(Full disclosure: my clients and I own shares of Deere)
Last week, I wrote about some of the issues surrounding the agricultural sector, and raised the question of whether John Deere (DE) might be a good, but lumpy, investment. This week, I put some meat on the bones of my last post with a competitive analysis comparing John Deere to its next two largest competitors: CNH Industrial (CNHI) and AGCO (AGCO).
Revenues
John Deere's revenues are quite a bit bigger than it's two biggest rivals ($ in millions).
Deere: 2013 $34,998, 2012 $33,501
CNHI: 2013 $21,128, 2012 $22,157
AGCO: 2013 $10,787, 2012 $9,962
As you can see, Deere is 1.6x the size of CNHI and 3.3x the size of AGCO in revenues. Granted, these numbers are revenues and not units, and Deere tends to sell larger, more expensive tractors and combines than it's competitors, so the revenue numbers may point more to product mix than unit dominance. In terms of value sold, or market share, though, Deere is clearly far in the lead.
Regional Revenues (note: CNHI includes Mexico in it's North American segment, AGCO and Deere include Mexico in their Latin America segments)
North America (includes Mexico for CNHI, not for AGCO and Deere)
Deere: 2013 $21,821, 2012 $20,807
CNHI: 2013 $5,618, 2012 $5,429
AGCO: 2013 $2,758, 2012 $2,584
Deere is 3.9x CNHI and 8x AGCO in North America. Deere dominates in large, high power tractors by a large margin in this all-important market.
Latin America (includes Mexico for Deere and AGCO, but not for CNHI)
Deere: 2013 $4,287, 2012 $3,589
CNHI: 2013 $1,968, 2012 $1,507
AGCO: 2013 $2,040, 2012 $1,856
Deere is 2.3x CNHI and 2x AGCO in Latin America. Deere isn't as dominant in Latin America as they are in North America, but they are still dominant.
Europe, Middle East, Africa (EMEA), Asia, Asia-Pacific
Deere: 2013 $8,890, 2012 $9,105
CNHI: 2013 $5,037, 2012 $5,252
AGCO: 2013 $5,989, 2012 $5,522
Deere is 1.7x CNHI and 1.6x AGCO in EMEA/Asia/Asia-Pacific. Deere has even less dominance here than in Latin America, but they still dominate nonetheless. This makes sense considering the greater use of smaller, lower horsepower tractors and combines in these markets (because Deere skews to larger, high horsepower equipment).
Operating Profit
Here, too, Deere is just plain bigger.
Deere: 2013 $5,425, 2012 $4,724
CNHI: 2013 $2,002, 2012 $2,145
AGCO: 2013 $1,510, 2012 $946
Deere is 2.5x CNHI and 4.3x AGCO in profit share. Those dollars don't just make the company richer, it makes Deere capable of plowing much more back into improving efficiency and innovating new products.
Research and Development
Deere's higher profits allow it to put more money into engineering newer and better equipment.
Deere: 2013 $1,477, 2012 $1,434
CNHI: 2013 $710, 2012 $718
AGCO: 2013 $353, 2012 $317
Deere outspends CNHI 2x and AGCO 4.4x. Those larger research and development dollars give Deere an edge in maintaining its technological and manufacturing lead.
Capital Expenditure (capex)
Deere spends more on new capital than it's competitors.
Deere: 2013 $1,155, 2012 $1,315
CNHI: 2013 $1,035, 2012 $1,046
AGCO: 2013 $391, 2012 $341
Deere is out-spending 1.2x CNHI and 3.4x AGCO in capital expenditures. More importantly, Deere is generating higher returns on its capex than CNHI or AGCO (as measured by examining incremental growth in net income versus incremental spend on capex over three year periods).
These numbers aren't an exhaustive proof, but they do give you an idea of why Deere might be able to continue dominating the farm equipment market. My comments should not be meant to imply that AGCO and CNHI are slouches, it's just that Deere has done that much better (in fact, AGCO has been doing an excellent job of coming from behind over the last 10 years whereas CNHI has tended to just keep pace).
I think Deere's dominating scale gives it a sustainable competitive advantage over rivals, assuming management doesn't squander that lead (an issue I will address in a later article). But, this doesn't mean the economics of the business are necessarily good. Next week, I'll tackle this topic to see if the economics of the industry and Deere specifically are good enough to want to own.
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, September 26, 2014
Friday, September 19, 2014
John Deere: down on the farm
(Full disclosure: my clients and I own shares of Deere).
This has been a tough year for the agriculture sector. After a couple of fat years of high profitability, farmers and those who sell to farmers are worried about a couple of lean years. The agriculture sector is a victim of it's own success. High productivity has led to bumper crops that are driving down the prices of corn, soybeans, wheat, etc., and that is leading to lower profits for farmers and lower demand for farm equipment.
That has led to speculation about how long the farm sector will be down. I'll kill the suspense: no one knows.
On the one hand, you have huge supply, both from farmers in the U.S. and around the world (Brazil, in particular, has become very productive). Lots of supply drives down prices. This supply has been "enhanced" by government support of ethanol production and loans for farmers to buy equipment, which means the oversupply may last.
On the other hand, you have demand. Global demand has subsided with slow developed economies in the U.S., Europe and Japan, as well as slower developing and emerging economies in the rest of the world. This is likely to be a temporary phenomenon, but it could last, especially with bad economic policies or geopolitical issues.
So, no one really knows how long this downturn might last. Higher demand caused by accelerating economic growth could make the downturn very brief. Lower supply is the rational economic outcome from low crop prices. How these factors play against each other is simply unknown and unknowable.
But, that is what makes the farm sector such an interesting place to look for value investments.
The economics of the business are good, especially for equipment manufacturers. There are three big producers of farm equipment that share more than 50% of the global market, and that share is likely to grow over time. Those manufacturers are John Deere (DE), Case New Holland International (CNHI) and AGCO (AGCO).
