In Search of the Perfect Investment

There is talk of interest rates being raised next year. Important to get that mortgage now.

Stocks are gambling. You pick the fundamentals and pray.

I got it right with Visa, until the last few days:

It’s edging back. I’m holding. I’m still way up.

There’s concern with Boeing also, but this is a sound stock:

Amazing how well GoPro is holding up.

My dearest friend sent me a piece by Cullen Roche founder of Orcam Financial Group and author of Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance (Palgrave Macmillan). It’s sane thinking:

Seven market myths that make investors poorer

Financial markets are complex dynamic systems, populated by irrational and biased participants. Because of this, we have a tendency not only to misunderstand how the financial markets function, but we tend to buy into myths that often harm our financial well-being.

But by better understanding the financial markets, ourselves and the behavioural flaws that drive these persistent myths, we can increase our odds of achieving our financial goals. Here’s what investors need to watch out for:

1. You can’t be Warren Buffett

Over the past 30 years, the world’s greatest investor has come to be idolised. But the way Warren Buffett has amassed enormous wealth is often misunderstood. The myth of the simpleton from Omaha who just picks ‘value’ stocks has driven an entire generation to fall for the myth that they can replicate what Buffett does.

Make no mistake; Buffett is not a simple value-stock picker. What he has built is far more complex and resembles something that few retail investors can even come close to replicating.

Berkshire Hathaway, Buffett’s firm, essentially acts as a multi-strategy hedge fund. Berkshire engages in sophisticated insurance underwriting, complex fixed-income strategies, multi-strategy equity approaches and tactics that more resemble a private equity firm than a value-based brokerage account. Replicating this isn’t just difficult — it might well be impossible.

2. You get what you pay for

Few things are more detrimental to portfolio performance than fees. Most mutual funds underperform a highly correlated index, yet they charge 0.8 per cent more in fees on average than a highly correlated index. That might not seem like much, but when you compound this at 7 per cent over 30 years, your total return gets reduced by 23 per cent. At that rate of return, an investor who buys $100,000 of a closet index fund and one who buys a highly correlated, low-fee index will amass, respectively, $590,000 and $740,000 over that 30-year period. Millions of investors are stuck in mutual funds that don’t outperform a benchmark index.

There’s a simple and irrefutable rule in markets: all assets are always held by someone. Therefore, in the aggregate, the performance of the market is what it is; no one ‘beats’ the market. So the investor who incurs greater fees, frictions and other inefficiencies will underperform the aggregate as well a peer who incurs fewer of these frictions. In finance, more expensive doesn’t necessarily mean better.

3. You should focus either on fundamentals or technical analysis

A great battle rages in financial circles between fundamental analysis and technical analysis. Fundamentalists believe you need to understand corporate fundamentals to predict how an asset might perform; technicians believe an asset’s past performance is the key to its future.

But this debate is like trying to determine whether it’s better to drive looking through the windshield or also utilizing the rear-view mirror. The truth is somewhere in-between, as both can be useful ways to be aware of the road. Be open-minded about financial markets. There are no holy grails and there’s value in various styles and approaches, including both fundamental and technical analysis.

4. The myth of `passive’ investing

There’s no such thing as a ‘passive’ investor. No one can realistically replicate the performance of a truly passive index over the long-term. Accordingly, we’re all active portfolio managers in some sense, whether it’s establishing a lump-sum portfolio at initiation, rebalancing, reinvesting, reallocating, and the like. We need to be aware of how these actions can be positive or negative.

It’s important to reduce fees and frictions, but not at the risk of oversimplifying the portfolio to the point where it’s counterproductive. The concept of passive investing is built on useful and sound principles, but often overlooks the fact that portfolio management is a process, not a passive undertaking.

5. The stockmarket will make you rich

Most market participants tend to think of their financial situation in nominal terms. But when you are looking at your portfolio performance, it’s imperative to think in real terms. View your portfolio performance by the return that goes into your pocket. That means backing out inflation, taxes, fees and other frictions that reduce nominal return.

The stockmarket is not what makes us rich. The people on the Forbes 400 list didn’t get wealthy flipping stocks in their brokerage accounts. They got wealthy building and running fantastic companies. The stock market can protect your wealth and help you maintain purchasing power, but it’s not the place where most of us are likely to make our fortunes.

6. You have to beat the market

It’s hard to avoid the allure of trying to beat the market; to outperform on a consistent basis by simply picking stocks. In truth, most of us are not going to strike it rich in the stockmarket and most of us shouldn’t even try.

You don’t need to beat the market. Attempting to beat the market means taking risks that are probably not appropriate. Instead, you need to allocate assets in a manner consistent with your financial goals of beating inflation, without exposing your portfolio to disruptive levels of risk. Beating the market is probably not only unattainable for most, but likely to encounter disastrous financial turbulence along the way.

7. `Stocks for the long run’ is the best strategy

You’ve probably heard about ‘stocks for the long run’ or ‘buy and hold’. These concepts are usually sold to investors using misleading nominal historical returns, or the promise of climbing on the financial roller coaster at age 25 and getting off at age 65, whereupon you stroll into the sunset years.

