eBay-Like Investing

Being a hockey fan, I buy a lot of jerseys on eBay. They're cheaper and usually in great condition. I bought my first one in May 2010 for my 33rd birthday when Montréal Canadiens had an improbable playoff run to the Eastern Conference Final, getting a white (Away) jersey to complement my red (Away) jersey, which was already so old that home teams wore white back when I got it.

Since then, I have bought several more jerseys (more than necessary, admittedly). While a team jersey can usually be found (well) below $50, most of the player jerseys still sell for $75 and (way) up. I bought my first player jersey this summer when I found a reasonably priced Patrick Roy jersey for $55 (before shipping & handling). Patrick Roy is the reason I'm a hockey fan today, and even more so, the reason I am a fan of Les Canadiens.

A few weeks later, I happened across a bid on a jersey for Alex Galchenyuk who was the third overall draft pick in 2012. The auction started at $19.99 with a Buy-It-Now price of $99.99. The shipping was reasonable as well, and it worked out that if someone won without another bid, then they would pay $27 (fittingly, since Galchenyuk's jersey number is 27). I followed the auction for a day, and with only three days left and no bids, I bit just to see how it ended.

Unfortunately, Alex Galchenyuk's contract had yet to be renewed during the auction. Therefore, no one else was willing to bid on the item. The auction closed with only my bid, so I happily paid the $27. The day after the jersey arrived, Galchenyuk re-signed with the team. Therefore, I tweeted about how I had just gotten his jersey off eBay for $27 (USD) the night before, a.k.a. #HumbleBrag.

I got a quick response asking for the name of the seller because that person wanted to see what else the person had available. The reality is there was nothing else that great of a deal. Truthfully, my jersey wasn't even that great of a deal when I bid on it because there was still a solid chance that he could have gone into free agency, and that jersey would have been outdated before I even got it.

However, I had high hopes for Galchenyuk regardless which team he represented, and the fact that Montréal is my favourite team would be a reminder that he started with the Habs. Putting money on it before he re-signed resulted in a sharp profit of owning a current player jersey at a fraction of its retail price.

Same as investing.

By the time you hear about a stock by word-of-mouth, its run is generally over. Buying a stock because someone you know got it for a deep discount would be on par with paying retail on a jersey that someone you know got for cheap. However, if you still believe in the company's future the way I believe in that of this hockey player, then the profits could be realized in the long run.

I have been investing in individual stocks for a little over a year now so there is not much personal wisdom that I can share. But I have only bought as much as I was willing to lose, and I have not backed down from any individual stock yet. It is entirely possible that one or more will become completely devalued. In fact, my first stock purchase was for a company in Chapter 11 bankruptcy, so I can reasonably expect that stock to be worth nothing soon, but even still, the amount remaining in that investment is as much as I would be willing to bet on an improbable turnaround. (Nevermind that stock became part of a pump-and-dump in September, rising from $0.06 to $0.64, but still below doubling in value for me, which has been my target amount.)

Based on my experiences thusfar, however, I am even more steadfast in my belief in index investing.(Not that trading stocks isn't a bit of fun in its own way.)

The Full Motley -- 4Q, 2015

As the tide rolls in and rolls out, the markets rise and fall alike, at least during business hours save on a few national holidays.  After a choppy third quarter, the markets saw a strong rise throughout October.  Unfortunately, it's not October anymore and the Santa Claus Rally (which is more lore than rule) is several weeks away.  The markets have been recently retreating, and as much as ever, the possibility of any day rising or falling is anyone's guess.

While this tumultuous uncertainty may inspire many questions, more opinions and few answers, the most productive steps for your financial health may be considering every possibility and then weighing each against its corresponding probability to revisit your asset allocation and assess that the percentages are a true reflection of your long-term view of the market.  Then, rebalance accordingly.  

When things were at their most dire in early 2009, I remember considering the probability that the US dollar would become worthless and that the markets would zero out to nothing.  The former scenario was vastly unlikely and the latter hypothetical was borderline impossible, requiring virtually every business to file bankruptcy (which, even then, it would take a few years before the stock values would be zeroed out).  Compared to the chances that the market declines were irrational overreactions, it became easy to justify not just maintaining my investments in the market but increasing them at the time.