John Deere has the largest share of revenue and profits, and they have wisely plowed those profits back into making better equipment. That gives Deere a sustainable competitive advantage they can maintain as long as they are well managed. Deere dominates the high end of the market for tractors and combines, which is the direction global markets are going as farming becomes more productive and mechanized over time.
That, however, does not remove the cyclical nature of the business. Farm cycles go boom and bust due to government interference, lending practices, weather, global demand, and a host of other issues. This cyclical nature isn't necessarily a bad thing. As Warren Buffett says, I'd rather have a lumpy 15% than a stable 12%.
So, is John Deere a good investment capable of providing a good, but lumpy return? That is the topic I'll pick up again next week.
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.
This has been a tough year for the agriculture sector. After a couple of fat years of high profitability, farmers and those who sell to farmers are worried about a couple of lean years. The agriculture sector is a victim of it's own success. High productivity has led to bumper crops that are driving down the prices of corn, soybeans, wheat, etc., and that is leading to lower profits for farmers and lower demand for farm equipment.
That has led to speculation about how long the farm sector will be down. I'll kill the suspense: no one knows.
On the one hand, you have huge supply, both from farmers in the U.S. and around the world (Brazil, in particular, has become very productive). Lots of supply drives down prices. This supply has been "enhanced" by government support of ethanol production and loans for farmers to buy equipment, which means the oversupply may last.
On the other hand, you have demand. Global demand has subsided with slow developed economies in the U.S., Europe and Japan, as well as slower developing and emerging economies in the rest of the world. This is likely to be a temporary phenomenon, but it could last, especially with bad economic policies or geopolitical issues.
So, no one really knows how long this downturn might last. Higher demand caused by accelerating economic growth could make the downturn very brief. Lower supply is the rational economic outcome from low crop prices. How these factors play against each other is simply unknown and unknowable.
But, that is what makes the farm sector such an interesting place to look for value investments.
The economics of the business are good, especially for equipment manufacturers. There are three big producers of farm equipment that share more than 50% of the global market, and that share is likely to grow over time. Those manufacturers are John Deere (DE), Case New Holland International (CNHI) and AGCO (AGCO).
John Deere has the largest share of revenue and profits, and they have wisely plowed those profits back into making better equipment. That gives Deere a sustainable competitive advantage they can maintain as long as they are well managed. Deere dominates the high end of the market for tractors and combines, which is the direction global markets are going as farming becomes more productive and mechanized over time.
That, however, does not remove the cyclical nature of the business. Farm cycles go boom and bust due to government interference, lending practices, weather, global demand, and a host of other issues. This cyclical nature isn't necessarily a bad thing. As Warren Buffett says, I'd rather have a lumpy 15% than a stable 12%.
So, is John Deere a good investment capable of providing a good, but lumpy return? That is the topic I'll pick up again next week.
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, September 12, 2014
Perhaps a Roth IRA isn't so safe after all
If you could perfectly predict the future, financial planning would be a piece of cake.
Unfortunately, that's not possible. Future rates of return and inflation are not precisely predictable. Neither is how long you will live. Neither are tax rates.
Which brings me to the topic for today. The Roth IRA is a great deal because it allows you to save and invest after-tax dollars that won't be taxed on withdrawal. Even better, unlike a traditional IRA or 401(k) plan, retirees aren't mandated to pull certain amounts out each year, providing flexibility in income and tax planning. Better still, you can pass those dollars on to heirs with much fewer restrictions than is the case with a traditional IRA or 401(k).
That is, unless they change the rules.
Well, apparently, changing the rules is precisely what is being considered. According to an article in the WSJ, two proposals being sent to Congress are trying to do just that.
First, one proposal seeks to require Roth owners to start taking distributions at age 70 1/2, just like with traditional IRAs and 401(k)s. That would remove a major element of the Roth's appeal both for retirees and their heirs.
Second, the other proposal attempts to end the ability of heirs to stretch out distributions. This would eliminate another of the major appeals of the Roth IRA as an estate planning tool.
The Roth IRA has created a garden industry of advisers, lawyers and accountants who have helped investors (for an hourly fee, of course), to shuffle assets from traditional IRAs to Roths and back again in order to dodge the tax man. This has always been premised on the predictability of the law, which is now in question.
And, this brings us back to the difficulty of financial planning. It isn't easy, nor is it rocket science. What makes financial planning difficult is that it is inherently decision making under uncertainty. If you say X will result if Y occurs, there is usually an assumption behind that. When that assumption can and almost certainly will change--like tax laws--you can wind up with plans that aren't quite as solid as they were described to be.
I frequently council investors against setting their financial plans in too much concrete. Instead, a range of assumptions for returns, inflation, taxes, etc. should be used. Nor should it be assumed that things like Social Security will be around, especially for younger investors; at any point in time, the majority or vocal minority can yank away the benefits you were promised.
Instead, it's best to plan to take care of yourself regardless of how the rules are changed. It's better to be approximately right than precisely wrong.
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.
Unfortunately, that's not possible. Future rates of return and inflation are not precisely predictable. Neither is how long you will live. Neither are tax rates.
Which brings me to the topic for today. The Roth IRA is a great deal because it allows you to save and invest after-tax dollars that won't be taxed on withdrawal. Even better, unlike a traditional IRA or 401(k) plan, retirees aren't mandated to pull certain amounts out each year, providing flexibility in income and tax planning. Better still, you can pass those dollars on to heirs with much fewer restrictions than is the case with a traditional IRA or 401(k).
That is, unless they change the rules.
Well, apparently, changing the rules is precisely what is being considered. According to an article in the WSJ, two proposals being sent to Congress are trying to do just that.
First, one proposal seeks to require Roth owners to start taking distributions at age 70 1/2, just like with traditional IRAs and 401(k)s. That would remove a major element of the Roth's appeal both for retirees and their heirs.
Second, the other proposal attempts to end the ability of heirs to stretch out distributions. This would eliminate another of the major appeals of the Roth IRA as an estate planning tool.
