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).

2015 Preview: Hard to say "Good Buy"

Healthcare has been golden.

With the change in calendars, short-term speculators will provide countless opinions on what sectors are ripe to benefit the most in the new year.  While short-term investing is not my true interest (despite my market predictions below), there is a benefit to investing before a market increases and the start of a year is as valid of a time as any to identify some of those markets.  If there is an industry with both recent losses and strong long-term prospects (e.g. a solid future), then it may be a better investment opportunity than an industry with recent gains fourfold over the rest of the market.  Even The Motley Fool (no relation) had a year-end article identifying the market's best and worst sectors of 2014.

Performance chasing is a horrible deterrent from long-term growth, yet so many novice investors naturally are lured into the pitfall (and the pitfall is not exclusive to novice investors).  Truthfully, there are valid reasons for “performance chasing” however, such as if an industry previously thought to be wholly unprofitable has proven otherwise.  But expectations of repeated gains at comparable levels should not be held.  To illustrate this point, consider the housing market in 2004, prior to its bubble filling with the hot air of performance chasers.  If real estate had never been viewed as a profitable market previously, then the subsequent years would have proven otherwise.

Gold market fell after 2 great years.

Energy's 2014 decline was in 4Q.

Likewise, also consider gold and precious metals market, which were vastly profitable in 2008 but its market has shown consecutive years of negative returns since then.  If anyone believes that the market itself is no longer viable (i.e. is gold becoming absolutely worthless?), then this downturn could signal the end of the industry as a whole, so it would not be a worthwhile investment. However, if the value of gold is merely decreasing but it will continue to maintain relevance in the future for years to come (i.e., will most value gold in the future?), then it may be a good buying opportunity for a longer range investment.

Granted, these ideas are by no means bulletproof.  For example, I believe the Healthcare industry has outpaced the market as a whole each year for the past 12 years or more.  Is it a bubble about to pop?  Maybe, but if any investors have bearishly avoided Healthcare for the past decade, then there was a substantial amount of profits missed.  About 230% to be exact.

In addition to market sectors, the economies of individual countries could also be considered.  Recently, Money.CNN.com posted a graph* showing the returns from each world economy.  It is worth a look-see.  While my theory would identify Russia as a promising market for 2015, whereas China and Argentina are potentially on the verge of a bubble, there are a lot more geopolitical factors involved in international investing.  While the theory is valid, I would be more bearish on poorly performing economies, but again, the theory still applies and any of those countries could see a reversal in fortunes in the next 12 months.  In this case, the validity of rebalancing become more evident.

CNN trolls are better used
for entertainment than knowledge.

Everyone says to “buy low, sell high,” but so few focus on how to accomplish those two seemingly simple steps.  As illustrated at left, even when a method of how is presented, there is often a public dismissal of the point of view.  For the record, the dissenting opinion presented was flawed: a rebalancing investor would have still benefit from the large cap appreciation, but merely reduced a portion of the portfolio’s exposure to the booming sector (i.e. “sell high”).  Additionally, the rebalancing investor will further benefit either from a future “boom” in small cap stock (buying before the increase) or a quick downturn in large cap (having already sold high).

In reality, no one knows what the markets can do and more often than not, individual years matter little over a lifetime (financially, just as well as personally).  But as I have noted in the past, predicting the forthcoming year is good fun!  While I expected the 2014 markets would clock in above 10%, following the increases in excess of 25% the prior year, it fell just short.  Coming into the last trading day of the year, it could have closed at 10% just as likely as it closed below, falling almost 1% today to close at 17,823 for a modest increase of 7.75% for the year (Nasdaq and S&P 500 increased 13.4% and 11.4%, respectively).

For 2015, there are a few factors involved.  The increases of year after year have to catch up, but the mechanics creating these increases have not really changed.  What I call the "laws of TINA" (There Is No Alternative) still apply, but interest rates are likely to increase during the coming year.  I still expect the Dow to increase this year, but I anticipate only modest gains from the Dow, Nasdaq, and S&P 500).  If the Dow were to increase exactly 10% in 2015, then it would be at 19,606.



