"Youth is wasted on the young."
It's an old adage, and it's so very true. At the ages when we can take the greatest risk, we feel the most insecure. At least, in terms of finances. Therefore, next year, for the first time in my life, I am going to trust the words of the media, or at least, let a financial advisor guide me in my upcoming fiscal year. Of course, I'm talking about Mo Ansari (president of Compaq Asset Management) whose radio show I listen to most evenings on KFNN 1510, Radio That Makes You Money.
Honestly, there's another caveat fueling my decision as well. I want to introduce an actively managed fund into my portfolio, also for the first time in my life. Two years ago, I introduced the Vanguard Total Bond Market Index fund to provide a stronger hedge against stocks. For the past several months, and every time I listen to Market Wrap nowadays, Mo Anasari is warning investors that the bond market is doomed for a retreat due to overcrowding, comparing it to the tech stocks of 2000 and the real estate market of 2006. Granted, if you want to get someone's attention, those two events are how to do it, so he may just have a flair for drama, but I respect his opinion, and the only way I will be able to track his word is if I put it into active practice.
In fairness, it is not just Mo Ansari advising against the bond markets. Even Vanguard.com, which provides my 401(k) has an article entitled "Vanguard's investment chief cautions bond investors." Inside is an interview with Chief Investment Officer Gus Sauter who notes, "I'm increasingly worried that people aren't aware of the risks in the bond market. (New bonds) have very low interest rate levels. But at some point, the economy will strengthen and those interest rates will rebound. Investors who have pushed out further on the yield curve by investing in longer-term bonds will then see a greater decline in the principal value of their investments."
Therefore, in 2011, I am going to direct no new money into bonds. Keep in mind, my allocation into the bond market won't change at all, just the new money is going to be directed 100% into the stock markets, so when I rebalance quarterly, there will be bigger moves than $200 here to there like I saw this past year.
The active fund that I am introducing is the Vanguard PRIMECAP Fund (Fund #59). Unfortunately for individual investors who may be interested in the fund, this is a closed fund. The only new money coming into this fund is through a Vanguard 401(k), which I have through work so I am able to invest money there.
Mo Ansari always discusses the importance of having an "exit strategy" in place when introducing a new fund. At this point, I am looking for this fund to take the place of half my large stock money, so whereas I have a portion in international stocks, a portion in aggressive stocks, and a portion in large stocks, I will now have portions in international stocks, aggressive stocks, indexed large stocks, and active large stocks. As I age and grow more conservative, my balance in aggressive stocks will dwindle first. If all goes well, then I would keep this new fund in balance with the index fund. If its performance consistently under-performs the index fund for two straight years, then I will move out of the fund.
Unlike two years ago when I directed only new money into the Vanguard Total Bond Market Index fund, I am going to boost this one by moving some money into the new fund. The overall focus is on my asset allocation, which currently looks like this:
Fund # - Real / Current / Target
Fund 24 - 25% / 25% / 25%
Fund 29 - 5% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 85 - 50% / 50% / 50%
Fund 113 - 10% / 10% / 10%
What I am looking to do is change it to look like this:
Fund # - Real / Current / Target
Fund 24 - 25% / 10% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 0% / 50% / 25%
Fund 84 - 10% / 0% / 10%
Fund 85 - 50% / 35% / 25%
Fund 113 - 10% / 5% / 10%
Keep in mind, I am not abandoning my own instincts either. Another popular market right now is the gold market, and in my personal opinion, I would compare this market to the tech stocks of 2000 and the real estate market of 2006. I think the investors in those notorious pitfalls are looking more towards gold than they are to bonds. I have the option to invest in the Precious Metals & Mining fund, but I am going to shy away from it. Although my brother-in-law noted that his father has been encouraging him to invest in that market, and Mo Ansari has been presenting both sides of the story, so hopefully, that market will either boom or peter in the next year. But I'm expecting it to tank just based on the personality of the investors I believe getting into that market right now.
This is my overview for 2011. I am passively retreating from bonds in the short term but I am retaining them in my asset allocation, and I am actively introducing actively-managed funds in hopes that they can outpace the markets most years.
DISCLAIMER: I am neither licensed nor permitted to give specific financial advice, so if you want investment recommendations, then please consult with a financial advisor or reputable financial sources; my favorite website is CNNFN.com and my favorite radio station is KFNN 1510 AM "Radio That Makes You Money." Additional information and financial tools can be found at Vanguard.com. The investment decisions presented above were tailored to my risk tolerance and my financial goals.
Sunday, December 5, 2010
Tuesday, November 9, 2010
The Full Motley: 4Q 2010
Since the start of the fourth quarter, the markets have been enjoying closings above 11,000 more days than not, which isn't surprising that they experienced a fourth-quarter boost since it is often typical after a third quarter retreat (actually, the standard retreat is viewed as lasting from May until the start of October).
My favorite radio program for the drive home is Market Wrap with Mo Ansari on KFNN 1510 "Radio That Makes You Money." Mo Ansari has great insights and forethought, and he prepares as a pessemist but his amount of negativity often reflects optimism. I guess any time you are looking forward to plan for the long-term future, that frame of mind is somewhat optimistic in itself.
I expect the markets to end 2010 between 11,500 and 12,000, at which point I can revisit my previous blog where I looked at a poll posted on Money.CNN.com in November 2009 asking readers to predict where the market would close 2010.
The big deal about 2010 is that President Barack Obama is now midway through his term as president. Originally, as in "when the markets tumbled down to 6,500," I predicted that our recovery would outpace anything in the past and that the markets would be back to October 2007 by November 2012. The reason I thought that was due to the strength of Obama, but now that we are two years away from the relatity of the next election, I can see it turning out a very different way.
All the Obama supporters who turned out in droves two years ago only to get him elected are not going to be going to the polls in November 2012. Read that carefully, but my use of the word "only" is to separate those voters who showed up in November 2008 because Obama was running from those voters who would have come out to the polls regardless which candidate was running for the Democratic party.
The Republican party ran a very poor campaign two years ago, and if they want to take Obama out of the White House in January 2013, then they had better learn from the mistakes of the John Kerry campaign in November 2004. Not enough people vote against a bad president to make a difference. The Republican party still needs a strong candidate, and if their nomination of John McCain was any indication, they don't have one. Although there are a lot of new names emerging with this political renaissance from these Tea Party campaigns for the mid-term elections.
Personally I am a Republican, but after eight years of George W. Bush (whom I considered a good president), it was time for the Democratic party to take office and focus on the things that Republicans don't care about as much, namely the healthcare issues (although, it's a bit disappointing that Obama has not been able to propose an adequate solution, but the issue is getting addressed, so maybe these minor changes to the current nature of the programs will be the best solution).
