all bad skill. Same for Obama. Was he unlucky or unskillful to have the housing market meltdown and a giant oil spill in the Gulf of Mexico on his watch? People aren't very objective in judging politicians and the degree to which luck plays a part, especially when they go into situations with political prejudices.
I've found luck and skill even play a part in parenting. If you're saying "DUH!?" right now, I agree with you. When my almost 3 year old daughter is sick or teething (which I consider luck, not skill on my part), things go worse. This means tantrums galore! When she isn't sick or teething, things go a lot better. She occasionally even listens to me! My skill is the same (or at least relatively stable), but my results are different because luck plays a part.
No where is this more obvious in my life than with investing. Luck plays a major part in investing because the outcomes are due to so many complex factors. Predicting economic outcomes, weather patterns, competitive dynamics, etc. makes investing a terribly difficult area to separate skill from luck. And yet, both good and bad luck are there along with skill.
That's why its so important to look at a managers long term record. If he or she does well over the long run but hasn't done well recently, bad luck is probably playing a part and good luck will eventually come back. On the flip side, a good record doesn't necessarily mean skill and good luck, it could just be good luck. This burns investors more than anything else in the investing world, and it counts when looking at investing managers as much as specific investments (Apple, anyone?).
Skill or statistics? Lucky or good. You be the judge. But, don't fool yourself that both good and bad luck aren't playing a roll. They most certainly are.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Lucky, or good? This question gets asked a lot, but few realize how important it is.
Having just finished Michael Mauboussin's book, Think Twice, I couldn't help but reconsider this question across a range of areas.
It turns out to be crucial in sports, business, politics, investing, and even parenting!
The basic issue is that the outcomes we see are one part skill, and one part probability, (i.e. luck). Where we get wrapped around the axle is when we assume that bad luck means bad skill, or, more frequently, that good luck means good skill.
Sports seems like the most obvious example. People assume hot and cold streaks are due to controllable skill, when they're much more likely due to good and bad luck. A 60% free throw basketball shooter has a 7.8% chance of making 5 in a row; a 40% shooter has a 1% chance of 5 in a row. But, that doesn't mean that on any given night the 40% shooter won't shoot better than the 60% shooter. Sorry, that's just probability.
A better example is the Sports Illustrated jinx. Teams or athletes tend to do worse after they appear on the cover of Sports Illustrated. Luck or skill? They were probably on the cover because they had skill and a streak of good luck. The did worse afterward because they had skill and a streak of bad luck. Fans will probably claim otherwise, but it's more likely a change in luck than skill.
The same phenomenon occurs in business. Companies and managers that appear on the front of Business Week, Forbes and Fortune tend to under-perform afterward (both their stock and underlying performance metrics). Were they on the cover because they were terribly skillful, or because they had skill and were a bit luckier than average? This doesn't bode well for Apple, Google or Hewlett Packard that have graced a lot of magazine covers recently.
You can see the same thing in a business's underlying performance. If a company is shooting the lights on in sales and profits, it's part luck and part skill. A company with terrible performance may be terrible, but it's also likely to be partly bad luck. The statistics show that performance tends to regress to the mean over time--the good get worse and the bad get better.
Politics and entertainment are also good examples. Was Bush purely to blame for 9/11 and hurricane Katrina, or was he unlucky? Likely, he was both unlucky and unskillful, but he's frequently blamed as if it were all bad skill. Same for Obama. Was he unlucky or unskillful to have the housing market meltdown and a giant oil spill in the Gulf of Mexico on his watch? People aren't very objective in judging politicians and the degree to which luck plays a part, especially when they go into situations with political prejudices.
I've found luck and skill even play a part in parenting. If you're saying "DUH!?" right now, I agree with you. When my almost 3 year old daughter is sick or teething (which I consider luck, not skill on my part), things go worse. This means tantrums galore! When she isn't sick or teething, things go a lot better. She occasionally even listens to me! My skill is the same (or at least relatively stable), but my results are different because luck plays a part.
No where is this more obvious in my life than with investing. Luck plays a major part in investing because the outcomes are due to so many complex factors. Predicting economic outcomes, weather patterns, competitive dynamics, etc. makes investing a terribly difficult area to separate skill from luck. And yet, both good and bad luck are there along with skill.
That's why its so important to look at a managers long term record. If he or she does well over the long run but hasn't done well recently, bad luck is probably playing a part and good luck will eventually come back. On the flip side, a good record doesn't necessarily mean skill and good luck, it could just be good luck. This burns investors more than anything else in the investing world, and it counts when looking at investing managers as much as specific investments (Apple, anyone?).
Skill or statistics? Lucky or good. You be the judge. But, don't fool yourself that both good and bad luck aren't playing a roll. They most certainly are.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, May 21, 2010
Fat lady singing?; Paris.
With the recent market pull-back of over 10%, it's a good time to ask if the bull market that began in March 2009 is over.
First off, I don't know, and neither does anyone else. I, like so many others, am speculating on what may happen, not forecasting what will happen. Forecasting short term market direction is foolish. Or, as Warren Buffett put it, "The fact that people will be full of greed, fear and folly is predictable. The sequence is not predictable."
Given those caveats, I don't think this market pull-back is the end of this bull market. I have several reasons for this opinion.
1) The governments of the world are still flooding the system with money at zero percent interest rates. It's unlikely markets will tank with so much easy money available.
2) The governments of the world are still back-stopping every economic problem. Market crashes rarely happen when everyone has just experienced one, or when governments are working so hard to prevent them. Eventually, governments will run out of ammunition, but they haven't, yet.
3) Lots of economic numbers look good. Granted, commodities like copper and oil have pulled back, but manufacturing data looks strong and railroad shipments are staging a real recovery. These figures may turn down, but for now they are signaling a real recovery.
4) Retail investors were just starting to join the party. I've commented before that the general public tends to be a contrarian indicator--do the opposite of what they are doing. Retail investors were just starting to pull money from bond funds and put them into equity funds. I believe they will end up much more fully invested before things really roll over.
I must admit, I was prepared for the downturn. I had bought volatility for both my clients and myself and have mostly cashed out (I invested in a security that goes up when the market goes down). Now, I'm getting reinvested in the same blue chip companies I've been recommending for quite some time.
Markets may continue to head down for a bit, and it's nice to have some hedges against that, but I don't think the fat lady is singing (yet). It's a good time to invest in quality companies at cheaper prices.
In the long run, governments will run out of ammunition. When that happens, markets will probably head down by more than 10%. In my opinion, that's still a couple of years away, but I could be wrong and it could be starting now. Either way, I'm prepared.
On a separate note, my wife and I just got back from a week in Paris, and we had a blast. The food there was simply unbelievable. In fact, my wife and I had the best meal of our lives at a little restaurant called chez l' Ami Jean (Rue Cler area). Outstanding!
I also found the people of Paris to be incredibly friendly and helpful. It was almost impossible to look at a map and try to figure out where you were without someone stopping to offer help. We tried our French on them, and they were happy to oblige while still being able to speak English when necessary (their English was always better than our French).
Paris is the world's leading vacation destination, so my recommendation is hardly unique, but I'd highly recommend it to anyone thinking about world travel.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
With the recent market pull-back of over 10%, it's a good time to ask if the bull market that began in March 2009 is over.
First off, I don't know, and neither does anyone else. I, like so many others, am speculating on what may happen, not forecasting what will happen. Forecasting short term market direction is foolish. Or, as Warren Buffett put it, "The fact that people will be full of greed, fear and folly is predictable. The sequence is not predictable."
Given those caveats, I don't think this market pull-back is the end of this bull market. I have several reasons for this opinion.
1) The governments of the world are still flooding the system with money at zero percent interest rates. It's unlikely markets will tank with so much easy money available.
2) The governments of the world are still back-stopping every economic problem. Market crashes rarely happen when everyone has just experienced one, or when governments are working so hard to prevent them. Eventually, governments will run out of ammunition, but they haven't, yet.
3) Lots of economic numbers look good. Granted, commodities like copper and oil have pulled back, but manufacturing data looks strong and railroad shipments are staging a real recovery. These figures may turn down, but for now they are signaling a real recovery.
4) Retail investors were just starting to join the party. I've commented before that the general public tends to be a contrarian indicator--do the opposite of what they are doing. Retail investors were just starting to pull money from bond funds and put them into equity funds. I believe they will end up much more fully invested before things really roll over.
I must admit, I was prepared for the downturn. I had bought volatility for both my clients and myself and have mostly cashed out (I invested in a security that goes up when the market goes down). Now, I'm getting reinvested in the same blue chip companies I've been recommending for quite some time.
Markets may continue to head down for a bit, and it's nice to have some hedges against that, but I don't think the fat lady is singing (yet). It's a good time to invest in quality companies at cheaper prices.
In the long run, governments will run out of ammunition. When that happens, markets will probably head down by more than 10%. In my opinion, that's still a couple of years away, but I could be wrong and it could be starting now. Either way, I'm prepared.