* - graph notes:Countries with +/-20%
Argentina - 54.51%
China     - 43.32%            
India - 29.93%
Pakistan - 26.59%
Turkey - 24.61%
Indonesia - 20.24%
Nigeria - (20.67%)
Greece - (26.62%)
Russia - (44.9%)

North America
USA- 12.73%
Canada- 6.9%
Mexico- 0.79%
Brazil - (1.54%)

The Full Motley -- 4Q, 2014

Having now completed five years of quarterly rebalancing, this habit is well established and it feels natural.  In fact, it only takes me a couple minutes to calculate the moves that I need to make and submit them to make it official.  In this case, the movements were all less than 1% and hardly worth recounting here.

Although the market has not performed the way I expected, wanted, or planned (if it ever does, then it is merely a coincidence), I found it interesting that the amount my actively-managed large cap fund was up almost equaled the amount that my international index fund was down while my large cap index fund was up almost the same amount that the index bond fund was down.  Even the amount that the high-yield bond fund was down was comparable to the amount the actively-managed mid cap fund was up.  Instead of rebalancing this month, I could have been almost as well off by simply exchanging those amounts between the respective funds.

Outside of the 401(k), I have been amassing a slew of individual stocks.  My approach there has been taking it as an educational approach.  When I started investing in index funds, I had a strategy in mind based on what I had acquired from other people's experiences, but I felt truly knowledgeable after making it through my first market cycle.  I expect the same case will be said for individual stock picks.  Not many will be winners (as defined by outperforming the stock market) but I hope to be able to assess for myself what separated the ones that were winners from the ones that were not before I establish a true strategy.

So far, I have taken stock tips from The Motley Fool, from word of mouth, from Money CNN, and even from YouTube comments (of all places).  If my quarterly updates start getting thin based on my rebalancing activity, I may take the opportunity to address these individual stocks as well.

The 40-Year-Old Collector

Since the beginning of the year, the market expectations have been that there is only so high it can go before it retreats.  By the middle of the year, the focus of media attention was on its improbable upward mobility, citing that it had been nearing three years since the last market correction in October 2011 (defined as a 10% drop from its all-time high).  There were murmurs of QE3 causing the drop as it triggered previous sell-offs, but still, nothing more than 10%.  There were plenty of online articles to read predicting that the market would peter along through the rest of the year, continue to rise toward 18,000, or retreat into a bona fide correction, but as always, no one knew for sure.

Then, October 2014 started.  The volume of trading on the Dow went into overdrive, logging its best trading day of the year on Wednesday, October 8, 2014, and its worst on Thursday, October 9, 2014, moving 275 points and 334 points, respectively.  Even Tuesday, October 7, 2014, saw the Dow fall 272 points.  The following week, the Dow continued its slow and steady decline, despite Friday, October 17, 2014, being heralded as a market rally.

Myself, I have been patiently waiting for a market correction, preferably 15-20% to test my diversification strategies employed earlier this year, but also to buy in to a few individual stocks that I have been eyeing for the past several months.

While buying individual companies is new to me (hitherto, I have been strictly a mutual fund investor, and low-cost indexing for the most part), I have often been a collector.  Whether it was G. I. Joe toys, wrestling magazines, compact discs, or VHS/DVDs, I habitually buy and hold.  As I am pushing 40 now, my interests have simply changed from toys and other entertainment to a more lucrative hobby.

It fittingly started with $WWE.  After it plummeted from a $30+ high to almost $10 this May, I decided that, if the stock dropped below $10, I would buy it and hold until it reached $20, then pick it up again the next time it fell below $10 (a common trend for the stock price over its 15-year history). Unfortunately, the stock itself did not cooperate with my plans, remaining over $10 so far this year. However, I reasoned one key to individual stock trading over long-term ranges is patience. Additionally, I assumed a market correction was nearing, at which point the stock price would surely fall below $10.  (Still waiting.)

