"The safe way to double your money is to fold it over once and put it in your pocket." - Frank Hubbard
I know that this is a subject that most of you understand but most of us tend to forget how powerful it is over the long run. I spend a lot of my time chatting to investors about how to maximize their investment returns and it simply boils down to maintaining a consistent positive return year after year.
When I talk about consistent I am referring of course to small amounts of volatility. Volatility is fine if you are trading but it can be murder on returns. Selling at the lows and buying at the highs is the most common mistake made by pretty much all investors. Eliminating this from your portfolio will produce far better returns. If you could cut the losers from your portfolio and let the winners run I am sure you will agree that you would be in a far better financial position.
Now this is not easy to do for a number of reasons but the most prevalent reason of them all is that people get emotionally involved with their investments. After months of research you buy into a position just as the market turns and you are instantly in a losing position. You double down and it falls lower so you buy more. Down it goes again. Now your pride is hurt and you want to get even but the more you buy the lower it goes so the trade now turns to a long term hold. There is no way that you will sell now that your pride has been called into question. Rather sit on the position for eternity until it at least comes back to where you purchased it so that you can proudly tell everyone that you did not take a loss.
This is where you have thrown all thoughts of compounded annual rates of return out of the window. The way to true wealth is through compounding but by dragging along a loser for years you have immediately dropped your total rate of return and thereby reduced the compounding effect on your overall portfolio. Rather take the loss early and look to get in when the position is a lot lower or reinvest the proceeds into something that is working than have the drag on the portfolio.
Furthermore the psychological impact can be immense. First off there is the negativity that can impact your social life and secondly it can have a negative impact on your next trade. If the next trade does not go well then you can end up losing confidence and this can destroy a person's trading career. I do not say this lightly as it has ended many a career on the trading floor.
As a brief recap on compounding, the table below shows you the impact that just 3 percent can have on a portfolio of $1 million:
Compound annual rate of return at 5% for 10 years = $1,283,359
Compound annual rate of return at 8% for 10 years = $1,489,846
The difference after 10 years is over $200,000. This is not insignificant. If you increase the time frame to 20 years the difference balloons to $2,214,162. That is real money and therefore you should pay strict attention to all the investments in your portfolio to ensure that they are providing you a few extra percentage points of return as this can mean the difference between a happy retirement and one that is a struggle.
The last issue with this is that normally it takes a lot more risk to get those few percentage points than it is worth however one place that you can look is your cash deposits. These create a huge drag on a portfolio as they are currently earning nothing. Find a place that can provide you 2 or even 3 percent on this cash like fixed rate deposits and this will provide your entire portfolio the boost that it needs to get you to retirement sooner rather than never.
Thursday, September 29, 2011
Tuesday, September 20, 2011
QE3?
"Enjoy when you can, and endure when you must." - Johann Wolfgang von Goethe
Europe is a mess. Italy has just been downgraded and Greece will default at any moment. The stock market, the only beneficiary of the Federal Reserve's quantitative easing, is struggling and the fear around the world has pushed gold to new highs. Every investment conference I go to touts gold and gold mining stocks. A bubble is starting to form in the space. Don't get me wrong it is still a long way from a bubble but it is coming. I would still load up on the gold mining stocks as the market has not yet priced in the gold price move but I doubt that this will be a long-term hold but rather a short-term trade.
The Federal Reserve is currently meeting. They have extended the meeting an extra day to make sure that everything that needs to be discussed is discussed. They have a lot to talk about and I believe that a lot of what will be said will be about another round of quantitative easing.
It is clear that the stock market needs the juice provided by the Federal Reserve to operate. Take the stimulus away and it is all over for the stock market. The housing market continues to drag and the shadow inventory will begin to show up in the very near future forcing prices even lower. The government entities are holding almost 1 million houses in inventory. They need to unwind these but there is no market for them. Add to this the number held by the banks and it is easy to see why the price of housing has nowhere to go but down.
