Gold, Dollar, S&P comparisons, does it matter?

There is a tendency to compare the merits of investing in Gold, Oil, the Dollar, and the Equity indexes like the S&P, Dow, and more.  There are multiple ways to approach this, and many have simply looked at the charts, long, short, and intermediate.  Many approaches have nothing to do with real investing.  From my point of view and experience, the definition of investing is: making a positive return from opportunities while managing risk in order to minimize losses.  It’s really that simple.  Approaching the markets from the perspective of “long-term investing”, “risk avoidance”, and “diversification” tend to be meaningless except to those who don’t understand what they are doing in the first place.

To make it simple, consider investing in just one stock for a moment.  Let’s assume the company is of course “XYZ Corporation”.   Why would someone invest in XYZ to begin with?  How will they know if there is potential for a positive investment return, and how will they “work” to maintain such a positive return?   It helps to pay attention to the company itself and the merits of being invested at any point in time.  Sometimes XYZ has great new products, new marketing, new management or something else we could identify as potentially raising business prospects in the future.  At other times XYZ has poor prospects.  If an investor is sharp, pays attention, and understands these trends, the investor could potentially own the stock at times of positive opportunity and at other times avoid ownership.

This is pretty basic stuff but it’s how it works, all the time, and for all time; it’s easy to forget the basics.  This simple truth is often obscured by those who want to over analyze, over emotionalize, and even over simplify with alternative investment ideas like Asset Allocation, Diversification, Alternative Investing, Private Placement, Bonds… and much, much more.  All the while, these complex views of investing still depend on the simple performance of the underlying instruments and their individual performance.  Stocks within the portfolio must go up for an equity mutual fund to increase in value, regardless of the “style” of the fund.  It’s a funny thing when people somehow fall prey to the idea that their Mutual Fund is an investment when it is a pool of underlying investments.  Sometimes they even think an IRA account is an “investment” when in reality it is only an account.

I have to ask: If the purpose of investing is to make money, to identify opportunity, and to avoid risk, then why does “long-term” have anything to do with it?  Gold has only been performing short-term.   Stocks and the dollar have only been underperforming Gold in the short-term.  In the shorter term a savvy investor has been able to outperform Gold with compound rates of return based on buying and selling.   If an investor does the work, then it is irrelevant as to whether a position is better long or short, since all instruments have their time, and usually only short to intermediate.

Instead of XYZ let’s use Apple.  No argument here, you could have made a great return in Apple, even compared to gold, since 2005.  Because AAPL has done so well compared to nearly anything, should we now forget that it is a stock and begin to see it only as a long-term investment vehicle and try to say that it should be compared to Oil, Gold, the S&P index, Currency, the Economy itself?  Or should we realize Apple is simply having a great run and it would have been nice to participate?  The Dollar performs at times and so does the S&P, but really, all investments should be compared based on their time of opportunity and whether or not you have the fortitude to participate at all.

It isn’t time that matters unless you are losing money anyway.  If you are making money time is on your side.  So why see everything as long-term?  There was a time when Apple really stunk and should have disappeared but somehow the company clung to its existance and, fortunately for those who either own shares or love the iPhone, it held a great revival!

Shall we say the U.S. is dead and cannot have a future?  Is the dollar dead?  Maybe we simply must invest more wisely.  Do you believe professional investors drop their earnings into mutual funds and forget about them or is it more likely they actively seek opportunity and trends, then move their money accordingly?

Job Report Statistically Irrelevant

The job report today came in at +117,000, creating an unemployment number of 9.1% vs. last reported 9.2%. The error margin is +/- 100,000. This means that the number is statistically irrelevant. Yet our news media and low-level talking heads in the financial industry choose to play it up as if it’s the beginning of economic recovery.  This won’t last long since the markets are already giving up the plus side.

In order for the number to be statistically relevant, new jobs created would need to be 4 times greater or more. To have any meaning at all we would need to see a monthly increase in the 300K plus range over an extended period of time. As it is, it would take decades for the current number to have any impact at all!

Other irrelevant numbers are the S&P 500 and DOW indexes, which have barely moved this year, yet the media has continued to hang on every 100 point move in either direction. They love to squeal about the VIX volatility index; why anyone would follow this redundant number which tells you only what is currently happening is beyond me.  I remember when 100 DOW points meant a 10% move, but today it’s just 1% or less and yet receives even more attention. There really must be no real news to report these days or they would completely ignore these things (um, sure).

All of this implies two important things: 1) you can’t invest according to the news headlines, and 2) this truly is a trader’s market, maybe the best ever. The first item is not a shocker, and if you have been watching the markets for any length of time you’ve even heard the culprits themselves (reporters) state that you can’t just follow the headlines. The second is the real revelation which any savvy investor should be taking note of.

Disproportionate Sell-off of Japan

No doubt Japan has suffered a tragic loss of life and property, and the risk of nuclear radiation is real.  The problem here is the apparent panic sell-off which is already out of proportion with reality and more in proportion to a real war.  What’s pushing this negative market activity?  Is it just the news, or is it some other fear? Disproportionate is right, unless you are banking on another quake and tsunami.  I seriously doubt the productivity of the Japanese people has been impacted enough to warrant a collapse in their corporate world.

Maybe the markets are down because of the number of Americans who begin standing around pointing fingers at others, trying to blame them for being unprepared for one of the worst quakes and tsunamis in history.  Reminds me of what happens when I honk at someone to move out of the way and their reaction is to either hit the brakes and look around or stop and stare at you.  Few ever get what the honking is about, or they are just angry and impolite enough not to care.