I voted for Obama, proudly, and the reason I voted for Obama was for the change he would bring. I know a lot of critics and cynics have complained that he has fallen short of his goal of "change," but maybe they misunderstood his campaign slogan or at least, the only change I was interested in was the one that I knew he already represented, and that was changing the political paradigm of how campaigns are run.
Maybe I was one of the few voters who "got it," or maybe all the Obama supporters read into his "Change" campaign the way they wanted to, but I cannot lavish enough praise onto Obama's 2008 campaign for its class and its no-nonsense philosophies. As I was saying, it was my hope that it was that "change" that Obama was referencing in his campaign.
I would be surprised to see a return to the old mud-slinging methods, but the Arizona elections hardly resembled Obama's successful tactics from two years ago. I did not see many if any commercials putting the importance of voting for someone above not voting for the other person. As a result, most people decided not to vote at all (which isn't the worst thing: I think blind voting obligated by the "privilege" is more irresponsible than not voting).
Regardless, it was amusing to hear what qualified as "bad" in today's politics during the past month of campaigns. For as much guff as SB 1070 received in its initial press, there were signs around the Valley that cited when a candidate voted in favor of it. It rightly has the public's support, even when it was deemed "poisonous" by the media.
Conversely, the worst thing to have your name tied to in this campaign was apparently Nancy Pelosi. Also, voting in favor of Obama's weak stimulus plan was a very bad thing, and any candidate who voted for it was exploited by their opposition as a bad politician for that reason alone.
Politics aside, the markets are slowly recovering from its retreat after a high in 2007, and the only thing individual investors can do is focus on their own portfolio. As the bond markets continue to plunge, I moved a small 2.5% of my stock holdings into the Total Bond Market Index fund today. If the stock markets have not recently been over-valued, then the bond markets are at least becoming under-valued, so the trend is more likely to turn around to my benefit. But even if stocks continue to rise and bonds continue to retreat, then only moving 2.5% into a losing asset class won't adversely affect my overall portfolio either. The best place to find a winning investment is the state lottery or a casino. The best place to amass wealth is through reasonable investing.
My favorite radio program for the drive home is Market Wrap with Mo Ansari on KFNN 1510 "Radio That Makes You Money." Mo Ansari has great insights and forethought, and he prepares as a pessemist but his amount of negativity often reflects optimism. I guess any time you are looking forward to plan for the long-term future, that frame of mind is somewhat optimistic in itself.
I expect the markets to end 2010 between 11,500 and 12,000, at which point I can revisit my previous blog where I looked at a poll posted on Money.CNN.com in November 2009 asking readers to predict where the market would close 2010.
The big deal about 2010 is that President Barack Obama is now midway through his term as president. Originally, as in "when the markets tumbled down to 6,500," I predicted that our recovery would outpace anything in the past and that the markets would be back to October 2007 by November 2012. The reason I thought that was due to the strength of Obama, but now that we are two years away from the relatity of the next election, I can see it turning out a very different way.
All the Obama supporters who turned out in droves two years ago only to get him elected are not going to be going to the polls in November 2012. Read that carefully, but my use of the word "only" is to separate those voters who showed up in November 2008 because Obama was running from those voters who would have come out to the polls regardless which candidate was running for the Democratic party.
The Republican party ran a very poor campaign two years ago, and if they want to take Obama out of the White House in January 2013, then they had better learn from the mistakes of the John Kerry campaign in November 2004. Not enough people vote against a bad president to make a difference. The Republican party still needs a strong candidate, and if their nomination of John McCain was any indication, they don't have one. Although there are a lot of new names emerging with this political renaissance from these Tea Party campaigns for the mid-term elections.
Personally I am a Republican, but after eight years of George W. Bush (whom I considered a good president), it was time for the Democratic party to take office and focus on the things that Republicans don't care about as much, namely the healthcare issues (although, it's a bit disappointing that Obama has not been able to propose an adequate solution, but the issue is getting addressed, so maybe these minor changes to the current nature of the programs will be the best solution).
I voted for Obama, proudly, and the reason I voted for Obama was for the change he would bring. I know a lot of critics and cynics have complained that he has fallen short of his goal of "change," but maybe they misunderstood his campaign slogan or at least, the only change I was interested in was the one that I knew he already represented, and that was changing the political paradigm of how campaigns are run.
Maybe I was one of the few voters who "got it," or maybe all the Obama supporters read into his "Change" campaign the way they wanted to, but I cannot lavish enough praise onto Obama's 2008 campaign for its class and its no-nonsense philosophies. As I was saying, it was my hope that it was that "change" that Obama was referencing in his campaign.
I would be surprised to see a return to the old mud-slinging methods, but the Arizona elections hardly resembled Obama's successful tactics from two years ago. I did not see many if any commercials putting the importance of voting for someone above not voting for the other person. As a result, most people decided not to vote at all (which isn't the worst thing: I think blind voting obligated by the "privilege" is more irresponsible than not voting).
Regardless, it was amusing to hear what qualified as "bad" in today's politics during the past month of campaigns. For as much guff as SB 1070 received in its initial press, there were signs around the Valley that cited when a candidate voted in favor of it. It rightly has the public's support, even when it was deemed "poisonous" by the media.
Conversely, the worst thing to have your name tied to in this campaign was apparently Nancy Pelosi. Also, voting in favor of Obama's weak stimulus plan was a very bad thing, and any candidate who voted for it was exploited by their opposition as a bad politician for that reason alone.
Politics aside, the markets are slowly recovering from its retreat after a high in 2007, and the only thing individual investors can do is focus on their own portfolio. As the bond markets continue to plunge, I moved a small 2.5% of my stock holdings into the Total Bond Market Index fund today. If the stock markets have not recently been over-valued, then the bond markets are at least becoming under-valued, so the trend is more likely to turn around to my benefit. But even if stocks continue to rise and bonds continue to retreat, then only moving 2.5% into a losing asset class won't adversely affect my overall portfolio either. The best place to find a winning investment is the state lottery or a casino. The best place to amass wealth is through reasonable investing.
Tuesday, August 31, 2010
The Full Motley: 3Q 2010
Today was an amazing day in the market, kinda. It closed just about 10,000 for the second day in a row. It convinced me that there are several investors out there waiting for the market to fall below 10,000 to buy. For the record, I am one of them. The last time I bought in was around June 29th when the market spent a couple days south of 10,000, but since that time, it has been as resistant to 9,999 as negatives are to each other.
Fortunately, my primary focus is on my overall asset allocation so I don't have to time the market quite as intently as others (I'll still pick up a good deal when it presents itself, however). As I have explained in the past, and I'll be quoting myself from a prior blog often here, if you spend all your time timing the market, then you aren't making money in the market: you're earning money through a second job. And personally, I don't even work hard enough at my day job to take on a second.
