There have been several articles of late that have grabbed our attention or garnered significant national press that we thought we would take the time to share this week. Please see a brief intro to each and a link to access below . . .
Why I am Leaving Goldman Sachs
Now former Goldman Sachs employee Greg Smith wrote an op-ed piece for the New York Times last week on how watching clients' interests being routinely and systematically ignored for the betterment of the firm led to him feeling like the only ethical option was to resign. The piece has been much publicized as an indictment against Goldman and the entire wirehouse business model in general.
Really Big Claims Based on Too Little Data
TAAG Blog favorite Carl Richards posted this New York Times Bucks blog recently. Carl takes on the dangers of looking at data over the short term and building conclusions based upon not enough information. He also does an excellent job of explaining why, ultimately, the data supports a low cost, globally diverse portfolio over finding the best fund manager du jour every time.
The Real Cost of Paper Savings Bonds
This was a post from a guest blogger to the FPA All Things Financial Planning Blog that Chip contirbutes to monthly on the potential risks of hanging onto physical, paper savings bonds and the electronic deposit program the Treasury has established to make tracking and redeeming your bonds safe and simple.
Have a great week!
The Asset Advisory Group
Website / E-mail
Showing posts with label passive investing. Show all posts
Showing posts with label passive investing. Show all posts
Tuesday, March 20, 2012
Monday, November 29, 2010
Time for a Reality Check
(from Dan Solin's Huffington Post blog, 10/28/2010 - click here for the original post)
As year-end approaches, this seems like a good time for a reality check.
On October 9, 2007, the Dow Jones Industrial Average closed at its all time high of 14,164. At that level, it had gained 94% over the preceding five years. The euphoria of the bulls was palpable.
On March 9, 2009, the index reached a new twelve-year low, closing at 6,547. The bears became the talk of Wall Street. Doom was in the air.
How you dealt with your investments during this period is indicative of everything that is wrong with the securities industry and why you need to fundamentally change the way you invest.
Few brokers predicted the greatest financial crisis since the Great Depression. Almost no one predicted both the meltdown and rapid recovery of the markets. Yet more than 90% of individual investors maintain brokerage accounts and rely on the flawed advice of their "investment professionals."
What if you didn't panic and did nothing from October 9, 2007 to date? I call it the Seinfeld approach to investing. You were in a globally diversified portfolio of low cost index or passively managed funds in an asset allocation (the division of your portfolio between stocks and bonds) appropriate for your tolerance for risk and investment objectives.
As of September 30, 2010, if your allocation to stocks was 50%, your portfolio has fully recovered. Investors with with an allocation of less than 50% to stocks have positive returns. If you were among the small percent of investors for whom an allocation of 100% stocks was appropriate, your total return is down almost 20%.
Check your portfolio returns. How do those results compare? Most likely, not well if you were listening to the financial pundits and "fled to safety" when the market crashed.
Almost all clients of brokers invest in actively managed funds, where the fund manager attempts to "beat the market." The use of these funds is another reason why investors typically underperform the market. If there is one compelling reason for terminating your relationship with your broker, it's the fact that recommendations of actively managed mutual funds are the way brokers make a living.
In a recent blog, Eugene Fama and Kenneth French, two of the most distinguished Professors of Finance in the country, explained the folly of investing in actively managed funds. They concluded that, when you factor luck into the equation, they expect 97% of actively managed funds to underperform a passive alternative.
Their conclusion is consistent with other studies that have shown over 99% of active fund managers have no genuine stock picking ability.
If your personal reality check persuades you to enter the New Year with a new investing approach, don't necessarily assume you can do it yourself. Studies over a 30 year period show that even those who pursue an indexing strategy on their own fail to capture 100% of market returns. They still do far better than investors in actively managed funds, but their failure to rebalance their portfolios and the lack of discipline to stay the course when times get rough, take a heavy toll.
A competent passive advisor, who focuses on your asset allocation and recommends investments only in index funds, passively managed funds or Exchange Traded Funds, can be a wise investment.
As year-end approaches, this seems like a good time for a reality check.
On October 9, 2007, the Dow Jones Industrial Average closed at its all time high of 14,164. At that level, it had gained 94% over the preceding five years. The euphoria of the bulls was palpable.
On March 9, 2009, the index reached a new twelve-year low, closing at 6,547. The bears became the talk of Wall Street. Doom was in the air.