While markets are only down 10% at most, the long-term views should not be influenced on whether the market is going to retreat 15% or even 20% from its all-time high, but merely whether today's all-time high will continue to be the all-time in another decade or two.  The money invested in stocks, including equity mutual funds, will be working for you.  Those efforts are not always an instant reward, but historically, they have been.

Therefore, while others celebrated Singles Day online (mostly in China), I rebalanced my portfolio as quickly as I could, moving about 0.1% from four funds to split between two trailing equity funds, namely Vanguard Total Stock Market Index and Vanguard Explorer Fund.  And now I'm done for activity in my 401(k) for the rest of the year (in fact, until February 10, 2016, which marks the 7th anniversary of this blog).  While I will likely keep an eye out to see how things develop in between, I am committed to my asset allocation and there is no need or temptation to adjust the portfolio any further.  The most complicated part of investing is how simple it is.

Pop Quiz

It's the end of the month.  Tomorrow is Friday and a payday.  Your checking account has $400, and tomorrow's paycheck will cover your expenses for the next two weeks.

You have a mortgage payment at 5%, a car loan at 4%, a credit card balance (although no trouble paying it off every month), a Roth IRA, and a money market fund earning <1 do="" excess="" following="" hich="" nbsp="" of="" p="" should="" the="" with="" you="">
1) Put it toward your mortgage;
2) Put it toward your car;
3) Put it toward your credit card;
4) Put it in your Roth IRA; or
5) Put it in your money market fund?

Did you answer?  If so, you're not wrong!  Aside from talking to a computer screen (which could be a little weird), the fact that you are living below your means with an excess at the end of the month puts you ahead of the game.  Ideally, paying down the mortgage with a higher rate before the car loan would put you slightly ahead in the long run, but if that's the worst financial mistake you made, then again, you are still ahead of the game.

Financial success is often more about avoiding the wrong decision than making the right choice.

Many financial experts (and, according to them, financial studies as well) support the notion that periodic reallocation is more critical to long-term financial success than the investments themselves.  Interesting theory, and considering I reallocate quarterly, I would be foolish to dispute it.  In my past year of investing in individual stocks, I have felt the panic of making the wrong decision (and how it, ironically, usually becomes a self-fulfilling prophecy).

The Full Motley -- 2Q, 2015

Time to rebalance, but it's worth noting a pet peeve of mine.  It is more of an investing myth, an over-simplified statement restated into meaning without having as much strength behind it as it sounds like it has.  The saying is "buy low, sell high," but that's the biggest myth of investing.  For the most part, the real truth is that there no "sell high" in investing.  Regardless when you sell, that money will go somewhere else, and it will then outpace the performance of the other investment -- or any other investment option at that given time.  There are a couple exceptions: one of which is retirement where you are using the assets to live and the other is rebalancing.  Rebalancing is the act of buying low, selling high, although the statement itself in the context of rebalancing is overly simplified and not the complete truth.  As a myth, "buy low, sell high" provides more understand than a million other words would, so it is useful and reachable.  But, at the same time, if you understand investing well enough, then the limitations of the advice make it less than useful.

That said, my quarterly rebalancing is all the more effective because it answers the question that would otherwise lead to "paralysis by analysis" (as Mo Ansari loves to say) of where to put the money sold high in order to get as much (or, ideally more) out of it than leaving it where it was.

This quarter, I got to see the international markets boom personally.  I had been hearing about it, but I had yet to see the evidence as clearly as it is here.

I moved small amounts from Vanguard Total International Stock Index Fund and (perhaps surprisingly) Vanguard Explorer Fund and I split the sum among Vanguard High-Yield Fund, Vanguard PRIMECAP Fund, Vanguard Total Bond Index Fund (which, as of the end of last month is the largest bond fund in the world, overtaking Pimco Total Return Fund) and Vanguard Total Stock Market Index Fund (which has been the largest mutual fund in the world since overtaking Pimco Total Return Fund at some point in the past year or two).

Losers In The Game

Immediate setup for failure

Another weekend marks the end of another full week of misinformation recirculated through convenient medias like Twitter, Facebook, and CNN.  This morning, I was perusing Facebook, and I encountered rather troubling propaganda from the anti-rich contingent. It mimicked the game of monopoly, farcely excusing the 99% for losing the game immediately, topped with a sarcastic conclusion that they're lazy.