The Roth IRA has created a garden industry of advisers, lawyers and accountants who have helped investors (for an hourly fee, of course), to shuffle assets from traditional IRAs to Roths and back again in order to dodge the tax man. This has always been premised on the predictability of the law, which is now in question.
And, this brings us back to the difficulty of financial planning. It isn't easy, nor is it rocket science. What makes financial planning difficult is that it is inherently decision making under uncertainty. If you say X will result if Y occurs, there is usually an assumption behind that. When that assumption can and almost certainly will change--like tax laws--you can wind up with plans that aren't quite as solid as they were described to be.
I frequently council investors against setting their financial plans in too much concrete. Instead, a range of assumptions for returns, inflation, taxes, etc. should be used. Nor should it be assumed that things like Social Security will be around, especially for younger investors; at any point in time, the majority or vocal minority can yank away the benefits you were promised.
Instead, it's best to plan to take care of yourself regardless of how the rules are changed. It's better to be approximately right than precisely wrong.
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, September 05, 2014
China: how will its mass urbanization impact the global economy
China's impact on the global economy is hard to overstate.
Not only is it the world's second largest economy (by country, not region), but also the source of a huge amount of incremental growth over the last 15 years.
I've seen estimates that over 50% of the demand for iron ore and copper comes from China. Almost 50% of worldwide steel is produced in China. I once read that China has used as much concrete in 2011 and 2012 as the U.S. used in the 20th century! I don't know if such estimates are specifically accurate, but their magnitude gives you a flavor of how China has impacted the global economy. In short, the economic crisis since 2008 would have looked a lot worse without China.
Given that, it's important to consider the impact of China on future economic growth.
One of the dynamics going on in China is the move from a more production-based to a consumption-based economy. China is approximately 34% consumer-based versus 70% in the U.S. China has built an economy, predominantly from the top down, that has mostly produced goods for other countries, like the U.S., Europe and Japan. But that source of growth was limited. You can only take market share for so long before you need to become your own source of growth.
China is trying to make that transition, but getting a command and control economy to do that without large disruptions is very difficult.
One aspect of such a transition is having hundreds of millions of Chinese farmers move from the hinterland to cities. In cities, they can work in factories and produce much more than they can on the farm. That higher productivity leads to higher consumption, thus achieving China's goals.
But, how do you move hundreds of millions of people from farm to city. In the west, and Japan, that transition took place over many decades, and mostly organically (by organically, I mean through free market forces, not through government fiat). Those transitions led to disruptions, just as it will in China.
China, however, is trying to do this much more quickly and on a much more massive scale. China wants to move around 235 million people to cities over the next 20 years. For perspective, that's the size of the 10 largest cities in the world now (from Tokyo at 37 million to Mexico City at 20 million). Can you even imagine trying to regrow 10 of the largest cities in the world, over the next 20 years? (for more information, read Stratfor's article on the subject)
Achieving such a task is Herculean, and it will impact the global economy.
How? I don't know. It could all happen smoothly, which I consider unlikely. It could occur with either international or domestic war, as such pressures have created throughout history. It could happen in fits and starts with massive swings in economic growth from boom to bust. No one knows, really, but it bears watching.
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.
Not only is it the world's second largest economy (by country, not region), but also the source of a huge amount of incremental growth over the last 15 years.
I've seen estimates that over 50% of the demand for iron ore and copper comes from China. Almost 50% of worldwide steel is produced in China. I once read that China has used as much concrete in 2011 and 2012 as the U.S. used in the 20th century! I don't know if such estimates are specifically accurate, but their magnitude gives you a flavor of how China has impacted the global economy. In short, the economic crisis since 2008 would have looked a lot worse without China.
Given that, it's important to consider the impact of China on future economic growth.
One of the dynamics going on in China is the move from a more production-based to a consumption-based economy. China is approximately 34% consumer-based versus 70% in the U.S. China has built an economy, predominantly from the top down, that has mostly produced goods for other countries, like the U.S., Europe and Japan. But that source of growth was limited. You can only take market share for so long before you need to become your own source of growth.
China is trying to make that transition, but getting a command and control economy to do that without large disruptions is very difficult.
One aspect of such a transition is having hundreds of millions of Chinese farmers move from the hinterland to cities. In cities, they can work in factories and produce much more than they can on the farm. That higher productivity leads to higher consumption, thus achieving China's goals.
But, how do you move hundreds of millions of people from farm to city. In the west, and Japan, that transition took place over many decades, and mostly organically (by organically, I mean through free market forces, not through government fiat). Those transitions led to disruptions, just as it will in China.
China, however, is trying to do this much more quickly and on a much more massive scale. China wants to move around 235 million people to cities over the next 20 years. For perspective, that's the size of the 10 largest cities in the world now (from Tokyo at 37 million to Mexico City at 20 million). Can you even imagine trying to regrow 10 of the largest cities in the world, over the next 20 years? (for more information, read Stratfor's article on the subject)
Achieving such a task is Herculean, and it will impact the global economy.
How? I don't know. It could all happen smoothly, which I consider unlikely. It could occur with either international or domestic war, as such pressures have created throughout history. It could happen in fits and starts with massive swings in economic growth from boom to bust. No one knows, really, but it bears watching.
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, August 29, 2014
In defense of active investment management
The idea of picking an investment manager instead of investing in an index fund has been taking a beating, lately.
Under the assumption that investors can weather the market's ups and downs without becoming euphoric or panicking, and assuming that most of them can't tell a good from a poor investment manager, the case is growing that most people should invest in an index fund and watch better results roll in.
That case has a lot of validity, but it's important to listen to the other side of the argument, too, in order to pick the right choice for you--the individual.
After all, we don't all buy GM cars, or buy Apple computers, or eat at McDonald's. Some people prefer other options. It all depends on what you want to accomplish, how much work you want to put into it, and what your abilities are.
With that in mind, I highly recommend an article by William Smead of Smead Capital Management titled, The Demise of Active Management is Greatly Exaggerated.
Not surprisingly, Smead is an active investment manager who is talking his book (just like most passive/index investors), but he has some interesting points to make and some thought-provoking data to go along with it.