On a separate note, my wife and I just got back from a week in Paris, and we had a blast. The food there was simply unbelievable. In fact, my wife and I had the best meal of our lives at a little restaurant called chez l' Ami Jean (Rue Cler area). Outstanding!
I also found the people of Paris to be incredibly friendly and helpful. It was almost impossible to look at a map and try to figure out where you were without someone stopping to offer help. We tried our French on them, and they were happy to oblige while still being able to speak English when necessary (their English was always better than our French).
Paris is the world's leading vacation destination, so my recommendation is hardly unique, but I'd highly recommend it to anyone thinking about world travel.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Wednesday, May 05, 2010
"The Fault, Dear Brutus..."
I read a stunning Morningstar article the other day. Ken Heebner's CGM Focus Fund returned an outstanding 17.84% annualized return over the last 10 years. While the market as a whole went down, CGM Focus would have multiplied your money by 5.2 times. Wow!
That's assuming, of course, that you bought the fund and held on during all the ups and downs of both the market and the CGM Focus Fund. The return that Heebner's actual investors received (as calculated my Morningstar)? Negative 16.82% annualized!
You might look at those numbers incredulously and wonder how on earth the fund could provide 17.84% returns while investors lost 16.82% annualized.
It relates to the title of this blog. As Shakespeare put it in Julius Caesar, "The fault, dear Brutus, is not in our stars, But in ourselves." The reason investors get lousy returns is not due to fate, but because they shoot themselves in the foot.
How can a fund go up 17.84% annualized, but investors get -16.82% returns? Investors chase volatile performance. They buy after a fund had done well, only to find it top and roll over. After it tanks, they give up and sell, only to find it race back up again. Rinse and repeat.
Research clearly shows investors are their own worst enemy. Instead of formulating a plan and sticking to it through bumpy markets, they try to game the system. That's why Dalbar studies have consistently shown investors get 1/4 of the return of the mutual funds they invest in--they chase performance!
It's not just individual investors who do this, professionals chase performance, too. Jeremy Grantham of GMO talks about how he lost 60%--60%!!!--of his clients during the late 1990's and early 2000. His clients were abandoning him because he "didn't get" the dot-com boom. Grantham's disciplined investment approach, of course, turned out to be right, and he provided brilliant returns for those clients who stuck around.
This lesson is counter-intuitive to most people, but vitally important to investment success. Markets move in fits and starts. Trying to time the market is a fool's errand. The people who succeed over the long run stick to a disciplined and proven approach. Judging investment records by short term performance, even 3 to 5 years, isn't enough. If a disciplined approach doesn't look like it's working, stay the course or--even better--put more money to work in it. Focus on the long term, even when it's extremely hard to do, or hire someone who can do that for you.
Or, as Warren Buffett puts it, "be greedy when others are fearful and fearful when others are greedy."
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I read a stunning Morningstar article the other day. Ken Heebner's CGM Focus Fund returned an outstanding 17.84% annualized return over the last 10 years. While the market as a whole went down, CGM Focus would have multiplied your money by 5.2 times. Wow!
That's assuming, of course, that you bought the fund and held on during all the ups and downs of both the market and the CGM Focus Fund. The return that Heebner's actual investors received (as calculated my Morningstar)? Negative 16.82% annualized!
You might look at those numbers incredulously and wonder how on earth the fund could provide 17.84% returns while investors lost 16.82% annualized.
It relates to the title of this blog. As Shakespeare put it in Julius Caesar, "The fault, dear Brutus, is not in our stars, But in ourselves." The reason investors get lousy returns is not due to fate, but because they shoot themselves in the foot.
How can a fund go up 17.84% annualized, but investors get -16.82% returns? Investors chase volatile performance. They buy after a fund had done well, only to find it top and roll over. After it tanks, they give up and sell, only to find it race back up again. Rinse and repeat.
Research clearly shows investors are their own worst enemy. Instead of formulating a plan and sticking to it through bumpy markets, they try to game the system. That's why Dalbar studies have consistently shown investors get 1/4 of the return of the mutual funds they invest in--they chase performance!
It's not just individual investors who do this, professionals chase performance, too. Jeremy Grantham of GMO talks about how he lost 60%--60%!!!--of his clients during the late 1990's and early 2000. His clients were abandoning him because he "didn't get" the dot-com boom. Grantham's disciplined investment approach, of course, turned out to be right, and he provided brilliant returns for those clients who stuck around.
This lesson is counter-intuitive to most people, but vitally important to investment success. Markets move in fits and starts. Trying to time the market is a fool's errand. The people who succeed over the long run stick to a disciplined and proven approach. Judging investment records by short term performance, even 3 to 5 years, isn't enough. If a disciplined approach doesn't look like it's working, stay the course or--even better--put more money to work in it. Focus on the long term, even when it's extremely hard to do, or hire someone who can do that for you.
Or, as Warren Buffett puts it, "be greedy when others are fearful and fearful when others are greedy."
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 30, 2010
Is Greek Tragedy Contagious?
I've written several blogs touching on Greece's problems over the last 5 months (please see: Sovereign Subprime, Bonds and Cash Just Aren't That Safe, Going Greek, Return of the Bond Market Vigilantes). But, as one of my long time readers noted, given recent events, it's time for an update.
First, a review. Greece's fiscal deficit is hitting double digits. When deficits get this large, countries find it difficult to issue debt and keep their currency from sliding in value. Greece, however, is in a unique position as a member of the European Union (EU) that also utilizes the euro as its currency. Greece's fiscal and debt problems are not just their own, but an issue for the entire EU. This means more fiscally responsible countries like Germany and France are feeling compelled to bail out Greece. If they don't, their economies will suffer, too, and the political/economic experiment that is the EU will go into the dustbin of history (as have all other pseudo-unions of this sort).
As I've remarked elsewhere, Greece's tragic movie is coming to theaters near you, because Greece's issues are and will be repeated the world over. This includes western Europe's sick brothers: Portugal, Italy, Ireland, and Spain; several eastern European countries; several South American countries; and will soon feature such first world countries as the United Kingdom, Japan, and the United States.
If this sounds like hyperbole to you, I don't blame you. But, let me explain.
Greece's problems are not a product of bad luck or bad timing, but are self-imposed. Like Bernie Madoff's Ponzi scheme, Greece's government promised benefits it couldn't possibly pay out. Greece's economy is saddled with a huge public sector that has overly generous pay, benefits and pensions. Now that Greece needs to trim back those benefits to get its fiscal house in order, public sector employees are taking to the streets in violent protest. This is shutting down its economy. This may be hard to believe for Americans, but Greece's Air Force protested by not coming to work this week! When the defense sector goes on strike, things are out of hand.
How can Greece solve its problems? It must cut public spending and grow the economy. Only then can it pay back its debt burden. This is no more complex than a family running up too much credit card debt--the solution is to spend less, make more money, and pay off debts. But, Greece's family is refusing to cut spending while its public sector is preventing growth. Not a pretty picture.
Greece is not alone in having made such unfulfillable promises. Close on its heels are Portugal and Spain. What made news this week was what debt markets noted months ago: the credit worthiness of Greece, Spain and Portugal is degrading--the rating agencies snapped out of their stupor and finally downgraded Spain, Portugal and Greece. In fact, Greece was cut all the way to junk.
So now Greek tragedy is spreading to the weaker brothers of Europe. Who is next in line? Italy and Ireland, and then eastern Europe, and so on. The problem is that this could feed on itself. If the EU, primarily Germany and France, don't nip this in the bud, the problem will grow over most of Europe. What turns this into a negative feedback loop is that when credit ratings are cut and interest rates soar, it becomes more difficult to cut spending and grow your way out of the problem.
How does this impact the U.K., Japan and the U.S.? All three have made promises they can't keep; all three hope to grow beyond their obligations instead of cutting benefits; all three assume they can grow by selling products to places like Europe, China, etc. All three face Greece's problems, but at an earlier stage. If they don't reduce cut spending or grow strongly enough, they will before long find themselves in their own Greek tragedy.
If you don't think the U.S. (or the U.K., or Japan) has such a problem with its public sector, check again. Our states and municipalities have made enormous promises to public sector employees--promises that almost any actuarial accountant will tell you are unfulfillable. How do you think teachers, policemen, fire-fighters, motor vehicle administrators, etc. will react when we say we need to cut their pay, benefits and pensions? Perhaps not with violent street protests, but certainly not with simple resignation.
Greece's overwhelming problems will not visit us tomorrow, but they will come over time. Even if Greece's problems are solved, which will probably cost the EU (and International Monetary Fund (IMF)) 180 billion euros over the next 3 years, the EU still has to deal with Portugal, Spain, Italy and Ireland. How many hundreds of billions of euros before France and Germany are pulled down, too?
Greece's problems are turning into Spain and Portugal's problems, which are turning into France and Germany's problems, which will eventually hurt the U.K., Japan and U.S.