How you dealt with your investments during this period is indicative of everything that is wrong with the securities industry and why you need to fundamentally change the way you invest.
Few brokers predicted the greatest financial crisis since the Great Depression. Almost no one predicted both the meltdown and rapid recovery of the markets. Yet more than 90% of individual investors maintain brokerage accounts and rely on the flawed advice of their "investment professionals."
What if you didn't panic and did nothing from October 9, 2007 to date? I call it the Seinfeld approach to investing. You were in a globally diversified portfolio of low cost index or passively managed funds in an asset allocation (the division of your portfolio between stocks and bonds) appropriate for your tolerance for risk and investment objectives.
As of September 30, 2010, if your allocation to stocks was 50%, your portfolio has fully recovered. Investors with with an allocation of less than 50% to stocks have positive returns. If you were among the small percent of investors for whom an allocation of 100% stocks was appropriate, your total return is down almost 20%.
Check your portfolio returns. How do those results compare? Most likely, not well if you were listening to the financial pundits and "fled to safety" when the market crashed.
Almost all clients of brokers invest in actively managed funds, where the fund manager attempts to "beat the market." The use of these funds is another reason why investors typically underperform the market. If there is one compelling reason for terminating your relationship with your broker, it's the fact that recommendations of actively managed mutual funds are the way brokers make a living.
In a recent blog, Eugene Fama and Kenneth French, two of the most distinguished Professors of Finance in the country, explained the folly of investing in actively managed funds. They concluded that, when you factor luck into the equation, they expect 97% of actively managed funds to underperform a passive alternative.
Their conclusion is consistent with other studies that have shown over 99% of active fund managers have no genuine stock picking ability.
If your personal reality check persuades you to enter the New Year with a new investing approach, don't necessarily assume you can do it yourself. Studies over a 30 year period show that even those who pursue an indexing strategy on their own fail to capture 100% of market returns. They still do far better than investors in actively managed funds, but their failure to rebalance their portfolios and the lack of discipline to stay the course when times get rough, take a heavy toll.
A competent passive advisor, who focuses on your asset allocation and recommends investments only in index funds, passively managed funds or Exchange Traded Funds, can be a wise investment.
Monday, March 15, 2010
Are You Compelled to Make Bad Investing Decisions?
(From Dan Solin's blog, Huffington Post, March 9, 2010)
Here's a question I have always found vexing:
Why do so many intelligent people act so irrationally with their investments? It turns out that we may be programmed to do so.
According to an article in the Wall Street Journal, an MRI of the brains of investors chasing stock returns is the same as those anticipating a chocolate truffle, sex or (for drug addicts) cocaine!
Researchers in neuroeconomics have found that our brains are programmed to look for patterns. When we find one (or even the prospect of one) the neurochemical dopamine kicks in with the equivalent of a shot of heroin to the brain. We are almost compelled to take risks, even though a dispassionate view of the data would indicate that we are investing irrationally.
This process also affects investor behavior in uncertain times, like those we are currently experiencing. Even a hint of bad news will cause our brains generate a sense of "anxiety and dread" driving investors to overreact.
For more studies about these issues, I highly recommend Jason's Zweig's excellent book, Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.
Brokers and the financial media understand this process. How else can you explain the popularity of live TV shots showing the frenetic activity on the floor of the NYSE, when this background is irrelevant to most investors? Or the high testosterone personalities of financial pundits and many brokers, who breathlessly report on financial news, or call to give investors the latest "hot tip" on the short term prospects of a stock or the next top performing mutual fund?
Those who study finance regard these activities as counter-productive and calculated to enhance the wealth of the securities industry and deplete the assets of investors. Most investors need no reminder that this is precisely the way the system has been working -- and most likely will continue to do so in the future.
Perhaps investors need the equivalent of drug rehabilitation to reprogram their brains so they can rationally assess the overwhelming data indicating that reliance on the traditional securities industry for investment advice is no different than relying on a drug dealer for advice about kicking a drug habit.
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.
Here's a question I have always found vexing:
Why do so many intelligent people act so irrationally with their investments? It turns out that we may be programmed to do so.
According to an article in the Wall Street Journal, an MRI of the brains of investors chasing stock returns is the same as those anticipating a chocolate truffle, sex or (for drug addicts) cocaine!