Smead points out that quite a bit of academic data supports the case for investing in parts of the market that aren't always priced correctly. He highlights that investments in businesses with low debt, high and sustainable profitability, and overall stability can do remarkably better than an index investment.
Also, index funds market weight their holdings, which means they own too much of the things that investors love best right before they go off the cliff, and not enough of things most investors hate right before they take off--just think about 2000 or 2008. There are other methods for assembling portfolios that work better over the long run.
I'm not trying to make a complete case for active investing, here, but I am trying to point out the other side of the argument. Naive investors may think the case is closed and everyone should be a passive/index investor, when in reality it depends on your preferences and abilities.
Most may be incapable of beating the market, but not all. Most may be unable to pick managers who do better than an index fund, but not all. Most may not want to put the time and effort into doing better than average, but not all.
Just as most--but not all--people love to eat at McDonald's, most--but not all--people should probably be passive/index investors. The key is deciding which group you are a member of and thinking clearly about your options.
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.
Under the assumption that investors can weather the market's ups and downs without becoming euphoric or panicking, and assuming that most of them can't tell a good from a poor investment manager, the case is growing that most people should invest in an index fund and watch better results roll in.
That case has a lot of validity, but it's important to listen to the other side of the argument, too, in order to pick the right choice for you--the individual.
After all, we don't all buy GM cars, or buy Apple computers, or eat at McDonald's. Some people prefer other options. It all depends on what you want to accomplish, how much work you want to put into it, and what your abilities are.
With that in mind, I highly recommend an article by William Smead of Smead Capital Management titled, The Demise of Active Management is Greatly Exaggerated.
Not surprisingly, Smead is an active investment manager who is talking his book (just like most passive/index investors), but he has some interesting points to make and some thought-provoking data to go along with it.
Smead points out that quite a bit of academic data supports the case for investing in parts of the market that aren't always priced correctly. He highlights that investments in businesses with low debt, high and sustainable profitability, and overall stability can do remarkably better than an index investment.
Also, index funds market weight their holdings, which means they own too much of the things that investors love best right before they go off the cliff, and not enough of things most investors hate right before they take off--just think about 2000 or 2008. There are other methods for assembling portfolios that work better over the long run.
I'm not trying to make a complete case for active investing, here, but I am trying to point out the other side of the argument. Naive investors may think the case is closed and everyone should be a passive/index investor, when in reality it depends on your preferences and abilities.
Most may be incapable of beating the market, but not all. Most may be unable to pick managers who do better than an index fund, but not all. Most may not want to put the time and effort into doing better than average, but not all.
Just as most--but not all--people love to eat at McDonald's, most--but not all--people should probably be passive/index investors. The key is deciding which group you are a member of and thinking clearly about your options.
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, August 22, 2014
Is stock picking dead?
Is it time to throw in the towel on stock picking (active investing)? Should everyone become an index investor (passive investing)?
As Vanguard Group, the king of passive investing, approaches $3 trillion in assets under management, and as mounting evidence shows that most investors should buy cheap index funds instead of trying to pick market-beating money managers, it's a good time to ask the question: is stock picking dead (Jason Zweig asks just this question in The Decline and Fall of Fund Managers in the Wall Street Journal, today).
To advocates of passive investing, there is simply no argument. The average return of the average investor is average minus fees. Therefore, to maximize returns, most people should buy cheap index funds to minimize fees.
The evidence fully supports this view. Investors do a terrible job of picking money managers and timing the market. They would be better off just buying an index fund with low costs.
Most money managers lose to the market. Many who do win over 3, 5, even 10 year periods do it by luck that isn't repeated over the following 3, 5, or 10 years. Given that, the average investor is unlikely to successfully figure that out going forward.
Do some money managers beat the market? Yes. Do most of them do it by luck and not skill? Yes. Do any money managers do it by skill and over the long run? Yes. Are they almost impossible to pick ahead of time? For the vast majority of people, yes.
The money managers who do beat the market are unusually intelligent, think long term, are fiercely independent, and align their interests with their clients. Because most investors don't look for those things (they tend to look at past performance or for friendly people), and most money managers don't possess those traits, most investors should buy low cost index funds.
Suppose everyone invested in index funds? Would that make everything right in the world? The problem then would be that without anyone analyzing and pricing individual securities, securities markets useful function, price discovery, wouldn't happen. That would be bad because markets need effective pricing to work.
But, how many people need to be picking stocks to still have securities markets perform their price discovery function? No one knows the answer precisely, but it is not zero. Someone needs to analyze and price securities, or markets wouldn't work. But, the number of people doing this doesn't need to be as great as it is now (an article in the Financial Analysts Journal (not free) by Charlie Ellis, points this out).
So stock picking isn't dead, it just doesn't need to be done by as many analysts and portfolio managers as are currently doing it.
Is passive investing the right choice for most investors? Yes. Does that mean stock picking is dead? Definitely not.
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.
As Vanguard Group, the king of passive investing, approaches $3 trillion in assets under management, and as mounting evidence shows that most investors should buy cheap index funds instead of trying to pick market-beating money managers, it's a good time to ask the question: is stock picking dead (Jason Zweig asks just this question in The Decline and Fall of Fund Managers in the Wall Street Journal, today).
To advocates of passive investing, there is simply no argument. The average return of the average investor is average minus fees. Therefore, to maximize returns, most people should buy cheap index funds to minimize fees.
The evidence fully supports this view. Investors do a terrible job of picking money managers and timing the market. They would be better off just buying an index fund with low costs.
Most money managers lose to the market. Many who do win over 3, 5, even 10 year periods do it by luck that isn't repeated over the following 3, 5, or 10 years. Given that, the average investor is unlikely to successfully figure that out going forward.
Do some money managers beat the market? Yes. Do most of them do it by luck and not skill? Yes. Do any money managers do it by skill and over the long run? Yes. Are they almost impossible to pick ahead of time? For the vast majority of people, yes.