With all that, what are the investing implications?
1) Buying sovereign bonds or holding cash is more dangerous than it may seem. If you must hold bonds, hold corporate or inflation protected bonds. If you must hold cash, gold is the way to go.
2) The world economy is likely to continue growing despite these issues. Fiscal stimulus from Europe, Japan, the U.S. and China will not run out until later this year, and until that happens, sovereign subprime will be a side issue. But, markets are likely to be more volatile than they have been over the last year, so owning something that does well in more volatile markets will probably be beneficial.
3) For the long run, buy blue chip, franchise companies and lowest cost commodity producers. Great companies have pricing power and not much debt, so they will be able to grab market share, grow, and adapt to changing times. When longer term sovereign issues raise their head more significantly, interest rates will spike, currencies will tank, and commodities will thrive. Owning lowest cost producers will be very profitable.
4) The timing on these issues coming to a head will be almost impossible to get right. If Germany decides to be nationalistic and kicks Greece out of the EU, markets will react right away. If the EU bails out Greece, then Portugal, then Spain, then Italy, etc. this could drag out over a long time. If you can read minds and know how sovereign powers will react, you can get the timing right; for the rest of us mortals, trying to time the markets will prove to be a fool's errand.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I've written several blogs touching on Greece's problems over the last 5 months (please see: Sovereign Subprime, Bonds and Cash Just Aren't That Safe, Going Greek, Return of the Bond Market Vigilantes). But, as one of my long time readers noted, given recent events, it's time for an update.
First, a review. Greece's fiscal deficit is hitting double digits. When deficits get this large, countries find it difficult to issue debt and keep their currency from sliding in value. Greece, however, is in a unique position as a member of the European Union (EU) that also utilizes the euro as its currency. Greece's fiscal and debt problems are not just their own, but an issue for the entire EU. This means more fiscally responsible countries like Germany and France are feeling compelled to bail out Greece. If they don't, their economies will suffer, too, and the political/economic experiment that is the EU will go into the dustbin of history (as have all other pseudo-unions of this sort).
As I've remarked elsewhere, Greece's tragic movie is coming to theaters near you, because Greece's issues are and will be repeated the world over. This includes western Europe's sick brothers: Portugal, Italy, Ireland, and Spain; several eastern European countries; several South American countries; and will soon feature such first world countries as the United Kingdom, Japan, and the United States.
If this sounds like hyperbole to you, I don't blame you. But, let me explain.
Greece's problems are not a product of bad luck or bad timing, but are self-imposed. Like Bernie Madoff's Ponzi scheme, Greece's government promised benefits it couldn't possibly pay out. Greece's economy is saddled with a huge public sector that has overly generous pay, benefits and pensions. Now that Greece needs to trim back those benefits to get its fiscal house in order, public sector employees are taking to the streets in violent protest. This is shutting down its economy. This may be hard to believe for Americans, but Greece's Air Force protested by not coming to work this week! When the defense sector goes on strike, things are out of hand.
How can Greece solve its problems? It must cut public spending and grow the economy. Only then can it pay back its debt burden. This is no more complex than a family running up too much credit card debt--the solution is to spend less, make more money, and pay off debts. But, Greece's family is refusing to cut spending while its public sector is preventing growth. Not a pretty picture.
Greece is not alone in having made such unfulfillable promises. Close on its heels are Portugal and Spain. What made news this week was what debt markets noted months ago: the credit worthiness of Greece, Spain and Portugal is degrading--the rating agencies snapped out of their stupor and finally downgraded Spain, Portugal and Greece. In fact, Greece was cut all the way to junk.
So now Greek tragedy is spreading to the weaker brothers of Europe. Who is next in line? Italy and Ireland, and then eastern Europe, and so on. The problem is that this could feed on itself. If the EU, primarily Germany and France, don't nip this in the bud, the problem will grow over most of Europe. What turns this into a negative feedback loop is that when credit ratings are cut and interest rates soar, it becomes more difficult to cut spending and grow your way out of the problem.
How does this impact the U.K., Japan and the U.S.? All three have made promises they can't keep; all three hope to grow beyond their obligations instead of cutting benefits; all three assume they can grow by selling products to places like Europe, China, etc. All three face Greece's problems, but at an earlier stage. If they don't reduce cut spending or grow strongly enough, they will before long find themselves in their own Greek tragedy.
If you don't think the U.S. (or the U.K., or Japan) has such a problem with its public sector, check again. Our states and municipalities have made enormous promises to public sector employees--promises that almost any actuarial accountant will tell you are unfulfillable. How do you think teachers, policemen, fire-fighters, motor vehicle administrators, etc. will react when we say we need to cut their pay, benefits and pensions? Perhaps not with violent street protests, but certainly not with simple resignation.
Greece's overwhelming problems will not visit us tomorrow, but they will come over time. Even if Greece's problems are solved, which will probably cost the EU (and International Monetary Fund (IMF)) 180 billion euros over the next 3 years, the EU still has to deal with Portugal, Spain, Italy and Ireland. How many hundreds of billions of euros before France and Germany are pulled down, too?
Greece's problems are turning into Spain and Portugal's problems, which are turning into France and Germany's problems, which will eventually hurt the U.K., Japan and U.S.
With all that, what are the investing implications?
1) Buying sovereign bonds or holding cash is more dangerous than it may seem. If you must hold bonds, hold corporate or inflation protected bonds. If you must hold cash, gold is the way to go.
2) The world economy is likely to continue growing despite these issues. Fiscal stimulus from Europe, Japan, the U.S. and China will not run out until later this year, and until that happens, sovereign subprime will be a side issue. But, markets are likely to be more volatile than they have been over the last year, so owning something that does well in more volatile markets will probably be beneficial.
3) For the long run, buy blue chip, franchise companies and lowest cost commodity producers. Great companies have pricing power and not much debt, so they will be able to grab market share, grow, and adapt to changing times. When longer term sovereign issues raise their head more significantly, interest rates will spike, currencies will tank, and commodities will thrive. Owning lowest cost producers will be very profitable.
4) The timing on these issues coming to a head will be almost impossible to get right. If Germany decides to be nationalistic and kicks Greece out of the EU, markets will react right away. If the EU bails out Greece, then Portugal, then Spain, then Italy, etc. this could drag out over a long time. If you can read minds and know how sovereign powers will react, you can get the timing right; for the rest of us mortals, trying to time the markets will prove to be a fool's errand.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 23, 2010
Unexciting expectations.
The stock market is a puzzle to most people. It zigs when everyone expects it to zag. It goes up on a bad unemployment report one day, then down when a report shows the economy is booming the next. It can leave us frustrated and angry on such occasions.
Although I agree it's a mystery in the short term, it's much less of a puzzle over the long term. At any point in time, it's possible to provide a reasonable range of returns for the next 5 or 10 years. The market doesn't end at a precise point over that time frame, but it does follow a logical path.
The market's underlying logic is based on fundamentals. They include: 1) profits, 2) growth, 3) dividends and 4) how much people are willing to pay for those three. The first 3 are straightforward; the third is erratic over the short run, but tends to revert to the mean over the long haul.
No crystal ball needed. No eye of newt, or rat tail. Just an understanding of the underlying logic and the discipline to realize that's where things will head over time.
What does my "crystal ball" show for market returns over the next 5 to 10 years? A pretty unexciting picture. Over the next 5 years, I expect returns of -4% to 11%, with an average tendency of 3%. See, unexciting. Over the next 10 years, it looks like 2% to 10% annualized returns with an average of 6%. Assuming inflation in the 3% range, that leaves 0% to 3% real, annualized returns over the next 5 to 10 years. Probably a lot less than most people are expecting or planning.
The path to that range and those averages is likely to be much more "exciting." If anything was learned over the last 2 1/2 years, it's that a boring long term path may prove terrifyingly exciting over the short run.
The market peaked in October 2007, plunged 57%, then climbed 79% to today. That's a 23% decline from fall 2007, and an annualized loss of 10% a year. Our path going forward may prove similarly breath-taking.
How do you avoid such "excitement"? Don't invest in the stock market. But, beware that inflation and defaults may make cash and bonds just as terrifying.
Is there any way to do better? Yes, but it means being more selective than buying "the market." Over almost any time period, some stocks do well. Finding them isn't an easy task, but it can be done. Wal-Mart and Johnson & Johnson, which I held for clients and myself during the downturn, did quite well.
This doesn't eliminate risk, or volatility. That's just part of life (and especially investing). But, better long term returns are possible. They're unlikely to shoot out the lights, but they can put you in a much better position when the next real bull market begins.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The stock market is a puzzle to most people. It zigs when everyone expects it to zag. It goes up on a bad unemployment report one day, then down when a report shows the economy is booming the next. It can leave us frustrated and angry on such occasions.
Although I agree it's a mystery in the short term, it's much less of a puzzle over the long term. At any point in time, it's possible to provide a reasonable range of returns for the next 5 or 10 years. The market doesn't end at a precise point over that time frame, but it does follow a logical path.
