In Search of the Perfect Investment

Russia gave our President an out. A reason not to bomb Syria. And the market skyrocketed yesterday.

Russia. Yup. Russia. Go figure. Nice bounce:

Note that the Dow took out 15,000.

Neat.

There is good economic news, with three key indicators besting expectations, Reuters reported. China’s annual industrial output jumped 10.4% in August, retail sales rose 13.4%, and fixed-asset investment spiked 20.3% (in the first eight months from the same period last year).

My advice of “cash is king” clearly sucks. Fortunately, I ignored my own stupid advice and stayed invested. Hence I benefited by yesterday’s nice uptick. My investment strategy yesterday was to play tennis twice — at 7 and at 3 — and watch the final at 5 PM. My brilliant recent investment strategy has been to add to positions doing well and trim ones not doing so well.  Visa and Nike are being added to the Dow 30, which is good since I own both and had mentioned Nike a little while ago. I hadn’t put Nike in the list in the right column, since I thought it overpriced. But I’ll add it now. I notice they chucked out Hewlett-Packard. Maybe that will be good for my small short in that ugly stock?

I’m putting a little money today into an interesting residential real estate syndication in the south. In this investment business, there’s only one free lunch — it’s called diversification.

I have some entrepreneurial stories and more on Google in Kansas City. But they’ll wait till tomorrow. Meantime you must read this piece from the New York Times:

 Trying to Outguess the Unpredictable by Carl Richards

“All I want is for you to tell me when the market will go up and when the market will go down.”

A client made this request early in my career. My first thought: “I totally understand. Who doesn’t want to know that?” My second thought: “Too bad I have no idea when either event will happen.”

It’s a very human thing to seek answers to unknowns, and we often start our search by looking for experts and gurus. We try to find people we hope will reveal the future and take away the gut-wrenching uncertainty of what comes next.

Few situations leave us feeling more uncertain than our investing decisions. If we just knew what came next, we could sleep easier at night. But that’s not how the markets work, and attempts to predict with certainty what the markets will do next are best described as market timing.

When we’re honest about it, we’re looking for this kind of help from investing newsletters. The problem is that we rarely get the results we’re hoping for. Mark Hulbert of the Hulbert Financial Digest took a look at top-performing newsletters from 1986 to 2010 and found they underperformed the S.& P. 500 by 2.6 percent. Despite this and other research clearly showing how bad these newsletters are at predicting the market, some investors still gravitate to them. They’re convinced they’ve found a way to reduce the uncertainty and time the market.

Unfortunately, this so-called certainty can come with unexpected consequences. In recent weeks, T. Rowe Price took the unusual step of banning 1,300 American Airlines employees from trading among its funds in their 401(k) retirement plans. Why? Because they were engaging in what T. Rowe Price described as “collective” trading. As a group, these fund investors were making the same trades simultaneously. Fund managers hate collective trading because it can leave them scrambling to buy or sell, often at great expense, to cover the moves.

So what did T. Rowe Price see as collective trading? How about following recommendations from an investment newsletter, EZTracker, to exit “T. Rowe Price funds in American’s 401(k) plan six times since mid-2010 after a holding period of less than a year.” These recommendations “triggered a rush of buys and sells in the days following the end-of-month release of the newsletter,” the company said.

Stop for a minute and think about that last part. Over the course of three years, this particular newsletter recommended exiting funds six times after holding them for less than a year. In terms of fees alone that’s a lot of activity. It’s also hard to see these recommendations as anything other than market timing, and following them as a group got people banned from trading. I doubt this was the outcome that any of these investors had in mind when they subscribed to EZTracker.

Now, I know that it seems like an extreme example. After all, there must be newsletters that don’t get their subscribers banned. However, this story highlights what can happen if investors think they know what the markets will do next. And that’s the underlying risk of relying on investment newsletters. They create a false sense of certainty.

At its core, subscribing to an investment newsletter is an expression of hope that someone somewhere knows more than we do. On some level, we’re hoping that, like an expert or a guru, a newsletter will predict what the markets will do next. It’s no different than tuning into financial broadcasts or studying the latest financial publications. We’re looking for answers because we’re human.

Once we understand that it’s our first instinct to reduce uncertainty as much as possible, it becomes a little easier to ask questions. It becomes easier to ask if it’s really in our best interest to trust predictions regarding something that’s inherently unpredictable. And it becomes easier to ask if this behavior really helps us be better investors or just makes us think we’re better investors. So take a deep breath, accept your human shortcomings, and realize that no one knows exactly what the markets will do next. And that’s O.K.

Favorite New Yorker cartoons.

Click here: You’ll die laughing.  The real reason you can’t use your phone in an airplane.

Harry Newton who’s trying to catch up on paperwork. All the accounts that are linked to my old dead credit card, now need being linked to my new alive credit card. It’s the second time this year my Visa got hacked and I had to switch cards. Yesterday I updated E-Z Pass and found out why we’re “enjoying” a jobless recovery. I cancelled my old card and added a new one — all the while talking to a machine and never once touching a poor human anywhere. Robots, voice recognition and computer telephony (a field I actually named) are taking over with a vengeance. 60 Minutes did a piece on robots on Sunday night. It shows dramatically what happened to all the jobs. If you have kids, tell them they need three things: a decent education, software programming skills and an understanding that new companies and entrepreneurship is their future. It’s a whole new world out there.