Many times in conversations I am presented with a concern that begins with ‘well we KNOW that….’ What follows is usually a statement that has been made and repeated enough times in the media that it is now accepted as fact. But sometimes what we think we know to be true may not be true forever.
For example, many people express concern that the US has lost manufacturing jobs at a rapid pace over the last decade, and believe we will no longer be a significant, global economic player. In the past, the strong US dollar made it difficult to export our products at favorable exchange rates, and lower wages in China and other countries made our labor costs uncompetitive, so the number of manufacturing plants in the US did decline; but that may no longer be the case.
The booming Chinese economy, which created a middle class whose population is an attractive target market for companies like P&G and McDonalds, has also had the consequence of raising labor rates in the country. According to the May 12 issue of The Economist, pay for factory workers in China soared by 69% between 2005 and 2010. This wage growth in China, combined with the relatively slow growth of wages in the US, may no longer make locating factories in China the savings ‘slam dunk’ that it once was. Caterpillar, a heavy equipment manufacturer, is moving production back to Texas, while NCR is moving its ATM machine manufacturing to the state of Georgia. Several other examples are cited in the article.
It’s a great lesson to learn. Every negative cited in the news – falling housing prices, the decline in the US dollar, the high US unemployment rate – has a corresponding impact in other areas of the economy we may not even be aware of today. There are too many forces at work on the market for us to know for certain what will happen next, so don’t accept conventional wisdom at face value. What you ‘KNOW’ to be true may already be changing.
Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/
Showing posts with label financial media. Show all posts
Showing posts with label financial media. Show all posts
Wednesday, June 22, 2011
Wednesday, June 8, 2011
When Television Feeds the Urge to Trade
(from Carl Richard's New York Times' Bucks blog, 6/6/2011 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)
Traveling last week, I shared some workspace where CNBC played all day on television. For most people, I realize that it’s often comforting background noise. However, since I almost never watch television, I found it amazing how bipolar I felt as they shifted from one commentator to another.
Given how wild the markets were last week, I imagine that there were many people tuning in trying to figure out what to do. And that’s the problem.
Watching CNBC might be entertaining, but unless you fancy yourself some sort of day trader, it will not help you figure out what to do with your life savings.
This won’t apply to all of you, but I’m going to make some assumptions here. I assume that for most of us the purpose of earning money, saving it and actually doing financial planning is to hit some sort of goal. I’ll also assume that those goals are typically things like getting out of debt, establishing a rainy-day fund and saving for retirement or college for kids.
If that’s true, what are you going to learn from watching hours of endless chatter about new-home sales or the jobs report that will be helpful in meeting those goals?
Things change so fast, and on television the reactions in the markets are amplified by the need to have something to talk about to keep everyone watching so they don’t miss the latest breaking news. This constant stream of information makes us feel like we should be doing something.
But the question is, what?
What should we be doing? What changes should we make based on the latest breaking news? Do you see the potential problem? If we’re tuning in to figure out what the latest news means for our investment plans, and we make changes based on what we hear … well, that’s an awful lot of changing.
Doesn’t it make much better sense to design our investment plans based on our goals, and then make changes when those goals change, instead of trying to react to the minute-by-minute updates? The only thing we know for sure is that things will change. Does your financial plan help you weather these changes or are you tempted to jump every time a new headline pops up on television?
Traveling last week, I shared some workspace where CNBC played all day on television. For most people, I realize that it’s often comforting background noise. However, since I almost never watch television, I found it amazing how bipolar I felt as they shifted from one commentator to another.
Given how wild the markets were last week, I imagine that there were many people tuning in trying to figure out what to do. And that’s the problem.
Watching CNBC might be entertaining, but unless you fancy yourself some sort of day trader, it will not help you figure out what to do with your life savings.
This won’t apply to all of you, but I’m going to make some assumptions here. I assume that for most of us the purpose of earning money, saving it and actually doing financial planning is to hit some sort of goal. I’ll also assume that those goals are typically things like getting out of debt, establishing a rainy-day fund and saving for retirement or college for kids.
If that’s true, what are you going to learn from watching hours of endless chatter about new-home sales or the jobs report that will be helpful in meeting those goals?
Things change so fast, and on television the reactions in the markets are amplified by the need to have something to talk about to keep everyone watching so they don’t miss the latest breaking news. This constant stream of information makes us feel like we should be doing something.
