Sunday, December 14th, 2008
Saving money around the holiday season is a very common theme this year and retailers are doing their best to entice consumers to open their wallets with sales and discounts that many thought we would never see.
Many, if not all, online stores are offering free shipping and the savings on non-essential items like video games and electronics is virtually unheard of.
Holiday Incentives
Many traditional retailers are offering incentives on financing. Just what a nation that has lived on credit for the last ten years needs – more debt. I do believe that the main stream media, with a the constant barrage of negativity toward the economy, has scared the average person into saving more money. (The only good thing the media has accomplished over the last few months.)
Some recent statistics show that many Americans are not taking on any credit card debt this holiday season and that is certainly something that has changed from recent years. With mortgages getting harder to qualify for, the importance of a good credit score has finally hit home with American consumers.
Many consumers have also said that they are planning to spend significantly less money this holiday season overall. Again, a profound change from the overspending that plagued recent years.
Will this Be Lasting Change?
One has to wonder if these changes will become habits that will last and be ingrained in the generation like the spendthrift and frugal survivors of the great depression era, or if the ideals of the recent “have it now” ideology will return with a vengeance at the end of this economic downturn.
I must say that I personally do not know which one is the lesser of the two evils? There must be a reasonable balance between spending and saving that will both benefit the economy and businesses as a whole and the individual. That is the balance that we seek as a society.
Today’s Investors Will Benefit
I am certain that this economic downturn will offer today’s young investors, who continue to buy stocks, an opportunity at wealth in their later years.
No matter how much money you spend this holiday season, I urge you to not only look in your favorite stores, but look at them as well. Who knows, the best bargain you find this season may be that beaten down retail store stock you’ve always shopped at!
Posted in Saving Money | 3 Comments »
Thursday, December 4th, 2008
As an investor, you come up with an overall approach to meet your objectives and then bring in the stocks, bond, real estate etc. to your portfolio to execute the plan. Of course you expect that there will be frustrations along the way – just like we can’t control the weather, we can’t control the markets. But, if you are willing to put up with the frustrations, by the end of your investment time horizon, you should be able to enjoy the retirement you’ve always dreamed of.
Historical Statistics
Anyone investing for a long time should expect markets to go down sooner or later, but the long-term trend has always been up. In 183 years of equity markets in the U.S. performance was positive 70% of the time and negative only 30% of the time. Years like the one 2008 is shaping up to be are extremely rare. In fact, the only complete calendar year that lost over 40% was 1931. Conversely, the market improved by more than 40% ten times.
The chart below shows the frequency of positive and negative calendar year returns in the U.S.
There are two key messages to take away from this chart:
- The market performance of 2008 is well outside the norm. Looking at history, it seems unreasonable to expect such negative returns to keep recurring.
- Investors often focus on average returns, but the long-term experience of the market is very different from the average. The average U.S. equity calendar year return is approximately 8%, but in any given calendar year there’s less than a 25% chance of a return in the range of 0 to 10%. Returns outside that range should be expected – both positive and negative.
Additionally, what you can’t see in the chart is that four of the five best years (over 50% return) occurred immediately following a negative year.
With 2008 being the worst calendar year in recorded history for equity returns, do you think that the possibility is increased for history to repeat itself with 2009 rebounding with a potential 50%+ return? While we have history as a guide, only time will tell if these statistics will hold true in the future.
Posted in Investor Education | 5 Comments »
Friday, November 21st, 2008
The markets took another beating yesterday with the S&P/TSX plunging 756 points to fall below the 8,000 mark for the first time since 2003, closing at 7,735 and the DJIA fell 360 points to close at 7,637. The events of this week are sure to keep investors questioning their actions or inactions with respect to their investments and whether or not they should ‘do something’.
The well-studied principles of investor behavior are a large part of what moves our markets both up and down. Investing strictly on facts and discipline is difficult – after all, we are humans processing information with all the emotions, biases and shortcuts that get in the way.
Herd Mentality, Loss Aversion, Fear of Regret – these are the names given to just some of the various behaviors that cause people, as emotional beings, to make mistakes in their investment choices again and again.
One such behavior called “Overconfidence” occurs where investors make errors in overestimating the accuracy of their opinions and information, often due to past investing ‘successes’.