The market's underlying logic is based on fundamentals. They include: 1) profits, 2) growth, 3) dividends and 4) how much people are willing to pay for those three. The first 3 are straightforward; the third is erratic over the short run, but tends to revert to the mean over the long haul.
No crystal ball needed. No eye of newt, or rat tail. Just an understanding of the underlying logic and the discipline to realize that's where things will head over time.
What does my "crystal ball" show for market returns over the next 5 to 10 years? A pretty unexciting picture. Over the next 5 years, I expect returns of -4% to 11%, with an average tendency of 3%. See, unexciting. Over the next 10 years, it looks like 2% to 10% annualized returns with an average of 6%. Assuming inflation in the 3% range, that leaves 0% to 3% real, annualized returns over the next 5 to 10 years. Probably a lot less than most people are expecting or planning.
The path to that range and those averages is likely to be much more "exciting." If anything was learned over the last 2 1/2 years, it's that a boring long term path may prove terrifyingly exciting over the short run.
The market peaked in October 2007, plunged 57%, then climbed 79% to today. That's a 23% decline from fall 2007, and an annualized loss of 10% a year. Our path going forward may prove similarly breath-taking.
How do you avoid such "excitement"? Don't invest in the stock market. But, beware that inflation and defaults may make cash and bonds just as terrifying.
Is there any way to do better? Yes, but it means being more selective than buying "the market." Over almost any time period, some stocks do well. Finding them isn't an easy task, but it can be done. Wal-Mart and Johnson & Johnson, which I held for clients and myself during the downturn, did quite well.
This doesn't eliminate risk, or volatility. That's just part of life (and especially investing). But, better long term returns are possible. They're unlikely to shoot out the lights, but they can put you in a much better position when the next real bull market begins.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 16, 2010
The iPad is good--no GREAT!--for cable and phone companies.
I don't own an Apple iPad, but I do own an iPod Touch, so I can well imagine how great the Apple iPad will be.
However, I strongly disagree with those who believe it's the death-dell for cable and phone companies (full disclosure: I own Comcast and Verizon stock both for clients and myself). In fact, I believe the iPad, and other devices like it, will be a huge boon to phone and cable companies. Now, let me explain why.
First off, let me be clear: the iPhone, iPad and iPod Touch are revolutionary. If you've used any of these, you know what I'm talking about. Whether you use it to surf the net, play games, download apps, whatever, it's amazing.
But, something new and amazing doesn't necessarily mean the end of everything else. I don't believe I'll be eating dinner off an iPad in 5 years because plates will become obsolete (any more than I believed the Internet would change everything--EVERYTHING--10 years ago during the dot-com bubble).
Innovations are hard to predict, and their impact on other things is even more difficult to forecast. So, let's all just take a deep breath...
Back to the subject at hand: I've read many articles over the past 5 years saying that cable and phone companies will go the way of the dodo because of Internet and wireless advances. Will cable and phone companies be impacted? You betcha! Will they become obsolete over night? No way. Is it possible they may adapt to this new landscape and thrive? Indeed, it is possible, maybe even likely.
I even read one article where the author claimed 50% of all video would be watched on phones. Perhaps that author knows something I don't, but I'm having a hard time imagining a family watching a movie on a phone, or even the amazing iPad. I could be wrong...
The other problem I have with the "all land-lines are dead" vision of the future can be summed up in two words: reliable bandwidth. Does anyone really believe that wireless cell phones are currently capable of handling high-bandwidth video? Did dropped calls suddenly disappear and I didn't get the memo? Will people really watch streaming video, like live sports, over such an unreliable service? At some point in time, yes, but not yet.
Let's keep in mind, the phone company carrying iPhone can hardly handle people downloading apps and making phone calls, and somehow that same network is going to handle live sports videos? I'll believe it when I see it. And, if I do, I doubt it will be within the next 3 years.
The iPad brilliantly illustrates my point. So far, it doesn't work through cell phone coverage (although it will very soon). What does it work through? WiFi, or short range wireless. Which is connected to what? Oh, that's right, a phone or cable line.
The secret to successful wireless technology is to get it on a land-line as soon as possible. Why? Because wireless is no where near as reliable and secure, nor does it have the same 2 way bandwidth, as wireline. And, guess what, that won't change any time soon.
So, if you want to watch movies and live sports and downloads apps and whatnot, you'll be doing it over a big fat land-line pipe. Guess who will provide that pipe? Phone and cable companies.
The usual reasoning I see from here is that cable and phone companies make their money with land-lines by selling us a bunch of channels we don't want or need. Wrong.
Phone and cable companies have to pay an arm and a leg to buy content to put on their networks, and the margins they make on that business are much smaller than the margins they make bringing high bandwidth Internet access to your home or office.
When every home has 3 iPads, 4 wireless computers, movies sent to the TV over the Internet, etc., people will want higher bandwidth than 1.5 Mbps (Mega bits per second). They'll want huge bandwidth. And, cable and phone companies will be happy to provide 50 Mbps, 100 Mbps, 1,000 Mbps! But, for a price. If people really want all that bandwidth, they'll be happy to pay for it.
If the phone and cable companies were smart, they'd be more focused on bringing the highest bandwidth possible to the home and reducing their business expenses to the bone. That's what they're doing.
They know they can make more money with an all digital, high bandwidth network. They know that paying an arm and leg for content doesn't make sense in the long run. They also know that many, if not most, of their customers will take several years to adapt to this new reality. They see the future, and probably better than I do.
The iPad is great for cable and phone companies because they can make more money selling customers high bandwidth Internet, and the best way to get there is to have millions of consumers realize they need more...More...MORE bandwidth to do what they want with their shiny new iPads.
I say, the more the merrier! Buy tons of iPads, use them to do everything you want over the net. But, realize, too, that you'll be doing it all over a fat land-line, and that cable and phone companies will be bringing that to you.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I don't own an Apple iPad, but I do own an iPod Touch, so I can well imagine how great the Apple iPad will be.
However, I strongly disagree with those who believe it's the death-dell for cable and phone companies (full disclosure: I own Comcast and Verizon stock both for clients and myself). In fact, I believe the iPad, and other devices like it, will be a huge boon to phone and cable companies. Now, let me explain why.
First off, let me be clear: the iPhone, iPad and iPod Touch are revolutionary. If you've used any of these, you know what I'm talking about. Whether you use it to surf the net, play games, download apps, whatever, it's amazing.
But, something new and amazing doesn't necessarily mean the end of everything else. I don't believe I'll be eating dinner off an iPad in 5 years because plates will become obsolete (any more than I believed the Internet would change everything--EVERYTHING--10 years ago during the dot-com bubble).
Innovations are hard to predict, and their impact on other things is even more difficult to forecast. So, let's all just take a deep breath...
Back to the subject at hand: I've read many articles over the past 5 years saying that cable and phone companies will go the way of the dodo because of Internet and wireless advances. Will cable and phone companies be impacted? You betcha! Will they become obsolete over night? No way. Is it possible they may adapt to this new landscape and thrive? Indeed, it is possible, maybe even likely.
I even read one article where the author claimed 50% of all video would be watched on phones. Perhaps that author knows something I don't, but I'm having a hard time imagining a family watching a movie on a phone, or even the amazing iPad. I could be wrong...
The other problem I have with the "all land-lines are dead" vision of the future can be summed up in two words: reliable bandwidth. Does anyone really believe that wireless cell phones are currently capable of handling high-bandwidth video? Did dropped calls suddenly disappear and I didn't get the memo? Will people really watch streaming video, like live sports, over such an unreliable service? At some point in time, yes, but not yet.
Let's keep in mind, the phone company carrying iPhone can hardly handle people downloading apps and making phone calls, and somehow that same network is going to handle live sports videos? I'll believe it when I see it. And, if I do, I doubt it will be within the next 3 years.
The iPad brilliantly illustrates my point. So far, it doesn't work through cell phone coverage (although it will very soon). What does it work through? WiFi, or short range wireless. Which is connected to what? Oh, that's right, a phone or cable line.
The secret to successful wireless technology is to get it on a land-line as soon as possible. Why? Because wireless is no where near as reliable and secure, nor does it have the same 2 way bandwidth, as wireline. And, guess what, that won't change any time soon.
So, if you want to watch movies and live sports and downloads apps and whatnot, you'll be doing it over a big fat land-line pipe. Guess who will provide that pipe? Phone and cable companies.
The usual reasoning I see from here is that cable and phone companies make their money with land-lines by selling us a bunch of channels we don't want or need. Wrong.
Phone and cable companies have to pay an arm and a leg to buy content to put on their networks, and the margins they make on that business are much smaller than the margins they make bringing high bandwidth Internet access to your home or office.
When every home has 3 iPads, 4 wireless computers, movies sent to the TV over the Internet, etc., people will want higher bandwidth than 1.5 Mbps (Mega bits per second). They'll want huge bandwidth. And, cable and phone companies will be happy to provide 50 Mbps, 100 Mbps, 1,000 Mbps! But, for a price. If people really want all that bandwidth, they'll be happy to pay for it.