The biggest problems are two-fold.  One, the propaganda invites and encourages The Simpsons "can't win; don't try" mentality.  People may not understand the basics of personal finance, so when they have an excess of their greatest asset, they do not hedge it against monetary assets, specifically time.  Maybe the wealth of youth is wasted on the young, or maybe I got lucky that I understood it correctly when elders briefed me on the concept years ago.

Little amounts now can grow over time in two ways. First, the accumulation of those unnoticeable pennies eventually fill a jar and create a substantial sum out of nothing (figuratively speaking, but almost literally). Likewise, small, unnoticeable amounts out of each paycheck build up and eventually create a financial cushion for emergency protection. Second, invested assets are not doing nothing. That money is put to work and it similarly earns its own paycheck, creating two paychecks: income that you earn on the job and dividends that your money earns for you.

My mother taught us the financial philosophy that "you can either work hard or let your money work hard for you." For her, that was an unloaded, non-judgmental notion since her two kids each took a different direction. My sister wanted luxuries; she knew she had to work for it. On the other hand, I opted to go without extravagance in favor of a more simplistic lifestyle. "A penny saved is a penny earned" was my mentality, and I filled the metaphoric jars. For the record, my mother's philosophy had one flaw in that those options are not as mutually exclusive as they sounded. I'm confident that my sister's money is working for her as sure as I have my own work ethic.

The second problem with the monopoly graph is the implication that personal finance is a game, dividing players into a winner and losers. That's an absolute loser mentality. There is no need to view money in terms of a game, or in terms of winners and losers and financial success is not lessened by others' wealth. There is no need to gauge personal wealth by other portfolios. "Keeping up with the Joneses" exists, but their excess or deficiencies have no direct effect on other's personal wealth. When I saw the graph on Facebook, I commented that the game would not be over until someone quit. The sarcastic conclusion that the "losers" are lazy is missing the point that they are actually justifying their decision to quit.

Another problem with the whole graph is that Monopoly is a skillful game of entrepreneurship. The "lazy" judgments are typically applied to people expecting hand-outs and freebies to get by.

I had to laugh this week reading through comments by CNN trolls and how often they unwittingly call me rich. Making statements that the "rich were the only ones who gained from the 2008 stock market decline" qualifies me as rich. Maybe some of my Facebook friends would think I'm rich, too. The difference is that my actions don't prevent them from doing the same.

CNNFN: Over Half of Americans Have No Stocks

Over half of Americans have $0 in stocks

By Heather Long

More American adults drink coffee daily than have money invested in the stock market.

Less than half, or 48%, of American adults have money in stocks, according to Bankrate's Money Pulse survey. Compared to that, about 61% of adults have at least a cup of coffee daily, according to the latest National Coffee Drinking Trends.

Courtesy of Money.CNN.com

The stock-owning Americans include anyone that has money invested in pension funds, 401(k) retirement plans, IRAs, mutual funds, ETFs or those owning individual stocks like Apple ($AAPL), Ford ($F) and Tesla ($TSLA).

The low number is an alarming trend for America's financial future.

Daily coffee consumption has been growing in recent years, while stock ownership peaked in 2007 -- just before the worst of the financial crisis and Great Recession, according to data from the Federal Reserve.

Missing out on the bull market: Americans who have kept their money on the sidelines are likely regretting it.

The U.S. stock market is in the midst of one of its longest surges in history. The popular S&P 500 Index, which tracks the 500 biggest and most well known publicly traded America companies, has risen over 200% since it bottomed out in March of 2009.

To put it another way, if you took roughly the $1,200 a year spent on buying a daily Starbucks (SBUX) grande caffe latte and put it in the stock market in March 2009, you would have $3,600 today.

"Despite the market hitting record highs, retail investors have dramatically increased their allocation to cash," says Suzanne Duncan, global head of research at State Street's Center for Applied Research.

The stock market gains are only making the rich richer, exacerbating the nation's inequality problems.

Why people don't invest: The Bankrate survey identified a number of factors that keeps people from investing. The biggest problem by far is that people don't have enough money to invest.

As CNNMoney has reported, median household income in America isn't much higher than where it was in 1995. Many families simply aren't seeing their finances improve enough to feel comfortable investing in stocks.