Researchers in neuroeconomics have found that our brains are programmed to look for patterns. When we find one (or even the prospect of one) the neurochemical dopamine kicks in with the equivalent of a shot of heroin to the brain. We are almost compelled to take risks, even though a dispassionate view of the data would indicate that we are investing irrationally.
This process also affects investor behavior in uncertain times, like those we are currently experiencing. Even a hint of bad news will cause our brains generate a sense of "anxiety and dread" driving investors to overreact.
For more studies about these issues, I highly recommend Jason's Zweig's excellent book, Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.
Brokers and the financial media understand this process. How else can you explain the popularity of live TV shots showing the frenetic activity on the floor of the NYSE, when this background is irrelevant to most investors? Or the high testosterone personalities of financial pundits and many brokers, who breathlessly report on financial news, or call to give investors the latest "hot tip" on the short term prospects of a stock or the next top performing mutual fund?
Those who study finance regard these activities as counter-productive and calculated to enhance the wealth of the securities industry and deplete the assets of investors. Most investors need no reminder that this is precisely the way the system has been working -- and most likely will continue to do so in the future.
Perhaps investors need the equivalent of drug rehabilitation to reprogram their brains so they can rationally assess the overwhelming data indicating that reliance on the traditional securities industry for investment advice is no different than relying on a drug dealer for advice about kicking a drug habit.
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.
Monday, January 11, 2010
Lessons for Investing Success
It’s always interesting to read the financial press this time of year. You can find a prediction to support whatever your gut feeling is about the future direction of the stock market. Tucked into this month’s Money Magazine amongst articles profiling the hottest mutual fund managers, and why investing in gold is a fool’s errand, is an excerpt from The Elements of Investing by Burton G. Malkiel and Charles D. Ellis. It caught my eye because Dimensional Fund Advisors (DFA), whose mutual funds we use in our client portfolios, utilizes the research of both of these gentlemen to guide their approach to investing.The article is entitled “Dodge the 6 Biggest Investing Mistakes” and in each area, I see clients struggle to overcome these mistakes so that they will be successful long term investors.
Overconfidence
“We tend to be overconfident. If we do make a successful investment, we confuse luck with skill.”
All of us want to be able to brag to our friends that we identified the next hot stock before anyone else due to our superior stock picking ability. In reality, most times a lucky pick can turn into a disaster when confused with skill that can be relied upon in the future.
Following the Herd
“Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many to sell at the market’s bottom when pessimism is rampant.”
During the past twenty years I have talked many clients out of doing the exact opposite of what they should. We all know that buying low and selling high is the way to investing success, but unfortunately, our gut, along with the popular press and our friends and relatives, often leads us in the wrong direction.
Timing the Market
“The average investor’s actual returns are at least two percentage points lower (than the stock market as a whole) because the money tends to come in at or near the top and out at or near the bottom.
I think that this is one of the areas that an advisor can add the most value to clients. It doesn’t matter if the market is going up or down, investors feel better when buying the winning asset class or stock and selling the loser. Convincing them that staying invested over the long run is the best path to reaching their financial goals can be challenging during a roaring bull or raging bear market.
Assuming More Control Than You Have
“There is no dependable way to predict the future movements of a stock’s price from its past wanderings.”
We all want to look for trends, whether it’s in the market’s movement in general, a particular stock’s price, or whether it is likely to split in future. Feeling as if we can spot these patterns gives us more sense of security than we really have. I continually see this when discussing the price of the stock of a company from where the client has retired.
Paying Too Much in Fees
“There is one piece of investment advice that, if you can follow it, can dependably increase your returns: Minimize your investment costs.”
The DFA funds are not available to the public and are passively managed, which both allow them to keep the costs within their funds a fraction of what the typical retail investor pays.
Trusting Stockbrokers
“The stockbroker’s real job is not to make money for you but to make money from you.”
The advantage of working with an independent, fee only investment advisor is that there is no incentive from a brokerage firm to recommend trades or products which can be hazardous to the client’s wealth.
Investors that are able to overcome these mistakes and focus on their long terms goals despite the short term fluctuations of the stock market and the constant barrage from the media enticing them to do the exact opposite, are more likely to have a successful investing experience.
Chris Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/
Monday, November 30, 2009
What a Year It's Been
As we enter the last month of the last year of the first decade of the first century of the new millennium (got all that?), I’ll spare you a recap of the entire decade and simply reflect on what has been an eventful year for investors to say the least. While a lot of this has been covered in the media and even in this blog, I think it’s a good time to take one more walk through 2009 and how it might relate to the future.