During this time, I started compiling a "wish list" of other companies that I would like to buy for the right price.  After deciding to buy $WWE, I considered what other companies would be like WWE, whose rise to $30 was highly improbably considering its $10-$20 historic range.  For the most part, $WWE went up so high because it had launched its innovative online WWE Network.  I pondered what other corporate brands could have the luxury to duplicate that product.  The only one that I could rationalize was $DIS.  Like WWE, which has monthly pay-per-view events, weekly television shows, and a long history for its fans' entertainment, Walt Disney Co. would have annual movies, an ongoing cable television channel, and a long history for its fans' entertainment.  Like WWE, Disney has an enviable amount of die-hard fanatics.

Additionally, I considered some of my personal favorite brands.  Leading the pack were $PEP and $YUM.  I also considered how the oncoming Internet revolution would continue to radically change the way consumers do business.  I almost immediately eliminated any "brick-and-mortar" business, aside from fast food, until I considered that grocery stores would probably be the longest surviving stores.  Therefore, I added $KR to my wish list since its national reach would likely keep it afloat for as long as feasible.

Aside from my favorite brands, I have stayed open-minded to some companies that I would have never considered but-for their high-risk/-reward stocks.  If you call a spade "a spade," then call my wavering interest in these companies "greed."  The Motley Fool (of which I am NOT affiliated, despite my surname) often encourages its readers to buy suppliers for future technological revolutions.  If television were replaced by Netflix or Roku and the like, but you are unsure which brand will succeed, then buy what they all have in common.  For example, GT Advanced Technologies Inc. ($GTATQ) was heralded as a sure-fire winner before $AAPL released its latest iPhone since they were contracted to supply the virtual scratch-proof sapphire screens. Unfortunately, things went horribly awry, and the iPhone did not use these screens, leading GT Advanced Technologies to close a plant in Mesa, Arizona, and file Chapter 11 bankruptcy shortly thereafter.  Its stock price went from a high of $20+ in July 2014 to under $1 in October.  I had a buy price of $10 for that stock, so I dodged my first massive loss in the market (for full disclosure, I have bought some of its shares, primarily to follow the company and for the high-reward element if the stock price recovers).

I will be interested to see how my wish list grows and, of course, how long it takes to buy them all!

Credit Where Credit's Due

This morning, CNN Money posted an article regarding this year's most popular credit card.  For the past seven years, American Express earned that distinction, but now it has to share the honor with Discover (my family has been a loyal to Discover since its first national roll-out campaign in the mid-80s). Not surprisingly, the CNN trolls (the commenters with more opinions than knowledge) chimed in on the subject of credit cards, but they were immediately shut down at every post. Two trolls in particular stuck out. One compared credit cards to a layaway plan, insisting that people who can pay off their monthly amount were better off using cash, and the other said credit cards were the shovel you use to dig your own financial grave.

I will discuss the first commentary in a moment as it was more relevant, but the second comment stuck with me because it was the perfect test for a hypothesis I had a few weeks ago. Imagine how much more agreeable we would be if we used first person in place of second person in our comments. For example, if that CNN troll had instead stated “credit cards were the shove I used to dig my own financial grave,” it would inspire more empathy instead of the barrage of defensive outrage (though, for all I know, outraged replies may be the gold that trolls treasure in the first place).

A lot of media outrage has been generated over the years about credit cards. Some of it is warranted, especially the predatory methods some companies used targeting fresh-faced college students who were falsely assured all their efforts today would be rewarded later, so they decided to spend a blue streak today, driving themselves into those aforementioned financial graves later.  There was also a slew of good, old-fashioned stupidity involved in consumer credit abuse, as the first comment mentioned, such as using credit cards to buy things now to pay off slowly.  Aside from the extraordinary fees charged for that irresponsible behavior, I still believe the resulting sensation of depression it can cause is more costly.

