Book 14: Investment advices
We need to
distinguish good information from garbage.
1 Newsletters and subscriptions
Why
do you not see too many reviews on investment newsletters and subscriptions
from the media? If it is a bad review, most likely they will not advertise in
the media. If it is a good review, they may have to face legal actions in the
future if the vendor’s subscription or newsletter does not perform well.
I've been using investment newsletters /
subscriptions for years. Many are priced reasonably and some are even free.
While a lot of them are garbage, some are very good.
When
you have a lot of money to invest and you're not using a financial adviser
and/or not subscribing to any investment service, it could be a big financial
mistake. You do not want to be penny smart but pound foolish. Very few have the
knowledge and the time to make use of the free financial data, including the
guidance and articles from the web.
You need a computer, access to the Internet and a spreadsheet in order to use most subscription services effectively.
I'm not going to compare specific services / newsletters at the risk of being sued, but I will include some general pointers on how to select them. Yesterday’s garbage could be a gold mine today if the subscription improves and/or the market conditions fit what they recommend.
First, you need to find out your requirements and how much time you can afford to use them. If you have $20,000 or less to invest, most likely your investment both in time and money will not pay off; just buy an ETF and practice market timing described in this book. My pointers are:
You need a computer, access to the Internet and a spreadsheet in order to use most subscription services effectively.
I'm not going to compare specific services / newsletters at the risk of being sued, but I will include some general pointers on how to select them. Yesterday’s garbage could be a gold mine today if the subscription improves and/or the market conditions fit what they recommend.
First, you need to find out your requirements and how much time you can afford to use them. If you have $20,000 or less to invest, most likely your investment both in time and money will not pay off; just buy an ETF and practice market timing described in this book. My pointers are:
·
Newsletters giving you specific stocks to buy do
not require much of your time. However, if they're successful, there will be
too many followers buying the recommended stocks that can drive up the prices
at least temporarily. The owner of the subscription service and his insiders
will buy the recommended stocks before you unless they’re not allowed to do so
(but who’s enforcing this?). I had several of these newsletters, and so far I
have not renewed any one of them due to poor performance.
·
If I found the Holy Grail of investing, do you
believe I would share it with you for $100 or so? I only will after I invest my
money first. My subscribers would push up the prices for me and then I could
unload them before my subscribers.
I
am publishing a book (not a promise) in June time frame every year with the
title “Best Stocks for 2021” recommending a handful of stocks. Due to my
relatively small positions and few buyers of the book, it will not have the
adverse effects described. Most of my recommendations should be value stocks
for long term hold unless the market is risky. My books will not be the Holy
Grail as my objective is beating the S&P 500 Index.
·
If the volume of the recommended stocks are
small, they can be manipulated easily either by the newsletter owners and/or by
your peer subscribers. The first ones to sell the recommended stocks win and
the last ones to sell them lose.
·
I prefer systems that can find a lot of stocks
by providing many searches (same as screens). However, it will take a lot of
time to learn and test their performances unless they provide historical
databases. Most likely, you need to further research each stock screened.
From my experience, the best performance comes from the stocks that have been screened by more than one search especially for the short term (less than 6 months). My theory is that they've been identified by many folks and hence their prices could be jacked up. It is more profitable to buy them ahead of the herd and sell them before the herd. In any case, research the stock you are interested in.
From my experience, the best performance comes from the stocks that have been screened by more than one search especially for the short term (less than 6 months). My theory is that they've been identified by many folks and hence their prices could be jacked up. It is more profitable to buy them ahead of the herd and sell them before the herd. In any case, research the stock you are interested in.
·
Most of you have received promotional mail that
indicates their incredible performances such as tripling the money in a short
time. Just ignore them. If it is that good, most likely they will keep it for
themselves. It is the same for seminars that boost some penny stocks. Most
likely the recommended stocks would rise initially to lure you and other
suckers to move it. Watch out! As of 2016, I do not see these junk mail as
often as before; the public is smarter. They must have switched their
promotions to YouTube.
·
A ‘guru’ told me that he made a big fortune in
silver a month ago. Guess what? He also recommended selling it two months
earlier and lost a lot of money in doing so. He is always right but he will not
advertise the times he was wrong. We call it a double talk technique.
·
There are free trial offers (or deeply
discounted) for most subscription services. Take advantage of them. Some
services require you to spend a lot of time, so ensure you have the time. Keep
track of the performance yourself via paper trading. Do not trust their
‘official’ performances which can be manipulated.
·
Subscribe to a newsletter that fits your style
of investing. If you're a day trader, newsletters on long-term investing are
not good for you. Some subscriptions handle all kinds of investing styles and
you need to find the strategies and recommendations within the newsletter to
fit your style. Short-term swing traders have different set of metrics than
long-term investors.
·
Newsletters on penny stocks are risky to most of
us. They may show you a list of big winners but they do not show you their
losers.
I
define penny stocks as the stock price less than $2 (officially $5) and a
market cap less than 100 M. Once a long while I do trade penny stocks. Actually
I bought ALU at $1 but ALU’s market cap then was about 2 billion at the time.
The stocks with prices between $1 and $10 represent the most volatile stocks
but a few are real gems. They are routinely ignored by most analysts.
·
There are many sectors like drugs, mines,
insurance and banks that retail investors cannot evaluate them effectively. It
is better to seek expert advice from specific newsletters. Check out their past
performance and take advantage of the free trial offers.
·
Remember there is no free lunch in life. The
higher potential return of a stock, the riskier the stock is. To me, all trades
are educated guesses. The more educated the guesses are, the higher chance they
will perform in the long run. However, noting is 100% sure.
·
Some newsletters / subscriptions save us time by
summarizing the financial data by providing a value rank and a growth rank.
Some provide a timely rank from the price momentum. When the market favors growth, use the growth
rank, and vice versa.
·
Be careful with the information from radio and
TV commercials. Many try to sell to peoples' fear and greed by overstating
without necessarily telling the whole story. It is not possible to make 50% in
covered calls consistently or making another gold rush from $400 to $2,000. One
advertises the market will lose 80% in 2016. It is possible but not likely.
[Update: The market was profitable in 2016.] These are tactics to get you
subscribing to their services.
·
TV financial shows usually exaggerate in order
to sell their products. Analyze them before you act on the news.
·
As retail investors, most of us cannot afford to
do extensive research. Many researches and market opinions are available on the
internet free. Start to search for such
information from your broker’s site and financial sites such as
SeekingAlpha.com, MarketWatch.com, CNNfn.com and Yahoo!Finance.com. Analyze the
news and some could be obsolete, or could be manipulated with a hidden agenda.
·
Most compare their performances with the S&P
500 index. Some investment newsletters inflate their performance with dividends
while comparing to an index without including dividends.
To
illustrate, the S&P 500 has an average annual return of 1% on appreciation
and 1.5% on dividends for a total return of 2.5%. Hence, the performance of a
newsletter should compare itself to 2.5% not 1%.
·
The performance of the last 10 years (I prefer
the last 5 years) is more important than that of 25 years. The last 10 years is
a better prediction of the newsletter than the last 25 years as the weatherman
has found out.
More
than one time, I have found a popular subscription that did not beat S&P
500 in the last 5 years but it did in the last 20 years. It could be that too
many folks are using the same strategy.
·
When the new major researcher takes over the
subscription, s/he may not have the same expertise as the previous researcher.
·
Ensure the subscriptions change their strategies
according to the current market conditions. For example, 10 years ago ADRs
(U.S. listed stocks of foreign countries) performed far better than today. The
trend may reverse in the future.
·
Few if any use real money for their portfolios,
as they cannot cheat with real money. That’s why you never achieve the
compatible performance by following what the portfolio trades. Some can
manipulate by using the best prices of the day. Some omit their losers. Do not
trust any performance claims even from reputable monitor services unless the
portfolios can be verified with real money.
Some
sample portfolios trade excessively and they may not fit your investment
strategy.
·
When a subscription service has several
strategies (say 10 for illustration purposes), they will advertise the
strategies with the best returns for a specific time period.
·
On 12/8/2014 TNH was down by 12% by the end of
the day. If they used the open price, it would have made a difference of 12%
Contrary
to not recommending investment services, I recommend your broker for the stock
research. AAII is a low-priced subscription, but Fidelity (requiring
membership), Finviz and Yahoo!Finance are free today.
#Filler: My grandson
My
six-year old grandson called the library about the availability of the book
Mine Craft. The lady told him that only Mine Craft for Dummies was available.
He told her it was not for him as he was not a dummy.
