Friday, September 5, 2014

5 Things To Ponder: Perspicacious Observations

by Lance Roberts

This past week has seen the market repeatedly attempt new "all-time" highs only to be found wanting. There has been plenty of headline data for the "bulls" to feast on from the ECB announcing a program to buy bonds, surging ISM data and improvement in productivity. However, the underlying data has kept the "bears" in the game with new orders and employment showing weakness, unit labor costs shrinking and the realization that the ECB's plans are likely be ineffectual.

I thought one of the most interesting comments this week came from Brad Delong with referenceto the exit of the Federal Reserve from its monetary campaigns:

"Meanwhile, in the US, the Federal Reserve under Janet Yellen is no longer wondering whether it is appropriate to stop purchasing long-term assets and raise interest rates until there is a significant upturn in employment. Instead, despite the absence of a significant increase in employment or a substantial increase in inflation, the Fed already is cutting its asset purchases and considering when, not whether, to raise interest rates."

There is mounting evidence that these monetary campaigns have very little effect on stimulating economic growth, yet the ECB specifically noted yesterday that they are engaging in the same program in hopes of stimulating economic growth and inflation. What the actual outcome will be is yet to be seen, but over the last 24-hours the markets seem to less convinced of a positive outcome.

This weekend's reading list covers a rather wide range of topics to contemplate between football games, "couch naps" and junk-food.  Since my goal is to be of service to you, here is the official schedule of games this weekend via NFL:


1) You Suck At Investing by Shawn Langolis via Marketwatch


As this chart from Richard Bernstein Advisors shows, mom and pop stink it up on a pretty steady basis and have lagged gains in every asset class, with the exceptions of Asian emerging markets and Japanese equities, over the last 20 years. The average investor has even managed to underperform cash – represented in the chart by 3-month T-bills.

The chronic underperformance confirms that investors' are generally plagued by emotional behaviors (i.e. buy high/sell low).  Despite the recent media deluge of "buy and hold" advice,"passive beats active" investing, etc., the reality is that individuals never survive the long game. The evidence is pretty clear that for most, putting money into bonds and cash is actually the best choice. The problem is that such advice doesn't generate fees for WallStreet, viewership for the media or feed our personal "greed."

2) What Risk Really Means by Howard Marks via Oaktree Capital Management

If you read nothing else this this.

"In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don't think most investors fear volatility. In fact, I've never heard anyone say, 'The prospective return isn't high enough to warrant bearing all that volatility.' What they fear is the possibility of permanent loss."

Risk Revisited by Howard Marks

3) Stocks Are NOT Fairly Valued by GaveKal Capital

"No matter how many times we hear 'stocks are trading right around their average valuation levels of the past 15 years' and this chart is trotted out as evidence that stocks are 'fairly valued', we cringe a little bit.

By every measure that we look at stocks have flown by fairly value and have entered into richly valued territory."


4) The Four Most Useless Things Advisers Tell You by Howard Gold via MarketWatch

[Note: As a financial adviser it is important that you understand the arguments "against" you. Unfortunately, Howard's points are correct are the reality that is currently prevailing in the markets today. What is the old saying about dinosaurs?]

  1. Your biggest retirement risk is outliving your money.
  2. Wait until you are 70 to claim Social Security benefits.
  3. The only good IRA is a Roth IRA
  4. Why accept "mediocre" returns when you can beat the market?

"Academic research has demolished the whole notion of market-beating stock picking, of course, and now the trend toward index funds is unstoppable. But those with a vested interest are clinging to the old ways by appealing to Americans’ desire to be “better than average.”

Oh, if only they were truly mediocre! My MarketWatch colleague Chuck Jaffe wrote recently about how badly investors perform, mostly because they move in and out of stocks at exactly the wrong time, missing much of the upside that’s part of every bull market. If they really bought and held, their equity holdings could keep up with the market while their wealth grew over time."

5) A Brain In Doubt Leaves It Out by Robert Seawright via AboveTheMarket

"The bottom line here is that the way we’re built makes it really hard for us to make good decisions and sometimes (quite literally) to see things accurately. To have even a fighting chance to do so, we need actively to consider and test opposing viewpoints. We don’t like to think that we’re wrong, but we are – a lot, about yellow dots and broad concepts alike. As Jeff Bezos of Amazon insightfullyexpresses it, people who are right a lot of the time are people who change their minds a lot.

Good science, good practice and good process all demand that we remain open to new and better evidence and to change our minds when and as events warrant. But doing so is much easier said than done, of course. Information may be cheap, but meaning is expensive and elusive. If we are going to make better decisions in the markets and elsewhere, we need a much broader perspective and we need to be constantly refining and updating our viewpoints. More than that, we need really talented people actively empowered to try to discover where we are going and where we have already gone wrong…even when and as our conflicted brains wants to leave such things out of our consideration."

Bonus Read: Even Bull Markets Aren' t Easy by Ben Carlson via A Wealth Of Common Sense

"Risk, then, comes in two flavors: 'shallow risk,' a loss of real capital that recovers relatively quickly, say within several years; and 'deep risk,' a permanent loss of real capital.” – William Bernstein

Plenty of pundits think we’re due for a healthy pullback or even an end to the current bull market. The problem is that healthy turns into scary pretty quickly for most investors when stocks do finally fall.

Investors must remember that losses come with the territory when investing in stocks. It’s always for a different reason, but even when things are rolling along nicely, markets do tend to take a breather on occasion."

Have a great weekend.

"People say that money is not the key to happiness, but I always figured if you have enough money, you can have a key made." -- Joan Rivers, RIP.

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