With all of these issues and the problems in Europe, the Federal Reserve has no option but to continue to print money. They are already adding to the Eurodollar reserves. Even though I believe that the policy is flawed they are too deep into it to stop now. The questions are how large is the stimulus going to be and when will it happen? I believe that they will announce round three at the close of the meeting this week and that it will be a large amount. The reason for this is that this is really one of the last opportunities that they have without bringing into question their neutrality.
Already there is a lot of mud slinging going on in congress and President Obama has recently unveiled a tax hike aimed at the rich. Jobs and a balanced budget are front and center in the political debates and the Federal Reserve cannot be seen to support either side. Delaying the inevitable will create a situation that drags the Federal Reserve into the political spotlight. It cannot afford this if it is to remain intact. Already there is a high level of distrust of their policies and the politicians are eager to find somewhere to place the blame. What easier target than the Federal Reserve.
Therefore I believe that if we are to see some new easing it will be in the very near future and could easily be tomorrow. As such if you are a gambling man you could take a swing that it happens tomorrow and go long the market as if the announcement happens there should be a good upside pop. On the flip side I believe that the market is starting to price in another round of easing and if it does not happen you could be in for a huge decline. A safe way to play this is to buy options on the market. If you straddle the market with a put and a call option at the money then you could benefit no matter which direction the market goes. All you need is a big move and I believe that one is coming.
As this is a short-term trade I would not go all in on this but would limit your risk by moving the bulk of your investments into cash if you have not already done it. Look to alternate investments options and if you are at a loss as to what those may be contact me and I will point you in the right direction.
Europe is a mess. Italy has just been downgraded and Greece will default at any moment. The stock market, the only beneficiary of the Federal Reserve's quantitative easing, is struggling and the fear around the world has pushed gold to new highs. Every investment conference I go to touts gold and gold mining stocks. A bubble is starting to form in the space. Don't get me wrong it is still a long way from a bubble but it is coming. I would still load up on the gold mining stocks as the market has not yet priced in the gold price move but I doubt that this will be a long-term hold but rather a short-term trade.
The Federal Reserve is currently meeting. They have extended the meeting an extra day to make sure that everything that needs to be discussed is discussed. They have a lot to talk about and I believe that a lot of what will be said will be about another round of quantitative easing.
It is clear that the stock market needs the juice provided by the Federal Reserve to operate. Take the stimulus away and it is all over for the stock market. The housing market continues to drag and the shadow inventory will begin to show up in the very near future forcing prices even lower. The government entities are holding almost 1 million houses in inventory. They need to unwind these but there is no market for them. Add to this the number held by the banks and it is easy to see why the price of housing has nowhere to go but down.
With all of these issues and the problems in Europe, the Federal Reserve has no option but to continue to print money. They are already adding to the Eurodollar reserves. Even though I believe that the policy is flawed they are too deep into it to stop now. The questions are how large is the stimulus going to be and when will it happen? I believe that they will announce round three at the close of the meeting this week and that it will be a large amount. The reason for this is that this is really one of the last opportunities that they have without bringing into question their neutrality.
Already there is a lot of mud slinging going on in congress and President Obama has recently unveiled a tax hike aimed at the rich. Jobs and a balanced budget are front and center in the political debates and the Federal Reserve cannot be seen to support either side. Delaying the inevitable will create a situation that drags the Federal Reserve into the political spotlight. It cannot afford this if it is to remain intact. Already there is a high level of distrust of their policies and the politicians are eager to find somewhere to place the blame. What easier target than the Federal Reserve.
Therefore I believe that if we are to see some new easing it will be in the very near future and could easily be tomorrow. As such if you are a gambling man you could take a swing that it happens tomorrow and go long the market as if the announcement happens there should be a good upside pop. On the flip side I believe that the market is starting to price in another round of easing and if it does not happen you could be in for a huge decline. A safe way to play this is to buy options on the market. If you straddle the market with a put and a call option at the money then you could benefit no matter which direction the market goes. All you need is a big move and I believe that one is coming.
As this is a short-term trade I would not go all in on this but would limit your risk by moving the bulk of your investments into cash if you have not already done it. Look to alternate investments options and if you are at a loss as to what those may be contact me and I will point you in the right direction.