If the phone and cable companies were smart, they'd be more focused on bringing the highest bandwidth possible to the home and reducing their business expenses to the bone. That's what they're doing.
They know they can make more money with an all digital, high bandwidth network. They know that paying an arm and leg for content doesn't make sense in the long run. They also know that many, if not most, of their customers will take several years to adapt to this new reality. They see the future, and probably better than I do.
The iPad is great for cable and phone companies because they can make more money selling customers high bandwidth Internet, and the best way to get there is to have millions of consumers realize they need more...More...MORE bandwidth to do what they want with their shiny new iPads.
I say, the more the merrier! Buy tons of iPads, use them to do everything you want over the net. But, realize, too, that you'll be doing it all over a fat land-line, and that cable and phone companies will be bringing that to you.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 09, 2010
Renminbi revaluation.
Be careful what you wish for, you just might get it.
The U.S. Congress has been trying to get the Chinese to allow their currency, the renminbi (or yuan), to appreciate versus the U.S. dollar. Timothy Geithner, our Treasury Secretary, rushed off to the far east to broker such a deal a couple of days ago.
Whereas most see this as a wonderful beginning, I believe it will end in tears.
Chinese currency is called renminbi. The word means "people's currency" (in direct contradiction of those who believe China has anything to do with capitalism). It's more commonly and historically called the yuan (which means round, after the shape of coins).
The Chinese peg their currency to the dollar. This means they buy and sell dollars and yuan to keep the 2 currencies marching in lockstep. The yuan was pegged to the dollar from 1997-2005 at 8.27 yuan to the dollar. It was allowed to float somewhat freely ("managed peg") from 2005 to 2008, where it appreciated (in a very controlled manner) from 8.27 to 6.83 (fewer yuan to dollars means the yuan is going up in value). That managed peg lasted until the crisis of 2008, when it was put back on a fixed peg at 6.83 yuan to the dollar, and remains there still.
The Chinese are not mean-spirited in pegging their currency. They partially do it to maintain their trading relationship to the U.S. It's easier to conduct trade, both for people in the U.S. and China, when you know what the exchange rate will be. They also peg their currency because they are a controlled economy. In other words, they don't have the mechanisms to let their economy manage itself because it's not a free market.
Many think this gives China an unfair advantage (sarcastic comment: just like it gives Alabama an unfair advantage over Michigan to have the dollar in Alabama the same as the dollar in Michigan). Such folks believe we must force China to remove its peg so we can compete more "fairly" (unless, of course, the people in Congress think they are losing, then they don't want it to be fair).
I don't believe forcing China to revalue its currency will be all good news.
It will be good for U.S. companies who compete with China. If Chinese and U.S. companies are competing for the same business, China has an advantage by manipulating its currency. But, China does not compete with the U.S. for high-end manufacturing, they compete with the U.S. at the low end, mostly. So, it will benefit low-end manufacturing in the U.S.
But, this will be bad for U.S. consumers. Letting the yuan appreciate will make all those Chinese goods we buy cost more (and we buy a LOT of Chinese goods). It also means China will have a more valuable currency to compete with U.S. dollars in buying goods all over the globe. In other words, it will lead to higher prices for commodities, goods, probably everything.
A small minority of U.S. businesses, with buddies in the Congress, will benefit at the expense of the vast majority of U.S. consumers and higher-end U.S. businesses. Isn't that nice.
The fallout will not be pretty, to be frank. It's bad for bonds because it means higher interest rates. And, those higher rates will hit U.S. consumers, U.S. businesses, and, of course, the biggest debtor of all: the U.S. government.
It will be good for commodity investments. It will be good for U.S. businesses in competition with Chinese businesses. That seems like more downside than upside to me.
To top it off, it won't solve the U.S.'s fiscal problems--it will make them worse. Higher interest rates and inflation will not reduce the U.S.'s debt, or reduce our burden of future social programs. Nor will it help employment. For every new job in low end manufacturing, we'll lose 2 or more elsewhere. It will lead to larger public finance problems, and sooner.
The U.S.'s problem is that it spends too much and it pays with debt. That's not China's fault. We need to save more, spend less, and make products that others want. We won't beat China with low-end manufacturing, but we can at the high-end. But, a depreciating dollar relative to an appreciating yuan won't help that.
No, getting the Chinese to allow the yuan to appreciate will not help the U.S., it will help China. Is that what we really want?
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Be careful what you wish for, you just might get it.
The U.S. Congress has been trying to get the Chinese to allow their currency, the renminbi (or yuan), to appreciate versus the U.S. dollar. Timothy Geithner, our Treasury Secretary, rushed off to the far east to broker such a deal a couple of days ago.
Whereas most see this as a wonderful beginning, I believe it will end in tears.
Chinese currency is called renminbi. The word means "people's currency" (in direct contradiction of those who believe China has anything to do with capitalism). It's more commonly and historically called the yuan (which means round, after the shape of coins).
The Chinese peg their currency to the dollar. This means they buy and sell dollars and yuan to keep the 2 currencies marching in lockstep. The yuan was pegged to the dollar from 1997-2005 at 8.27 yuan to the dollar. It was allowed to float somewhat freely ("managed peg") from 2005 to 2008, where it appreciated (in a very controlled manner) from 8.27 to 6.83 (fewer yuan to dollars means the yuan is going up in value). That managed peg lasted until the crisis of 2008, when it was put back on a fixed peg at 6.83 yuan to the dollar, and remains there still.
The Chinese are not mean-spirited in pegging their currency. They partially do it to maintain their trading relationship to the U.S. It's easier to conduct trade, both for people in the U.S. and China, when you know what the exchange rate will be. They also peg their currency because they are a controlled economy. In other words, they don't have the mechanisms to let their economy manage itself because it's not a free market.
Many think this gives China an unfair advantage (sarcastic comment: just like it gives Alabama an unfair advantage over Michigan to have the dollar in Alabama the same as the dollar in Michigan). Such folks believe we must force China to remove its peg so we can compete more "fairly" (unless, of course, the people in Congress think they are losing, then they don't want it to be fair).
I don't believe forcing China to revalue its currency will be all good news.
It will be good for U.S. companies who compete with China. If Chinese and U.S. companies are competing for the same business, China has an advantage by manipulating its currency. But, China does not compete with the U.S. for high-end manufacturing, they compete with the U.S. at the low end, mostly. So, it will benefit low-end manufacturing in the U.S.
But, this will be bad for U.S. consumers. Letting the yuan appreciate will make all those Chinese goods we buy cost more (and we buy a LOT of Chinese goods). It also means China will have a more valuable currency to compete with U.S. dollars in buying goods all over the globe. In other words, it will lead to higher prices for commodities, goods, probably everything.
A small minority of U.S. businesses, with buddies in the Congress, will benefit at the expense of the vast majority of U.S. consumers and higher-end U.S. businesses. Isn't that nice.
The fallout will not be pretty, to be frank. It's bad for bonds because it means higher interest rates. And, those higher rates will hit U.S. consumers, U.S. businesses, and, of course, the biggest debtor of all: the U.S. government.
It will be good for commodity investments. It will be good for U.S. businesses in competition with Chinese businesses. That seems like more downside than upside to me.
To top it off, it won't solve the U.S.'s fiscal problems--it will make them worse. Higher interest rates and inflation will not reduce the U.S.'s debt, or reduce our burden of future social programs. Nor will it help employment. For every new job in low end manufacturing, we'll lose 2 or more elsewhere. It will lead to larger public finance problems, and sooner.
The U.S.'s problem is that it spends too much and it pays with debt. That's not China's fault. We need to save more, spend less, and make products that others want. We won't beat China with low-end manufacturing, but we can at the high-end. But, a depreciating dollar relative to an appreciating yuan won't help that.
No, getting the Chinese to allow the yuan to appreciate will not help the U.S., it will help China. Is that what we really want?
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 02, 2010
Self-imposed retirement delusion.
The American dream is financial independence, but we aren't saving or planning enough for retirement. Everybody knows this, but we aren't doing enough about it. Frankly, the gulf between what people know and what they're doing has progressed beyond "inadequate planning," it's outright delusional.
How much do you need? Around 20 times your annual spending needs. That will allow you to withdraw 5% a year and still handle the bumps and bruises that markets will inevitably serve over time. Conservatively, I use 22 times my desired retirement spending needs, and that doesn't include income from any source other than savings.
If you have a pension or fixed annuity, you can subtract that from your annual needs to do the calculation. If you're older than 50, you can probably plan to receive the social security benefits you've been promised. If you're 40 to 50, be ready to give those benefits a significant haircut. If you're below 40, like me, don't count on it (by the way, the more you save, the less likely you'll be to get it).
Assuming the average John and Jane Doe need around $40,000 a year to live on, they'll need $800,000 to retire. Americans aren't even on a glide-path to reach that point--they're on a different planet.