However, I am also very disciplined -- hence the reason this blog is dated in August instead of September. On the tenth of every third month (February, May, August, and November), I review my account and I will rebalance it to a set asset allocation that I feel is comfortable for me. If I change my asset allocation, I usually do it six months out and then work my way slowly into the new balance. This month, I was a week late on getting to my rebalance (which wasn't surprising since it was a hellacious week!) but lucky for me, it was a simple shift because it barely takes me five minutes to do this anymore since I already know my target and my current allocations match those percentages. I just shift my real allocations to match the current allocations.
Fund # - Real / Current / Target
Fund 29 - 5% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 24 - 26% / 26% / 25%
Fund 113 - 9% / 9% / 10%
Fund 85 - 50% / 50% / 50%
Done, no further action was necessary. I plan to revisit my allocations when I have more opportunity to research and consider alternatives, at which time I could change my target allocations and then work on getting my current allocations to reflect the target, but the displine of revisiting investments once a year or once a quarter is the critical piece of a successful asset allocation.
It's easier than watching the markets like a hawk, and cheaper than paying someone else to do so.
DISCLAIMER: I am neither licensed nor permitted to give specific financial advice, so if you want investment recommendations, then please consult with a financial advisor or reputable financial sources; my favorite website is CNNFN.com and my favorite radio station is KFNN 1510 AM "Radio That Makes You Money." The investment decisions presented above were tailored to my risk tolerance and my financial goals.
Fortunately, my primary focus is on my overall asset allocation so I don't have to time the market quite as intently as others (I'll still pick up a good deal when it presents itself, however). As I have explained in the past, and I'll be quoting myself from a prior blog often here, if you spend all your time timing the market, then you aren't making money in the market: you're earning money through a second job. And personally, I don't even work hard enough at my day job to take on a second.
However, I am also very disciplined -- hence the reason this blog is dated in August instead of September. On the tenth of every third month (February, May, August, and November), I review my account and I will rebalance it to a set asset allocation that I feel is comfortable for me. If I change my asset allocation, I usually do it six months out and then work my way slowly into the new balance. This month, I was a week late on getting to my rebalance (which wasn't surprising since it was a hellacious week!) but lucky for me, it was a simple shift because it barely takes me five minutes to do this anymore since I already know my target and my current allocations match those percentages. I just shift my real allocations to match the current allocations.
Fund # - Real / Current / Target
Fund 29 - 5% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 24 - 26% / 26% / 25%
Fund 113 - 9% / 9% / 10%
Fund 85 - 50% / 50% / 50%
Done, no further action was necessary. I plan to revisit my allocations when I have more opportunity to research and consider alternatives, at which time I could change my target allocations and then work on getting my current allocations to reflect the target, but the displine of revisiting investments once a year or once a quarter is the critical piece of a successful asset allocation.
It's easier than watching the markets like a hawk, and cheaper than paying someone else to do so.
DISCLAIMER: I am neither licensed nor permitted to give specific financial advice, so if you want investment recommendations, then please consult with a financial advisor or reputable financial sources; my favorite website is CNNFN.com and my favorite radio station is KFNN 1510 AM "Radio That Makes You Money." The investment decisions presented above were tailored to my risk tolerance and my financial goals.
Tuesday, June 29, 2010
Thank you, Global Jitters!
I'm glad that our annual bonuses were paid on Friday, and today the markets are down almost 3%. What great timing! I had been planning to dump more money into my Total Stock fund when the DOW finally closed below 10,000, so this appears to be my opportunity.
Thank you, Global Jitters!
Thank you, Global Jitters!
Tuesday, June 8, 2010
AOL -- Cautionary Tale: A Killing in the Stock Market
By Tom Dunkel
(June 6) -- A retired South Carolina teacher two weeks ago opened a piece of mail that he likened to getting kicked in the stomach:
"If you are receiving this letter, it means that I have taken, or at least attempted to take, my own life..."
The letter was written by a North Canton, Ohio, man named Barry Watzman. He and the recipient had never met face to face, but they did chat online for years via a bulletin board devoted to Rambus Inc., a small California company that designs memory interface solutions for computer chips.
Tragically, Watzman was not joking. A few days before his 61st birthday, he hooked a breathing tube up to the tailpipe of his car and drifted off to eternal sleep. However, he refused to go quietly into that good night: Watzman asked the retired teacher to post his long-distance suicide note on the Rambus forum.
"I have nothing left, NOTHING," Watzman confessed in his letter. "I never in my wildest dreams thought that this situation would end up this way."
Is this a cautionary tale about overzealous online investing or about the fragility of a solitary human being? Is Rambus' corporate roller-coaster ride an anomaly, or does it speak to larger issues of a dysfunctional legal and regulatory system?
At one time Watzman had racked up more than a million dollars in Rambus profits. But he never cashed out, hoping instead for an even bigger payday that never came. When the pendulum swing of the share price (which has fluctuated between $4 and $115 over the past decade) turned against him this past year, he tried to recoup his losses by doubling down with speculative options.
The strategy backfired to disastrous effect. Rather than hide his shame, Watzman opted to share it with those Rambus faithful who gather daily on the Investor Village website.
"The particular circumstance of using the Web is unusual, but this is something we ought to expect to see a lot more of," Yeates Conwell, professor of psychiatry at the University of Rochester School of Medicine and Dentistry and co-director of the Center for the Study and Prevention of Suicide, told AOL News. "To the extent that [the Internet] is a means of communication and suicide is an interpersonal act, it makes sense."
Conversation on the often raucous Rambus bulletin board turned suddenly sober and sentimental in the wake of the Watzman news. Posters reflected upon a death "in the family," mourning someone who, conventionally speaking, was a stranger to them, a disembodied voice on their computer screens. But "Ramboids," as the hardest-core stock holders are known, tend to be creatures of impassioned extremes.
"The board is filled with people who get seriously emotional about investing," said Jeff Schreiner, a senior semiconductor analyst at Capstone Investments, who has been tracking Rambus since 2000. "This is different from other companies."
Indeed, an Investor Village regular recently suspected that curiosity seekers were visiting the Rambus site just to read about Watzman and these exotic Ramboids: "Guest count unusually high. Sadistic! People coming to observe us and our behavior as if we were some remote rainforest culture."
Rambus is what's commonly referred to as a story stock, only in this case the narrative rises to the level of a sprawling, multigenerational Russian novel.
The company was founded in 1990 by two brainiac engineers, Mike Farmwald and Mark Horowitz. Rambus went public in 1997. Its business model is based on intellectual-property royalties charged for advances made in chip architecture.