We entered the year feeling battered and bruised by what was one of the most horrific quarters of a generation to end 2008. A little blip in December provided a glimmer of hope that the worst was behind us. That blip was met by what can only be described as roughly 10 weeks of pain and some of the worst months on record in January and February. In early March, there was a true feeling of desperation in the air when it came to investing and the world economy in general.
Since then, we have enjoyed what has been a fairly historic recovery, despite a lot of mixed messages in the media and the day to day lives of our friends and family. International markets and real estate, which led the way down, have performed exceptionally well as would be expected in leading the world back out of the recession. The US market has followed steadily behind, but still providing impressive returns. While unemployment and other economic indicators continue to depress, they certainly seem to have leveled off. As they are lagging indicators, it only makes sense that they would struggle to keep up with a historically forward looking market.
So what does all this mean? In terms of changing how you invest or what you invest in, not much in my opinion. Remember all of the so called experts back in early March telling everyone to get back in as the tides were about to rise again? I don’t either. Remember those who yelled from the mountaintops in late February that it was time to pull out of the market? Have they gotten back in yet? Have they already missed the bulk of the recovery? It simply proves that we are rarely able to predict what is coming around the bend and that anyone who claims they can is just another salesperson selling expertise they simply do not have.
The smart money will continue to thoughtfully plan their financial future over the long term, allocate investment choices accordingly and then stick to that plan to the best of their ability. Despite short term success and failure, this is the only method that time and time again has proven the most effective way to enjoy a successful investment experience. Chasing returns at the cost of meeting your goals continues to be a losing battle.
A columnist in the Cincinnati Business Courier recently used a quote from John F. Kennedy that seems appropriate for the times in which we live. Kennedy said, “Change is the law of life, and those who look only to the past or present are certain to miss the future.”
Nothing is certain about the current recovery or what lies ahead in 2010 and beyond. The climb back to prosperity may be slow, job growth may move at a snails’ pace, and challenges at home and abroad will continue to play their role as wild cards to any planned path. But how different are these challenges to those that the world has faced in one form or another for generations?
It has never been more challenging to pick who the winners and losers might be going forward. Knowing that you don’t have to in order to invest successfully is an empowering feeling. All you need is a belief in the continued growth of the overall world market in the long term. So long as entrepreneurs and businesses continue to use their ingenuity and scarce resources to produce value for an ever increasing amount of consumers; and so long as you have the ability as an investor to provide those entrepreneurs capital in trade for a fair return on your investment, you can still proceed into 2010 encouraged that the 21st century, while off to a slow start, will be another step forward for the world.
By Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com
We entered the year feeling battered and bruised by what was one of the most horrific quarters of a generation to end 2008. A little blip in December provided a glimmer of hope that the worst was behind us. That blip was met by what can only be described as roughly 10 weeks of pain and some of the worst months on record in January and February. In early March, there was a true feeling of desperation in the air when it came to investing and the world economy in general.
Since then, we have enjoyed what has been a fairly historic recovery, despite a lot of mixed messages in the media and the day to day lives of our friends and family. International markets and real estate, which led the way down, have performed exceptionally well as would be expected in leading the world back out of the recession. The US market has followed steadily behind, but still providing impressive returns. While unemployment and other economic indicators continue to depress, they certainly seem to have leveled off. As they are lagging indicators, it only makes sense that they would struggle to keep up with a historically forward looking market.
So what does all this mean? In terms of changing how you invest or what you invest in, not much in my opinion. Remember all of the so called experts back in early March telling everyone to get back in as the tides were about to rise again? I don’t either. Remember those who yelled from the mountaintops in late February that it was time to pull out of the market? Have they gotten back in yet? Have they already missed the bulk of the recovery? It simply proves that we are rarely able to predict what is coming around the bend and that anyone who claims they can is just another salesperson selling expertise they simply do not have.
The smart money will continue to thoughtfully plan their financial future over the long term, allocate investment choices accordingly and then stick to that plan to the best of their ability. Despite short term success and failure, this is the only method that time and time again has proven the most effective way to enjoy a successful investment experience. Chasing returns at the cost of meeting your goals continues to be a losing battle.
A columnist in the Cincinnati Business Courier recently used a quote from John F. Kennedy that seems appropriate for the times in which we live. Kennedy said, “Change is the law of life, and those who look only to the past or present are certain to miss the future.”