The money managers who do beat the market are unusually intelligent, think long term, are fiercely independent, and align their interests with their clients. Because most investors don't look for those things (they tend to look at past performance or for friendly people), and most money managers don't possess those traits, most investors should buy low cost index funds.
Suppose everyone invested in index funds? Would that make everything right in the world? The problem then would be that without anyone analyzing and pricing individual securities, securities markets useful function, price discovery, wouldn't happen. That would be bad because markets need effective pricing to work.
But, how many people need to be picking stocks to still have securities markets perform their price discovery function? No one knows the answer precisely, but it is not zero. Someone needs to analyze and price securities, or markets wouldn't work. But, the number of people doing this doesn't need to be as great as it is now (an article in the Financial Analysts Journal (not free) by Charlie Ellis, points this out).
So stock picking isn't dead, it just doesn't need to be done by as many analysts and portfolio managers as are currently doing it.
Is passive investing the right choice for most investors? Yes. Does that mean stock picking is dead? Definitely not.
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, August 15, 2014
Ignore the news for better returns
When people picture successful investors, they think of someone watching all the news all the time, especially when the market is open. They picture someone reacting to that news, too: "a bad storm hit Florida, short orange juice futures now!" or "Alcoa just announced bad earnings, dump our position!"
The reality is just the opposite. The best investors want to know all about the companies they invest in, but they don't trade that news or react quickly to it (people who make a living trading do, but those folks aren't investors, and, if you are reading my blog, you probably aren't a trader).
I always get a surprised look from clients and prospects when I tell them I don't check prices all day long. I suppose they think that is what good investors do, but that't not true (see a recent article by Chuck Jaffe and MarketWatch).
One reason is that investing is long term oriented. It's not about what happened today, but what will happen over time. Investors focus on years of earnings, not one quarter's. Their attention is on competitive positioning and economic value-creation, and their view is unlikely to change because of one data point on one day. To successfully invest over the long term, you need to think and act long term, not on the range of the moment.
Another reason is that good interpretation of new information takes time. A good investor needs to integrate new information into a mosaic of information they've already assembled and thought about. Does this new information contradict what I think I already understand? Do I need to reconsider my opinion? What other information would confirm or deny this new data? Thought and interpretation can take days, weeks and even months--not seconds.
Headline information is also likely to already be priced into securities. By the time the news reaches people like us, it has already been acted upon by the traders who focus in that area. Like Baron Rothschild, they are tied into information networks that cost a lot of money and disseminate information much more rapidly. By the time we see it, prices have almost certainly already moved (usually hours or days ago).
Someone once asked Warren Buffett when was the last time he checked the price of his holdingw. He said he thought it was a couple of weeks ago. When you are focused primarily on the fundamentals, you don't need daily or minutely price quotes. The best investors have the same attitude.
If you focus on the fundamentals and not the daily news, I can almost guarantee you'll get better investing results, 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.
The reality is just the opposite. The best investors want to know all about the companies they invest in, but they don't trade that news or react quickly to it (people who make a living trading do, but those folks aren't investors, and, if you are reading my blog, you probably aren't a trader).
I always get a surprised look from clients and prospects when I tell them I don't check prices all day long. I suppose they think that is what good investors do, but that't not true (see a recent article by Chuck Jaffe and MarketWatch).
One reason is that investing is long term oriented. It's not about what happened today, but what will happen over time. Investors focus on years of earnings, not one quarter's. Their attention is on competitive positioning and economic value-creation, and their view is unlikely to change because of one data point on one day. To successfully invest over the long term, you need to think and act long term, not on the range of the moment.
Another reason is that good interpretation of new information takes time. A good investor needs to integrate new information into a mosaic of information they've already assembled and thought about. Does this new information contradict what I think I already understand? Do I need to reconsider my opinion? What other information would confirm or deny this new data? Thought and interpretation can take days, weeks and even months--not seconds.
Headline information is also likely to already be priced into securities. By the time the news reaches people like us, it has already been acted upon by the traders who focus in that area. Like Baron Rothschild, they are tied into information networks that cost a lot of money and disseminate information much more rapidly. By the time we see it, prices have almost certainly already moved (usually hours or days ago).
Someone once asked Warren Buffett when was the last time he checked the price of his holdingw. He said he thought it was a couple of weeks ago. When you are focused primarily on the fundamentals, you don't need daily or minutely price quotes. The best investors have the same attitude.
If you focus on the fundamentals and not the daily news, I can almost guarantee you'll get better investing results, 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.
Friday, August 08, 2014
Market timing success equals long term failure
People just love a good story.
The story of the boy who cried wolf. The legend of Atlantis. The myth of a pot of gold at the end of a rainbow. Who can forget such great stories?
Even though we know these are just myths, we are fascinated nonetheless.
In investing, the favorite legend is: the myth that people make money timing the market.
People love legends about investors who sold at the top and bought at the bottom. Don't confirm the facts. Don't dig into the details. It's entertainment, after all.
The reality is that people don't make money timing the market (see my most recent client letter for some background). Even assuming someone gets lucky enough to sell at the top, they never get back in until they've lost the advantage they gained in selling. Or, if they buy at the bottom, they sell too soon or too late and lose that advantage, too. Check the facts.
The people who claim to sell at the top or buy at the bottom do worse than buy and hold (as highlighted by Mark Hulbert in the Wall Street Journal, subscription required).
Why do people persist in believing the myth? It's entertaining. It makes for great cocktail party fodder. People want to believe.
The reality is that good investing is boring. You save by spending less than you make. You invest it wisely after a lot of study. You initially look stupid. Then, over time, your wealth grows and you become financially independent.
Where's the pizzazz?! The lasers? The alien invasions?
Nowhere to be found.
Good investing is not high entertainment. But, becoming financial independent is very entertaining.
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 story of the boy who cried wolf. The legend of Atlantis. The myth of a pot of gold at the end of a rainbow. Who can forget such great stories?
Even though we know these are just myths, we are fascinated nonetheless.
In investing, the favorite legend is: the myth that people make money timing the market.