Technically savvy investors like Watzman, a professional engineer until he was laid off and switched to part-time teaching, revel in the bits and bytes of data transfer. It's all about increasing the speed and capacity of memory controllers, which in turn stretch bandwidth to help make possible our ever-more-sophisticated video games, TVs and cell phones.
Proponents insist Rambus solved the "memory bottleneck" in chip design with game-breaker engineering. Critics say the technology is evolutionary, not revolutionary, adding that Rambus seduced some chip manufacturers into adopting its designs by not fully disclosing its ultimate pay-to-play patent intentions.
Those arguments have been publicly hashed out (also, rehashed and re-rehashed) for nearly 15 years. In courtrooms in Virginia, Delaware, California and Washington, D.C. At the U.S. Patent and Trademark Office, Justice Department, Federal Trade Commission and International Trade Commission.
Charges and countercharges have been traded ad infinitum involving collusion, document destruction and price fixing. Hundreds of millions of dollars in court costs ... and counting. Enough legal briefs filed to fill the Grand Canyon.
And, still, no definitive resolution.
Watzman's suicide note lambasted dithering judges, corporate patent pirates and even Rambus' bonus-happy executives. "Screwing shareholders," he proclaimed, "is 'the American Way'."
His fellow investors at Investor Village groped for conclusions of their own regarding his demise. One quoted Shakespeare. One saw the hand of "Satan" at work. Some vowed to be more civil in their future message posts and less risky with their future investment dollars. "Nuke John," a battle-scarred veteran Ramboid, echoed a popular sentiment, noting Watzman was "a good man and he didn't deserve what the US justice system put Rambus investors through."
He leaves behind a mother, two adult sons and a wife. Debbie Watzman understandably wants nothing further to do with Rambus. She repeatedly warned her husband about placing too much faith in one company, about the dangers of unconditionally giving heart and soul to a stock.
"He was not a naive investor, but at the end it wasn't an investment strategy. It was gambling," she told AOL News. "I wish I could warn everybody who's involved with this thing to take a step back."
The International Trade Commission was due to announce a decision on May 26 in a high-profile case where Rambus asserts a European chip maker has infringed upon several patents. Ramboids were in no stepping-back mood.
May 26 would've been Barry Watzman's birthday. Many Ramboids saw poetic justice in the timing of those dual events. A favorable ITC verdict normally sends the winning company's stock price soaring. This could mark an important turning point in Rambus' intellectual property fight. It could mean a measure of redemption for poor Watzman.
Poetic justice didn't happen. The International Trade Commission elected to postponed its decision until late July.
Rambus stock tumbled 10 percent after that latest delay. But the price spiked back up this week: There are rumors a ruling is imminent in another case being heard in California federal court. Ramboids are again anxiously anticipating word from a judge. Waiting ... waiting ... waiting.
Great news could come any minute.
http://www.aolnews.com/2010/06/06/cautionary-tale-a-killing-in-the-stock-market/
Kay's Thoughts-- My apologies to the Ramboids, but I am deeply fascinated with this story! I will post more later, including a TLDR-friendly summary when I have time (whenever that is) but, until then, I find it ironic that I came across this story at the same time that I was about to do another entry of why I choose to shun individual stocks. In case you're curious as well, then RMBS closed today around $21.90 (up 1.11%, which just about matches the DOW's performance today). For my future reference, WWE closed at $16.04 (down .31%), YUM closed at 40.89 (up 2.82%), and PEP closed at 62.65 (up 1.49%).
Please note that, despite the CNNFN label, this article was written for AOL News.
Before I leave here though, I wanted to note some key elements that I found most interesting. Assuming the article is 100% accurate, and if not, it's really the "story" that intrigues me anyway, so my resulting commentary is based solely on the details of Barry Watzman presented here, and not an actual opinion on the man himself.
His letter said he had "nothing left, NOTHING," followed by later disclosure that the stock has fluctuated between $115 and $4. It said that he had profits of over $1-million invested in the company, so loosely concluding that when the stock was at its $115 highmark, he had exactly $1,000,000 in the company (which we know is an understatement), he owned at least 8,696 shares in the company.
Here's the scary part: the stock had fallen to as low as $4/share, at which point I'm willing to bet he was posting an overall loss, but the balance of his shares were still worth $34,782. As I mentioned before, the stock is at $21.90 today, at which point his assumed share balance was worth $190,435.
I understand his being inconsolable. But it's a tragedy that he couldn't see how many people live full lives with far less (money) than he had. Or that he couldn't adjust to it.
(June 6) -- A retired South Carolina teacher two weeks ago opened a piece of mail that he likened to getting kicked in the stomach:
"If you are receiving this letter, it means that I have taken, or at least attempted to take, my own life..."
The letter was written by a North Canton, Ohio, man named Barry Watzman. He and the recipient had never met face to face, but they did chat online for years via a bulletin board devoted to Rambus Inc., a small California company that designs memory interface solutions for computer chips.
Tragically, Watzman was not joking. A few days before his 61st birthday, he hooked a breathing tube up to the tailpipe of his car and drifted off to eternal sleep. However, he refused to go quietly into that good night: Watzman asked the retired teacher to post his long-distance suicide note on the Rambus forum.
"I have nothing left, NOTHING," Watzman confessed in his letter. "I never in my wildest dreams thought that this situation would end up this way."
Is this a cautionary tale about overzealous online investing or about the fragility of a solitary human being? Is Rambus' corporate roller-coaster ride an anomaly, or does it speak to larger issues of a dysfunctional legal and regulatory system?
At one time Watzman had racked up more than a million dollars in Rambus profits. But he never cashed out, hoping instead for an even bigger payday that never came. When the pendulum swing of the share price (which has fluctuated between $4 and $115 over the past decade) turned against him this past year, he tried to recoup his losses by doubling down with speculative options.
The strategy backfired to disastrous effect. Rather than hide his shame, Watzman opted to share it with those Rambus faithful who gather daily on the Investor Village website.
"The particular circumstance of using the Web is unusual, but this is something we ought to expect to see a lot more of," Yeates Conwell, professor of psychiatry at the University of Rochester School of Medicine and Dentistry and co-director of the Center for the Study and Prevention of Suicide, told AOL News. "To the extent that [the Internet] is a means of communication and suicide is an interpersonal act, it makes sense."
Conversation on the often raucous Rambus bulletin board turned suddenly sober and sentimental in the wake of the Watzman news. Posters reflected upon a death "in the family," mourning someone who, conventionally speaking, was a stranger to them, a disembodied voice on their computer screens. But "Ramboids," as the hardest-core stock holders are known, tend to be creatures of impassioned extremes.
"The board is filled with people who get seriously emotional about investing," said Jeff Schreiner, a senior semiconductor analyst at Capstone Investments, who has been tracking Rambus since 2000. "This is different from other companies."