But the question is, what?
What should we be doing? What changes should we make based on the latest breaking news? Do you see the potential problem? If we’re tuning in to figure out what the latest news means for our investment plans, and we make changes based on what we hear … well, that’s an awful lot of changing.
Doesn’t it make much better sense to design our investment plans based on our goals, and then make changes when those goals change, instead of trying to react to the minute-by-minute updates? The only thing we know for sure is that things will change. Does your financial plan help you weather these changes or are you tempted to jump every time a new headline pops up on television?
Wednesday, February 23, 2011
Clueless
(from Dan Solin's Huffington Post blog, 2/8/2011 - click here for the original post)
I'm sure Pat Dorsey is highly intelligent and very competent. He is the director of equity research for Morningstar, which is a big job that gives him access to vast resources about the stock and bond markets. As he noted in an article published January 17, 2010 in Money Magazine's Investor's Guide 2010 entitled "10 stocks that can keep running," the analysts he works with at Morningstar cover 2000 stocks. Wow.
With such an impressive background and extensive resources, I am sure many investors paid close attention to Mr. Dorsey's 2010 predictions about stock market trends.
His primary observation was that we were in the "first phase of a bull market" where "smaller and junkier stocks tend to lead the way." However, he confidently predicted that "...speculative frenzy eventually gives way to the fundamentals, and that should bring your focus back to high-quality blue-chip stocks this year."
He was very negative on "lower-quality small stocks" noting they could "get killed if reality falls short of high expectations."
Many investors no doubt dumped their small stocks and focused on blue chips. After all, Mr.
Dorsey is the director of equity research at Morningstar. Presumably he can accurately predict whether large or small stocks will outperform in a given year.
Not exactly.
In a thoughtful analysis not available to the investing public, Weston J. Wellington, vice president of Dimensional Fund Advisors noted that US small stocks had their best year since 2003. The S&P Small Cap 600 index was up 26.31%, compared to an increase of 15.06% in the S&P 500.
It gets worse.
Wellington did an analysis of the ten blue chip stocks recommended by Mr. Dorsey and found they had an average return of 6.3% , significantly under-performing the S&P 500 index.
Let' see if I got this right.
Mr. Dorsey was dead wrong in his prediction that blue-chips would outperform small stocks in 2010. His selection of blue-chips did not come close to the returns that were yours for the taking by investing in the comparable index.
Yet investors continue to rely on the financial media which features pundits of all stripes, confidently predicting the direction of the markets and advising you to buy this or that stock.
It's all errant nonsense, akin to voodoo, designed to separate you from your money and to continue the transfer of wealth from you to those who "manage" your money.
Mr. Dorsey, and his colleagues who pretend to be able to predict random, future events, may be clueless.
You don't have to be.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
I'm sure Pat Dorsey is highly intelligent and very competent. He is the director of equity research for Morningstar, which is a big job that gives him access to vast resources about the stock and bond markets. As he noted in an article published January 17, 2010 in Money Magazine's Investor's Guide 2010 entitled "10 stocks that can keep running," the analysts he works with at Morningstar cover 2000 stocks. Wow.
With such an impressive background and extensive resources, I am sure many investors paid close attention to Mr. Dorsey's 2010 predictions about stock market trends.
His primary observation was that we were in the "first phase of a bull market" where "smaller and junkier stocks tend to lead the way." However, he confidently predicted that "...speculative frenzy eventually gives way to the fundamentals, and that should bring your focus back to high-quality blue-chip stocks this year."
He was very negative on "lower-quality small stocks" noting they could "get killed if reality falls short of high expectations."
Many investors no doubt dumped their small stocks and focused on blue chips. After all, Mr.
Dorsey is the director of equity research at Morningstar. Presumably he can accurately predict whether large or small stocks will outperform in a given year.
Not exactly.
In a thoughtful analysis not available to the investing public, Weston J. Wellington, vice president of Dimensional Fund Advisors noted that US small stocks had their best year since 2003. The S&P Small Cap 600 index was up 26.31%, compared to an increase of 15.06% in the S&P 500.
It gets worse.
Wellington did an analysis of the ten blue chip stocks recommended by Mr. Dorsey and found they had an average return of 6.3% , significantly under-performing the S&P 500 index.
Let' see if I got this right.
Mr. Dorsey was dead wrong in his prediction that blue-chips would outperform small stocks in 2010. His selection of blue-chips did not come close to the returns that were yours for the taking by investing in the comparable index.