People love legends about investors who sold at the top and bought at the bottom. Don't confirm the facts. Don't dig into the details. It's entertainment, after all.
The reality is that people don't make money timing the market (see my most recent client letter for some background). Even assuming someone gets lucky enough to sell at the top, they never get back in until they've lost the advantage they gained in selling. Or, if they buy at the bottom, they sell too soon or too late and lose that advantage, too. Check the facts.
The people who claim to sell at the top or buy at the bottom do worse than buy and hold (as highlighted by Mark Hulbert in the Wall Street Journal, subscription required).
Why do people persist in believing the myth? It's entertaining. It makes for great cocktail party fodder. People want to believe.
The reality is that good investing is boring. You save by spending less than you make. You invest it wisely after a lot of study. You initially look stupid. Then, over time, your wealth grows and you become financially independent.
Where's the pizzazz?! The lasers? The alien invasions?
Nowhere to be found.
Good investing is not high entertainment. But, becoming financial independent is very entertaining.
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, July 25, 2014
Comparison shopping
When you go shopping for a house, TV, clothes, or car, you understand that you need to shop around.
Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?
If you don't do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.
The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)
But, many consumers don't comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don't find out who else is out there or what they have to offer. How do you know what you're getting is any good if you don't know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you--you know, the shark with his fin showing.
What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?
Would you want to work with a plumber who can't fix her own pipes, or a doctor that can't successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn't succeeded financially themselves (or are on a clear path to doing so)?
It is shocking how few advisers follow their own advice. Most mutual fund managers don't put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn't they be fully invested themselves?
Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don't expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker--good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don't understand how they are getting paid or they are evasive in answering your questions, be wary.
Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn't sell at the same price as a Yugo, so don't expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.
Finding good financial advice is hard. There just aren't that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.
To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.
As they say, if you don't know jewelry, know the jeweler. To get good investing advice, you don't need to know investing, but you do need to know your investing adviser.
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.
Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?
If you don't do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.
The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)
But, many consumers don't comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don't find out who else is out there or what they have to offer. How do you know what you're getting is any good if you don't know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you--you know, the shark with his fin showing.
What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?
Would you want to work with a plumber who can't fix her own pipes, or a doctor that can't successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn't succeeded financially themselves (or are on a clear path to doing so)?
It is shocking how few advisers follow their own advice. Most mutual fund managers don't put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn't they be fully invested themselves?
Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don't expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker--good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don't understand how they are getting paid or they are evasive in answering your questions, be wary.
Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn't sell at the same price as a Yugo, so don't expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.
Finding good financial advice is hard. There just aren't that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.
To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.
As they say, if you don't know jewelry, know the jeweler. To get good investing advice, you don't need to know investing, but you do need to know your investing adviser.
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, July 18, 2014
Show me your numbers
Most investors don't really know how they are doing.
One reason is that many investment advisers don't report their performance. Jason Zweig pointed this out in a Wall Street Journal article this past weekend.
Another reason is that most investors don't know what the numbers mean. Are the numbers reported before fees or after fees? Do the numbers include contributions and withdrawals, or are they time-weighted to remove that impact (investment advisers shouldn't get credit for your deposits)? Is performance compared against a relevant benchmark? Many advisers would prefer to keep their clients in the dark, otherwise such clients would know how poorly they are doing.
Even more investors don't really want to know how they are doing. It's kind of like deciding to step on the scale--or not--after the holidays. Do you really want to know how much weight you've put on?
But, not reporting, not understanding, and not looking won't change the underlying reality. Reaching your financial goals is too important to play ostrich.
Make sure your investment adviser reports their performance accurately. Such results should comply with industry standards, include fees, adjust for deposits/withdrawals, and be compared to a relevant benchmark.
If you don't understand the numbers, ask questions. Evasive answers should raise red flags in you mind. Clear descriptions should give you comfort.
If you want peace of mind, you need to know where you are going and whether you are getting there. With investing, accurate reporting is not a nice-to-have, but a necessity.
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 reason is that many investment advisers don't report their performance. Jason Zweig pointed this out in a Wall Street Journal article this past weekend.
Another reason is that most investors don't know what the numbers mean. Are the numbers reported before fees or after fees? Do the numbers include contributions and withdrawals, or are they time-weighted to remove that impact (investment advisers shouldn't get credit for your deposits)? Is performance compared against a relevant benchmark? Many advisers would prefer to keep their clients in the dark, otherwise such clients would know how poorly they are doing.
Even more investors don't really want to know how they are doing. It's kind of like deciding to step on the scale--or not--after the holidays. Do you really want to know how much weight you've put on?
But, not reporting, not understanding, and not looking won't change the underlying reality. Reaching your financial goals is too important to play ostrich.
Make sure your investment adviser reports their performance accurately. Such results should comply with industry standards, include fees, adjust for deposits/withdrawals, and be compared to a relevant benchmark.
If you don't understand the numbers, ask questions. Evasive answers should raise red flags in you mind. Clear descriptions should give you comfort.
If you want peace of mind, you need to know where you are going and whether you are getting there. With investing, accurate reporting is not a nice-to-have, but a necessity.
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, July 11, 2014
Past performance is not an indicator of future results
Every money manager must say that past performance is not an indicator of future results, but most investors ignore this warning.
In fact, most investors--individual and professionals alike--use past performance to choose money managers.
That's a big mistake.
S&P Dow Jones recently reported on why: investment performance is rarely persistent. Put differently, past performance really doesn't tell you much about future returns.
How bad are the numbers? Out of the 687 mutual funds that were in the top one-quarter in March 2012, only 3.8% were there again two years later (purely random results would have indicated 6.25% would have remained).
Out of the 1,372 mutual funds that were in the top one-half in March 2012 , only 18.7% were there two years later (purely random results would have indicated 25% would have remained).
Just because a money manager beats the market in one period does not mean they will in the following period. In fact, it is much more likely they won't.
Over 5 years, the numbers are even more stark. Out of 715 mutual funds in the top one-quarter in March 2010, only 0.3% were there again four years later (purely random: 0.4%).