Indeed, an Investor Village regular recently suspected that curiosity seekers were visiting the Rambus site just to read about Watzman and these exotic Ramboids: "Guest count unusually high. Sadistic! People coming to observe us and our behavior as if we were some remote rainforest culture."
Rambus is what's commonly referred to as a story stock, only in this case the narrative rises to the level of a sprawling, multigenerational Russian novel.
The company was founded in 1990 by two brainiac engineers, Mike Farmwald and Mark Horowitz. Rambus went public in 1997. Its business model is based on intellectual-property royalties charged for advances made in chip architecture.
Technically savvy investors like Watzman, a professional engineer until he was laid off and switched to part-time teaching, revel in the bits and bytes of data transfer. It's all about increasing the speed and capacity of memory controllers, which in turn stretch bandwidth to help make possible our ever-more-sophisticated video games, TVs and cell phones.
Proponents insist Rambus solved the "memory bottleneck" in chip design with game-breaker engineering. Critics say the technology is evolutionary, not revolutionary, adding that Rambus seduced some chip manufacturers into adopting its designs by not fully disclosing its ultimate pay-to-play patent intentions.
Those arguments have been publicly hashed out (also, rehashed and re-rehashed) for nearly 15 years. In courtrooms in Virginia, Delaware, California and Washington, D.C. At the U.S. Patent and Trademark Office, Justice Department, Federal Trade Commission and International Trade Commission.
Charges and countercharges have been traded ad infinitum involving collusion, document destruction and price fixing. Hundreds of millions of dollars in court costs ... and counting. Enough legal briefs filed to fill the Grand Canyon.
And, still, no definitive resolution.
Watzman's suicide note lambasted dithering judges, corporate patent pirates and even Rambus' bonus-happy executives. "Screwing shareholders," he proclaimed, "is 'the American Way'."
His fellow investors at Investor Village groped for conclusions of their own regarding his demise. One quoted Shakespeare. One saw the hand of "Satan" at work. Some vowed to be more civil in their future message posts and less risky with their future investment dollars. "Nuke John," a battle-scarred veteran Ramboid, echoed a popular sentiment, noting Watzman was "a good man and he didn't deserve what the US justice system put Rambus investors through."
He leaves behind a mother, two adult sons and a wife. Debbie Watzman understandably wants nothing further to do with Rambus. She repeatedly warned her husband about placing too much faith in one company, about the dangers of unconditionally giving heart and soul to a stock.
"He was not a naive investor, but at the end it wasn't an investment strategy. It was gambling," she told AOL News. "I wish I could warn everybody who's involved with this thing to take a step back."
The International Trade Commission was due to announce a decision on May 26 in a high-profile case where Rambus asserts a European chip maker has infringed upon several patents. Ramboids were in no stepping-back mood.
May 26 would've been Barry Watzman's birthday. Many Ramboids saw poetic justice in the timing of those dual events. A favorable ITC verdict normally sends the winning company's stock price soaring. This could mark an important turning point in Rambus' intellectual property fight. It could mean a measure of redemption for poor Watzman.
Poetic justice didn't happen. The International Trade Commission elected to postponed its decision until late July.
Rambus stock tumbled 10 percent after that latest delay. But the price spiked back up this week: There are rumors a ruling is imminent in another case being heard in California federal court. Ramboids are again anxiously anticipating word from a judge. Waiting ... waiting ... waiting.
Great news could come any minute.
http://www.aolnews.com/2010/06/06/cautionary-tale-a-killing-in-the-stock-market/
Kay's Thoughts-- My apologies to the Ramboids, but I am deeply fascinated with this story! I will post more later, including a TLDR-friendly summary when I have time (whenever that is) but, until then, I find it ironic that I came across this story at the same time that I was about to do another entry of why I choose to shun individual stocks. In case you're curious as well, then RMBS closed today around $21.90 (up 1.11%, which just about matches the DOW's performance today). For my future reference, WWE closed at $16.04 (down .31%), YUM closed at 40.89 (up 2.82%), and PEP closed at 62.65 (up 1.49%).
Please note that, despite the CNNFN label, this article was written for AOL News.
Before I leave here though, I wanted to note some key elements that I found most interesting. Assuming the article is 100% accurate, and if not, it's really the "story" that intrigues me anyway, so my resulting commentary is based solely on the details of Barry Watzman presented here, and not an actual opinion on the man himself.
His letter said he had "nothing left, NOTHING," followed by later disclosure that the stock has fluctuated between $115 and $4. It said that he had profits of over $1-million invested in the company, so loosely concluding that when the stock was at its $115 highmark, he had exactly $1,000,000 in the company (which we know is an understatement), he owned at least 8,696 shares in the company.
Here's the scary part: the stock had fallen to as low as $4/share, at which point I'm willing to bet he was posting an overall loss, but the balance of his shares were still worth $34,782. As I mentioned before, the stock is at $21.90 today, at which point his assumed share balance was worth $190,435.
I understand his being inconsolable. But it's a tragedy that he couldn't see how many people live full lives with far less (money) than he had. Or that he couldn't adjust to it.
Monday, May 10, 2010
The Full Motley: 2Q 2010
If I'm not mistaken (and I very well could be again), I didn't need to make adjustments to my allocations last quarter, so I just let it stay as is. Now, it is May 10th and a new quarter, so I looked at my allocations again, and here's the status:
Fund # - Real / Current / Target
Fund 29 - 5% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 24 - 26% / 26% / 25%
Fund 113 - 9% / 9% / 10%
Fund 85 - 50% / 50% / 50%
So, my only move this quarter was to put 1% of the portfolio from the Explorer fund to the Total International Stock Index fund. Rather pointless move on the surface, but the obedience in monitoring the portfolio quarterly and maintaining my target Asset Allocation is the key.
I didn't get to mention it over the weekend, but the markets had a hefty nosedive this past week. The Dow was well above 11,000 for the majority of May, but then it headed south for the summer, and now the Dow is flirting with closing below the 10,000-level again. It hasn't yet, but I had said many times months ago that I expected the markets to retreat after hitting 10,000. As it turned out, they retreated after hitting 11,500 or so, or more likely, they retreated in May because that's what they frequently do. Sell in May, then go away. Buy back in October... there might be a rhyme around this philosophy, but I cannot think of it right now.
Regardless, this is my day in the quarter to look at my portfolio and things seem to be doing what I want, so I can look at them again on August 10th.
Fund # - Real / Current / Target
Fund 29 - 5% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 24 - 26% / 26% / 25%
Fund 113 - 9% / 9% / 10%
Fund 85 - 50% / 50% / 50%
So, my only move this quarter was to put 1% of the portfolio from the Explorer fund to the Total International Stock Index fund. Rather pointless move on the surface, but the obedience in monitoring the portfolio quarterly and maintaining my target Asset Allocation is the key.