It's particularly problematic among young adults. Just over a quarter of adults under 30 reported having any money in stocks or in funds that invested in stocks, according to the Bankrate survey. Young people have the most to gain by investing in stocks since research shows that they the market is likely to rise a lot in the decades before they retire.

The next largest barriers are that people don't feel educated enough about the stock market, they don't trust stock brokers, and they think it's too risky to be in equities.

Randy Frederick, managing director of trading and derivatives at Schwab's Center for Financial Research gets a lot of inquiries from fearful investors who aren't sure they want to get into stocks or get back in.

"People often call and ask me: 'What about the flash crash?'" Federick told CNNMoney. "I tell them that's only happened once and the market came back. Let's focus on the other 99% of the time."

Time Is Money

I just returned from a weekend getaway today. An annual vacation, as it were, but I opted to drive instead of fly. I wanted to test out my "new" car (I bought it back in August of last year) over a long distance. My one thought was that, after reading a half-dozen articles about Nvidia ($NVDA) and Tesla ($TSLA) launching autonomous automobiles in the near-future, I lamented that I look forward to those days so I could read a book or two during the trip. Then I recalled the more current solution: audio books. I ran to the library and checked out a few (in case one was a bust), including Flash Boys by Michael Lewis, a book I attempted to read in my spare time last year, but eventually conceded that I didn't even have spare time.

The whole story was fascinating, but arguably designed to rile up the general public in an outrage that they do not fully understand. I soon figured out why it went from the best-seller list to being available in the public library so quickly. Like many other examples, just because a story is non-fiction doesn't make it true. A lot of the direct concerns in Flash Boys has been discredited by large.

According to this story, public enemy in the financial world is high-frequency trading (HFT). The details of the practice are less important to readers I would consider my target audience because it's virtually irrelevant for long-term planning. The disservice this novel does scare investors away from investing altogether without fully explaining the exact harm. Frequently, the story referenced the disservice that banks are doing to their investors, which applied in the context of the story. However, if readers are turned away from the stock markets, then this story would do more harm than HFT ever could.

Midway through the story, I started listening as a novice outsider (truthfully, the material was so far beyond my reach that I actually was). It was startling. It was alarming. It was outrageous and upsetting. But what "it" was got downplayed a bit too much, and all too often, "it" became all too easily confused with investing in general.

More vividly than the accounts being relayed within the novel, I pictured readers getting turned away from investing by thinking that the rigging (as it was described) was destructive to their personal investments. Unfortunately (or thankfully, actually), that is not true. If you are a long-term retirement investor, then HFT would have minimal impact on your portfolio.

In the end, I likened the story being told to a marathon race. If you were training for a marathon to improve your personal health, then would it matter to you if the winner of that marathon cheated the runner-up? Individual investors are planning for long-term goals, most often retirement. If your retirement were 10 years away, how important is each millisecond? This was the point that the story failed to address (albeit, its target audience was hopefully finance professionals and day-traders, and not retirement investors).

In both cases, time is money. Throughout Flash Boys, that became the universal message (and I wish the novel itself adopted this name). For HFT, each nanosecond counts because second-place isn't good enough. For long-term investors, these nanoseconds and fractions of a penny difference in stock prices are not going to matter in the big picture. As long as the money is invested, then it will grow exponentially through the compounding effects known as "time value of money." The disservice of HFT as described in the novel is that, if an individual were invested in an actively managed mutual fund, then the fund manager would be getting cheated out of fair market price of each trade -- but the unspoken bigger issue is that too much activity in these portfolios becomes counter-intuitive to the investors themselves.

If you buy individual stocks, then plan on holding every investment until short-term capital gains are irrelevant (by that point, microseconds and daily market fluctuations will have less impact on the overall investment). If you don't know how short-term capital gains impact stocks, then don't trade individual stocks until you do. I allowed a loophole for people day-trading in their retirement account, so I'll explicit fill that loophole and discourage that behaviour as well (those wins and losses are unlikely to reimburse the effort over the course of decades).

Time is money. In the HFT realm, it's all about nanoseconds (less time nets more money). In the world of retirement planning, it's all about decades (more time nets more money).