As a whole, overconfident investors trade too much. In a study I recently read, 78,000 households were divided into five groups based on trading frequency. The average portfolio return for the highest trading frequency group was almost 40% less than that of the lowest trading frequency. Along with trading frequently, overconfidence often leads to purchasing the wrong investments.
In another study, the same researchers followed brokerage accounts that sold a stock and bought a replacement stock shortly after. In the four months following the trade, the stocks that were sold on average earned 2.6% vs. only 0.11% earned by the replacement stocks. After a year, the stocks that had been sold outperformed the replacement stocks by 5.8%.
Of course this data, while reliable in it’s own context, does not necessarily apply to today’s market conditions. However, the behavioral finance theory certainly does.
It is very important to truly understand why you are selling or buying a certain stock. If it is for technical analysis reasons, understand the risk-reward scenario and the charting pattern your are following. If it is for fundamental reasons, understand the company and what drives revenues and expenses. Don’t listen to the talking heads in the media – they make money spreading bad news and driving down investor confidence – also known as emotion.
As hard as it is, emotion is best left at the door when dealing with your investment portfolio.
Posted in Investor Education | 2 Comments »
Monday, November 10th, 2008
Buy Low Sell High
If you have heard it once, you have heard it one thousand times. This age-old advice is the epitome of the saying “it’s easier said than done”.
In recent months, my favorite sector, the financial sector has taken a beating. Many of my favorite stocks are now boasting dividends in the mid to high single digits. These dividend yields are quite a bit higher than the average yields for these companies, not to mention that some of the largest banks in the gargantuan US economy are selling at 10-12 times earnings!
Enter Investor Psychology
Even though I have a long-term investment strategy and believe in the future prospects of companies such as Citigroup (C) and Bank of America (BAC), I still have a hard time pulling the trigger when all of the news outlets are forecasting nothing but doom and gloom.
Money is made when one is brave enough to accept a risk that few others are willing to take. We must be willing to step out on a limb and believe in our strategy from time to time, for there is no reward without risk!
Brave or Stupid…You Decide
A recent article in the Globe and Mail outlined the following, which I thought was a spectacular move, and outlines some of my own thoughts:
Bill Miller, the famed mutual fund manager at Legg Mason, might describe as predictable, but illogical, market psychology.
Studies repeatedly show investors place too much weight on information that’s (a) recent, and (b) dramatic. The multibillion mortgage writedowns at U.S. banks are both.
Mr. Miller, who beat the Standard & Poor’s 500 for an incredible 15 consecutive years, has been getting enthusiastic lately about U.S. financial stocks. At the moment, he looks foolish and stupid. Two years from now, he’ll be thought of as brave and wise.
What Mr. Miller is referencing is a common strategy known as contrarian. Being a contrarian is just as it sounds. Contrarian investors buy solid stocks that have fallen out of favor with investors, mainly due to recent news and “panic“.
Buffettology
Mr. Warren Buffett actually played a contrarian role the last time that the financial sector was out of favor in the early 1990’s. Buffett took a large stake in Wells Fargo when everyone else was running far and fast from the financials. If you take a look at a 15 – year chart for Wells Fargo, you’ll see that Buffett looks Brave and Wise now, not Foolish and Stupid!
Buffett also made recent headlines for his investments in Goldman Sachs and General Electric, not to mention a NY Times article in which he proclaimed that his personal portfolio is currently being invested in United States equities.
Are you prepared to look foolish and stupid for a few months in order to look as brave and wise as Warren Buffet in the future?
If so, you too could be taking double digit dividends (and capital gains) to the bank 10 years from now!
Posted in Investor Education | 10 Comments »
Wednesday, November 5th, 2008
A few weeks ago I wrote an article titled Panic or Profit and many folks thought I was just spouting theory. While that may be, the recent evidence of my “theory” has been proven at least half true thus far.
According to the Globe and Mail, panic sticken investors in Canada pulled a record $8.45-billion from the mutual fund market in a stampede for the exits. It was the worst month for net outflows since the Investment Funds Institute of Canada (IFIC) began collecting data in 1990, and nearly doubled the previous record posted in September, which saw net outflows of $4.5-billion.
Panic Selling
Of course many will be inclined to argue that those who pulled thier funds from the market in early October were smart and can now re-invest at lower prices. While this is true, the figures shown are net outflows for the month – so we’re not talking about trading or churning of these funds. This data is a decent representation of those investors who panic-sold.