Yet investors continue to rely on the financial media which features pundits of all stripes, confidently predicting the direction of the markets and advising you to buy this or that stock.
It's all errant nonsense, akin to voodoo, designed to separate you from your money and to continue the transfer of wealth from you to those who "manage" your money.
Mr. Dorsey, and his colleagues who pretend to be able to predict random, future events, may be clueless.
You don't have to be.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
Tuesday, January 18, 2011
Resolutions - Part I
Brad Steinman, Director of the Canadian arm of Dimensional Fund Advisors, offered up 10 important investment resolutions to start off the new year. Brad’s goal was to warn investors away from “ill-advised practices that are detrimental to their wealth” and hopes that “a set of New Year’s Investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.”
Rather than rattle them off in what would be a rather lengthy blog post, we’ve decided to take a few resolutions at a time and provide some commentary on each periodically over the next several weeks.
Resolution #1: I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.
TAAG Thoughts: This is a topic we’ve covered at length in this space. There’s no question that what once passed as tabloid journalism has become “the news” across all fronts. Be it Jim Cramer, Brett Favre or the Kardashians, it can be difficult to differentiate between the evening news, CNBC and TMZ. The line between entertainment and information has been severely blurred if not erased altogether. We fully agree with Mr. Steinman that the best media to listen to when it comes to long term investment strategies is no media whatsoever.
Resolution #2: I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.
TAAG Thoughts: This touches on several of our firms core values, most notably the notion that gurus, much like the media, are to be ignored. Those who “get it right” are impossible to identify in advance, rarely repeat their success and the actual return investors receive in chasing these soothsayers after the fact pales in comparison to the returns as advertised. For more on the obstacles and dangers related to this manner of investing, see Dan Solin’s blog from last year.
The thoughts on capitalism and the long term expected return on capital ring true as well. In the long term, the only bet an investor needs to place is that the companies of the world will continue to grow. There will be lots of bumps in the road, some wild successes and some companies that cease to be, but, in the long run, the world will continue to develop new innovations and grow its collective balance sheet as it always has. You can participate in that growth by holding a globally diversified portfolio that seeks not to beat or outthink a market that, in the short term, will almost always disappoint.
These resolutions may seem like simple ideas, but we see time and time again that it is so easy to get caught up in the media hype or the promise of something out there that will allow investors to hit that home run without taking the required risk. Neither is an accurate depiction of real life or where our expectations should lie when it comes to our portfolios.
We hope you enjoy these and the other resolutions to come.
Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com
Rather than rattle them off in what would be a rather lengthy blog post, we’ve decided to take a few resolutions at a time and provide some commentary on each periodically over the next several weeks.
Resolution #1: I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.
TAAG Thoughts: This is a topic we’ve covered at length in this space. There’s no question that what once passed as tabloid journalism has become “the news” across all fronts. Be it Jim Cramer, Brett Favre or the Kardashians, it can be difficult to differentiate between the evening news, CNBC and TMZ. The line between entertainment and information has been severely blurred if not erased altogether. We fully agree with Mr. Steinman that the best media to listen to when it comes to long term investment strategies is no media whatsoever.
Resolution #2: I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.
TAAG Thoughts: This touches on several of our firms core values, most notably the notion that gurus, much like the media, are to be ignored. Those who “get it right” are impossible to identify in advance, rarely repeat their success and the actual return investors receive in chasing these soothsayers after the fact pales in comparison to the returns as advertised. For more on the obstacles and dangers related to this manner of investing, see Dan Solin’s blog from last year.
The thoughts on capitalism and the long term expected return on capital ring true as well. In the long term, the only bet an investor needs to place is that the companies of the world will continue to grow. There will be lots of bumps in the road, some wild successes and some companies that cease to be, but, in the long run, the world will continue to develop new innovations and grow its collective balance sheet as it always has. You can participate in that growth by holding a globally diversified portfolio that seeks not to beat or outthink a market that, in the short term, will almost always disappoint.
These resolutions may seem like simple ideas, but we see time and time again that it is so easy to get caught up in the media hype or the promise of something out there that will allow investors to hit that home run without taking the required risk. Neither is an accurate depiction of real life or where our expectations should lie when it comes to our portfolios.
We hope you enjoy these and the other resolutions to come.
Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com
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