# Filler: My favorite store
The
new name of the merged companies “Family Dollar” and “Dollar Store” would be
"General Family Dollar" or "Two Dollars Now".
If
you want to prove the rich are more beautiful, just go to any dollar store.
Must be offending a lot of folks. Sorry!
2 Making full use of a subscription
Most
subscription services have three grades for each stock: Fundamental (a.k.a.
Value), Momentum (a.k.a. Growth or Timeliness) and a combination of the two
known as composite or total grade. Fundamental grade is important for long-term
holding while Momentum grade is important for short-term holding.
When the
market is favorable to value investing, select the Fundamental Grade such as
during Early Recovery, a phase in the market cycle defined by me. To emphasize
one grade over the other, obtain a number by dividing it by the other grade
such as Fundamental/Momentum if it can be done; a letter grade can be converted
to a number. Use this number for sorting in descending order and/or searching.
The
following uses IBD and GuruFocus for illustration. Both require subscription.
IBD
I use the
composite grade of this popular service especially for day traders and
short-term swing traders. It is more a momentum grade to me, but they do have a
value grade named SMR. I evaluate their IBD50 stocks, their top 50 recommended
stocks. Check out the recent performance of IBD50 as provided. I would like to
have a second opinion such as the equivalent grades from Fidelity.
Screen
Basic (under Screen Center). It lists the stocks with top IBD’s metrics.
Leading
sector (under Screen Center). Basically it is the second step of my Top-Down
Investing strategy (the first step is market timing).
Next to
the screened stock, click on Stock-Checkup for a complete evaluation of the
stock according to IBD.
GuruFocus
I use the
screener to find stocks in my book Best Stocks. I found there are a lot of
useful features I had not used them all. It will be a perfect system if they
provide a historical database for testing the screens.
The idea
is following the institutional investors who drive the market. However, at
least in 2015, the gurus did not perform well.
Besides
this great concept, it offers many tools for analyzing stocks. It has a score system that has been proven.
The following metrics are harder to find in other sites: F-Score, EV/EBIT
(Yahoo!Finance has it), Shiller PE, and DCF. Many metrics are compared to its
industry and its history. They are displayed in an easy-to-read graphics.
Insider trade and institutional ownership are great features.
Afterthoughts
·
My friend told me he saw an ad that would show
him how to make $500 a day for working a few minutes before the market opens.
He is nice enough to share his ‘discovery’ with me. If it is as advertised, I
would be the first one to sign up. If it really works, it will not work very
soon. When a strategy is over-used, it will not work. Unfortunately, a fool is
born every minute as the same ad had been here for a while. As of 2015, the ad
disappeared.
·
Currently (2016) I spend about $1,500 for all
subscription services. I believe $200-$600 should cover the basic. To start,
you can use your broker’s web site for research tools. Some have a lot of
research for evaluating stocks and some even include searches. Fidelity (I was
not paid by them) has spent a lot in this area. Even if you do not trade with
them, use their research by opening an account with no minimum balance (as of
2020).
·
If the offer is too good to be true (like making
$500 every day with little effort and little investing money), most likely it
is not. If they give you a free 50” TV for spending $299, most likely it is a
trap with bait. Again, remember there is no free lunch.
However, some bait could be good like the free 30-day
trial offer for an investment service or the free dinners I attended seminars
on estate planning. It is part of the business cost. If I do not attend more
than two dinners, eventually I would end up paying two free dinners for someone
else. This book could be the best deal for your entire investment life if you
invest time to read it, digest it and use the ideas that are applicable to you
and the current market.
·
Sometimes they contract with each other and you
have to determine which one is right. For example, in evaluating SBS for a
momentum candidate on 11/16/2016, Zacks and Blue Chip Growth rated it as best
while IBD and another site I subscribed rated it as average. They are not right
all the time. However, if one is consistently right, trust it.
·
Do not trust any claim and the past performance
may not have anything to do with the current or future performance.
·
On 5/2013, I received an ad boasting how great
its portfolio performs from a well-known subscription on investing. The
cumulative return from 2001 to today is an impressive 308% beating S&P
500’s 43%. However, if you analyze it further, most of the big gains are made just
before 2009.
To prove it, I used their data and input their returns from
2009 to today. Their accumulative return was 37% while S&P 500 was 66%.
Current data has better predicative power than the older data.
The
moral of the story:
1. Read
any claim with skepticism. Test it yourself.
2. The
recent performance has better predictive power than the older data, which they
could use the time period that was favorable to them.
3. When
a strategy is over-used, it will become less effective.
4. The
market conditions change from time to time. Some strategies work better than
others in different conditions and different phases of the market cycle.
5. Most
likely their return includes dividends while the S&P 500 index does not.
6. Many
used the best prices in the trade day. I trust them more if they used a
portfolio with real money.
7. If
it works that well, why they give it to you.
8. Make
sure they do not trade before they give the info to you.
3 How newsletters ‘improve’ performance
Investing subscriptions can ‘improve’ their performances:
1. Cheating
the results.
2. Only
show you their best portfolios.
Cheating the results
Do not trust the performance of
the newsletter providers. They cannot cheat if they use real money for a real
portfolio. Here are some ways they can cheat:
·
They buy at the lowest prices of the day and
sell at the highest prices of the day. To illustrate, a stock shot up by 25% in
the afternoon, and the newsletter could use the open price of the day as the
buy price.
·
Change the sold date 2 days earlier by using
last Friday instead of Monday for losses and vice versa for gains. The gain and
the sell price do not change, but the annualized return changes favorably to
them.
Trading with the closing prices has less chance to cheat. However, some stocks can be traded off hours and the morning futures can indicate the direction of the stock for the day.
Trading with the closing prices has less chance to cheat. However, some stocks can be traded off hours and the morning futures can indicate the direction of the stock for the day.
·
Survival bias.
In a nut shell,
the stocks will not be included if they lose all the value or have been
delisted from the exchanges. Many penny stocks go belly up. For example, Lehman
Brothers was supposed to be included in your search, but it was not traded
since the historical database took it out. Hence their portfolio looks better
than it really is.
Penny stocks
have higher chances of being out-of-business. The spin-offs and mergers could
do the opposite of the effect of survival bias, but there are far more bankrupt
stocks than the spin-offs and mergers combined.
·
Most compare their performances with S&P
500. It is legal for investment newsletters to inflate their performance with
dividends while comparing to an index that does not include dividends.
·
The performance of last 10 years (I prefer to
use last 5 years) is more important than that of 25 years. The subscription may
use the period that has performance favorable to them.
Only advertise those
strategies that perform well
When a subscription service has
several funds or strategies, it may advertise the return of its best fund or
strategy for a specific time period.
Afterthoughts
·
I advocate investment subscriptions use real
cash for their portfolios to demonstrate their investing results.
Alternatively, they should use some sites that can audit their trades.
·
The performance sometimes does not tell the
entire story. The cash position would deteriorate the performance in a rising
market – it could be the correct decision for those who do not want to take
risk.
·
Google reviews on the subscription service
before you subscribe it.
#Filler: Do we need illegal workers?
Without them, no welfare
recipients want to work in the farm. Even I was desperate, I could pick oranges
for half a day; the experience encouraged me to work hard and not to pick
oranges again. I earned enough to have a buffet. I felt sorry for the
restaurant owner for piling up the chicken wings and became a soda machine
myself (due to drinking too much soda).
4 Hedge fund 101
LTCM (a
hedge fund named Long Term Capital Management), with smart folks, ran their
hedge funds into the ground. Many hedge funds are closed due to fraud, and/or
poor performance.
The primary purpose is supposed to ‘hedge’
your investments from market plunges / dips. Since 2008, the government has
printed so much money, and it make the market recover. It also make the hedges
(shorts, derivatives, etc.) unnecessary. In reality, most hedge funds today do
not hedge.
Hedge funds
get tons of press coverage as a Holy Grail type of investing. The media need
the advertising from this $2.5 trillion industry. It is similar to mutual
funds, but they take more risk for supposedly better returns. Most require
higher minimum investments and more restrictions such as requiring longer
periods.
It could be the worst deal to most of their
customers: 2% average up front and 20% average on your profit. It is more
acceptable to me if the 20% is on profit over the S&P 500 return. Why
should I pay you 20% on my 10% profit when the market rises by 15%? In this
case, my fund loses 5% relative to the market.
Well, if they consistently make a lot of
money for you, maybe it is not too much to object to. However, most risk your
money by betting big recklessly. When they win, they get 20% of your profit and
they use you for advertising to lure in other suckers. When they lose your money, they do not lose a penny. It
encourages them to take big risks. I do not know any hedge fund (HF) manager
who pays you back your losses.
