Buyer Beware

Being merely smart isn't good enough in the investment profession because everybody is smart. You also have to have the cynical attitude and ability to sniff out bs. Sounds like [certain investment managers] were sorely deficient in that department based on [what] they were buying. This is where Warren Buffett excels, and is often underappreciated.

From Daniel Mauro, on Knowing when to Quit: The Key to Success

This idea is very true...and it works as much for everybody, in different walks of life. For example, we all have to make sure we aren't misled in our daily lives. 

Making good investments has a lot to do with not being misled and lied to. Be careful. 

May the buyer beware.

Christina Romer's Optimistic Presentation: "Back to a Better Normal"

    Christina Romer's lecture called "Back to a Better Normal: Unemployment and Growth in the Wake of the Great Recession" presented at Princeton University, April 17, 2010, exceeded my excited anticipation. Her message remained solidly optimistic, despite present day observations of an ominous nature. My synopsis is taken from my notes and the written speech.

   "By almost every indicator, the US economy is finally on the road to recovery."

   "The New Normal" is a concept discussed by President and advisers frequently. "We are very far from normal."

    Current unemployment rates reflect a severe shortfall, a collapse of aggregate demand as an effect of the financial crisis that caused a loss of wealth, disruptions of credit, devastation of state and local government budgets, greater caution on the part of consumers and firms, and fall in output around the world. The "rise in long-term unemployment is the almost-inevitable consequence of the severe recession." Romer emphasizes "there is every reason to expect that long-term unemployment will come back down when aggregate demand recovers."

    Challenges reduced but not yet eliminated are credit that remains tight, businesses aren't hiring, state governments have budget shortfalls...It's currently "a replay of what happened during the recovery from the Great Depression."

Christina Romer, President Obama, Lawrence Summers

Photo by Pool/Getty Images North America

    Consumption is not likely to be "the main engine of a strong recovery." Monetary policy is "unusually tight given the condition of the economy". We are"growing again, but not booming". The economy is "not predicted to reach normal levels for an extended period...There are limits on the role government can play."

"What More Can We Do?"

a) "Our focus as policymakers should be on how we can help the private sector recover faster."

b) tax incentives for businesses to employ and retain workers.

c) "additional fiscal relief to the states" extend unemployment insurance benefits extensions, caused by shortages of jobs not workers, and provide capital to small banks to lend to small businesses.

d) open markets to US goods, to move "global economy to more balanced growth."

e) energy conservation through rebate programs.

    Rapid recovery can "help ensure that unemployment does not remain permanently higher". Return of economy to normal is "both possible and a policy imperative...High unemployment is a disaster for the economy"and "more importantly, a tragedy for those affected."

   Can we do better than "just get back to where we were before the recession?" "Could good economic policies lead to economic growth that is stronger and more durable than before?" The answer, Romer says, is yes, with these economic transformations:

1. "Dealing with the Budget Deficit": "budget problem was years in the making." To get fiscal house in order, health reform legislation include mechanisms experts say will "slow the growth of health care costs over time...Vigilance on "implementation of the reforms" is necessary "to make sure that those mechanisms work" and a range of other measures are needed.

2. "Rebalancing Demand": higher personal savings and investment are the goals. New investments in clean energy, biotechnology, healthcare and information technology are better than borrowing, consumption spending and "unsustainable" construction.

3. "Financial regulatory reform" : new sets of rules needed to "curb destructive bubbles" require greater accountability of Wall Street, consumer protections, new rules for financial system  -  a "regulatory framework where capital and liquidity requirements control excessive risk-taking and where regulators consider risks to the system as a whole and not just to individual institutions."

4."Investing in Education and Innovation": with investments in education, basic science, new labs and research facilities.

The LIMB Method of Choosing Mutual Funds

I have been revisiting the year's top gainers list for a future post, and have looked again at the "CANSLIM" method for stocks invented by William O'Neill, founder of Investor's Business Daily newspaper and author of investment guidebooks, just for mental exercise. I always get somewhat confused and tied up in knots worrying about stocks, so funds are relaxing for me to look at.  As far as mutual funds are concerned, the "LIM" are more important than the "CANS" in my view. (This is something I decided myself, and it really simplifies the process of choosing mutual funds.)