Of course, this isn’t remotely how life works, and our financial lives should reflect that. Our financial lives are a series of events. You get married, buy a house, have children, send them to college, plan for retirement. Life happens, and investment portfolios should reflect this. We can’t just throw ourselves and our families into the stockmarket and hope it’s going up when our most important (and expensive) events occur.

Forget about the long run. There are only short sprints inside of a marathon. Planning a portfolio around the ideas of ‘buy and hold’ and ‘stocks for the long run’ look nice inside of an academic study based on 12 per cent annualized gains, but in reality often causes more financial pain than anyone deserves.

Your emails are not safe. The U.S. Government wants Microsoft to hand over emails stored on data centers in Ireland. Microsoft is fighting it. It’s not clear:

+ If American emails are stored there. They probably are.

+ If copies of emails you erased are stored there. They probably are.

I have never liked storing my confidential on someone’s cloud in somewhere land. It’s easy to run your own email server. I do.

Good not to put any dangerous stuff in an email. Pick up the phone. Meet in a Starbucks. I remember being in Budapest when it was run by the bad people. Only place to talk was walking outside in noisy traffic.

For more on this, read a piece in this week’s Economist. Click here.

Legalize marijuana, says the New York Times. An editorial from Sunday’s paper:

 Repeal Prohibition, Again

It took 13 years for the United States to come to its senses and end Prohibition, 13 years in which people kept drinking, otherwise law-abiding citizens became criminals and crime syndicates arose and flourished. It has been more than 40 years since Congress passed the current ban on marijuana, inflicting great harm on society just to prohibit a substance far less dangerous than alcohol.

The federal government should repeal the ban on marijuana.

We reached that conclusion after a great deal of discussion among the members of The Times’s Editorial Board, inspired by a rapidly growing movement among the states to reform marijuana laws.

There are no perfect answers to people’s legitimate concerns about marijuana use. But neither are there such answers about tobacco or alcohol, and we believe that on every level – health effects, the impact on society and law-and-order issues – the balance falls squarely on the side of national legalization. That will put decisions on whether to allow recreational or medicinal production and use where it belongs – at the state level.

We considered whether it would be best for Washington to hold back while the states continued experimenting with legalizing medicinal uses of marijuana, reducing penalties, or even simply legalizing all use. Nearly three-quarters of the states have done one of these.

But that would leave their citizens vulnerable to the whims of whoever happens to be in the White House and chooses to enforce or not enforce the federal law.

The social costs of the marijuana laws are vast. There were 658,000 arrests for marijuana possession in 2012, according to F.B.I. figures, compared with 256,000 for cocaine, heroin and their derivatives. Even worse, the result is racist, falling disproportionately on young black men, ruining their lives and creating new generations of career criminals.

There is honest debate among scientists about the health effects of marijuana, but we believe that the evidence is overwhelming that addiction and dependence are relatively minor problems, especially compared with alcohol and tobacco. Moderate use of marijuana does not appear to pose a risk for otherwise healthy adults. Claims that marijuana is a gateway to more dangerous drugs are as fanciful as the “Reefer Madness” images of murder, rape and suicide.

There are legitimate concerns about marijuana on the development of adolescent brains. For that reason, we advocate the prohibition of sales to people under 21.

Creating systems for regulating manufacture, sale and marketing will be complex. But those problems are solvable, and would have long been dealt with had we as a nation not clung to the decision to make marijuana production and use a federal crime.

In coming days, we will publish articles by members of the Editorial Board and supplementary material that will examine these questions. We invite readers to offer their ideas, and we will report back on their responses, pro and con.

We recognize that this Congress is as unlikely to take action on marijuana as it has been on other big issues. But it is long past time to repeal this version of Prohibition.

 Harry’s advice (learned from first hand experience):

1. Don’t go near the stuff. It’s much, much stronger than it was 30 years ago. Today’s stuff is positively lethal. And absolutely do not eat it. That can send you to the hospital ultra-fast.

2. Don’t go near any marijuana stocks. There are more marijuana crooks and crooked companies than Carter had liver pills. I bet they were less dangerous.

Before you bury a terrorist, make sure to remove his suicide belt.  This video shows what happens if you don’t.

Click here.

Favorite cartoons from this week’s New Yorker:

Immigrant sex. Negotiations with a hooker.

An illegal immigrant picks up a hooker.

“Hey, how much you charge for an hour, sister?” he asks.

“$100,” she replies.

In broken English, he says, “Do you do immigrant style?

“No,” she says.

“I pay you $200 to do immigrant style.

“No,” she says, not knowing what immigrant style is.

“I pay you $300.”

“No.” she says.

Finally he says, “I pay $1,000 to do immigrant style.”

She thinks, “Well, I’ve been in the game for over 10 years now. I’ve had every kind of request from weirdos from every part of the world. How bad could immigrant style be?”

She agrees and has sex with him.

After several hours, they finish. Exhausted, the hooker says, “Hey, I was expecting something perverted and disgusting.  But that was ok. So, what exactly is immigrant Style?”

The illegal immigrant replies, “You send bill to Government.

Harry Newton who spent most of his weekend finishing the 28th edition of  his dictionary — see the right hand column. Boy it’s hard to overstate the speed that technology is  advancing.