You would have better return by investing in
a no-load index fund, or a diversified ETF than an average hedge fund. To
calculate the average hedge fund performance, you need to include the many
hedge funds that are out of business. To illustrate my point, check out the
performance of SPY in the last five years and that of the average hedge fund.
After a hedge fund has failed, most fund
managers just open another hedge fund (if they do not go to jail first due to
fraud) and give you all the excuse for losing your hard-earned money. Some lose
their reputation, but you may not check them out their past performances.
In 2011, the hedge fund industry did not beat the S&P 500 index fund after their fees.
In 2011, the hedge fund industry did not beat the S&P 500 index fund after their fees.
Some hedge fund managers learn modern portfolio theories from Ivy League universities and apply them in the hedge funds. Often their theories are based on wrong testing procedures, or they cannot be sustained in real life.
Many invest in new companies and small
companies where they would have big profit swings. They need to learn the
business of the company in which they plan to buy the stocks, interview the
owners, read between the lines, and double check whether the owners are telling
the truth by talking to their competitors, vendors and customers. It explains
the high cost for their research. We just need to look at the transactions of
the insiders. There is no need to travel to visit the company unless you want
to.
Some use their specialties in certain sectors and that's fine. If they use derivatives, be careful and that's what resulted in our 2007 financial crisis. Derivatives could reduce the risk of the portfolio if they are properly used. If you still want to invest in them, ask for their methods and their historical performances. Very few hedge funds are good. When you find a good one, most likely it has been closed to new investors or its fees are outrageous.
The owner of a famous baseball franchise lost big money from a hedge fund that concentrated in the oil sector. Almost every ETF in this sector made good money that year, but he still stayed with the hedge fund and had similar miserable returns the following year. I did not blame him for his first mistake, but on his sticking with the same hedge fund after a losing year. It could be that the hedge fund gave him a hard time when he wanted to take his money out, or he could be busy in his baseball franchise.
Some use their specialties in certain sectors and that's fine. If they use derivatives, be careful and that's what resulted in our 2007 financial crisis. Derivatives could reduce the risk of the portfolio if they are properly used. If you still want to invest in them, ask for their methods and their historical performances. Very few hedge funds are good. When you find a good one, most likely it has been closed to new investors or its fees are outrageous.
The owner of a famous baseball franchise lost big money from a hedge fund that concentrated in the oil sector. Almost every ETF in this sector made good money that year, but he still stayed with the hedge fund and had similar miserable returns the following year. I did not blame him for his first mistake, but on his sticking with the same hedge fund after a losing year. It could be that the hedge fund gave him a hard time when he wanted to take his money out, or he could be busy in his baseball franchise.
One hedge fund has a performance of 25%
every year over a long period of time. The SEC, takes notes and then
investigates whether they were using insiders' information. It turned out it
did. There are very few hedge funds with consistent performance beating the
market after their hefty fees. If you find one, stay with them forever. One
hedge fund was rated as the top fund and the next year it was out of business due
to poor performance. Hedge fund managers chase after short-term returns as the
outflow will be serious if they do not perform well. When they were successful
recently, they had a hard time to perform with an excessive inflow of money.
In 1980, this industry started with really
capable fund managers and made good money for their clients. After that, every
analyst wanted to open a hedge fund and most did not even beat the market after
their fees. Alternatively, just buy the ETF SPY (or similar ETF for the market)
and relax, instead of waiting for the hedge fund to wipe out your savings. This industry is not properly regulated.
Do not believe in any articles / ads praising how great the hedge funds are without knowing their credibility and their hidden agendas. The hedge fund indexes usually ignore the survivor bias of the bankrupted hedge funds and the early exits of many hedge funds.
Do not believe in any articles / ads praising how great the hedge funds are without knowing their credibility and their hidden agendas. The hedge fund indexes usually ignore the survivor bias of the bankrupted hedge funds and the early exits of many hedge funds.
Since
the hedge funds very seldom keep the stocks more than a year, their capital
gains would be short-term and hence would be taxed at a higher rate than the
long-term capital gains. In addition, many funds have a 1-3 year lock-up period
and only allow withdrawals on the first day of each fiscal quarter.
Afterthoughts
·
From WSJ, from 1999-2008, the hedge fund
industry beats S&P 500 by 13% a year. From WSJ, from 2009 thru July 2012,
it lagged the market by almost 8%.
In 2011, the average hedge fund lost money
when S&P 500 was flat. In 2012, the average hedge fund earned about 6% when
S&P 500 was up 13%. It is ‘genius’ to buy an ETF representing the entire
market instead of an average hedge fund.
A pig wearing lipstick is still a pig. If
you run 5 hedge funds, you will advertise your best fund. Advertising industry
will benefit and eventually their investors if hedge funds will pay for this
expense.
http://money.cnn.com/2013/07/25/investing/sac-capital-charges/index.html?iid=HP_LN
·
A famous hedge fund manager (so is the one on
Sears) has big losses in JCP and shorting another company. It teaches us to
diversify and be conservative.
·
In 50 years, the $10,000 investment will grow to
$1,170,000 assuming a 10% return a year. However, about $700,000 will be the
cost of the typical mutual fund. It will be better to buy an ETF (a far lower
fee) and avoid market plunges described in my book.
·
Hedge funds must have had a hard time in 2013.
Hedging against a rising market is a fool’s game. Another article to
review.
Links
# Filler: Toaster and the economy
You can find
many toasters made in the USA in museums. Is it OK to move the toaster factor
from China to Vietnam?
The logic:
All toasters are made in China.
Chinese toasters are crappy.
Conclusion: All toasters are crappy.
Question: Do you find iPhone crappy (as it is assembled in China)?
The logic:
All toasters are made in China.
Chinese toasters are crappy.
Conclusion: All toasters are crappy.
Question: Do you find iPhone crappy (as it is assembled in China)?
Question: If we charge heavy tariffs on Chinese goods and the Chinese do the same on our exports such as Boeing planes (the disadvantage is to us if they do not have the same tariff on Airbuses). What is it called? Trade war.
5 Modern portfolio theory MPT
Most fund managers learn modern
portfolio theory from colleges. The theories are faulted. However, some gained
Nobel prizes using the faulted theories - a bad reflection on today's silly
Nobel Prize committee; it is similar to the silly award to President Obama for
doing nothing but reckless spending. Many others have proved them wrong many
times.
Walking randomly in the stock
market postulates the price of a stock is already built-in, so there is no need
to evaluate stocks. It is also known as the efficient-market
hypothesis. Explain to me why as a group my stocks with high scores
always beat my stocks with low scores for years. If you cannot find a
functional scoring system, it does not mean all the scoring systems do not
work. For the same reason, there is no need to take college courses to evaluate
stocks if the prices are built-in.
When the professor writes
equations on the board, he is dreaming I his fantasy world that will never
resemble reality. However, you need to waste time to ‘learn’ in order to get
good grades. Without good grades from a prestigious college, you cannot get a
good job in this profession.
The so-called modern portfolio theory is most likely based on wrong or insufficient testing parameters / assumptions. Unfortunately they're still supported by the Ivory Towers. All the students taking these courses should ask for refunds. Most likely these professors are still driving an old Toyota and have never made good money in the stock market besides in 'teaching', selling 'books' and/or running hedge funds to cheat you out of your money. Still not convinced? How do you explain why many stocks increased 50% and many decreased 50% in a year? How do you explain why Buffett’s 20%, yearly profit in his prime?
I’m still waiting for the counter
arguments to prove me wrong. Professors, please drop me a line to defend
yourself. So far, there is none.
Links
Efficient-market hypothesis:
6 Advice from the ivory towers
One guy wrote several good articles at Seeking Alpha and is liked
and adored by many. I'm not attacking him, but we have to ask: Should we follow
investment advice from someone who can read, think and write professionally
without making a BUCK in the market?
How many folks at the Ivory Tower including some Nobel Prize
recipients have made a bundle in investing? Not even the most beautiful
minds like Newton and Einstein! I conclude that the market is not always
rational and the investors need to be multi-disciplined especially in economy,
psychology, statistics, finance, PC tools, etc. Luck also plays a good part of
the performance, but in the long term luck is not important.
Some very smart folks even lost big money for themselves and
their clients such as the Nobel Prize-winning economists running LTCM to go
bankrupt. Irving Fisher, considered the father of Modern Portfolio Theory, had
several big wins, drew a lot of followers and then lost all his and his
followers' money.