I didn't get to mention it over the weekend, but the markets had a hefty nosedive this past week. The Dow was well above 11,000 for the majority of May, but then it headed south for the summer, and now the Dow is flirting with closing below the 10,000-level again. It hasn't yet, but I had said many times months ago that I expected the markets to retreat after hitting 10,000. As it turned out, they retreated after hitting 11,500 or so, or more likely, they retreated in May because that's what they frequently do. Sell in May, then go away. Buy back in October... there might be a rhyme around this philosophy, but I cannot think of it right now.
Regardless, this is my day in the quarter to look at my portfolio and things seem to be doing what I want, so I can look at them again on August 10th.
Saturday, February 6, 2010
The Full Motley: 1Q 2010
Admittedly, finance is tricky.
I just realized today that I think I made a mistake in my IRA funding where I had intended to have 60/40 split going to stocks and bonds, but I noticed this afternoon that in fact I have been directing 40/60 to stocks & bonds, respectively. This isn't the end of the world, obviously, since I still had money going into both stocks and bonds the past six months. Likewise, it turned out my "mistake" was a smart move since stocks were appreciating and now I can buy in that they have retracted in value quite a bit while moving out of the bonds which have had a steady increase the whole time. Hence the reason I said, "I think I made a mistake." It may have been my original design six months ago, and I didn't remember thinking so strategically in advance. Plus, I'm not used to my short-term strategies actually panning out correctly.
But this reinforces my stubborn belief that no investor of any age should ever be 100% stocks. Stocks and bonds are inversely related, so when one trends upward, in theory, the other is going down. While you're never going to be able to time which direction each will be going in a given day/week/month/year, if you invest wisely in both, it is a relatively good substitute for being omniscient.
I don't look any further than Vanguard STAR Fund to support my belief. When the markets tumbled in March 2000, the Vanguard Total Stock Market Index fund felt the brunt of its impact while the STAR fund staved off its negative effects. When the markets turned around in the following years, the Total Stock Market Index fund never caught up to the STAR fund. Not even close. Why? Because the STAR fund is a balanced fund invested in both stocks and bonds. When the markets tumbled again at the end of 2008, the STAR fund was posting a negative 10-year return. Not as bad as the one on the Total Stock Market Index fund. When the so-called "lost decade" ended (titled as such because the DOW ended the decade at the same level it started it), the Total Stock Market Index fund was posting a -1% return. The STAR fund had a 5% return. It benefited from some profits of the bond market during this time.
Compare the returns of the Total Stock Market Index fund to the STAR fund on Vanguard.com and you can see that the Total Stock Market Index fund beat the STAR fund in the 1-year return with 28.7% to 24.85%. But the 3-, 5-, and 10-year returns favor the STAR fund (3- = -5.1% to -.11%, 5- = .91% to 3.64%, 10- = -.27% to 5.11%, respectively). That extra 4% from Total Stock Market Index fund this past year hardly seems worth pursuing.
I know that I am the only one here with this level of interest in finance, investing, and the markets, but if you have a 401(k) at work now or later and they offer fund selections that include the "Target Retirement Funds" or all-in-one funds, then those options are definitely worth the benefit. They are split between stocks and bonds, AND (in the case of the TRFs) the split between stocks and bonds changes annually as you near retirement.
In other market news, I was checking my IRA because the markets were on pace to close below 10,000 for the first time since November. In fact, the DOW had fallen 150 points below that mark when I started composing this entry yesterday. Then, the market closed and I checked the damage: 10,012, so even despite going as low as 9840.98 during the day, it closed up slightly. Amazing!
I just realized today that I think I made a mistake in my IRA funding where I had intended to have 60/40 split going to stocks and bonds, but I noticed this afternoon that in fact I have been directing 40/60 to stocks & bonds, respectively. This isn't the end of the world, obviously, since I still had money going into both stocks and bonds the past six months. Likewise, it turned out my "mistake" was a smart move since stocks were appreciating and now I can buy in that they have retracted in value quite a bit while moving out of the bonds which have had a steady increase the whole time. Hence the reason I said, "I think I made a mistake." It may have been my original design six months ago, and I didn't remember thinking so strategically in advance. Plus, I'm not used to my short-term strategies actually panning out correctly.
But this reinforces my stubborn belief that no investor of any age should ever be 100% stocks. Stocks and bonds are inversely related, so when one trends upward, in theory, the other is going down. While you're never going to be able to time which direction each will be going in a given day/week/month/year, if you invest wisely in both, it is a relatively good substitute for being omniscient.
I don't look any further than Vanguard STAR Fund to support my belief. When the markets tumbled in March 2000, the Vanguard Total Stock Market Index fund felt the brunt of its impact while the STAR fund staved off its negative effects. When the markets turned around in the following years, the Total Stock Market Index fund never caught up to the STAR fund. Not even close. Why? Because the STAR fund is a balanced fund invested in both stocks and bonds. When the markets tumbled again at the end of 2008, the STAR fund was posting a negative 10-year return. Not as bad as the one on the Total Stock Market Index fund. When the so-called "lost decade" ended (titled as such because the DOW ended the decade at the same level it started it), the Total Stock Market Index fund was posting a -1% return. The STAR fund had a 5% return. It benefited from some profits of the bond market during this time.
Compare the returns of the Total Stock Market Index fund to the STAR fund on Vanguard.com and you can see that the Total Stock Market Index fund beat the STAR fund in the 1-year return with 28.7% to 24.85%. But the 3-, 5-, and 10-year returns favor the STAR fund (3- = -5.1% to -.11%, 5- = .91% to 3.64%, 10- = -.27% to 5.11%, respectively). That extra 4% from Total Stock Market Index fund this past year hardly seems worth pursuing.
I know that I am the only one here with this level of interest in finance, investing, and the markets, but if you have a 401(k) at work now or later and they offer fund selections that include the "Target Retirement Funds" or all-in-one funds, then those options are definitely worth the benefit. They are split between stocks and bonds, AND (in the case of the TRFs) the split between stocks and bonds changes annually as you near retirement.
In other market news, I was checking my IRA because the markets were on pace to close below 10,000 for the first time since November. In fact, the DOW had fallen 150 points below that mark when I started composing this entry yesterday. Then, the market closed and I checked the damage: 10,012, so even despite going as low as 9840.98 during the day, it closed up slightly. Amazing!
Wednesday, January 13, 2010
CNNFN: Six Biggest Investing Mistakes
By Burton G. Malkiel and Charles D. Ellis
We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. He is simply a better investor than just about any other in the world. Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios. Let's look at two examples.
In early 2000, Berkshire Hathaway's portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand - and he didn't claim to understand the complicated, fast-changing technology business - or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was passé, a fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.