Monday, September 12, 2011
Investing versus Trading
"Business is the art of extracting money from another man's pocket without resorting to violence." - Max Amsterdam
This week's blog is very near and dear to my heart. When I began in this business over 20 years ago I was an investor through and through. The only way to invest was through hard work. Start with a detailed analysis of a company, drill down into the numbers to find hidden value, interview management to make sure that nothing was missed and if the stock was still cheap relative to the results from my analysis then I would load up on the position. If the stock dropped lower I would confidently add to my position and then wait patiently for the rest of the market to discover my hidden gem and take it to my target price. Once there I would offload.
Of course I would keenly await the quarterly reports and raise or lower my expectations based on management comments and the reported numbers and guidance. I would hold positions for months if not years and normally I would be rewarded for my effort. Time, effort and patience were virtues and a formal education in analysis was important. Do your apprenticeship with a financial consulting firm or one of the major investment banks and you had a ticket to riches.
This all changed with the NASDAQ bubble and the advent of massive computer power. I clearly remember during the NASDAQ bubble in 1999 a technical trader friend of mine asking which positions I held. After our discussion he took five minutes to evaluate each of these technically and purchased a few of the names on their "breakout". He proceeded to buy more and more as the stocks moved higher and then exited near the top for a massive profit. I was amazed that anyone could base millions of dollars on a technical chart.
Over the years since I have become a keen advocate of technical analysis mainly because the market has changed so much that it almost makes financial analysis worthless. Certainly there is a place for financial analysis but it is more and more likely to be found in private equity funds than in Wall Street hedge funds. Traders have taken over the market and seek to gain an edge not by superior financial analysis but through superior speed and cheaper price of execution of a trade.
Traders seeking an edge try to sit right next to the market (literally) to get a millisecond advantage over the competition that is sitting a thousand miles away. This is all that they need. Company stocks are unknown only tickers are relevant and price to earnings ratios are replaced with stock price momentum. This is why you have situations where high priced stocks just keep on going while lower priced stocks do not move.
This is all very good and well but it has turned Wall Street into a glorified casino. The authorities are turning a blind eye to all of this as they are all making money. The average daily volume of stocks traded has almost quadrupled over the past decade while the market value of the Standard and Poors 500 (the largest 500 companies listed on the United States stock markets) has not moved. Money is being made by charging a fee for each share traded. Meanwhile investors are not being rewarded for this greed and are in reality the chicken fodder. Give us your money so we can pay ourselves fees and you can receive a negative return on your money.
This has to stop and is going to end badly. While everyone is making money no-one will turn their attention to these market practices. The downside is that just as the computers are pushing prices higher, at some point when the market bursts they will drive prices lower and in a hurry. At this point Congress will look into the problem but by then it will be too late. Thousands of investors will have lost their shirts but this time hopefully Wall Street will be made to pay.
Protect yourself by moving out of the market and looking for opportunities elsewhere. For those of you with a conservative edge I would advise that you take a long hard look at your overall portfolio and try to find a decent yield in a low yield environment. As I mentioned to a friend of mine the other day, it is better to get out now and protect against a 50% retracement than to try to catch a 10% increase in the market. Things are skewed to the downside so look to exit and wait patiently for the bottom. It will come and you will be rewarded, just like the old days.
This week's blog is very near and dear to my heart. When I began in this business over 20 years ago I was an investor through and through. The only way to invest was through hard work. Start with a detailed analysis of a company, drill down into the numbers to find hidden value, interview management to make sure that nothing was missed and if the stock was still cheap relative to the results from my analysis then I would load up on the position. If the stock dropped lower I would confidently add to my position and then wait patiently for the rest of the market to discover my hidden gem and take it to my target price. Once there I would offload.
Of course I would keenly await the quarterly reports and raise or lower my expectations based on management comments and the reported numbers and guidance. I would hold positions for months if not years and normally I would be rewarded for my effort. Time, effort and patience were virtues and a formal education in analysis was important. Do your apprenticeship with a financial consulting firm or one of the major investment banks and you had a ticket to riches.