There
is another author at Seeking Alpha. He was graduated from one of the best
colleges, writes very professionally, publishes many articles, sounds very
knowledgeable to me, and has a lot of good arguments in his article. He was
accused by several readers that most of his predictions were wrong and he had
used double talk technique, so he could not be wrong.
I have not tracked
his performance and have no intention to. He could be a manipulator so he may
advise folks to buy the stocks he is unloading, and vice versa. The moral of the story is to follow good
arguments when they appear to be logical but do not follow any stock
recommendations blindly. In another words, do your own home work.
7 No investor heroes
As of 1/2012, Bill Miller is
stepping down after big recent losses. Buffett's
last three year performance was so lousy that he should be ashamed of and
should not show his handsome face in public (too harsh on him but we all enjoy
making fun of winners when they are down). Gross, the king of bonds, made
serious mistakes. Whitney made big mistakes in investing in muni bonds; she
should have learned the lesson of not fighting against the city hall.
It was same for a very famous
shorter of Netflix with convincing arguments. Their arguments were correct but
the timing was not. The fund manager of a famous financial service advocated
bank stocks in 2007. He was burned badly.
There are many examples of heroes
turning into disgrace in the past. Recently my local newspaper Boston Globe had
an article stating most top fund managers did not beat the S&P 500 index
last year. Even Professor Irvin Fisher, the father of Wall Street, did not
predict the 1929 crash and lost a bundle including most of his own life
savings.
Recently Barron's had a round table discussion on 2012 market with the top experts. They also listed the recommended stocks from these experts a year ago and their performances. Guess what? Their average did not even beat the S&P 500 index in the previous year. Was I stupid enough to follow their 2012 recommendations?
Recently Barron's had a round table discussion on 2012 market with the top experts. They also listed the recommended stocks from these experts a year ago and their performances. Guess what? Their average did not even beat the S&P 500 index in the previous year. Was I stupid enough to follow their 2012 recommendations?
At least, most did not publish
their past performances in the beginning of 2013 if they under performed. Most
of their strategies did not work this year. That’s why I preach to monitor your
current strategies and only use those strategies that work recently. That is
why momentum is important and it is also important to protect your portfolio
with stops.
We learn:
We learn:
·
Retire at your peak like Peter Lynch. You can
call him a coward but he has a good sleep and laughs all the way to the bank.
With his fame, it is easy to sell some books and live nicely and respectably.
·
Do not invest on your fund managers like Miller.
Doubling on the way down without good reason is a fool's game and it could be
the last straw that terminates his brilliant career. When he won all the time,
he did not expect that he would be wrong this time. Success could blind his
eyes and give him false security. A lot of time the market is not rational.
Bill Miller has beaten the market index 12 times in a
row. Peter Lynch was the premier fund manager. Many similar outstanding fund
managers have to retire earlier due to poor performance or deteriorating
performance, or smart enough to realize that s/he cannot beat the market
consistently in the long run. The lessons are:
·
Using the long-term performance of any fund
manager to invest in a fund could be dangerous to your financial health.
·
Prefer to follow funds that have above average
returns for the five years (ensure managed by the same fund manager).
·
For the last 15 years, you can beat the market
by investing in ETFs with market timing.
·
Is your loser stock a good deal now when it
loses half of its value? Usually not. Should someone be excited when the
dividend yield is doubled due to the loss of half of its stock value?
Definitely not.
·
Do not believe you're always right all the time
and put all your eggs in a basket. Market is irrational sometimes as it is
created by irrational folks. The black swan could occur unexpectedly. The one
who made millions with all his/her money in one deal is just lucky or using insider’s
information. Diversify and play it safe.
·
Even the genius could not be right all the time.
It only takes one big loss to wipe out your entire savings if you bet it all.
We should treat investment as going to battle with an exit plan to reduce your
losses.
·
Gambling with other folks’ money is better than
with your own. The most you lose is your job and the bonuses, but not your
life-time saving.
·
Quit at the peak. We still remember the
beautiful face of Princess Diana forever, don’t we? Jesse Livermore
considered as the greatest trader experienced made millions and went bankrupt
several times. Finally he committed suicide. It is easy for the mind to make
millions, but tough to lose millions. His simple technique is trading more when
the trend is to your favor. The book Reminiscences
of a Stock Operator shares some of his techniques that most may not
work in today’s market. It is better to be a turtle, boring investor.
Afterthoughts
We do have some great stock
pickers and I am following them but checking their performance from time to
time.
Einhorn
is well known (though his portfolio is slipping today). Google ‘Einhorn’ to check his current picks. Einhorn
is a great investor, but he has made many mistakes too such as betting
on gold in 6/2013.
Arne Alsin is not
well known. Click here
for his performance. I was told another smart stock picker is Michael
Larson and he manages investment for Bill Gates.
Links
Irvin Fisher. https://en.wikipedia.org/wiki/Irving_Fisher
Arne Alsin. http://seekingalpha.com/author/arne-alsin
Michael Larson
8 The years (2011 & 2015) many stock pickers died
2011 is a year when stock
pickers (particularly the value pickers) did not perform. The performances
of AAII screens and the mutual funds I tested recently confirmed it. Most
investment advisers / newsletters did not beat the market index in 2011. Check
the performances of your investment newsletters such as Value Line and IBD if
you subscribe to their services. However, do not give them up. They may not
perform for a short while but they will return back to the normal performance
and hopefully sooner.
Most likely the culprit is the
result of the excessive printing of money.
The market was volatile with most of the gains in the first half of the year of 2011. Traders using technical analysis did better than the stock pickers based on fundamentals. Traders reacted to the trends faster.
The market was volatile with most of the gains in the first half of the year of 2011. Traders using technical analysis did better than the stock pickers based on fundamentals. Traders reacted to the trends faster.
From my limited data of about 250
stocks for a period of about half a year, I tested out which fundamentals do
not predict well in 2011. They were Fidelity’s Analysts' grade (now renamed as
Equity Summary Score), cash flow and the short %. Normally, the stocks
with Analysts' grade A (or above 8), cash flow (grade A from Blue Chip Growth)
and shorter % (less than 5) would perform better than the average. Not in 2011.
You can obtain most of the mentioned metrics from many sources and most likely
you reach the same conclusion for 2011. These parameters worked again in 2015.
I adjusted my search criteria accordingly
for swing trades. I did not buy a lot
and waited for a big dip. However, when I always look for bargains.
My suggestion
Your fundamental metrics need to
be checked whether they still perform in the current market. When they worked a
year ago, it does not mean they must work this year.
Update 2015
2015 is the year when the stock
pickers died too. Ackman the famous
hedge fund manager and Buffett, the legend, both did not do well in 2015.
Furthermore, I checked the performances of many gurus from GuruFocus.com. I
found most gurus did not beat S&P 500 for the last 5 years, but they did in
the last 10 years.
Most AAII screens were negative
in 2015 and most did not beat S&P 500.
Traders make money in a sideward market at the expense of the stock
pickers. In other words, technical analysis beat value analysis which is based
on fundamentals in 2015. Barron’s recommendations did not beat the market. IBD
had about 25% loss from the peak in 2015 to the beginning of 2016.
I reviewed the performances of
many gurus. I was surprised for the last five years it is far better to invest
in an ETF fund that simulates the market such as SPY. There are fewer great
returns from a few mutual funds last year.
I bet it is due to the good
performance of the ‘bubble’ stocks or FANG (Facebook, Amazon, Netflix and
Google) that weigh a lot in an ETF that is market cap weighed.
I also speculate that when the
gurus become famous to attract more followers, they cannot handle the extra
funds to invest. The market may not be rational for the last 5 years.
Ackman’s loss
is our lessons.
·
Many lessons have
been preached in this book such as diversification.
·
Even with the
best evaluation, sometimes we still lose.
·
Use stop loss.
·
Do not follow any
guru blindly.
·
“Buy Low and Sell
High” is better than “Buy High and Sell Higher”.
·
Use VRX as an
example
Do we want to buy VRX
today at $65.45? As of 3/1/2016, P/E is less than 5 and P/FCF is less than 11.
It seems to be a good buy but the Debt/Equity is about 5 times.
As of 3/30/2016, VRX
was at $28 with a P/E less than 3. It could bankrupt if they could not pay the
debt obligations. They have a market cap less than 10B but a good will asset
about 4 times in the last quarter. Sounds fishy?
·
P/E is not the
sole metric. Debt/Equity is more important for VRX.
·
The business
model was wrong. It bought the rights of maturing drugs and most times they
overpaid.
·
One insider sold
almost 1 billion worth of the stock in June, 2015 – not a good sign for sure.