In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them "financial weapons of mass destruction." When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.
Avoiding mistakes - such as the mistake of incurring unnecessary risks - is one of the great secrets of investment success. Be alert to these common ones that can prevent you from realizing your goals.
Mistake #1: Overconfidence
At our two favorite universities, Yale and Princeton, psychologists are fond of giving students questionnaires asking how they compare with their classmates. For example, students are asked: "Are you a more skillful driver than your average classmate?" Invariably, the overwhelming majority answer that they are above-average drivers. Even when asked about their athletic ability, where one would think it more difficult to delude oneself, students generally say they're above average. They see themselves as above-average dancers, conservationists, friends, and so on.
And so it is with investing. In recent years, a group of behavioral psychologists and financial economists have created the important new field of behavioral finance. Their research shows that we are not always rational. We tend to be overconfident. If we do make a successful investment, we confuse luck with skill. It was easy in early 2000 to delude yourself that you were an investment genius when your Internet stock doubled and then doubled again.
To deal with the pernicious effects of overconfidence, think about amateur tennis. The player who steadily returns the ball, with no fancy shots, is usually the player who wins. And the prudent buy-and-hold investor who holds a diversified portfolio through thick and thin is the investor most likely to achieve his long-term goals.
Mistake #2: Following the herd
People feel safety in numbers. Investors tend to get more and more optimistic, and unknowingly take greater and greater risks, during bull markets and periods of euphoria. That is why speculative bubbles feed on themselves.
But any investment that has become a widespread topic of conversation among friends or has been hyped by the media is very likely to be unsuccessful. Throughout history, some of the worst investment mistakes have been made by people who have been swept up in a speculative bubble. Whether with tulip bulbs in Holland during the 1630s, real estate in Japan during the 1980s, or Internet stocks in the United States during the late 1990s, following the herd - believing that "this time it's different" - has led people to make some of the worst investment mistakes.
Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many to sell at the market's bottom when pessimism is rampant.
More money went into equity mutual funds during the fourth quarter of 1999 and the first quarter of 2000 - the top of the market - than ever before. Most of that money went to high-tech and Internet investments, the ones that turned out to be the most overpriced and then declined the most during the subsequent bear market. And more money went out of the market during the third quarter of 2002 than ever before, as mutual funds were redeemed or liquidated - just at the market trough. Later, during the punishing bear market of 2007-09, new record withdrawals were made by investors who threw in the towel at record lows just before the first, and often best, part of a market recovery.
It's not today's price or even next year's price that matters; it's the price you'll get when you sell. For most investors, that's in retirement - and even at age 60, chances are you will live another 25 years and your spouse may live several years more. So don't let the crowd trick you into either exuberance or distress. Remember the ancient counsel, "This too shall pass."
Mistake #3: Timing the market
Does the timing penalty - the cost of second-guessing the market - make a big difference? You bet it does. The stock market as a whole has delivered an average rate of return of 9.6% over long periods of time.
But that return measures only what a buy-and-hold investor would earn by putting money in at the start of the period and keeping his money invested through thick and thin. The average investor's actual returns are at least two percentage points lower because the money tends to come in at or near the top and out at or near the bottom.
In addition to the timing penalty, there is also a selection penalty. When money poured into equity mutual funds in late 1999 and early 2000, most of it went to the riskier funds - those invested in high tech and Internet stocks. The staid "value" funds, which held stocks selling at low multiples of earnings and with high dividend yields, experienced large withdrawals. During the bear market that followed, these same value funds held up very well while the "growth" funds suffered large price declines. So the gap between overall market returns and an investor's actual returns is even larger than those two percentage points.
Mistake #4: Assuming more control than you have
Psychologists have identified a tendency in people to think they have control over events even when they have none. That can lead investors to overvalue a losing stock in their portfolio. It also can lead them to imagine trends when none exist or believe they can spot a pattern in a stock chart and thus predict the future. In fact, the changes in stock prices are very close to a "random walk": There is no dependable way to predict the future movements of a stock's price from its past wanderings.
The same holds true for supposed seasonal patterns, even if they appear to have worked for decades. Once everyone knows there is a Santa Claus rally in the stock market between Christmas and New Year's Day, the "pattern" will evaporate. Investors will buy one day before Christmas and sell one day before the end of the year to profit from the supposed regularity. But then investors will have to jump the gun even earlier, buying two days before Christmas and selling two days before the end of the year. Soon all the buying will be done well before Christmas and the selling will take place right around Christmas. Any apparent stock market pattern that can be discovered will not last as long as there are people around who will try to exploit it.
Mistake #5: Paying too much in fees
There is one piece of investment advice that, if you follow it, can dependably increase your returns: Minimize your investment costs. We have spent two lifetimes thinking about which mutual fund managers will have the best performance year in and year out. Here's what we now know: It was and is hopeless.
That's because past performance is not a good predictor of future returns. What does predict investment performance are the fees charged by the investment manager. The higher the fees you pay for advice, the lower your return. As our friend Jack Bogle, founder of mutual fund company the Vanguard Group, likes to say, "You get what you don't pay for."
We looked at all equity mutual funds over a 15-year period and measured the rate of return produced for their investors, as well as all the costs charged and the implicit costs of portfolio turnover - the cost of buying and selling portfolio holdings. We then divided the funds into quartiles. The lowest-cost-quartile funds produced the best returns.
If you want to own a mutual fund with top-quartile performance, buy a fund with low costs. If we measure after-tax returns, recognizing that high-turnover funds tend to be tax-inefficient, our conclusion holds with even greater force.
Mistake #6: Trusting stockbrokers
The stockbroker's real job is not to make money for you but to make money from you. Brokers tend to be friendly for one major reason: It gets them more business. The typical broker "talks to" about 75 customers who collectively invest about $40 million. (Think for a moment about how many friends you have and how much time it takes you to develop each of those friendships.) Depending on the deal he has with his firm, your broker gets about 40% of the commissions you pay.
So if he wants a $100,000 income, he needs to gross $250,000 in commissions charged to customers. Now do the math. If he needs to make $200,000, he'll need to gross $500,000. That means he needs to take that money from you and each of his other customers. Your money goes from your pocket to his pocket. That's why being "friends" with a stockbroker can be so expensive. A broker has one priority: getting you to take action, any action.
We urge you not to engage in "gin rummy" behavior. Don't jump from stock to stock or from fund to fund as if you were selecting and discarding cards in a game. You'll run up your commission costs - and probably add to your tax bill as well.
http://money.cnn.com/galleries/2010/moneymag/1001/gallery.investing_mistakes.moneymag/index.html
We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. He is simply a better investor than just about any other in the world. Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios. Let's look at two examples.