According to the Employee Benefit Research Institute's 2010 survey, 54% of those currently working have less than $25,000 in savings and 88% have less than $250,000. Those already retired are even worse off: 56% with less than $25,000 and 88% less than $250,000.
It's not just a matter of not having saved enough, it's a matter of even having thought about it. Both retirees and workers are confident they have or will have enough to retire. And, this is from a group where only 46% have even tried to calculate how much they'll need! Delusional.
How do workers and retirees expect to get by? That's where the survey gets scary. 66% of workers expect to keep working past 65. The percent of actual retirees that work past 65? 39%. In other words, people expect to keep working past 65, but don't--not because they don't want or need to, but because they can't. Why? Because they get fired, can't find work, or, most frequently, have health issues that make working impossible.
A startling 70% of those currently working expect to continue working in retirement to pay the bills. The percent of retirees who actually manage to do this: 33%.
The average worker expects his retirement income to come from working in retirement and a pension (even though the vast majority admit they don't have pensions and won't because few companies offer them). Where do actual retirees get most of their retirement income? Social security.
So, most people are planning to keep working, but the data clearly shows that won't happen for most. And, most expect to get a pension even though they don't have one and have no clear path for getting one. The reality is that most retirees rely on social security, but only 30% of people working and 52% of those currently retired expect social security to be available. This fantasy will turn to farce, but it's won't be funny.
The stock market--by itself--won't bail us out, either. Trend-line growth of 6% plus a 2% dividend yield means we should expect only 8% returns (which includes 3% inflation). But, most people won't even get those returns because they'll pay too much in fees and then they'll chase performance (selling what "didn't work" to buy what's recently "been working"). The reality is that most people will get returns that simply match inflation.
What's the real solution? Save more, save more, save more (which conversely means: spend less, spend less, spend less). I'm 39 and have 20% of the savings I'll need in 26 years (assuming 65 retirement, whether I like it or not!). Assuming I can get market returns (even though I've beat the market by 5% on average, annually over the last 14 years), I'll need to save 10% of my annual income to get there. I'm saving 20%. In other words, I'm not planning to get there with just enough if everything goes right, I'm assuming things won't go right and building a margin of safety into my plan.
It's time to drop the delusion and act. That action means saving more, spending less, investing wisely, and planning to have more than needed. The benefits are more than simply having peace of mind, it'll be food on the table and a roof over your head when you're too old to fix past mistakes.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The American dream is financial independence, but we aren't saving or planning enough for retirement. Everybody knows this, but we aren't doing enough about it. Frankly, the gulf between what people know and what they're doing has progressed beyond "inadequate planning," it's outright delusional.
How much do you need? Around 20 times your annual spending needs. That will allow you to withdraw 5% a year and still handle the bumps and bruises that markets will inevitably serve over time. Conservatively, I use 22 times my desired retirement spending needs, and that doesn't include income from any source other than savings.
If you have a pension or fixed annuity, you can subtract that from your annual needs to do the calculation. If you're older than 50, you can probably plan to receive the social security benefits you've been promised. If you're 40 to 50, be ready to give those benefits a significant haircut. If you're below 40, like me, don't count on it (by the way, the more you save, the less likely you'll be to get it).
Assuming the average John and Jane Doe need around $40,000 a year to live on, they'll need $800,000 to retire. Americans aren't even on a glide-path to reach that point--they're on a different planet.
According to the Employee Benefit Research Institute's 2010 survey, 54% of those currently working have less than $25,000 in savings and 88% have less than $250,000. Those already retired are even worse off: 56% with less than $25,000 and 88% less than $250,000.
It's not just a matter of not having saved enough, it's a matter of even having thought about it. Both retirees and workers are confident they have or will have enough to retire. And, this is from a group where only 46% have even tried to calculate how much they'll need! Delusional.
How do workers and retirees expect to get by? That's where the survey gets scary. 66% of workers expect to keep working past 65. The percent of actual retirees that work past 65? 39%. In other words, people expect to keep working past 65, but don't--not because they don't want or need to, but because they can't. Why? Because they get fired, can't find work, or, most frequently, have health issues that make working impossible.
A startling 70% of those currently working expect to continue working in retirement to pay the bills. The percent of retirees who actually manage to do this: 33%.
The average worker expects his retirement income to come from working in retirement and a pension (even though the vast majority admit they don't have pensions and won't because few companies offer them). Where do actual retirees get most of their retirement income? Social security.
So, most people are planning to keep working, but the data clearly shows that won't happen for most. And, most expect to get a pension even though they don't have one and have no clear path for getting one. The reality is that most retirees rely on social security, but only 30% of people working and 52% of those currently retired expect social security to be available. This fantasy will turn to farce, but it's won't be funny.
The stock market--by itself--won't bail us out, either. Trend-line growth of 6% plus a 2% dividend yield means we should expect only 8% returns (which includes 3% inflation). But, most people won't even get those returns because they'll pay too much in fees and then they'll chase performance (selling what "didn't work" to buy what's recently "been working"). The reality is that most people will get returns that simply match inflation.
What's the real solution? Save more, save more, save more (which conversely means: spend less, spend less, spend less). I'm 39 and have 20% of the savings I'll need in 26 years (assuming 65 retirement, whether I like it or not!). Assuming I can get market returns (even though I've beat the market by 5% on average, annually over the last 14 years), I'll need to save 10% of my annual income to get there. I'm saving 20%. In other words, I'm not planning to get there with just enough if everything goes right, I'm assuming things won't go right and building a margin of safety into my plan.
It's time to drop the delusion and act. That action means saving more, spending less, investing wisely, and planning to have more than needed. The benefits are more than simply having peace of mind, it'll be food on the table and a roof over your head when you're too old to fix past mistakes.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, March 26, 2010
China crazy!
Need further proof that people are going nuts over China? Simply adding "China" to a company's name has led to beating the market by 31% (for 18 listed companies so far in 2010). This is the finding of Professor Wei Wang of Queen's School of Business and reported by Jason Zweig in the Wall Street Journal this week.
The last time this happened was between 2004 and 2007, when adding the words "oil" or "petroleum" led to an 8% boost in stock performance.
Before that, it was the technology bubble from 1998 to 1999, when adding ".com" to a company's name led to 53% out-performance of other technology stocks.
In the late 1960's, a company's stock would soar if it added "-tronics" or "-dyne" to its name.
I'm sure if we went back to the 1800's, we'd find the same thing for "canal" and "railroad" companies.
It's a story as old as markets. People fall for the hype only to find they've invested in little more than smoke and mirrors.
I don't mean to say that no company is China is worth its salt. Nor am I saying that all oil, .com, or -tronics companies are pure puffery.
But, when simply changing the name of your company to reflect the latest craze leads to serious out-performance, you know there's a bubble afoot.
China, too, may not live up to the hype.
Is China a huge and growing market? Yes, indeed. Will China's economy have a huge and growing impact on the world economy? Unequivocally, yes.
But, that doesn't mean every investment in China will do well. In fact, it might be a good idea to pull back on the China hype and consider other less bubbly alternatives.
Perhaps a case history can be instructive, here. The last time people went country-crazy was the mid to late 1980's. Then, it was Japan, Inc. Do you remember how Japan was buying up real estate in New York, Hawaii and California, and how almost everyone was convinced the Japanese way of doing everything was better?
Fast forward to 2010, and Japan has been in a 20 year off-again, on-again recession. Their stock market peaked at almost 39,000 in late 1989 only to fall below 8,000 twice in the last 20 years (down over 80%). Even now, their market is around 11,000, down over 70% from it's peak of over 20 years ago!
Can you imagine if the Dow Jones Industrial Average were at 4,250 19 years from now!? That was the Japanese hype experience.
China's story may not look much better 10 or 20 years from now, either.
Before jumping into the hype machine, remember the lessons of history. Extreme hype is almost always a bad sign.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Need further proof that people are going nuts over China? Simply adding "China" to a company's name has led to beating the market by 31% (for 18 listed companies so far in 2010). This is the finding of Professor Wei Wang of Queen's School of Business and reported by Jason Zweig in the Wall Street Journal this week.
The last time this happened was between 2004 and 2007, when adding the words "oil" or "petroleum" led to an 8% boost in stock performance.
Before that, it was the technology bubble from 1998 to 1999, when adding ".com" to a company's name led to 53% out-performance of other technology stocks.
In the late 1960's, a company's stock would soar if it added "-tronics" or "-dyne" to its name.
I'm sure if we went back to the 1800's, we'd find the same thing for "canal" and "railroad" companies.
It's a story as old as markets. People fall for the hype only to find they've invested in little more than smoke and mirrors.
I don't mean to say that no company is China is worth its salt. Nor am I saying that all oil, .com, or -tronics companies are pure puffery.
But, when simply changing the name of your company to reflect the latest craze leads to serious out-performance, you know there's a bubble afoot.