·
Do more research
such as from Seeking Alpha and many other sources. When they resolve the
problem, it could be a buy.
·
Most of us do not
have time to look at the financial statements as most financial ratios are
readily available. The high value of some intangible asset is very suspicious.
9 Letter to an investment guru
The following is real with the names withdrawn to protect
the innocent.
Dear Guru, I followed your advice two times and both made me
money. However, the last time you're totally wrong and I lost a lot. What
should I do? John
First the guru did well with 66% correct. Investing is about educated guesses. 51% correct can make you a lot of money; try Black Jack. Even 50% can make you a lot of money if you bet more on winners and less on losers by using the reward/risk ratio.
Irvin Fisher made a fortune by several successful predictions. However, he bet most of his money on his last major prediction and lost it all. If John, the one who questioned, bet evenly, he would be far ahead of Mr. Fisher who bet it all in one hand.
The moral of this true story is: Do not bet it all as nothing is 100% certain in investing. Even with 99.99% sure, a black swan event could happen and it could wipe out your entire savings. Unfortunately this has been repeated many times and many folks never learn.
When someone tells me he made millions of dollar in a bet and this is his only bet for a long while, it does not impress me except by his good luck. Actually he has violated the diversification rule in investment. His good bet could be due to using some information illegally or by our Congress members legally at least at one time.
First the guru did well with 66% correct. Investing is about educated guesses. 51% correct can make you a lot of money; try Black Jack. Even 50% can make you a lot of money if you bet more on winners and less on losers by using the reward/risk ratio.
Irvin Fisher made a fortune by several successful predictions. However, he bet most of his money on his last major prediction and lost it all. If John, the one who questioned, bet evenly, he would be far ahead of Mr. Fisher who bet it all in one hand.
The moral of this true story is: Do not bet it all as nothing is 100% certain in investing. Even with 99.99% sure, a black swan event could happen and it could wipe out your entire savings. Unfortunately this has been repeated many times and many folks never learn.
When someone tells me he made millions of dollar in a bet and this is his only bet for a long while, it does not impress me except by his good luck. Actually he has violated the diversification rule in investment. His good bet could be due to using some information illegally or by our Congress members legally at least at one time.
Friends ask me what to buy and when to buy. I try to avoid these answers like a politician. If my guesses are right, they will not share their winnings with me. If they are wrong, I will be blamed mercilessly. Silence is proven golden here or the best advice is no advice. Folks do not know there is nothing 100% certain about investing.
I see many big losers by buying
stocks at the peaks such as in 2000 and many big winners by buying stocks at
the bottom. No one can predict the peaks and bottoms consistently. They are
just educated guesses and usually materialize more often than not materialize.
10 Read a book with an open mind
I read a guru's book on selecting
stocks. His idea of buying growth stocks made him a lot of money, but it may
not apply to the market of 2009. The current market favors value and not
growth. With a historical database, it is quite easy to verify: Compare the
performance of top 100 stocks sorted by a value grade to the performance of
stocks sorted by growth grade in the last 90 days.
2009 seemed to be the Early
Recovery phase of the market cycle (a phase defined by me). It favored the
beaten down stocks that had high values. I made good money on these stocks in
this phase of the market cycle and most likely the same strategy may not be
that effective in other phases of the market cycle. The point is: Apply the strategy
that favors the current market conditions.
For this period, I checked this
guru’s performance and he did not even beat the market. When the market passed
this Early Recovery phase of the market cycle, most likely his strategy based
on growth stocks will work again.
Read any book including mine with
an open mind and challenge the author. Even if the author is right, the
strategy may not work in the current market conditions, and/or it may not fit
your personal objectives. For example, most retirees prefer safety over profit.
Many books were written long time ago, so while the concepts are fine, they may
not be applicable today. Check out when the book was last updated.
It would not cost a lot for a big
Wall Street firm to write an article to recommend a stock and publish it in the
web site or newspapers. It is the common pump-and-dump strategy or using it to
sell short to make millions for them. There are plenty examples including
WorldCom and Enron. Separate gems from the garbage and do your own home work.
A good pointer could make us
thousands of dollars, and a bad one or a misinterpreted one could do the
opposite.
Do not
let this brief article fool you. It could save you a lot of time and money.
Matching the right strategy with the predicted market conditions is not easy.
However, when you have more rights than wrongs, you win big in the long run.
The following are what I read. It
was a gold mine for some, but it may not be applicable to others. Write down
your requirements. Some publications such as the Wall Street Journal and
Barron’s are expensive, but most of them are available in your local library.
Actually we are over-loaded with
information. Select the best of those that are available to you.
Seeking Alpha
Seeking Alpha (SA) is a
fascinating web site for investors. The price is right (it is free). You need
to understand that articles are written with authors’ agenda. Some may advocate
the stocks they already own, and some may ask you to sell the stocks that they
have sold short. In summary, authors may want you to trade the stocks to
benefit their portfolios. If you want to know more about your stock, search for
recent articles on that stock. Unfortunately, the number of free articles are
limited. Try Finzic.com and Fidelity.com.
Recently, I
made good money on ALU, DECK and ANC based on the opinions from articles at SA.
I have evaluated these stocks long time ago and did not buy them until
recently. I did lose some money from the stocks recommended even with good
arguments. However, my gains outnumber my losses. Several times, good timing
made a big difference.
If you want
to have all the headlines and recent articles on your stocks, create a
portfolio in the home page. It is quite handy.
SA has a Pro
subscription service with good performance they claim. Most retail investors
cannot afford to pay for this service.
Be cautious
on some obscure alpha-rich stocks particularly with .XX (pink sheets for
example). They are very risky and volatile.
SA and other
sites provide us food for thought and I have been benefiting from them. The
discussions in their comments to the articles have cleared my thoughts and
biases several time. However, as usual
you have to do your own evaluations before trading any stock.
Barron’s
and Wall Street Journal (WSJ)
I enjoy
Barron’s and WSJ. WSJ does not describe individual companies in detail like
Barron’s but the general market and the economy. Both are not cheap, but both
should be available in your local library.
If you
already have a subscription service on selecting stocks, WSJ is a very good
companion journal. I cannot find a better paper than WSJ and that is why most
business colleges require their students to subscribe it.
From my
experience, stocks recommended by Barron’s surge initially and then most cool
down. Hence, I do not keep the recommended stocks for too long and unload them
when they start to go down; of course there are many exceptions.
Update as of 1/2016
Barron’s kept
track of their recommendations in 2015. Their predictions from bullish articles
were not that well but their predictions from bearish articles were fine.
However, there were 146 bullish picks and only 17 bearish picks. If you picked
stocks and betted evenly according to Barron’s, you lose big time.
They compared
the performance of a stock to a specific benchmark. It is fine that you have
picked the right sector. For example, you should compare Apple’s performance to
a technical index (or an ETF simulating that index). It is really comparing
apples to apples (no bunch intended) instead of comparing Apple to the general
market (i.e. S&P 500 to most).
I disagree
another comparison using stock’s total performance (i.e. appreciation +
dividend) to the S&P 500 index without dividend. It is legal but not
correct.
For example, the stock appreciates 1%
and S&P 500 also appreciates 1%, and both pay 2% dividend. Hence it does
not beat the market. However, it claims it beats S&P 500 by 200% as
illustrated below:
Beat S&P 500 by = (3% - 1%) / 1% = 200%
where 3% = 1%
appreciation + 2% dividend
This is one of the many tricks how many
investment newsletters fool us. Personally I love Barron's. At least 2015 was
not a good year for their stock pickers and many other stock pickers too. I do
not want to speculate why the best minds in our industry cannot beat the
market. It also reminds me of the benefit of top-down investing: Invest when
the market is not risky, identify the best sectors and then the best stocks
within the best sectors. In addition, momentum worked this time over
fundamentals.
Yahoo!Finance
The comments
from the user board at Yahoo!Finance are good and sometimes the information
cannot be found in other sources. Everyone can post comments. Some information
is too personal, too harsh, too promotional and simply not reliable. Many times
there are contradictory comments such as shorting and longing on the same
stock. Several times I learned there was a serious lawsuit pending or a major problem
surfacing from a company.
I use it to
update the stock prices (via the download function). I used the charts to
identify the market cycle that turns out very beneficial. As of 2016, some of
the functions have been deteriorating. If they cannot improve them, why not
just do nothing?
Others and your broker’s
website
There is a lot of information than you expect and some brokers
offer free seminars. Cnnfn.com and
MarketWatch, The Street and Fidelity’s ViewPoint are very useful.
