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 »