Nothing is certain about the current recovery or what lies ahead in 2010 and beyond. The climb back to prosperity may be slow, job growth may move at a snails’ pace, and challenges at home and abroad will continue to play their role as wild cards to any planned path. But how different are these challenges to those that the world has faced in one form or another for generations?
It has never been more challenging to pick who the winners and losers might be going forward. Knowing that you don’t have to in order to invest successfully is an empowering feeling. All you need is a belief in the continued growth of the overall world market in the long term. So long as entrepreneurs and businesses continue to use their ingenuity and scarce resources to produce value for an ever increasing amount of consumers; and so long as you have the ability as an investor to provide those entrepreneurs capital in trade for a fair return on your investment, you can still proceed into 2010 encouraged that the 21st century, while off to a slow start, will be another step forward for the world.
By Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com
Thursday, September 24, 2009
The Secret to Investment Success
We all want to pick a winner. It doesn’t matter if we’re at the racetrack, casino, or investing our IRA. However, investors who spend most of their time trying to pick winners often end up losing more times than not. The number one determinant of your portfolio’s return is your asset allocation – the percentage of your investments in stocks and bonds – and not your superior stock picking ability or market timing. Once you have your asset allocation in place, your behavior will determine your long term success.
It’s easy to look back after a huge market run-up or downturn and think that it was obvious. It then becomes even easier to base our future decisions on recent events, by supporting our gut feeling by selectively looking at information that supports our opinion. We are constantly barraged with headlines that play to our emotions. The media loves to use current events to forecast the future. They want to create headlines that sell magazines or attract viewers, not create successful investors.
Steve Forbes said in a 2003 presentation to The Anderson School of Business, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.”
And just how do investors do with all of the information available about how to pick the winners? Dalbar does an annual study of investor performance versus the indexes. Last year the average equity investor underperformed the S&P 500 by almost 4%. They were down 41.63% vs. a loss of 37.72% for the S&P. For the past 20 years (January, 1989- December, 2008) the average equity investor earned an annual return of 1.87% vs. the S&P 500 average annual return of 8.35%. On a $10,000 investment, this meant a difference of $35,240!
We cannot control the short term direction of the markets. However, if we focus on what we can control - our reaction to the market- our chance of success will be much greater. Author Nick Murray does a great job summing it up: “At the end of our investing lifetime, it won’t matter what your funds did, it’ll matter what you did. And what you did will be a pure function of the quality of advice you got – from one caring, competent (advisor), and not from any number of magazines.”
By Chris Carleton, CFP(r)
It’s easy to look back after a huge market run-up or downturn and think that it was obvious. It then becomes even easier to base our future decisions on recent events, by supporting our gut feeling by selectively looking at information that supports our opinion. We are constantly barraged with headlines that play to our emotions. The media loves to use current events to forecast the future. They want to create headlines that sell magazines or attract viewers, not create successful investors.
Steve Forbes said in a 2003 presentation to The Anderson School of Business, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.”
And just how do investors do with all of the information available about how to pick the winners? Dalbar does an annual study of investor performance versus the indexes. Last year the average equity investor underperformed the S&P 500 by almost 4%. They were down 41.63% vs. a loss of 37.72% for the S&P. For the past 20 years (January, 1989- December, 2008) the average equity investor earned an annual return of 1.87% vs. the S&P 500 average annual return of 8.35%. On a $10,000 investment, this meant a difference of $35,240!
We cannot control the short term direction of the markets. However, if we focus on what we can control - our reaction to the market- our chance of success will be much greater. Author Nick Murray does a great job summing it up: “At the end of our investing lifetime, it won’t matter what your funds did, it’ll matter what you did. And what you did will be a pure function of the quality of advice you got – from one caring, competent (advisor), and not from any number of magazines.”
By Chris Carleton, CFP(r)
Tuesday, July 14, 2009
An Oracle Missteps
While as a rule I prefer not to forecast, an undeniable attempt by the markets at a recovery has begun, with some asset classes enjoying historic gains since early March. Even with this news, Warren Buffett, the Oracle of Omaha, has appeared in the media quite a bit with some downright depressing comments about the future of the economy. While I certainly believe that a return to “normal” will include some potentially significant bumps along the way and that a quick and easy ride back to where we were in 2007 (which was not, by any measure, normal either) is not likely, I am equally pessimistic about the uncharacteristically morose view that the world’s second wealthiest man has taken of late.