It is kind of sad to see American news focusing on a few boats bashed around by a wave, or one guy being washed out to sea in comparison to the overall tragedy in Japan.  Really though, the comparison may be better explained by how little economic effect it will have compared to the surviving population.  Japan will survive, and so will America.

Although this sell-off in Japan is disproportionate, it may actually be the correct thing in comparison to where the markets were.  It may be that a correction was at hand and the quake, tsunami, and reactors simply allowed the markets to face the truth.  I really can’t say for sure.  In the U.S. this simply is helping the markets get on with a correction which was already forming and may help it end that much sooner.

Overall, humans need to get a bit better grip on reality.  If they would stop hyping up prices in commodity, stock, realty, and other markets we wouldn’t be as susceptible to large sell-off activity.  Imagine if people invested according to the merits of valuation and earnings rather than speculation of future value and the psychological need to participate with the crowd.  But then that would imply people would be doing their own homework and understand the risks they take.  On the other side of things, if people were not as inclined to over-react there wouldn’t be as much opportunity for those who know how to play the game of risk and investment.

The Lost Art of Investing

Call it Investing, call it Risk Taking, call it Speculation, call it Stock Picking, or even call it Gambling if you must, but realize there is an art to the process and avoiding such truth is the opposite of opportunity.  Investors used to make money because someone worked at it, not simply because they made a deposit with whimsical money.

Case in point: as of this writing, a well-defined portfolio invested in well picked stocks and managed according to a system of maintenance, from 5/5/03 to 12/12/10, has produced a 194.8% return while the S&P has produced only 35.9%.  Is that dramatic?  Yes!  These numbers are from an investment service.

Here’s the point.  They used to call them Company’s Men (when it was still okay to call men Men), then the title changed to Stockbroker, and after that came Financial Consultant.  Legalistic challenges as well as opportunity to help clients forget “Stockbroker” as a derogatory title, have caused them to become today’s Financial Advisors.  Is there a difference between a Stockbroker and a Financial Advisor?  I believe so and I also believe the big firms want a major difference to exist.

Stockbrokers kept their jobs by performing well.  They had to perform in up and down markets by constantly looking out for risk and actively seeking opportunity.  Not all of them did a good job of this, but just like any profession some failed and some did well.  If you worked with a good stockbroker you likely made a good return as performance overshadowed losses.  That’s how it is done by the way.  There will be losses at times or there would be no risk, and if there is no risk, there is no longer investment opportunity.

In the two decades from 1980 until the end of the century, stockbrokers had a vast opportunity to expand on the notion that such effort had value!  By the end of that time many millions had been made on behalf of clients, both through methodical investment as well as the tossing of good after bad in the tech bubble of the time.  Do not believe it if someone implies a bubble never happened before.  The “Nifty-Fifty” of the early 1970s, the run-up of the markets before the great crash and depression, the multiple bubbles from 1900 to 1929 are examples of human nature in action with investment ideas, schemes, and opportunity.  Some won and some lost.  The problem of today arose when those same methodical stockbrokers began to warn clients of a market top.

First, to understand the contrast, let’s compare two things.  Imagine you are an investor and your account just jumped over a 7 year period from $50,000 invested to a market value of well over $1 million.  Your broker calls and starts telling you that it could be a good time to exit the market to a degree and protect your new-found net worth; your broker is protecting you as a client.  In comparison, now imagine you are the national sales manager of a large firm and the stockbrokers under you are signaling to clients that it may be prudent to exit positions they own; from this view the broker is reducing opportunity for trading fees.  In the first case you are grateful of the opportunity to reduce risk.  In the second case you blindly see that clients will potentially be pulling money from their accounts and reducing the pool of assets at the firm.  This is how the opportunity arose for the industry to begin focusing on investing everyone’s money into everything, through the use of allocation in managed portfolios.  This is the reason why stockbrokers who make money for and protect their clients are becoming extinct, because they increase the risk to the firm they represent since deposits will decrease in a down market and the firm would like to increase or maintain deposits during a downturn and maintain their fees on client assets.  The firm’s attitude often is one of belief that all assets on deposit belong to the firm, not to client, and so they protect the fee’s instead of focusing on performance.  Funny thing, if performance is good, then fees increase anyway, and would probably be much higher than they currently are. 

The days of the fighter pilot style, intelligent, hard-working, and ever opportunistic stockbroker have gone, for now, because the firms would rather hold your money in a more stagnant form in which their fees are not damaged or don’t cycle up and down in a wide pattern.  This does less good for the client and better for the firm. 

Don’t believe it?  Two things help make the point, one is that a market rate of return minus fees nearly guarantees lower performance, and the second is a high majority of managed accounts under-perform the markets.  Many financial advisors are effectively reduced to being no more than a teller at the bank.  You deposit the money and the advisor has little idea of where it goes and how it works even after expensive and broad training to allow them to be labeled with CFP, CFA or the like.  A lack of real practice tends to void the value of the education.

Now you may wonder if there is a solution to this.  Yes, you can do several things.  One is to pay for what you get.  If an advisor and the firm’s portfolios aren’t producing higher results than the markets, you need to realize you are paying for nothing.  Look for an advisor who can perform well.  You can learn to manage your own account.  I have seen many people try this and I have yet to see anyone, who has a career different from being a stockbroker/financial advisor, do well with this.  You can follow a good investment service which has true performance like the Investor’s Business Daily.  There are other things you can do like join a good investment group, and you can even change your career if you want to try the 5 year learning curve it takes to truly be good at it.  It is beyond the scope of this writing to provide a real answer since there is so much involved in assessing a person’s capacity to participate, including their own business ventures. 

In all, just realize there is no reason to fear investing directly in stocks, and there should only be fear in the inability to adjust to the reality of being wrong or missing opportunity.