Out of 1,431 mutual funds in the top-half of in March 2010, only 4.5% were there again four years later (purely random: 6.25%).
Does that mean that no one can beat the market? No. Does it mean it is very hard for someone to do so? Yes. It is even harder to tell the difference between those who can do it persistently and those who can't.
Investors who use past performance to chose money managers are taking a huge risk.
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 fact, most investors--individual and professionals alike--use past performance to choose money managers.
That's a big mistake.
S&P Dow Jones recently reported on why: investment performance is rarely persistent. Put differently, past performance really doesn't tell you much about future returns.
How bad are the numbers? Out of the 687 mutual funds that were in the top one-quarter in March 2012, only 3.8% were there again two years later (purely random results would have indicated 6.25% would have remained).
Out of the 1,372 mutual funds that were in the top one-half in March 2012 , only 18.7% were there two years later (purely random results would have indicated 25% would have remained).
Just because a money manager beats the market in one period does not mean they will in the following period. In fact, it is much more likely they won't.
Over 5 years, the numbers are even more stark. Out of 715 mutual funds in the top one-quarter in March 2010, only 0.3% were there again four years later (purely random: 0.4%).
Out of 1,431 mutual funds in the top-half of in March 2010, only 4.5% were there again four years later (purely random: 6.25%).
Does that mean that no one can beat the market? No. Does it mean it is very hard for someone to do so? Yes. It is even harder to tell the difference between those who can do it persistently and those who can't.
Investors who use past performance to chose money managers are taking a huge risk.
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 20, 2014
The stock market could jump up or tank this summer, be prepared
Will the market drop this summer? Does it matter? Yes, and no.
The hardest thing about investing is dealing with emotional swings. People really want the market to go up and never go down, but wishing won't make it so.
These emotional swings lead people to make big mistakes. Many sold in 2008-2009 and haven't gotten re-invested. The opportunity cost of that is HUGE.
It's better just to start with the premise that the market can go up 100% and down 50% (as Benjamin Graham suggested decades ago). Just accept that now because it has throughout recorded history.
If you are rattled by that prospect, then you don't belong in the game (and you'll have to save roughly three times more money per year to reach the same goal as someone who is investing in stocks).
If you invest, you must be prepared for such swings, even though that is tough to do.
Could the market tank this summer? Yes. Will it? No one knows. If it does, you need to be emotionally prepared to handle a drop.
Could the market continue marching up and double over the next 7 years? Sure. Will it? No one knows, so just be prepared.
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 hardest thing about investing is dealing with emotional swings. People really want the market to go up and never go down, but wishing won't make it so.
These emotional swings lead people to make big mistakes. Many sold in 2008-2009 and haven't gotten re-invested. The opportunity cost of that is HUGE.
It's better just to start with the premise that the market can go up 100% and down 50% (as Benjamin Graham suggested decades ago). Just accept that now because it has throughout recorded history.
If you are rattled by that prospect, then you don't belong in the game (and you'll have to save roughly three times more money per year to reach the same goal as someone who is investing in stocks).
If you invest, you must be prepared for such swings, even though that is tough to do.
Could the market tank this summer? Yes. Will it? No one knows. If it does, you need to be emotionally prepared to handle a drop.
Could the market continue marching up and double over the next 7 years? Sure. Will it? No one knows, so just be prepared.
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, June 04, 2014
What if inflation isn't low?
Provocative article in CFA Institute Magazine questioning if inflation isn't really low. What if inflation stats are misreporting actual inflation? What if central banks are keeping rates low and that is causing the income inequality that so many commentators are braying about?
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.
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 03, 2014
Market timing and market valuation
Excellent article from Morningstar on market timing and valuation.
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.
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 30, 2014
Retirement prep
Planning for retirement stresses most people out. Most people don't know how much to save fore retirement. Added to this, they have misconceptions about retirement itself.
With these two ideas in mind, I have two Wall Street Journal articles to recommend.
The first highlights online calculators that help you figure out how much to save for retirement. Let me ruin the plot: there are no magical calculators that tell you everything you need to know. Retirement calculators are all based on assumptions about a future that no one can know with precision. But, the process is worthwhile. Remember Eisenhower's quote: "Plans are nothing; planning is everything." Don't expect the calculators to give you quick and easy answers, but do expect the process to enlighten your understanding and inform your future actions.
The second highlights myths that most hold about retirement. Here, I'll quote Mark Twain, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." Most retire early because they have health problems or get fired--before they are ready to retire. Getting rehired isn't that easy. Buying a second home doesn't work out that well. You will have medical costs that Medicare doesn't cover. You'll probably spend more than you expect in retirement.
Everyone can prepare for retirement and succeed, but few do. Focus on planning instead of a plan, and make sure you aren't deluding yourself about the nature of retirement.
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 these two ideas in mind, I have two Wall Street Journal articles to recommend.
The first highlights online calculators that help you figure out how much to save for retirement. Let me ruin the plot: there are no magical calculators that tell you everything you need to know. Retirement calculators are all based on assumptions about a future that no one can know with precision. But, the process is worthwhile. Remember Eisenhower's quote: "Plans are nothing; planning is everything." Don't expect the calculators to give you quick and easy answers, but do expect the process to enlighten your understanding and inform your future actions.
The second highlights myths that most hold about retirement. Here, I'll quote Mark Twain, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." Most retire early because they have health problems or get fired--before they are ready to retire. Getting rehired isn't that easy. Buying a second home doesn't work out that well. You will have medical costs that Medicare doesn't cover. You'll probably spend more than you expect in retirement.
Everyone can prepare for retirement and succeed, but few do. Focus on planning instead of a plan, and make sure you aren't deluding yourself about the nature of retirement.
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 16, 2014
Don't invest with your gut
Most investors use their gut to guide their investing choices. Perhaps that's why so few are prepared for retirement.
MarketWatch had a good article on this subject this past week.