Personally, I got my first credit card as soon as I moved out to Arizona. It was through MBNA, which was a highly rated credit company until it was bought out by a highly disparaged credit company several years later. My credit card limit started at $3,000, and within a few years, it became a platinum card with an exponentially higher limit (as you may expect, that change occurred with the change in companies). I was offended by the increase, fearing that I would be more of a target for credit fraud, so I stopped using the card. In reality, the more unused credit you have in your name, the better it is reflected in your credit score. Canceling the card was a mistake, which may adversely affect me in the future.

Regardless, I was excited to apply for a Discover card to replace my Platinum card. Truthfully, Discover popularized the rewards gimmick that is an unspoken obligatory offer in every credit card today. The CNN troll who incorrectly stated that credit cards are mostly used for layaway purchases further defended her point by saying that the consumer is charged for those rewards vis-a-vis the monthly interest rate (finance) charges. Once again, her information was warped by the media-hyped fear mongering, and clearly not by personal experience.

In keeping with my previously mentioned “first person” theory, by paying off my credit card balance each month, I am not assessed a finance charge. I will still benefit from all the rewards though (and the credit card company still comes out ahead in the game) because those rewards are generated by the fees that credit companies charge the merchants. Truthfully, we are a society so grounded in credit that it is difficult for small businesses to survive without accepting credit. There are a few restaurants that I do not frequent simply because they do not accept Discover (and a few others that I never visit because they do not accept any credit).

Credit has gotten a bad wrap (for some good reasons) over the past few years, but the simple truth is that there is a way to use credit cards properly and responsibly, and the totality of those benefits is better than strictly hailing to the King (BTW, “cash is king”).

The Full Motley -- 3Q, 2014

I had reallocated my assets on Monday as I do each quarter, moving only a small fraction of my account (two-thirds of 1%, to be exact), and then at lunch on Tuesday, I happened to hear a discussion on Money Radio 1510, discussing the allegedly over-inflated research in favor of reallocating periodically, specifically noting that re-allocating monthly or quarterly was pointless. While I support some of that argument more than my actions would suggest (I honestly do not believe moving 0.67% of an account is critically important for long-term financial success), there are a lot of additional benefits to reallocating that the hosts of this talk radio program grossly (or, conveniently) overlooked.

First, periodic re-balancing keeps you thinking. Specifically, thinking about your future and your investments. Two things that, while I may not have any problem finding time to do so in the middle of the day, many others fail to consider. Granted, to the point of the show's hosts, over-thinking is a common pitfall for novice (and even expert) investors, but, to my point, neglecting it is on the opposite end of the spectrum and more detrimental in the long run.

Secondly, contrary to that program's apparent belief, not every piece of financial advice should be made in order to maximize profits. There are many things that are recommended solely to reinforce good habits and establish discipline.  That discipline in particular will prevail with cooler heads whenever the markets get particularly emotional (e.g., market corrections).  Periodic re-allocations can be one of those habits.

Furthermore, the downside of their argument against reallocating was that the initial allocation is completely arbitrary.  The hosts are professionals in the industry, so maybe they have clients often come to them devoted to a strict allocation, only to learn later that this allocation was generated by a computer program or an even more impersonal method.  Regardless, dismissing re-allocations based on the validity of the target allocation is where I mostly took a defensive stand.

The largest purpose of reallocating small amounts, such as monthly or weekly or daily reallocating will do, is to achieve rule #1 in investing: buy low, sell high. Until your target allocation changes significantly, generally due to the natural process of aging, there is no better method to move money out of inflated assets or move money into deflated assets than reallocation.  Because the amounts being moved are small and because these re-allocations are predesignated periodically, there should be no decisions to second-guess or no bad news to cause an adverse reaction in a temporary panic.

Another good habit for long-term financial success is diversification.  This year, I started adopting many more markets and sectors in my Roth IRA, including the gold (metals) market, healthcare sector, and 3D technology sector. Diversification can get you far, but there is a limit to its fruitfulness. Most people know that there is such a thing as over-diversification, but few would say that issue negates the benefit of diversification altogether. Same goes for re-allocations. Dismissing either strictly for its limitations is throwing the baby out with the bath water.