11 This time is different
Today is really different.
Recently I read a classic book on
investing. Similar to most other classic books, most ideas are not applicable
to today’s market. The author died more than 50 years ago. By my rough
estimate, the ideas are 30% correct and 30% incorrect. The remaining fall into
the grey area that they are only correct in specific market conditions and/or
specific interpretations. Most correct ideas are now conventional wisdom and
many have been repeated in this book. Some of the incorrect ideas are described
as follows.
·
Most of these books described strategies about
investing and then selected examples to fit the strategies. Most of my examples
are from my personal experiences. I included my bad experiences as they could
be more beneficial to you by not repeating the same errors.
·
Tax laws have been changed since then. Roth IRA
could be the best thing since slice bread if you’re eligible. Check my article
on Tax Avoidance in this book. This book has a link to the current tax law from
Wikipedia to keep you updated with the current and future tax laws. Your tax
lawyer or accountant is no substitution.
·
Today most brokers’ commission rates are so low
that it makes some trading strategies more effective than before. My commission
rate is zero in 2020 Your Dad may have paid over $300 for commission per trade.
·
Your Dad did not have Technical Analysis. I use
it effectively so far to detect market plunges. Many good technicians make
great money. 2015 is better for chartists than stock pickers.
·
Tracking ‘mispriced stocks’ is less useful today
than 50 years ago. Today these stocks are screened every day by investment
subscriptions, fund managers and even retail investors. The extensively used
P/E is only one metric among many to determine the value of a stock. P/B and
ROE are not as effective as twenty years ago. One popular book only used ROE.
The only reason I can think of why the stocks are
mispriced is via over-reaction by the media and manipulation. The media
exaggerate in order to sell their viewership and most information is outdated.
Most stocks are bargains during the market bottom. Lower prices than the
historical prices do not mean better potential for appreciation in the short
run. Buy when everyone is selling and vice versa.
Most ‘experts’ from the financial TVs manipulate the
public in order for them to trade specific stocks to their advantages. If you
cannot turn off these TV or radio programs, analyze what they preach. Sometimes
you act opposite to what they say and make a profit. To prove my point, check
out what they say and see whether they will be correct in 6 months. Usually
their predictions are correct only in the first few weeks and it could be due
to my herd theory.
Goldman Sacks is one manipulator to me. A famous
former fund manager from another company advised folks to buy a specific stock
while he was unloading it; he did not go to jail.
Today, the real ‘mispriced’ stocks could be those who are
losing the competitive edge of their major products, using high debts to boost
up the earnings, having major lawsuits pending, etc. These stocks most likely do not appreciate in
the long run.
·
Retail investors have most of the financial
information of a company and the economy at the same instance as the Wall
Street experts. Actually we have more advantages. Our PCs are fast enough in
evaluating investments and our spreadsheets can do most of calculations for our
basic analyses. Indicated by any abnormal large volume of a stock due to
trading by fund managers, day traders could take advantage of it. Hence, funds
pay more to get in and get out of a stock.
·
From 1970 to 2000, the market returned for an
average of 10% including dividends. Market timing would likely deteriorate your
return. However, from 2000 to 2020, we have two major market plunges with an
average loss of about 45%.
·
About 20 years ago, no one believed the major
companies such as Lehman Brothers and the old GM would go bankrupt; and many
companies had lost most values such as Citi Group in 2008.
·
We have new regulations, which are supposed to
protect investors (from illegal insiders’ trading for example). However the
government intervenes the market by pumping up too much money to cause a
non-correlation of the economy and the market. It happened in 2009 and 2020.
When they stop this practice, the market will correlate with the economy.
The chance of another 1987 crash is minimized with new
regulations. We did learn a lot from the 1929 crash as our market and its
regulations are quite different from then.
·
The economy may recover without employment recovery.
Most jobs today can be outsourced. Big companies hire the best workers at the
least costs in any country in the world. The world is getting smaller via
better communication and more efficient transportation.
Free trade and globalization make the world connected
better and most participants should benefit. Without employment recovery, it
would affect many sectors such as housing and retail. When one country is down
economically, many other countries will be affected. In 2020, we are trying to
take out globalization that is the major reason we have a bull market in the
last 20 years.
·
Sir
Newton and Irving Fisher lost
a lot of their money in their investments, so their high IQs have nothing to do
with investing. Even the Nobel-prize winners ran their hedge fund LTCM
to bankruptcy. It also teaches us to diversify and the black
swan could wipe out our entire savings if we bet all in one strategy
or one stock.
We have to change our strategy to adapt to the current
market. The market 50 years ago was not the same as the market today. Fewer
lessons from 50 years ago are valuable than the lessons learned in the last 15
years.
·
We do have new challenges and new tools.
Institutional investors (mutual fund and pension
managers) could manipulate the market. It could be a nice conspiracy theory
that the blood-sucking big boys meet on the first full moon every month to
determine the market direction and/or which sectors to rotate to. With today’s
internet, the big boys could drive the market fast and violently and the retail
investors would likely follow.
About 50% of today’s trades are executed by computers.
When they act at the same time and in the same direction, the market would
surge or plunge fiercely without warning.
High speed
trading could hurt us but also could benefit us. Sector rotation, ETFs, contra
ETFs, options and day trading should be examined and understood (even if you
don’t participate) by today’s retail investors.
Dow Theory with
emphasis on the Transport sector (including UPS
today) loses some of its luster as a lot of products do not have to be shipped
by rails such as the digitized music, eBooks and movies.
These are the
tools and strategies that your Dad’s generation did not use.
·
With today’s advances in publishing, books can
be published / updated with minimum effort and distributed throughout the
world. There is no need to print and store large numbers of books. Books can
include multi-media features and links to other articles. Readers enjoy the
lower cost and larger choices. You do
not need index and glossary in eBooks. Updating today’s digital business books
to keep up with the current market is easy, low-cost and efficiently done. This
book is a living-proof.
Conclusion
Technology and new regulations
change our tools about investing. Your Daddy did not have today’s powerful PCs,
spreadsheets, internet, etc. The tax laws and regulations are changing every
year. Read any book with an open mind and apply what works in today’s market.
Without updates, this book would be obsolete in 25 years and most books written
25 years ago are obsolete.
Today’s market is influenced by
the interest rates, aging population, population growths in different
countries, globalization, China, wars, conflicts among countries, energy,
technology, tax laws and regulations.
Links
Newton and his market loss:
Irving Fisher:
LTCM:
Black swan:
12 Advantages of a retail investor
The average retail investor does not beat the market due to switching between stocks and cash at the wrong time. Via the greed, they invest at the peak of the market and via fears they divest at the bottom. They do not expect the market to return from the bottom, but it always does.
Most fund managers are smarter than I, better
educated in investing than I, have ten times more research tools than I and
have ten times more computer power than I. However, most of them do not beat
me, the average casual retail investor. In addition, I spend less time in stock
research than an average fund manager (most are working at least 60 hours a
week). I hope the following help you to beat the market and the fund managers.
o
They cannot beat the market all the time. When
they do, more money flows in. It is very hard for them to perform with that
much of extra cash. When the market is depressing, everyone cashes out their
funds. They need to sell stocks even though some may have better potential to
appreciate.
The saying “When there is blood in the
streets, most likely it is the best time to buy” is correct. 2009 is an example.
Fund managers cannot take advantage of this opportunity as many clients have
cashed out.
o
Most cannot play market timing freely and they
have to satisfy all the rules set up for the fund. Every time they trade a
stock, they need to ensure no rules have been broken such as a restricted
percent of a stock to the fund. Most funds prohibit their managers from shorting,
buy contra ETFs and/or maintain high cash positions. Basically, most are not
allowed to react to the market whether it is going up or down.
o
When they trade, their high volumes are easily
tracked by day traders who can ride on their wagons. Hence they have to pay
more to buy and get less to sell.
o
By my rough estimate, they have about 1,000
stocks (about 600 for larger funds) to deal with. I as a retail investor have
about 3,000 stocks even skipping most stocks with prices below $2 or not listed
in the three major exchanges.
Their stocks have been fully evaluated by
analysts and newsletters / subscriptions such as Value Line and /or some firms
specializing in stock research for them. Hence, they do not gain any advantage
by following their peers.
The small and mid-cap stocks are risky but they
are more rewarding statistically in the long run. Many fund managers cannot buy
them due to the size of their funds.
o
Their performance as a group is actually worse
due to the closing down of non-performing funds.
o
Not nimble enough.