L - Leaders vs. Laggards. Choose leading mutual funds. The leadership of previous mutual fund success is easily found in fund charts (e.g. bigcharts.com) by checking longer time horizons. The bigger vista tells you more with mutual funds, as John Bogle says. This also tells you how they have fared in the most recent bubbles, and helps you invest based on how much you can afford to lose. The less you can afford to lose, the more conservatively you must invest. The younger you are, the more risks you can take with some of your money.
I -  Institutional Support. Again, choose leading mutual fund companies, because they mostly are the institutional support and some have lower fees than others. Easy.
M - Market Direction. Not so easy. In fact, this is the hardest. You want a fund heading up, right? This is why Bogleheads stay in funds and won't move out. Don't get me wrong, I like Vanguard et al. But funds tend to move up and down slowly, with some exceptions giving you time to think about your moves. Certainly, it's normal to change mutual fund lanes more slowly, SUV style, than to day-trade stocks lightning fast, because diversification and staying in the market are constant themes for good reason. The idea is to put money to work at all times, if possible, and choose carefully based on "your risk tolerance."
B - Beta. Beta is the financial term for volatility. 1(One) is the baseline for mutual funds, and the more risky, the farther away from 1 the beta is. It's a factor to compare when choosing mutual funds, especially sector and commodity funds as these move fastest.

L and M especially are the most important criteria for choosing leading mutual funds because they're all we have to go on. Even Jim Simons, the legendary hedge fund owner, says he chooses stocks based on past performance because it's all the information he has.  Of course, for legal reasons, stocks and funds constantly have the "beware" sign up.

Even though most of us aren't full-time day traders, there's still plenty of opportunity to do well in the market. We have lives. Full lives. With computers, we don't have to make charts by hand laboriously as we certainly used to have to do.

It's possible to invest in tax-exempt mutual funds and make off well all by yourself without spending hours and hours on it with the help of your quick online research. Morningstar.com and Fidelity.com are some online resources to check because you can compare funds and their fees (lower is usually better). You may want to spend hours depending on the size of your portfolio, but you don't have to. You can choose a mutual fund based on incomplete knowledge of a fund, and that's all right,  just as you won't ever know everything about a company if you buy its stock. For most consumers of mutual funds, fund leadership and market direction are key. Like children, vigilance is everything, but less so with mutual funds than stocks.

To summarize: funds are a lot easier to manage for the average investor than stocks for the following reasons,

(L) leadership - previous fund success
(I) institutional support - lower fees
(M) market chart direction and
(B) beta or volatility.

The point is that buying anything is a whim, including investments, necessities and groceries. Sorry if this is too basic, but there are thousands of stocks and funds to buy and it's a buyer's market. I can't help giving my two cents for what it's worth.

Famous Investment Quotations

When asked what the stock market will do, J.P Morgan (1837-1913) (banker, financier, businessman) replied:"It will fluctuate."

October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February. -Mark Twain

Keynes:The market can stay irrational longer than you can stay solvent.

Buffett:You only find out who is swimming naked when the tide goes out. – (many more from Buffett here)

From Poor Richard’s Almanac, Benjamin Franklin, 1735-47:

• A fool and his money are soon parted….
• Poverty wants some things, Luxury many things, Avarice all things….
• Beware of little Expenses, a small Leak will sink a great Ship.
  
  A bull is someone who believes the stock market will go up and a bear is someone who believes the stock market will go down. A bull market is a rising market and a bear market is a falling market. Where does bull and bear come from? Some sources say that a bull knocks you up in the air (rising market) and a bear knocks you down (falling market). Investment Trivia
  
  Shakespeare: Neither a borrower nor a lender be; for loan oft loses both itself and friend and borrowing dulls the edge of husbandry.
  
  Winston Churchill said this: “Saving is a fine thing. Especially when your parents have done it for you.”
  
  Groucho Marx: “Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.”
  
  Julius Rosenwald: “Do not be fooled into believing that because a man is rich he is necessarily smart. There is ample proof to the contrary.”
  
  Ecclesiastes 5:10 "Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income."
  
  Ecclesiastes 10:19 "A feast is made for laughter, and wine makes life merry, but money is the answer for everything."
  