Further to this point, most seasoned traders, who would be more inclined to recognize the market conditions and sell their holding to re-invest at a later date are likely not invested in mutual funds, but rather individual securities.
One such example of an individual who panic-sold is Norman Bambrick, a 72-year-old retiree in Port Perry, Ont. He bailed out of his bank fund after seeing his $200,000 investment in two accounts take a $12,000 haircut in 10 months.
“The funds didn’t work out for me and I cashed them,” Mr. Bambrick said.
“I had a feeling that they were headed for a disaster,” he said. “I had no confidence in them.”
What is even worse about this example is that the gentleman suffered just a 6% loss to his portfolio. This is an indication that he has received some incorrect advice about his risk tolerance and the investments that he holds.
Understand Your Risk Tolerance
If Mr. Bambick could not tolerate a 6% loss to his portfolio, he should not have been invested in those vehicles. At 72 years old, with such a low risk tolerance and relying on his portfolio for income, Mr. Bambick should likely be invested in Guaranteed Investment Certificates (CD’s in the USA) and Fixed Income securities only. Fortunately, that is exactly what Mr. Bambick did with the proceeds from the sale of his funds.
While this example is of an investor who was not likely in the appropriate asset allocation for his situation, it is still an example of panic selling. When we sell out of fear instead of understanding our fundamental reason for selling we often lock in losses. And, by the time we get up enough “courage” to return to following our original investment plan (when general market sentiment turns positive), we have often missed out on the initial upside gain.
The moral of the story is this:
- If you were lucky/smart enough to cash out before the downturn – don’t be too late to re-invest those proceeds because prices are much more attractive now.
- If you panic-sold during the downturn get prepared and develop a plan that is comfortable for you. Don’t miss out on potential gains when the market turns the corner.
- If you have been holding throughout, stick with your plan because this time is not different and equities will rebound as market uncertainty eases and we return to the fundamental valuations.
I personally fall into category number three and have been buying dividend growing stocks and some index ETF’s over the past 5 weeks.
Which category are you in?
Posted in Investment News | 6 Comments »
Monday, October 27th, 2008
As we saw on Friday, the current financial crisis has investors all over the world living in fear now. And this time, it’s the government who is helping businesses to bring down what is crippling markets – the credit crunch precipitated by the U.S. housing collapse.
Governments in North America, Europe and Asia have provided bailouts to troubled financial institutions, liquidity to money markets and guarantees to banking systems. And all of this is in addition to drastic interest rate cuts. Fortunately, there are some very encouraging signs that these initiatives finally are starting to work.
Some Good News For A Change
Indications that credit is starting to flow
- The rate at which banks lend to one another known as the London Interbank Offer Rate (LIBOR) decreased from a peak of 6.88% earlier this month to less than 1.3%.
- The spread between 3-month LIBOR and U.S. Treasuries (the risk-free rate) decreased from a record high 4.65% earlier this month to 2.7% on Friday. A narrower spread means that banks are more willing to lend to each other.
Good news for U.S. housing
- U.S. fixed-mortgage rates decreased helping more borrowers qualify
- Variable rates continue to decrease due to Fed rate cuts
- Oil and gas price declines result in more affordable heating costs for homeowners as we head into the colder months
- Data from August and September shows reduced inventory of U.S. homes. The 10.6 months supply of homes in August slipped to 9.9 months supply in September
- The FDIC and the U.S. Treasury are working on a proposed plan to prevent avoidable foreclosures by offering guarantees to lenders and companies that service mortgages
Despite these encouraging signs, we will continue to see volatility as investors react (or is that overreact?) to every new piece of information released.
Facts About Stocks and Recessions
There’s a lot a worry about the recession now. But what’s important to remember is that equity markets tend to be leading indicators of the economy.
Looking back through history, equity markets have typically retraced prior to, and in the early stages, of recessions. Once equities have reached their lows, they tended to rise quickly preceding the broader economic recovery.
So, make sure you don’t let yourself fall into the mob mentality or you may find yourself missing the upturn in equities.
We don’t know exactly when the recovery will commence, but over the long-term equities has still been the top-performing asset class. And out of all the equities, the dividend growers have been the most stable.
Posted in Investment News | 4 Comments »
Friday, October 24th, 2008
Is it just me, or does it seem like the media is playing a large part in the widespread financial panic that has consumed the globe?