In early 2000, Berkshire Hathaway's portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand - and he didn't claim to understand the complicated, fast-changing technology business - or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was passé, a fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.
In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them "financial weapons of mass destruction." When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.
Avoiding mistakes - such as the mistake of incurring unnecessary risks - is one of the great secrets of investment success. Be alert to these common ones that can prevent you from realizing your goals.
Mistake #1: Overconfidence
At our two favorite universities, Yale and Princeton, psychologists are fond of giving students questionnaires asking how they compare with their classmates. For example, students are asked: "Are you a more skillful driver than your average classmate?" Invariably, the overwhelming majority answer that they are above-average drivers. Even when asked about their athletic ability, where one would think it more difficult to delude oneself, students generally say they're above average. They see themselves as above-average dancers, conservationists, friends, and so on.
And so it is with investing. In recent years, a group of behavioral psychologists and financial economists have created the important new field of behavioral finance. Their research shows that we are not always rational. We tend to be overconfident. If we do make a successful investment, we confuse luck with skill. It was easy in early 2000 to delude yourself that you were an investment genius when your Internet stock doubled and then doubled again.
To deal with the pernicious effects of overconfidence, think about amateur tennis. The player who steadily returns the ball, with no fancy shots, is usually the player who wins. And the prudent buy-and-hold investor who holds a diversified portfolio through thick and thin is the investor most likely to achieve his long-term goals.
Mistake #2: Following the herd
People feel safety in numbers. Investors tend to get more and more optimistic, and unknowingly take greater and greater risks, during bull markets and periods of euphoria. That is why speculative bubbles feed on themselves.
But any investment that has become a widespread topic of conversation among friends or has been hyped by the media is very likely to be unsuccessful. Throughout history, some of the worst investment mistakes have been made by people who have been swept up in a speculative bubble. Whether with tulip bulbs in Holland during the 1630s, real estate in Japan during the 1980s, or Internet stocks in the United States during the late 1990s, following the herd - believing that "this time it's different" - has led people to make some of the worst investment mistakes.
Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many to sell at the market's bottom when pessimism is rampant.
More money went into equity mutual funds during the fourth quarter of 1999 and the first quarter of 2000 - the top of the market - than ever before. Most of that money went to high-tech and Internet investments, the ones that turned out to be the most overpriced and then declined the most during the subsequent bear market. And more money went out of the market during the third quarter of 2002 than ever before, as mutual funds were redeemed or liquidated - just at the market trough. Later, during the punishing bear market of 2007-09, new record withdrawals were made by investors who threw in the towel at record lows just before the first, and often best, part of a market recovery.
It's not today's price or even next year's price that matters; it's the price you'll get when you sell. For most investors, that's in retirement - and even at age 60, chances are you will live another 25 years and your spouse may live several years more. So don't let the crowd trick you into either exuberance or distress. Remember the ancient counsel, "This too shall pass."
Mistake #3: Timing the market
Does the timing penalty - the cost of second-guessing the market - make a big difference? You bet it does. The stock market as a whole has delivered an average rate of return of 9.6% over long periods of time.
But that return measures only what a buy-and-hold investor would earn by putting money in at the start of the period and keeping his money invested through thick and thin. The average investor's actual returns are at least two percentage points lower because the money tends to come in at or near the top and out at or near the bottom.
In addition to the timing penalty, there is also a selection penalty. When money poured into equity mutual funds in late 1999 and early 2000, most of it went to the riskier funds - those invested in high tech and Internet stocks. The staid "value" funds, which held stocks selling at low multiples of earnings and with high dividend yields, experienced large withdrawals. During the bear market that followed, these same value funds held up very well while the "growth" funds suffered large price declines. So the gap between overall market returns and an investor's actual returns is even larger than those two percentage points.
Mistake #4: Assuming more control than you have
Psychologists have identified a tendency in people to think they have control over events even when they have none. That can lead investors to overvalue a losing stock in their portfolio. It also can lead them to imagine trends when none exist or believe they can spot a pattern in a stock chart and thus predict the future. In fact, the changes in stock prices are very close to a "random walk": There is no dependable way to predict the future movements of a stock's price from its past wanderings.
The same holds true for supposed seasonal patterns, even if they appear to have worked for decades. Once everyone knows there is a Santa Claus rally in the stock market between Christmas and New Year's Day, the "pattern" will evaporate. Investors will buy one day before Christmas and sell one day before the end of the year to profit from the supposed regularity. But then investors will have to jump the gun even earlier, buying two days before Christmas and selling two days before the end of the year. Soon all the buying will be done well before Christmas and the selling will take place right around Christmas. Any apparent stock market pattern that can be discovered will not last as long as there are people around who will try to exploit it.
Mistake #5: Paying too much in fees
There is one piece of investment advice that, if you follow it, can dependably increase your returns: Minimize your investment costs. We have spent two lifetimes thinking about which mutual fund managers will have the best performance year in and year out. Here's what we now know: It was and is hopeless.
That's because past performance is not a good predictor of future returns. What does predict investment performance are the fees charged by the investment manager. The higher the fees you pay for advice, the lower your return. As our friend Jack Bogle, founder of mutual fund company the Vanguard Group, likes to say, "You get what you don't pay for."
We looked at all equity mutual funds over a 15-year period and measured the rate of return produced for their investors, as well as all the costs charged and the implicit costs of portfolio turnover - the cost of buying and selling portfolio holdings. We then divided the funds into quartiles. The lowest-cost-quartile funds produced the best returns.
If you want to own a mutual fund with top-quartile performance, buy a fund with low costs. If we measure after-tax returns, recognizing that high-turnover funds tend to be tax-inefficient, our conclusion holds with even greater force.
Mistake #6: Trusting stockbrokers
The stockbroker's real job is not to make money for you but to make money from you. Brokers tend to be friendly for one major reason: It gets them more business. The typical broker "talks to" about 75 customers who collectively invest about $40 million. (Think for a moment about how many friends you have and how much time it takes you to develop each of those friendships.) Depending on the deal he has with his firm, your broker gets about 40% of the commissions you pay.
So if he wants a $100,000 income, he needs to gross $250,000 in commissions charged to customers. Now do the math. If he needs to make $200,000, he'll need to gross $500,000. That means he needs to take that money from you and each of his other customers. Your money goes from your pocket to his pocket. That's why being "friends" with a stockbroker can be so expensive. A broker has one priority: getting you to take action, any action.
We urge you not to engage in "gin rummy" behavior. Don't jump from stock to stock or from fund to fund as if you were selecting and discarding cards in a game. You'll run up your commission costs - and probably add to your tax bill as well.
http://money.cnn.com/galleries/2010/moneymag/1001/gallery.investing_mistakes.moneymag/index.html
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