Many investors have unrealistic expectations for future returns. They think they need 10% returns above inflation to reach their goals. But, after inflation, returns over the last 50 years have been 5-6%--half of what investors think they need.
Also, more than half of investors want to generate returns with minimal risk. But, is it possible to generate above average returns with little risk?
Almost 80% of investors say they follow their gut instinct to invest while only 25% say their investment knowledge is strong. If you are using your gut and know it's unknowledgeable, you're in trouble.
Your gut is great for telling you that you are hungry, or ill, or infatuated, but it's not a robust tool for investment decision making.
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.
MarketWatch had a good article on this subject this past week.
Many investors have unrealistic expectations for future returns. They think they need 10% returns above inflation to reach their goals. But, after inflation, returns over the last 50 years have been 5-6%--half of what investors think they need.
Also, more than half of investors want to generate returns with minimal risk. But, is it possible to generate above average returns with little risk?
Almost 80% of investors say they follow their gut instinct to invest while only 25% say their investment knowledge is strong. If you are using your gut and know it's unknowledgeable, you're in trouble.
Your gut is great for telling you that you are hungry, or ill, or infatuated, but it's not a robust tool for investment decision making.
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 25, 2014
Save more!
The most important key to reaching your financial goals: saving.
You can't get good returns on money you don't save and invest.
You may not be able to control inflation, tax rates, bond or stock returns, but you have complete control over your savings.
This point was nicely made in a recent Wall Street Journal article, "If You're Not Saving, You're Losing Out."
The last 15 years have felt like a wasteland for portfolio growth if you just look at market appreciation. The Dow Jones Industrial Average, S&P 500 and NASDAQ indexes are up are 4-5% annualized over the last 15 years. That doesn't look or feel like huge portfolio growth.
But, if you have been saving over the last 15 years, then your portfolio's growth probably doesn't look bad. In fact, your saving has probably caused more portfolio growth than investment appreciation or dividends. That's not a bad thing, unless of course you haven't been saving.
The easiest route to financial independence is through consistent saving. Getting great returns helps enhance the outcome, but the savings comes first, and contributes the most.
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.
You can't get good returns on money you don't save and invest.
You may not be able to control inflation, tax rates, bond or stock returns, but you have complete control over your savings.
This point was nicely made in a recent Wall Street Journal article, "If You're Not Saving, You're Losing Out."
The last 15 years have felt like a wasteland for portfolio growth if you just look at market appreciation. The Dow Jones Industrial Average, S&P 500 and NASDAQ indexes are up are 4-5% annualized over the last 15 years. That doesn't look or feel like huge portfolio growth.
But, if you have been saving over the last 15 years, then your portfolio's growth probably doesn't look bad. In fact, your saving has probably caused more portfolio growth than investment appreciation or dividends. That's not a bad thing, unless of course you haven't been saving.
The easiest route to financial independence is through consistent saving. Getting great returns helps enhance the outcome, but the savings comes first, and contributes the most.
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 18, 2014
Athena Capital 1Q14 Client Letter
Athena Capital's 1st quarter client letter is available.
In it, I cover our investment results, my view of the market and economy, and how to set retirement milestones.
Let me know if you have any questions or comments on it!
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 it, I cover our investment results, my view of the market and economy, and how to set retirement milestones.
Let me know if you have any questions or comments on it!
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 11, 2014
Succeeding unconventionally
John Keynes once said, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
What he meant is that people would do better if they were focused less on their reputation and more on what works, but they don't.
In investing, you cannot do better than average by doing what everyone else is doing. This seems plain and simple, until investors become uncomfortable doing or being asked to do something the crowd isn't.
Howard Marks, the chairman of Oaktree Capital, illustrates these points brilliantly in his latest letter to investors, Dare to Be Great II.
For those of you who don't want to read the 9 page letter, I'll summarize with quotes:
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.
What he meant is that people would do better if they were focused less on their reputation and more on what works, but they don't.
In investing, you cannot do better than average by doing what everyone else is doing. This seems plain and simple, until investors become uncomfortable doing or being asked to do something the crowd isn't.
Howard Marks, the chairman of Oaktree Capital, illustrates these points brilliantly in his latest letter to investors, Dare to Be Great II.
For those of you who don't want to read the 9 page letter, I'll summarize with quotes:
- The real question is whether you dare to do the things that are necessary in order to be great. Are you willing to be different, and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both.
- ...you can't take the same actions as everyone else and expect to outperform.
- By definition, non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron.
- Most great investments begin in discomfort.
- To succeed at any activity involving the pursuit of gain, we have to be able to withstand the possibility of loss.
- But it's crippling to have to avoid all failures, and insisting on doing so can't be a winning strategy. It may guarantee you against losses, but it's likely to guarantee you against gains as well.
- I'm convinced that everything that's important in investing is counterintuitive, and everything that is obvious is wrong.
- Unconventional behavior is the only road to superior investment results, but it isn't for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and to survive some 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, April 04, 2014
Investment advice isn't only about maximizing returns
Generating above average returns isn't the only way investment advisers help clients.
As Vanguard has recently pointed out, investors on their own tend to make bad mistakes that destroy returns over time.
Investment advisers can help their clients make better decisions in key areas that dramatically impact long run returns:
I agree with Vanguard's findings and believe it highlights what many investors may be missing: investment advisers help clients reach their goals not just through investment selection, but by providing prudent and effective advice that can significantly impact returns over time.
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.
As Vanguard has recently pointed out, investors on their own tend to make bad mistakes that destroy returns over time.
Investment advisers can help their clients make better decisions in key areas that dramatically impact long run returns:
- keeping clients on an even keel emotionally by guiding them to be fearful when others are greedy and greedy when others are fearful
- guiding clients toward tax-efficient investing without making tax planning an all-consuming goal
- keeping client investment costs low
- guiding clients to rebalance their portfolios: selling what has gone up and buying what has gone down
I agree with Vanguard's findings and believe it highlights what many investors may be missing: investment advisers help clients reach their goals not just through investment selection, but by providing prudent and effective advice that can significantly impact returns over time.
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.
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