I know the media is in the business of selling “papers” but still I wonder why they always seem to play up the negative? This only serves to feed the panic and thus make an already irrational market further disconnect from the fundamentals.
Is there any time when they should consider playing up some of the positive stuff, like companies that continue paying dividends, increasing liquidity, interbank credit easing etc. instead of feeding the panic.
Is A Balanced Representation Too Much To Ask?
I am not suggesting for a moment that they hide the truth. However, all we are really getting is an opinion and interpretation on what is happening – but does anyone really know what is happening?
The average person on the street panic and because of the sensationalism of the situation portrayed by the media, cannot differentiate between opinion and facts. The average Joe may panic and liquidate his 401k and not even really know why he is selling, other than the fact that the media is bombarding him with messages of companies going bankrupt and people losing their life savings etc.
Worse yet, a study found that increased suicides and homicides are linked to the financial “crisis”.
An out-of-work money manager in California loses a fortune and wipes out his family in a murder-suicide. A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years.
In Massachusetts, a housewife who had hidden her family’s mounting financial crisis from her husband sends a note to the mortgage company warning: “By the time you foreclose on my house, I’ll be dead.”
Then Carlene Balderrama shot herself to death, leaving an insurance policy and a suicide note on a table.
I certainly don’t have all of the answers, if any at all, to these issues. However, I am becoming very disheartened with the mainstream media as they continue down a path that leads to more destruction that good. The above shows the outcome ofpeople feeling hopeless about their situation, financial or otherwise. Media outlets fuelling such hopelessness certainly doesn’t help.
Front page headlines do not necessarily need to be filled with hope, but I believe the media owes the public the opportunity to receive sound and relevant news about the state of the economy and their personal finances.
What Would It Take?
What would it take for the major media outlets to band together for the greater good of our global society and present quality information that would help to instill the appropriate (read: more rational) level of confidence in our monetary system(s)?
I know that much of the turmoil in the financial markets is real. However, for media outlets to portray this as the “financial apocalypse” is absurd, and in my opinion, unethical. Yes, there is cause for concern about the economy and the financial markets, but the infusion of undue fear on to the public is shameful.
At a time when media sources could be encouraging us to learn more about our economy and educate ourselves on personal finance, credit, and investing, they choose instead to churn out headline after headline proclaiming the next depression and the longest deepest recession in history etc.
One must wonder if there will ever be something bigger at stake than selling papers?
Posted in Investor Education | 6 Comments »
Friday, October 17th, 2008
The market volatility of this week has continued to keep investors on the edge of their seats. This roller coaster ride leaves many repeating the same word heard in most news reports on the subject: Unprecedented.
Although this is the type of word that perpetuates the fear that has gripped the current market, to me it seemed more than fitting. That is until I took a look back in history and chatted with a few of my “investor” friends that have been around a lot longer than I have.
Is It The 1980’s Again?
The period I often hear cited is the early eighties. At the time, the prime lending rate was 20%. Around June of ‘82 markets had the worst one-year return on record at about -40%. Even the music was rough: Dire Straits was singing ‘Industrial Disease’ and lyrics to Bruce Springsteen’s hit said “…these jobs are going and they ain’t coming back”. It was a daily occurrence for investors to drop off the keys to the house they could no longer afford. Sound familiar (minus the lending rates)?
We are all familiar with that bear market ‘dip’ of the early eighties from referring back to the Andex Chart of market returns. But what’s missing from the Andex chart is what was so poignantly described as “…the sheer and utter fear we all felt at the time”… similar to how many investors have been feeling lately.
We must remind ourselves that time dulls the fear just as it smooths out the peaks and valleys of market returns on that well-known chart. For as bad as that time was, the investors who lived through it have commented, “I would give anything to go back and buy up some of those stocks people were running from, or a few of those houses that no one could give away at the time”.
Put Stocks In Perspective
The key message here is to help reinforce the importance of perspective. Since the early 1900s we have had many market crises and experienced the fear that accompanies them. And although the current culture of 24/7 news access may amplify those fears, we cannot say with certainty if the bottom is near or when the markets will turn the corner. We can only say that markets have proven their resilience through similar markets of the past and gone on to new heights.
That said, why should this time be any different than the “end of the world” scenarios of past market corrections?
Posted in Investment News | 5 Comments »