This all changed with the NASDAQ bubble and the advent of massive computer power. I clearly remember during the NASDAQ bubble in 1999 a technical trader friend of mine asking which positions I held. After our discussion he took five minutes to evaluate each of these technically and purchased a few of the names on their "breakout". He proceeded to buy more and more as the stocks moved higher and then exited near the top for a massive profit. I was amazed that anyone could base millions of dollars on a technical chart.
Over the years since I have become a keen advocate of technical analysis mainly because the market has changed so much that it almost makes financial analysis worthless. Certainly there is a place for financial analysis but it is more and more likely to be found in private equity funds than in Wall Street hedge funds. Traders have taken over the market and seek to gain an edge not by superior financial analysis but through superior speed and cheaper price of execution of a trade.
Traders seeking an edge try to sit right next to the market (literally) to get a millisecond advantage over the competition that is sitting a thousand miles away. This is all that they need. Company stocks are unknown only tickers are relevant and price to earnings ratios are replaced with stock price momentum. This is why you have situations where high priced stocks just keep on going while lower priced stocks do not move.
This is all very good and well but it has turned Wall Street into a glorified casino. The authorities are turning a blind eye to all of this as they are all making money. The average daily volume of stocks traded has almost quadrupled over the past decade while the market value of the Standard and Poors 500 (the largest 500 companies listed on the United States stock markets) has not moved. Money is being made by charging a fee for each share traded. Meanwhile investors are not being rewarded for this greed and are in reality the chicken fodder. Give us your money so we can pay ourselves fees and you can receive a negative return on your money.
This has to stop and is going to end badly. While everyone is making money no-one will turn their attention to these market practices. The downside is that just as the computers are pushing prices higher, at some point when the market bursts they will drive prices lower and in a hurry. At this point Congress will look into the problem but by then it will be too late. Thousands of investors will have lost their shirts but this time hopefully Wall Street will be made to pay.
Protect yourself by moving out of the market and looking for opportunities elsewhere. For those of you with a conservative edge I would advise that you take a long hard look at your overall portfolio and try to find a decent yield in a low yield environment. As I mentioned to a friend of mine the other day, it is better to get out now and protect against a 50% retracement than to try to catch a 10% increase in the market. Things are skewed to the downside so look to exit and wait patiently for the bottom. It will come and you will be rewarded, just like the old days.
Thursday, September 1, 2011
Labor Day 2011
"Borrowed money shortens time." - Chinese proverb
Labor Day in the United States is September 4th this year. According to the knowledgeable people at Wikipedia "it became a federal holiday in 1894, when, following the deaths of a number of workers at the hands of the US military and US Marshalls during the Pullman Strike, President Grover Cleveland put reconciliation with the labor movement as a top political priority. Fearing further conflict, legislation making Labor Day a national holiday was rushed through Congress unanimously and signed into law a mere six days after the end of the strike."
To celebrate labor's day it would seem that labor should again strike, walk on the government and demand that Congress implement policies that create jobs for the needy rather than the fat cats in bank high rises. Unemployment is terribly weak after years of stimulus and this week second quarter productivity was revised down by the largest drop since the fourth quarter of 2008. For those of you with short-term memories, the fourth quarter of 2008 was the eye of the storm in terms of market weakness. Non-farm productivity was revised down to -0.7%. Yes that is correct it is negative! This has to lead to further layoffs in the near future. Not a great way to celebrate labor's day.
To add to the hurricanes battering the East coast it appears that the economy continues to be battered and the Federal Reserve has all but given up its fight. Mr. Bernanke finally admitted that the severity of the market ills is far worse than he ever anticipated and handed over the reigns to Congress when he stated that ".. most of the economic policies that support robust economic growth in the long run are outside the province of the central bank." So let me get this straight; he spent trillions of dollars with no reward other than an overpriced stock market and now he walks away and says it is all Congresses fault? Don't get me wrong, I agree with him to a large degree, but what about mopping up the mess that he created with all the additional debt that we are now burdened with? That is the problem with this country at present, there is no leader willing to take up the helm and drive the ship into the storm. We can only run on this course for so long until either the storm catches us or we crash into rocks.