I have spoken with many people over the last few weeks that share this negative outlook, often quoting Mr. Buffett as a source for their worries and concern. While a fan of his overall career and his disciplined handling of his personal finances, I would like to offer an opinion that may not be so popular with the Warren-nation. Is it possible the Oracle has misstepped of late and is struggling to acknowledge the error of his ways?
Warren Buffett is a human being. That’s right, I said it. He plays bridge, he drives a Caddy, he has lived in the same house for 51 years. He also happens to be one of the most successful, disciplined investors of all time. Yet even with all his discipline and all the information a man of his status has at his fingertips, he has proven just as likely to succumb to the “what goes up, must move higher” mentality as any of us.
Buffett’s primary reasoning behind his most recent comments is that he is not seeing recovery on the floors of the companies in his portfolio. Is that because the economic recovery is a pump fake and we should prepare to run and hide? Or could it be Berkshire Hathaway is not nearly as diversified as one might think?
Over the last several years, look at the companies Berkshire has acquired. Acme Brick, Borsheim’s Fine Jewelry, Clayton Homes, Helzberg Diamonds, MidAmerican Energy, RC Willey Home Furnishings, NetJets. These are home builders, mortgage companies, furniture stores, fine jewelry dealers, energy companies, even private jet charter services. Berkshire got caught up in the boom in housing, luxury goods, energy and credit just like the rest of the world.
Once things turned sour, he made a multi-billion dollar bet on General Electric before it subsequently tanked even further. This is certainly not just an attempt to point out fault (I actually think with the terms he secured, this will be a good deal for Buffett in the long run), but rather an attempt to point out that no one person, not even the Oracle, has all the answers. The ability to be right time and time again is a noble endeavor, but a sucker’s bet. Greed and a sense that some companies just simply never underperform are powerful emotional pulls for even the shrewdest investor.
As the U.S. and global economies get back on their feet, and they will, even if it’s a slow, volatile comeback over several years, we must remember to not take the wins too seriously or the losses too much to heart. In the long run, smart, disciplined investors with well diversified portfolios will be rewarded, while speculators and gamblers will win some, but lose most.
By Chip Workman
I have spoken with many people over the last few weeks that share this negative outlook, often quoting Mr. Buffett as a source for their worries and concern. While a fan of his overall career and his disciplined handling of his personal finances, I would like to offer an opinion that may not be so popular with the Warren-nation. Is it possible the Oracle has misstepped of late and is struggling to acknowledge the error of his ways?
Warren Buffett is a human being. That’s right, I said it. He plays bridge, he drives a Caddy, he has lived in the same house for 51 years. He also happens to be one of the most successful, disciplined investors of all time. Yet even with all his discipline and all the information a man of his status has at his fingertips, he has proven just as likely to succumb to the “what goes up, must move higher” mentality as any of us.
Buffett’s primary reasoning behind his most recent comments is that he is not seeing recovery on the floors of the companies in his portfolio. Is that because the economic recovery is a pump fake and we should prepare to run and hide? Or could it be Berkshire Hathaway is not nearly as diversified as one might think?
Over the last several years, look at the companies Berkshire has acquired. Acme Brick, Borsheim’s Fine Jewelry, Clayton Homes, Helzberg Diamonds, MidAmerican Energy, RC Willey Home Furnishings, NetJets. These are home builders, mortgage companies, furniture stores, fine jewelry dealers, energy companies, even private jet charter services. Berkshire got caught up in the boom in housing, luxury goods, energy and credit just like the rest of the world.
Once things turned sour, he made a multi-billion dollar bet on General Electric before it subsequently tanked even further. This is certainly not just an attempt to point out fault (I actually think with the terms he secured, this will be a good deal for Buffett in the long run), but rather an attempt to point out that no one person, not even the Oracle, has all the answers. The ability to be right time and time again is a noble endeavor, but a sucker’s bet. Greed and a sense that some companies just simply never underperform are powerful emotional pulls for even the shrewdest investor.
As the U.S. and global economies get back on their feet, and they will, even if it’s a slow, volatile comeback over several years, we must remember to not take the wins too seriously or the losses too much to heart. In the long run, smart, disciplined investors with well diversified portfolios will be rewarded, while speculators and gamblers will win some, but lose most.
By Chip Workman
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