  You’ll want to stay away from the brokerage firms who's motto is 'Win 'em, spin 'em, churn 'em, and burn 'em.' Investment Trivia
  
  We can all be reassured by this comforting saying from Bertrand Russell: "The most valuable things in life are not measured in monetary terms. The really important things are not houses and lands, stocks and bonds, automobiles and real state, but friendships, trust, confidence, empathy, mercy, love and faith."

American Financial Proverbs

A proverb "expresses a basic behavioral truth in a rather universal metaphor." (Deproverbio.com)

Some are applicable only to the American market, while others pertain to investing in general and could apply internationally. They may or may not be true, as a little warning! Most countries and cultures have their own proverbs.

These are a few of my favorite anonymous well-known proverbs I've heard many times, although there are many, many more and another post will have financial quotations. It’s an interesting area to research. Please send in your suggestions and attributions and this post will be updated.

Buy when the blood is running in the streets.

Buy low, sell high.

Bulls make money. Bears make money. Pigs get slaughtered.

Don’t try to catch a falling knife.

Buy on the rumor, sell on the news.

Sell in May and go away (not true this year!)

The trend is your friend.

Sell your losers and let your winners ride.

Don’t fight the tape.

The trend is your friend.

Buy when there is blood in the streets.

Think big. Think positive. Never show any sign of weakness.

Now is always the most difficult time to invest.

Look after the pennies and the pounds will look after themselves.

The last one is definitely British.

For Many Investors: Buy & Sell, Not Buy & Hold

A cogent article in today's Wall Street Journal makes the convincing point that the long-term buy-and-hold strategy has, by now, fallen out of fashion. Investors, especially those discouraged from the recent historically sharp downturn, are saying,

"things are different this time. "The problem I have with the buy-and-hold strategy is that it's a bull-market strategy," says Matthew Tuttle, a financial adviser in Stamford, Conn. "In the bust, you give all of your profits back."

Every time I hear "it's different this time," it usually isn't. That maxim has long been echoed in times of flux, whether it concerns the housing bubble, the internet bubble and going all the way back to the tulip craze.

Of course, the traditional view of die-hard buy-and-hold investor John Bogle disagrees. "It's a fools' game," says John Bogle, the 79-year-old founder of mutual-fund giant Vanguard Group, which helped popularize index funds and the virtues of buy-and-hold investing. Not only will short-term investors pay more commissions, fees and other costs, but various studies have shown that market timers typically lose more money than buy-and-hold investors.

"If you want to trade the market, you've got to be right twice -- you've got to get out and get back in," he says.

What do you think? Is it different this time? Were you always skeptical of "buy-and-hold forever"? What will make money for you this year?

WSJ article

Merit Prizes Are Over-Taxed

Larry Kudlow said in his show this evening, that taxes shouldn't punish legitimate earnings. But, of course, they do. What is he thinking?

Merit prizes, professional prizes, especially, for example, the Nobel Prizes, are not regarded tax-wise as an inheritance. They're taxed at 50% after deducting federal and state taxes, because they're thrown into the same tax bag as gambling winnings!

Is it any wonder, therefore, that UBS isn't giving out the names of Americans who have deposited money in Switzerland in private accounts to avoid taxes? It's not happening anytime soon.

Can you imagine the uproar if Nobel Prize winners and elite government officials were found to bank their money offshore, away from American taxes and the IRS? Can you imagine the backlash from voters?

Monday Morning Market Action

Financials and international stocks are heading down this snowy (in the east) morning following AIG's second bailout. Warren Buffett's making gloomy predictions for the markets, saying "the economy will be in a shambles for this year and maybe longer". It can't be a surprise that the Dow is below the 7,000 point last seen in 1997.

The manufacturing number of "US factory activity contracted again in February, but at a less severe rate, while construction spending dropped in January to its lowest level in more than four years" according to Marketwatch.

The fact that my purse was snatched midday yesterday at my suburban grocery store's parking lot near Princeton, New Jersey ("a safe area") is keeping me busy "staying on an even keel" -- a metaphor for market trading now.

How will America change?

President Obama’s optimistic speech last night wasn't replete with the smugness we have come to expect from Presidents. He described a litany of problems the country is having and then outlined how he will be focusing on three major areas: energy, healthcare and education.