China, too, may not live up to the hype.
Is China a huge and growing market? Yes, indeed. Will China's economy have a huge and growing impact on the world economy? Unequivocally, yes.
But, that doesn't mean every investment in China will do well. In fact, it might be a good idea to pull back on the China hype and consider other less bubbly alternatives.
Perhaps a case history can be instructive, here. The last time people went country-crazy was the mid to late 1980's. Then, it was Japan, Inc. Do you remember how Japan was buying up real estate in New York, Hawaii and California, and how almost everyone was convinced the Japanese way of doing everything was better?
Fast forward to 2010, and Japan has been in a 20 year off-again, on-again recession. Their stock market peaked at almost 39,000 in late 1989 only to fall below 8,000 twice in the last 20 years (down over 80%). Even now, their market is around 11,000, down over 70% from it's peak of over 20 years ago!
Can you imagine if the Dow Jones Industrial Average were at 4,250 19 years from now!? That was the Japanese hype experience.
China's story may not look much better 10 or 20 years from now, either.
Before jumping into the hype machine, remember the lessons of history. Extreme hype is almost always a bad sign.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, March 19, 2010
Don't trust your gut.
One year ago, almost everyone was panicking. Stock markets were hitting new lows--more than 50% below all-time highs of fall 2007. Bankruptcy risk seemed to be around every corner with rumors flying about which companies would die next. Additional rumors were floating that the government would be taking over large banks like Citigroup and Bank of America. The fear was palpable.
Today, the S&P 500 is up around 75% (it still needs to climb another 35% to get back to Fall 2007 highs). Emerging markets and some commodities are up even more. The banks everyone thought would be taken over, Citigroup and Bank of America, are up 289% and 436%, respectively. Everyone is starting to feel calm again.
So, what have we learned? Trusting your gut feel to guide your decision to invest or not works terribly. Investing when it feels like the sky is falling is excruciatingly difficult, but generates the highest returns. Intestinal fortitude--having the courage of your conviction--is as important as sound analysis.
Or, as Warren Buffett put it: 1) you pay a high price for a cheery consensus, and 2) if you wait for the robins, spring will be over. Waiting until things feels good is a guaranteed trip to poor or mediocre returns. If you wait until you feel good, it'll be too late.
With this in mind, where are we now? Investors piled into cash and bonds last year--precisely when they should have been buying equities. Now that the market and economy have recovered, they're finally starting to buy equities, again.
Knowing how the stock market and human psychology works, I expect the stock market to continue creeping up until everyone is on the bandwagon. Once they are, and fund flows into mutual funds are hitting new highs again, and everyone feels nice and comfortable, it will be time for another drop.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
One year ago, almost everyone was panicking. Stock markets were hitting new lows--more than 50% below all-time highs of fall 2007. Bankruptcy risk seemed to be around every corner with rumors flying about which companies would die next. Additional rumors were floating that the government would be taking over large banks like Citigroup and Bank of America. The fear was palpable.
Today, the S&P 500 is up around 75% (it still needs to climb another 35% to get back to Fall 2007 highs). Emerging markets and some commodities are up even more. The banks everyone thought would be taken over, Citigroup and Bank of America, are up 289% and 436%, respectively. Everyone is starting to feel calm again.
So, what have we learned? Trusting your gut feel to guide your decision to invest or not works terribly. Investing when it feels like the sky is falling is excruciatingly difficult, but generates the highest returns. Intestinal fortitude--having the courage of your conviction--is as important as sound analysis.
Or, as Warren Buffett put it: 1) you pay a high price for a cheery consensus, and 2) if you wait for the robins, spring will be over. Waiting until things feels good is a guaranteed trip to poor or mediocre returns. If you wait until you feel good, it'll be too late.
With this in mind, where are we now? Investors piled into cash and bonds last year--precisely when they should have been buying equities. Now that the market and economy have recovered, they're finally starting to buy equities, again.
Knowing how the stock market and human psychology works, I expect the stock market to continue creeping up until everyone is on the bandwagon. Once they are, and fund flows into mutual funds are hitting new highs again, and everyone feels nice and comfortable, it will be time for another drop.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, March 12, 2010
Batting average.
Investing is a humbling profession. Like predicting the weather, you're proud if you get things right a mere 50% of the time. That's tough because it means you're also wrong a large percentage of the time, and that's humbling.
This surprises many because they think long-time professionals should be able to do much better. The reality is that predicting the future, especially financial markets, is extremely difficult to do.
I was reminded of this recently looking at the investing records of the best in the business. Investing legends, like Lew Sanders, brag about being right 52-53% of the time. Super-humans, like Warren Buffett, are right 90% of the time. But that still means he flubs it 10% of the time. His 2008 investment in ConocoPhillips is a great example. Even geniuses sometimes get it wrong.
This reminds me, too, of how experts in a field can miss big changes. Tom Watson, the famous builder of IBM, thought there was a "world market for maybe five computers" in 1943. Bill Gates famously missed how the Internet would change the computer industry. If the the most brilliant, successful people in the field can miss things, then mere mortals, like me, have to predict with caution.
How should this impact investment decision making? In two ways, I think.
First, you have to adjust your predictions for the fact that you aren't going to project accurately 100% of the time. This means buying with a margin of safety (purchasing significantly below what you think an investment is worth). It means using probability theory to adjust your assessments of the future. It also means taking a pass on things you know you can't predict (Buffett strongly emphasized this in his latest annual report to shareholders).
Second, it means you need to keep track of your ability to predict. How can you adjust your predictions if you don't know how you've done?
I keep track of my predicting ability by comparing how my investment decisions stack up against market returns. If a stock I buy and sell beats the market, I count that as a "hit." Then I calculate my "batting average" as a percentage of the time I "hit" versus "swing." I use this batting average to adjust my investment position sizes.
I also keep track of by how much I "hit" and "miss." You can have an above 50% batting average and do terribly if your hits beat the market by 5% but your misses go down by 20%. Lew Sanders does well because his 52-53% hits go up much more than his 47-48% misses.
My batting average has fluctuated between 55-70% over time. Pretty good, but I plan to get better. Keeping track of my batting average and degree of out/under-performance helps me improve. This will boost my investing record.
It's humbling to be wrong 30-40% of the time, but without that self knowledge, I can never hope to improve. Plus, being right 60-70% of the time, at least in the investing profession, makes a big difference in results.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Investing is a humbling profession. Like predicting the weather, you're proud if you get things right a mere 50% of the time. That's tough because it means you're also wrong a large percentage of the time, and that's humbling.
This surprises many because they think long-time professionals should be able to do much better. The reality is that predicting the future, especially financial markets, is extremely difficult to do.
I was reminded of this recently looking at the investing records of the best in the business. Investing legends, like Lew Sanders, brag about being right 52-53% of the time. Super-humans, like Warren Buffett, are right 90% of the time. But that still means he flubs it 10% of the time. His 2008 investment in ConocoPhillips is a great example. Even geniuses sometimes get it wrong.
This reminds me, too, of how experts in a field can miss big changes. Tom Watson, the famous builder of IBM, thought there was a "world market for maybe five computers" in 1943. Bill Gates famously missed how the Internet would change the computer industry. If the the most brilliant, successful people in the field can miss things, then mere mortals, like me, have to predict with caution.
How should this impact investment decision making? In two ways, I think.
First, you have to adjust your predictions for the fact that you aren't going to project accurately 100% of the time. This means buying with a margin of safety (purchasing significantly below what you think an investment is worth). It means using probability theory to adjust your assessments of the future. It also means taking a pass on things you know you can't predict (Buffett strongly emphasized this in his latest annual report to shareholders).
Second, it means you need to keep track of your ability to predict. How can you adjust your predictions if you don't know how you've done?
I keep track of my predicting ability by comparing how my investment decisions stack up against market returns. If a stock I buy and sell beats the market, I count that as a "hit." Then I calculate my "batting average" as a percentage of the time I "hit" versus "swing." I use this batting average to adjust my investment position sizes.
I also keep track of by how much I "hit" and "miss." You can have an above 50% batting average and do terribly if your hits beat the market by 5% but your misses go down by 20%. Lew Sanders does well because his 52-53% hits go up much more than his 47-48% misses.
My batting average has fluctuated between 55-70% over time. Pretty good, but I plan to get better. Keeping track of my batting average and degree of out/under-performance helps me improve. This will boost my investing record.
It's humbling to be wrong 30-40% of the time, but without that self knowledge, I can never hope to improve. Plus, being right 60-70% of the time, at least in the investing profession, makes a big difference in results.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Tuesday, March 02, 2010
The return of the bond market vigilantes
James Carville, Bill Clinton's 1992 campaign strategist, is reported to have said, "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."
This quote highlights the power of markets, even over politicians.
The bond market can push around politicians because the decisions of millions of investors can raise or lower interest rates, raise or lower currency values, and push politicians into a corner where they have to change their tune.
Some see this as a dark and mysterious power run amok, but this simply is not true.