By the time they have done all the research
and received the approval to buy a specific stock, I may have bought the same
stock already. Usually it takes at least a week for a large fund to complete
trading a stock.
o The
high expenses.
The
fee is about 1.5% for the average fund.
Most hedge funds charge even more with the average 2% for expenses plus
20% on the profit. When the fund and the broker belong to the same company,
watch out on how its brokerage arm makes profits via the trading of the fund
under the same parent. Most hedge funds have no penalty for losing your money,
and hence it encourages their fund managers to take big risks.
o Not
spending enough time to do their own research.
Many
do not spend enough time on basic research and select the right strategies in
the current market conditions. They spend a lot of time in following the fund’s
and the company’s objectives, rules and regulations.
o Wrong
objective.
The
objective of most funds is beating the common index after expenses. Most fund
managers do not want to take too much risk and their personal objective is job
security. One will not lose the job if his performance is similar to a target
index. You achieve the same objective by buying an ETF that simulates the index
for less expenses.
o
The reason for some of their good performance is
due to taking too much unnecessary risk and/or the high leverage. Their
performance improves when the market is good, but degrades when the market is
down. When I see the market is coming down, I would park more cash and I only
use leverage when the market is going up.
·
Retail investors have a lot of advantages over
fund managers. However, I advise you not be a day trader. Statistically most
amateur traders lose money as they cannot compete with experienced, disciplined
traders.
Discipline, knowledge and due diligence will
make you money in the long term as a turtle investor.
# Filler: Gamma rays
Gamma rays are the most effective tool for
weight loss. If you die because of the gamma rays, you will lose weight
gradually, naturally and surely
# Filler:
Victims?
We’re victims of our own success: A higher living standard means
higher wages, more protections for our workers and more regulations for our
environment. All these will make us less competitive.
#Filler: How to end all our wars
If we send the children of our leaders to the
front line, we will not have any wars.
The youths should enjoy the best time of
their lives and not be sent back in body bags.
13 Invest responsibly
We work hard, save money and
invest. Our investing in stocks serves three primary purposes:
1. Good
return on our money (as in any investment), and
2.
Provide jobs and taxes for the
government. However, in reality, the stock market is being
changed to a big casino.
3.
Encourage good
management by trading the stock of the company.
Companies need our investing money to develop new products and hire employees. When the company makes money, it supposedly pays taxes and in theory hires more employees. We would not have Apple paying taxes and hiring thousands of employees if we did not finance it initially via IPO. However, global companies can hire anyone in any country at the least costs and produce a quality product.
This is the ideal purpose for investing. Investors choose the companies that produce the proper products and / or services mix that would be profitable and at the same time are good for society and the world. Apple is a good example.
We ought to pick companies that promulgate the society. Here are some evil industries:
·
Tobacco companies.
Do you invest in products that kill? Even if you do
not smoke, the second-hand smoke (and even the third-hand smoke for unborn
babies) still kills. We discourage smoking in U.S.A., while our tobacco
companies are making great profits in Russia and China. The recent legalizing of an illegal drug will
bring more deformed babies and encourages the addicts try more harmful drugs.
·
Defense (offense is
more appropriate) companies.
Why do we need a carrier generated by two nuclear
generators? We already have weapons to destroy the entire world by pressing a
button. Boeing is partially fine with a small division in offense.
After shooting in Newtown, most
stocks in gun manufacturing companies went down in prices (profits went up
initially due to fear of the ban). Their P/Es based on past earnings will be
exceedingly low. This is another example that P/E does not tell the outlook of
the industry.
Unfortunately they are legal products. Special interest groups control our politicians like puppets. However, the children in Newtown will not die for nothing and even politicians cannot cover their eyes and conscience any more.
My friend does not agree me with
the following. The United States has made a lot of money by upholding
capitalism around the world. If we had
no military, we could not protect our property rights here and abroad. Chamberlin proved that a weak country has no
rights when the fascists come knocking.
·
Casinos, wine, fast
food, soda...
These are border-line cases. They provide good services and products, if you do not take it to the extreme. They only hurt you but not others except from drunk drivers.
These are border-line cases. They provide good services and products, if you do not take it to the extreme. They only hurt you but not others except from drunk drivers.
Money is not everything in life once we
have the basics. We should invest wisely and responsibly in products that will
not harm us.
Again, what's good if you made millions in a tobacco company that
kills you via the second-hand smoke? How about the young kids killed every
day by guns?
Afterthoughts
I had a tough
time in arguing with a doctor. He cared about the dividends from his tobacco
stock more than your health. I wonder whether money was his original motive to
choose this noble profession. CVS has done a good deed by not selling tobacco
products.
2018
Tax law. The new tax law discourages
charity donations. Starting in 2018, marijuana is legal in many states
including California.
Drugs. My wife told me I missed a turn.
I told her we would be fine as the world is round. Logically right but wrong in
reality.
Yes, everything comes back sooner or later. As a
nation, the Brits pushed opium to China when they had nothing better to trade.
It led to bankrupting China. Now the addictive drugs are hurting the US and the
West.
Marijuana is less harmful than opium for sure, and it
has less side effect than some addictive pain relievers. However, I bet there
are more social problems with this drug such as car accidents and addiction.
Many would use it to step into a more harmful drugs. In a few years or so, we
can draw better conclusions than in 2020.
As an investor, do not invest in companies in this
'legal' drug with your hands counting money dripping in blood. The parents have
more work to do: Children are curious and they will follow what their friends
do.
They expect the state and many will profit with no
regard to the social problems and consequences. What kind of society we're
coming to? Again, the legalized drug kills!
Gun Control.
The recent
school shooting is NOT the last one - many more will come.
It has
not even been discussed much in our last presidential election by either party.
They must have received a lot of contributions to their campaigns from NRA and
gun manufacturers. If you love your children more than your gun, do not vote
for politicians who do not talk about gun control.
Do
something useful instead of saying condolences every time we have mass gun
killing. We've prayed for thousands of years for world peace - God must leave
us humans to fix our own problems.
We have
more guns than citizens. It is not practical to have full gun controls
overnight. However, there are many ways to limit the guns falling into the
wrong hands such as criminals and mentally challenged. Semi-automatic guns and
the adapters should be banned if not already. Gun registrations should be
reviewed thoroughly. Do we have a database for the mentally challenged? Enforce
gun regulations and take every hint seriously. Cut down violence in video
games.
Hope
someday we can send our children to schools, attend a concert or a movie
without worrying being shot at.
Fidelity
has a social score for most companies.
14 Are investors parasites?
Most of our
initial investment money is from our hard-earned money during our work life,
unless you're lucky having money via inheritance or marriage.
The retired rich could live a decent life with the money accumulated without investing in the risky market. However, we invest for better return for ourselves, and take some risk ourselves.
The retired rich could live a decent life with the money accumulated without investing in the risky market. However, we invest for better return for ourselves, and take some risk ourselves.
We do not
think we're the parasites to the society. Our investments have helped many
businesses grow. In turn, these businesses pay taxes and hire workers who again
in turn pay taxes. We, the investors, also pay taxes too on our profits from
selling our winners, sales taxes and any estate taxes when we pass away. The
society should benefit a lot from our investments.
If we live to
70s or 80s, we will still be physically able to work on our investments, but most
laborers can't. Hence, we will contribute to the society longer as a
group.
We also
reward companies with good management and/or profitable products and punish
companies with poor management and/or unprofitable products.
Buying future options helps the
farmers to have insurance for crops they plant and/or tells them whether the
crops will be profitable when they’re harvested.
It is unfair for the hard-working, rich folks less chance going to heaven than the lazy, welfare recipients. The majority of the free loaders (also known as the able welfare recipients and cheaters) are the actual parasites. The gate keeper of heaven, please take notes.
It is unfair for the hard-working, rich folks less chance going to heaven than the lazy, welfare recipients. The majority of the free loaders (also known as the able welfare recipients and cheaters) are the actual parasites. The gate keeper of heaven, please take notes.
It is
politically correct to help the poor and punish the rich (via excessive taxes).
When we tax the rich excessively and unfairly, the rich will give up the
citizenship and move to countries with less taxes. It could be the last straw
that breaks the camel’s back. We are experiencing the greatest exodus for the
rich in the last few years. Many countries welcome our rich with incentives and
open arms.
We treat the
middle class unfairly. I invest my hard-earned money and pay taxes on my
profits. When the rich are gone, we would be the group supporting the
government and the poor. Our entitlements such as social security are paid by
ourselves during our work life. Unlike the rich, we cannot abandon these
entitlements and move to other country.
