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).

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.