1. Energy: Infrastructure improvements will need to be made. Meanwhile, Republicans are worrying about how nuclear energy is going to be handled by the new administration.

2. Healthcare: Full reform of healthcare spending needs to be achieved. Pharmaceutical companies are looking at the government's healthcare initiatives and how that involvement could impact their businesses.

3. Education: clearly needs improvement. By the way, NPR is doing a great job of highlighting the differences in public educational facilities that has long been an issue in this country. I am convinced the problem is not usually with teachers, but with curriculum and facilities.

These are three key areas that will be the focus of business interest and government spending in new and innovative products and services. He also talked about housing and small business taxes. Since the President is looked on almost as a deity in this country, everyone has to pay attention.

Banking was highlighted as an area that needs reform, and even bankers should agree they are our servants, or else they're in the wrong profession. Banks might be boring, but the investing that is at their heart is wildly exciting.

Here is an article in Bloomberg News about Canada's banks to help explain why Canada isn't having the same problems as the U.S.

On Akamai and madoffsearch.com

This is a good article extolling the virtues of Akamai far more articulately than I can. It's a solid internet technology company that I do recommend highly.

There is a new website called

madoffsearch.com

where you can enter any name you like to search for victims of Madoff. Looking through the original list, alphabetized by first name, it is obvious that many investors gave money to CPA companies to invest. The rumor now is that hedge funds are looking at these investors, the kind of investors who want to give their money to others to invest.

Building up financial knowledge and investing some if not all your money yourself is the right thing to do.

But many big investment advisors, such as

Warren Buffett here on CNBC

and

Charles Nenner here on CNBC and Bloomberg

,are saying that now is exactly the time to invest for the long term while prices are so low.

Charles Nenner

Some market experts say the low is going to last half a year, and others say twenty years. No one knows for sure; they're all making (hopefully) educated guesses. So try to work on each moment being perfect, while keeping some money to use in the future.

"Don't invest what you can't afford to lose" is an old phrase. But then again, "invest for the long-term" is another.

Pending Home Sales Rise: Seen as "Huge News"

It's snowy here in the northeast today, a beautiful light snow. On the whole, the news is good, and encouraging.

Here's a late afternoon summer photograph of our ivy-covered pre-revolutionary spring house and a pine tree. Beyond is an old orchard, a new swimming pool and a cottage and a lot more. Beautiful, always.

Investment "Thought of the Day"

"We make ourselves rich by making our wants few."
-Henry David Thoreau


Is the reverse, we make ourselves "poor" by making our wants "many" true, as well?

This comment has to do with buying more than our means permit, a common occurrence in modern credit card society, long after it was written. It is human to want a rich and varied life, however much we may need to "make ourselves rich".

The more knowledgeable we are of what is out there to help us live and the more money we have to use as a tool to make our lives easier, the more complex and "rich" our desires are.

The late Hetty Green was a wealthy woman who made a virtue of frugality, except as far as buying securities is concerned, to the detriment of a full and varied life. "Frugality" works, but can appear to others as "poverty". This is a book about her.

Meanwhile, there are lots of stocks, purchases for the long term, definitely "wants" that are accelerating fast. Surely, Thoreau wasn't talking about stocks?

Bet This Pilot's Job is Secure

Have you ever heard of a plane landing on water and everyone getting out safely? Some passengers are walking on the wing afterward, looking like they are walking on water.

Courtesy CNN.com

My, were they lucky! Who said, "luck is what happens if you work really hard at something"? Whoever did was really onto something today. Everything aligned perfectly in the favor of passengers of the U.S. Airways flight to Charlotte, North Carolina today and a tragedy was averted.

Four bullish signs from Trader Talk

On CNBC, Bob Pisani talked about his four bullish signs, also on the link below:

1. Stocks are having multi-month breakouts, Halliburton, Alcoa, HP, and Morgan Stanley, and could be troughing now
2. Mortgage rates are going below 5%
3. Corporate bond issuance is up
4. Reflation signs: TIPS auction went well, rising commodity prices

I have also heard they will commodity prices will likely go lower in 2009 - more on that another time.
http://www.cnbc.com/id/2852547