I do not
object to help the poor, but should the middle class be taken care of first? I
do object giving our taxes to the rich bankers for bringing down the economy
when some should go to jail. Margaret Thatcher once said, “Socialism is
destroyed by giving to the poor until we have nothing left to give”. When the
host dies, the parasites will die too.
Can anyone explain the following?
·
The poor get 100%
free health care (say in Mass.), while the middle class like me are very
careful to decide whether to see a doctor or not. I have to pay a lot even
after the insurance.
·
The poor can go to
nursing homes free of charge, and we only go when we have no choice as it is
very expensive.
·
Last time a lady in
front of me in a super market with a real Gucci bag bought the best cut of
steak with her food stamp card. She could be driving a BMW too. Welfare
cheating is too common and too easy.
One common
comment to me is: “Tony, you can spend all your money and be poor.” Is he or am I stupid? Or, our society encourages folks to be poor,
lazy, dependent and stupid. Our generous welfare system encourages folks to be
lazy.
I do believe
in fair taxing and redistributing our wealth. The able welfare recipients
should be ‘forced’ to work, and his/her benefits should not be taken away the
welfare benefits for taking a job. Welfare frauds should be punished. Clinton’s
work initial is good but it also has more holes than the Swiss cheese.
I belong to the middle class, which is being squeezed by the 40%
who do not pay Federal income tax and the top rich 5%. The top 5% are the geese
that lay the golden eggs, but they can fly away to places where taxes are
lowered.
Afterthoughts
·
Norman’s (my good
friend) counter point.
Norman: You have come upon the current
structural change in the global society.
I don't agree with how you have addressed it, almost a racial slur on
the lower working class. In many
people's eyes, the capitalists are the parasites on society and they don't pay
taxes, but hide the money in Ireland and Switzerland. When this depression is over, there will be a
better distribution of wealth or the elite will suffer the same fate that Marie
Antoinette did. In my opinion, there
will have to be redistribution of wealth in order to maintain the demand for
goods and services. 99% of this country
is poor!
Tony: More than 40% of our population
do not pay Federal income tax. Representation without taxation is worse than
taxation without representation. Guilty as charged? You decide.
·
Why I love investing.
I learn most disciplines about investing
via common sense. Even if you have a Ph.D. from a prestigious college or how
tall and handsome you’re, your accomplishment about investing is only measured
by the performance of your portfolio.
I spend about two days a week now (after
all those testing and readings in the last 10 years) about investing. That's
why I can spend so much time in forums, write books and enjoy life too. I can
afford to make a mistake once a while and no one dies because of my error.
Everything I learn now can be useful for the rest of my life. I work on my
investment in any place I want and any time I want.
I'm my own
boss. There is no one to report to me and I have no one to report to. There is
no company politics. No one discriminates against my yellow face. I do not care
about others' feelings when I trade except my own when I lose.
I can play offense and defense without asking for permission. I do not have to follow any regulation, any dress codes, any work hours, etc. My commute is from my bed to the couch.
I would like to share my
experiences in this book. For one who never writes more than three pages at any
time in my entire career and in a foreign language (I bet my English is better
than your Chinese), it takes me to a new challenge. The main reason I wrote
this book is I cannot find one that would benefit the retail investor from
actual experiences.
From my profitable investment, I
can afford to take an early retirement and concentrate my effort to find new
and profitable strategies in stocks investing. Today and for my frugal living,
I do not have to bet big to accumulate more money but to protect them. There
are many ‘great’ investors died almost bankrupted. We do not want to follow
their footsteps. Be conservative and a turtle investor!
This is my payback to the society
besides my taxes as I do not expect make a living in writing books.
Links
Advice to a friend starting a new business
#Filler: Laughing in the
grave
I asked my friend Danny
why he needed a new phone. He told me it was for improving productivity – game
productivity? He also told me he had been waiting for 2 days and 2 nights in
the cold.
Either I was dumb in not
following his logic, the productivity is HUGE, he is a blind social climber, or
the work of a master salesman who is now laughing in the grave, counting his
money and singing Danny Boy.
15 Retirees, take notice
When we retire or are being laid off, we have plenty of
time. It is bad not to do anything financially. However, the worst could happen
to us: We invest in some venture without due diligence and lose our entire
savings. There are so many real-life examples.
Everyone enjoys eating out. Some believe they can make money in opening a new restaurant. Wrong. It is the human nature to be overly optimistic even on the toughest business. Their friends and family members do not want to dampen their enthusiasm. Most new ventures fail miserably.
Everyone enjoys eating out. Some believe they can make money in opening a new restaurant. Wrong. It is the human nature to be overly optimistic even on the toughest business. Their friends and family members do not want to dampen their enthusiasm. Most new ventures fail miserably.
Investing in stocks is another popular one. Many take a course in day trading. If their system works that well, why do they want to show it to you? When you want to invest in stocks, you should have many years of investing experience and do not gamble with the money you cannot afford to lose. In either case, start with paper trading before committing real money slowly.
One retiree lost all his money in the stock market which was too much volatile, and died because of worries. After several years, the market revived but he did not.
One retired headmaster worked as a partner in a small brokerage firm. Despite having fame and fortune initially, never-the-less he eventually lost all his money. He executed an order without checking his client’s maximum bet allowed. The bet was a total loss and this verbal order based on trust could not be legally bound.
The retired and famous baseball player from Boston lost all his money by owning a company that made video games. Even though he was an excellent baseball player, he was not a business man and his failure was almost a sure thing. For every successful story, there must be more failures that are not publicized. In most cases, no ambition is the best ambition during our retirement years. Investing in something we do not understand will likely cost us money, effort, frustration, and even our health.
16 Is Social Security going to survive?
Contrary to popular belief, Social
Security will not run out of cash. However, it will be cut down in purchase
power even it is supposed to adjust to inflation. The inflation rate has been
manipulated by the government by using the CPI that does not account for food
and energy.
Our politicians will not allow Social
Security to bankrupt otherwise they'll not be re-elected. Some simple steps are:
·
Move money to Social
Security from budgets in other areas. The Constitution does not require our
leader to balance the budget.
·
Printing more money and/or
beg Japan or anyone to loan us more.
·
Tax more on citizens
such as the extra tax for Social Security, Medicare and any new tax such as VAT
that is popular in many countries.
·
Tax the rich until
they move out of this country.
·
Import more young and
hard-working foreigners. Ensure not to import their parents to collect welfare
Social Security Supplement which could defeat the original purpose.
·
Selective immigration
would allow more income and investment and the right skills that we do not have
enough.
·
Incentive to die
early - just a joke.
If they suffer, let them die peacefully. How about
one extra percent exemption for each year below life expectancy? The last two
years usually requires the most expensive health care, not to mention the physical
suffering.
·
Give seniors Viagra
free - just a joke.
It will make prostitutes fully employed with new
customers from this age group. Excessive sexual exercise will end their lives
earlier but happily. Not a personal
experience but an observation.
17 Advice for a 70-year old
Why do you being a 70-year old want to be richer? By
statistics, which never lie, you have about ten years (actually more by
contingent statistics) to live. Investing is very emotional and it can damage
your health. Inheritance is good for the next generation, but it should not be
your primary reason to make more money. In addition, it would take out their
objective in life and fun in creating wealth. They should inherit enough to
start something and nothing more.
I agree that we ought to constantly keep our minds active. However, you're competing with veteran professionals in the stock market. Do not turn your life savings into a very expensive hobby. One way to beat them is to invest when everyone is selling and vice versa. It is easier said than done as most of us let emotions make our investing decisions.
If you could live to your eighth decade, you've beaten the odds and the social security system which was designed that a population will not live that long. Just have a big smile and a fulfilling day. Do not let the market control your mood. Like my late mother said: Every day you wake up alive and feel no pain, you've earned another day that is more important than all the gold in the world.
I agree that we ought to constantly keep our minds active. However, you're competing with veteran professionals in the stock market. Do not turn your life savings into a very expensive hobby. One way to beat them is to invest when everyone is selling and vice versa. It is easier said than done as most of us let emotions make our investing decisions.
If you could live to your eighth decade, you've beaten the odds and the social security system which was designed that a population will not live that long. Just have a big smile and a fulfilling day. Do not let the market control your mood. Like my late mother said: Every day you wake up alive and feel no pain, you've earned another day that is more important than all the gold in the world.
Afterthoughts
·
Bala said:
Great words from your late mom. Even at 70, learning never
stops and I learned something today. Thanks.
·
Norman:
Many of us in the 70 year old category are forced to
support our children and their children during this depression. My reason for
making money is to keep them eating and allow the children to go to school and
college.
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