The bond market is the largest market in the world in dollar value. It does not consist of a few powerful individuals or organizations, but of millions of investors making independent decisions. When the bond market pushes politicians around, it's because there are so many people in agreement with each other (and disagreement with government) that prices move very far in one direction.
That's not a conspiracy; it's a groundswell.
The bond market vigilantes are not an organized group, but their individual actions can force change. And, change it in the wind.
The vigilantes have been quiet for several years. With low inflation and high growth, there have been profitable opportunities elsewhere.
But, now that governments of the world have spent trillions getting their economies going and propping up weak companies, governments are again vulnerable to the vigilantes.
Nowhere is this more clear than in Europe, recently. Investors are understandably concerned about the balance sheets and cash flows of European countries, especially Portugal, Ireland, Greece and Spain (dubbed the PIGS).
Worldwide, bond markets have been raising interest rates and lowering the currency values of the weakest players.
This is not a bad thing. In fact, it's quite the opposite.
Like the stock market bashes companies with weak business plans, the bond market bashes reckless countries. Where governments think they can print money and issue bonds without constraint, the bond market brings discipline.
The bond market vigilantes don't cause problems, they react and point them out.
Without them, things would get much worse. Get ready to hear a lot more about bond and currency markets because sovereigns need reigning in.
Be glad they are enforcing such discipline, but stay out of their way. This is no time to bet heavily on currencies or bonds. Unless, of course, you happen to be a vigilante yourself.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
James Carville, Bill Clinton's 1992 campaign strategist, is reported to have said, "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."
This quote highlights the power of markets, even over politicians.
The bond market can push around politicians because the decisions of millions of investors can raise or lower interest rates, raise or lower currency values, and push politicians into a corner where they have to change their tune.
Some see this as a dark and mysterious power run amok, but this simply is not true.
The bond market is the largest market in the world in dollar value. It does not consist of a few powerful individuals or organizations, but of millions of investors making independent decisions. When the bond market pushes politicians around, it's because there are so many people in agreement with each other (and disagreement with government) that prices move very far in one direction.
That's not a conspiracy; it's a groundswell.
The bond market vigilantes are not an organized group, but their individual actions can force change. And, change it in the wind.
The vigilantes have been quiet for several years. With low inflation and high growth, there have been profitable opportunities elsewhere.
But, now that governments of the world have spent trillions getting their economies going and propping up weak companies, governments are again vulnerable to the vigilantes.
Nowhere is this more clear than in Europe, recently. Investors are understandably concerned about the balance sheets and cash flows of European countries, especially Portugal, Ireland, Greece and Spain (dubbed the PIGS).
Worldwide, bond markets have been raising interest rates and lowering the currency values of the weakest players.
This is not a bad thing. In fact, it's quite the opposite.
Like the stock market bashes companies with weak business plans, the bond market bashes reckless countries. Where governments think they can print money and issue bonds without constraint, the bond market brings discipline.
The bond market vigilantes don't cause problems, they react and point them out.
Without them, things would get much worse. Get ready to hear a lot more about bond and currency markets because sovereigns need reigning in.
Be glad they are enforcing such discipline, but stay out of their way. This is no time to bet heavily on currencies or bonds. Unless, of course, you happen to be a vigilante yourself.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, February 26, 2010
Castles built on quicksand.
Investment records that crush the market by a wide margin are incredibly tempting to potential investors. They look too good to be true, and frequently are.
Although I strongly believe beating the market is possible, doing so by a very wide margin is extremely difficult, and almost always means imprudent risks are or have been taken.
The best investor in the world, Warren Buffett, is said to have beat the market by around 10% a year over the last 60 years (taking into account both his personal and professional investments). That's incredible performance! A 10% return over 60 years would multiply your money 304 times; beating the market by 10%, providing a 20% annualized return over 60 years, would multiply your money 56,000 times! Buffett is the second richest man in the world because he's done something truly extraordinary.
So, when someone says they've beaten the market by anywhere close to 10% a year, you have to ask yourself if you're talking to the second coming of Warren Buffett, or someone building castles on quicksand.
Beating the market by anything close to 10% a year can be done, but most who've done so took incredibly high risk to get there. It may not seem that way when you talk to someone who's beaten the market by 8% a year for 15 years, at least not until their portfolio tanks by 60%. Making back a 60% loss requires a 250% gain, and that's very difficult to do without taking even more imprudent risks.
Why do I say beating the market by a wide margin requires taking imprudent risk? Just look at history.
Individual investors received 3% annualized returns while the mutual funds they invested in went up 12% a year (Dalbar study, 2003). Only around 45% of professional investors beat the market over rolling 5 year periods, and most of those 45% beat by less than 1% and can't do so consistently (Morningstar and Standard & Poors). Some of the best investing records in the business beat the market by a mere 3%+ annualized over long periods of time (I'm talking 20-30 years, not 3-5). Those in the business know how extraordinary 3% annualized out-performance is.
The way to beat the market is to invest differently than the market. That can be done in one of two ways: 1) prudently, with adequate diversification, or 2) imprudently, with highly skewed gambles and too much concentration.
Look at the records of investors that have blown up. They frequently had very long runs that look highly successful, until they blow up with 60%+ losses. It's like building a castle on quicksand: it looks good for a while, until it sinks into the muck.
When looking at investing records, it's more important to examine how the record was achieved than to focus exclusively on bottom line numbers.
Was the record generated over a long period of time, or was it less than 5 years? Were high returns due to a couple of lucky, out-sized bets, or a balanced portfolio that has edged up as a whole? Are returns due to a lot of investments over a long period of time, but all of those investments were in a single sector, like technology or financials? Can the investor non-defensively discuss their failures as well as successes?
If returns are over too short a period, or due to only a couple of out-sized bets, or focused in a narrow sector, or if the investor becomes overly defensive about how they generated results, you should be cautious. Those are warning signs.
I can't say all outstanding records are frauds, because there are Warren Buffetts out there. But, you better be certain you're talking to someone who really knows what they're doing, and you better be prepared to ask tough questions.
Or, you just might find yourself living in a castle built on quicksand, too.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Investment records that crush the market by a wide margin are incredibly tempting to potential investors. They look too good to be true, and frequently are.
Although I strongly believe beating the market is possible, doing so by a very wide margin is extremely difficult, and almost always means imprudent risks are or have been taken.
The best investor in the world, Warren Buffett, is said to have beat the market by around 10% a year over the last 60 years (taking into account both his personal and professional investments). That's incredible performance! A 10% return over 60 years would multiply your money 304 times; beating the market by 10%, providing a 20% annualized return over 60 years, would multiply your money 56,000 times! Buffett is the second richest man in the world because he's done something truly extraordinary.
So, when someone says they've beaten the market by anywhere close to 10% a year, you have to ask yourself if you're talking to the second coming of Warren Buffett, or someone building castles on quicksand.
Beating the market by anything close to 10% a year can be done, but most who've done so took incredibly high risk to get there. It may not seem that way when you talk to someone who's beaten the market by 8% a year for 15 years, at least not until their portfolio tanks by 60%. Making back a 60% loss requires a 250% gain, and that's very difficult to do without taking even more imprudent risks.
Why do I say beating the market by a wide margin requires taking imprudent risk? Just look at history.
Individual investors received 3% annualized returns while the mutual funds they invested in went up 12% a year (Dalbar study, 2003). Only around 45% of professional investors beat the market over rolling 5 year periods, and most of those 45% beat by less than 1% and can't do so consistently (Morningstar and Standard & Poors). Some of the best investing records in the business beat the market by a mere 3%+ annualized over long periods of time (I'm talking 20-30 years, not 3-5). Those in the business know how extraordinary 3% annualized out-performance is.
The way to beat the market is to invest differently than the market. That can be done in one of two ways: 1) prudently, with adequate diversification, or 2) imprudently, with highly skewed gambles and too much concentration.
Look at the records of investors that have blown up. They frequently had very long runs that look highly successful, until they blow up with 60%+ losses. It's like building a castle on quicksand: it looks good for a while, until it sinks into the muck.
When looking at investing records, it's more important to examine how the record was achieved than to focus exclusively on bottom line numbers.
Was the record generated over a long period of time, or was it less than 5 years? Were high returns due to a couple of lucky, out-sized bets, or a balanced portfolio that has edged up as a whole? Are returns due to a lot of investments over a long period of time, but all of those investments were in a single sector, like technology or financials? Can the investor non-defensively discuss their failures as well as successes?
If returns are over too short a period, or due to only a couple of out-sized bets, or focused in a narrow sector, or if the investor becomes overly defensive about how they generated results, you should be cautious. Those are warning signs.
I can't say all outstanding records are frauds, because there are Warren Buffetts out there. But, you better be certain you're talking to someone who really knows what they're doing, and you better be prepared to ask tough questions.
Or, you just might find yourself living in a castle built on quicksand, too.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Subscribe to:
Posts (Atom)