Seeing Is Believing

For all the pitfalls and missteps in investing, there can be a time and place to sit back and marvel at covered ground. I caught myself stopping to smell the roses earlier tonight, honestly trying to wrap my head around the recent returns that my portfolio was displaying for its 3- and 5-year returns especially. It's known that the stock market has not had an official correction in over three years now, which is alarming in many degrees but also reasonable based on the actual circumstances.

Psychologically, I have tricked myself into believing that my portfolio is at least 10% over-valued for its current balance, which made tonight's reflection all the more shocking. It was a nice moment to pat myself on the back for a "job well done," but it still feels as though I did nothing.

I have long held the belief that "you can work hard or you can let your money work hard for you," and there is a lot of truth to that cliché. I have been educating myself with individual stock investing for the past 8 months, but my success there has been a fraction of the simplicity of index investing. I have to laugh at the Money.CNN.com trolls who question leaving money on the table with inferior returns. So few have taken that next step of pretending it was "guaranteed failure" by under-performing the market by the expense ratio. (That argument hardly holds its own weight against its own inferred advice: why set yourself up for failure by investing in a fund with a high expense ratio?)

Mo Ansari frequently warns listeners that, regardless how much confidence they may have despite their age, younger investment professionals are learning as they go -- and they're learning with their clients' money. He often likens the situation to paying for strangers' education, conceding that it is fine with him as long as they understand that is what they're doing. For the most part, that comment made me realize I could be using (a fraction of) my own assets to gain a similar education on individual stock investing. Realistically, I never felt confident about investing until I made it through a complete market cycle (i.e. crash/recovery). By that point, I had accumulated a nice amount and all the philosophies Vanguard were preaching had proven true, so I continued down that route. I have held to those core principals for the majority of my portfolio, including my practice of rebalancing quarterly.

Effectively, it all comes down to testing theories, which is exactly what prompted my most recent stock purchase. I have heard that stocks often surge after a stock split, and last year I saw Apple ($AAPL) experience it from the sidelines, so I wanted to test the phenomenon on another stock experiencing a recent split, buying the equivalence of one share pre-split of Visa ($V). It is too early to determine success or failure on it, but the important thing is that I will get to see for myself (and since it's my money at stake, I am going to be more likely to remember the results personally). Trusting second-hand accounts is no longer a necessity. In sales, they teach "facts tell, stories sell," but building up my own book of stories, I will know firsthand how stocks react (and, having a direct emotional investment, I will *remember* how stocks reacted for years to come).

Regardless, I remain skeptical that any stock I've purchased will serve me better than my index mutual funds have treated me. But I would welcome any of them to prove me wrong!

The Full Motley -- 1Q, 2015

If the more things change, the more they stay the same were true, then the less things change, the more they need a change.  Unfortunately, that misplaced dichotomy reaps more penalties than rewards, at least in the financial lifeline (it may be food for thought in personal lives).  Patience reaps the most rewards, sticking with a plan at least until the original design is flawed.  Other fields have greener grass, but to benefit from greener fields with investing is to assume higher risk -- and the greenest pastures this year are rarely the greenest next year.  This dangerous temptation is known in industry terms as "performance chasing," and it is one of the great temptations to overcome for a healthy financial life.

I recently benefited from blindly following my original design when buying an individual stock this month where it reached my buy-in amount.  I had planned to buy in at one price, buy more at another price, and (if the stock fell as far as I thought it might) to buy twice as much as an unreasonably low price.  The stock went below the first price, and I knew its fourth quarter earnings report would be announced in a couple weeks, so there was a great temptation to hold off until then because I could buy twice as many shares at a lower amount.  But, knowing that I was still in the learning stage of stock investing, I went ahead and bought at the first price.

The very next day, the company released great news and that stock went up 25% from where I bought it.  This week, they held their earning report and lo and behold, expectations of disaster were way off and the stock went up even higher, about 60% above where I bought.  Success despite myself.

Same is my commitment to the plan to rebalance quarterly.  I am not sure how often it benefits me, but it is a good habit to have.  Like I've said before, making the most money possible is not always the goal in investing.  We can always do better in every avenue of life, so the pressure to pick the best stocks or funds should not measure successful investing.  Granted, that is easy for me to say when my actively traded large cap fund won an award for most successful group (PRIMECAP).