Let's turn to the Congressional Budget Office (CBO). The CBO is entrusted with estimating the growth of the economy and thereby expected tax revenues, surpluses, deficits and the like. Based on their expectations Congress makes its plans for the future of the country. Well the CBO expects that growth will be at 2.3% for the year. Considering that this number has already been ratcheted down a number of times and considering that we only grew at 1.4% for the first half of the year, there is absolutely no way that they are remotely close to being correct in their forecast. Furthermore they predict a 2.7% growth rate for 2012. It is my contention that 2012 will be the beginning of a recession and that the budget deficit will balloon just at the time when we need it to contract.
With Mr. Bernanke handing the reins over to Congress to make the right decisions (become austere) and with Congress relying on the inflated numbers from the CBO it looks like the hurricane will catch up to us before we reach the rocks! The Chinese who have lent us a significant amount of money have summed it up in the proverb at the beginning of this blog: "Borrowed money shortens time." I have said it before and I will say it again, get out of the market while it has sent you a life raft in the form of a weak bounce and harbor your cash into something safe for an extended period. Do not get sucked back into the market for at least the next 12 months.
To end this blog I am attaching a link that was provided to me by a friend. it is very clever and funny, particularly if you have spent any time in the mid-west like I did many years ago. Enjoy.
Labor Day in the United States is September 4th this year. According to the knowledgeable people at Wikipedia "it became a federal holiday in 1894, when, following the deaths of a number of workers at the hands of the US military and US Marshalls during the Pullman Strike, President Grover Cleveland put reconciliation with the labor movement as a top political priority. Fearing further conflict, legislation making Labor Day a national holiday was rushed through Congress unanimously and signed into law a mere six days after the end of the strike."
To celebrate labor's day it would seem that labor should again strike, walk on the government and demand that Congress implement policies that create jobs for the needy rather than the fat cats in bank high rises. Unemployment is terribly weak after years of stimulus and this week second quarter productivity was revised down by the largest drop since the fourth quarter of 2008. For those of you with short-term memories, the fourth quarter of 2008 was the eye of the storm in terms of market weakness. Non-farm productivity was revised down to -0.7%. Yes that is correct it is negative! This has to lead to further layoffs in the near future. Not a great way to celebrate labor's day.
To add to the hurricanes battering the East coast it appears that the economy continues to be battered and the Federal Reserve has all but given up its fight. Mr. Bernanke finally admitted that the severity of the market ills is far worse than he ever anticipated and handed over the reigns to Congress when he stated that ".. most of the economic policies that support robust economic growth in the long run are outside the province of the central bank." So let me get this straight; he spent trillions of dollars with no reward other than an overpriced stock market and now he walks away and says it is all Congresses fault? Don't get me wrong, I agree with him to a large degree, but what about mopping up the mess that he created with all the additional debt that we are now burdened with? That is the problem with this country at present, there is no leader willing to take up the helm and drive the ship into the storm. We can only run on this course for so long until either the storm catches us or we crash into rocks.
Let's turn to the Congressional Budget Office (CBO). The CBO is entrusted with estimating the growth of the economy and thereby expected tax revenues, surpluses, deficits and the like. Based on their expectations Congress makes its plans for the future of the country. Well the CBO expects that growth will be at 2.3% for the year. Considering that this number has already been ratcheted down a number of times and considering that we only grew at 1.4% for the first half of the year, there is absolutely no way that they are remotely close to being correct in their forecast. Furthermore they predict a 2.7% growth rate for 2012. It is my contention that 2012 will be the beginning of a recession and that the budget deficit will balloon just at the time when we need it to contract.
With Mr. Bernanke handing the reins over to Congress to make the right decisions (become austere) and with Congress relying on the inflated numbers from the CBO it looks like the hurricane will catch up to us before we reach the rocks! The Chinese who have lent us a significant amount of money have summed it up in the proverb at the beginning of this blog: "Borrowed money shortens time." I have said it before and I will say it again, get out of the market while it has sent you a life raft in the form of a weak bounce and harbor your cash into something safe for an extended period. Do not get sucked back into the market for at least the next 12 months.
To end this blog I am attaching a link that was provided to me by a friend. it is very clever and funny, particularly if you have spent any time in the mid-west like I did many years ago. Enjoy.
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