In case you missed any of my responses to the thousands of comments posted to my blog over the past few weeks, here’s a summary. This does not include every one of my responses, but just a few from each post. If you’d like to see ALL of my comments, you can view each post individually by clicking on the title of the post.
How would YOU build the optimal portfolio? - January 12, 2010
Question #1: How are YOU deciding whether you’ll invest in (1) domestic and foreign stocks, (2) gold bullion and other precious metals, (3) energy and natural resources, (4) foreign currencies and/or (5) bonds in 2010?
Question #2: How do you know how much of your money to invest in each area?
Sandeep Soni - 01.12.10 at 12:19 PM
Hi Martin, I have a simple strategy this year mainly thanks to all the inputs and content that I have been reading from you and the team:
1. To you first question and perhaps in reverse order I am completely out of bonds (including the short tenor ones!). All investments this year are earmarked for a) precious metals b) Stocks of Oil producers and c) Agri commodities and producers like Coffee/Sugar
2. I am all in and equally diversified with all 3 above at 33% each.
Wish me luck!
Thank you for your comments, Sandeep. I hope you did not misunderstand my first Money and Markets of the year, “Advance Warning: Danger of bond market collapse!” I was referring strictly to the dangers in long-term Treasuries — not shorter term Treasury bills or notes, and I have since updated the article to clarify. I believe you should continue to have a substantial stash of cash, and the most liquid, highest rated vehicle is still short-term Treasuries or equivalent.
Right now, unless you have a very high tolerance for risk, you may be (a) too heavily invested (b) too concentrated in stocks and (c) too focused on the precious metals and natural resource sectors. You could do very well for a while. But then, if there is a significant setback in resources, you could be very disappointed. I can’t advise you personally. But in general, I feel a portfolio like yours often needs more diversification, more cash, and less risk.— Martin
Hartmut Ramm - 01.12.10 at 1:11 PM
I really have no system. I am anxious to hear of a way to invest systematically and rationally. Investing, in the words of John Maynard Keynes, is like a beauty contest in which you do not choose the girl that looks the prettiest to you but the one you think the average judge will pick. I would add that investing poses the additional difficulties that the beauty contest never ends and that the judges are incredibly fickle.
Very well said, Hartmut! I chuckled out loud as I read your eloquent way of interpreting investment decision making. I’d add that, sometimes, investing is reduced to choosing the least ugly contestant. That’s certainly the case with currencies, when nearly all central banks are committing essentially the same blunders — but in varying degrees. And sometimes, as in 2008, it seemed to be true for nearly ALL investments (except inverse ETFs and other instruments to profit from bear markets).
So let’s not forget a very reasonable and rational alternative that all investors have at all times: NOT to invest, or not to invest all your money. There is nothing wrong with that, and it’s actually what we currently recommend for a PORTION of your portfolio today — the portion allocated to cash or equivalent.
Yes, the judges are fickle. Moreover, the judges are sometimes dead wrong. Indeed, it’s precisely when all investors (including the pros) are so overly confident and so completely committed to a particular theory about the market … that the theory is most likely to lead them to big losses. — Martin
John Penkala - 01.12.10 at 1:30 PM
I really don’t have a methodology when it comes to asset allocation. Unfortunately, I think I follow the crowd too much. I read, and if I read the same thing from a number of different sources I take it as credible. I’d like to learn more in order to make better decisions on my own.
Here is how I’ve invested:
1. As far as domestic stocks go I’m investing mostly in larger companies with international operations. 18%
I have about 8% of the portfolio in foreign stocks .
2. Gold and Silver- 18%
3. Energy and Resources- 6% in stocks and ETF’s recommended by Weiss Research
4. Foreign Currencies- I don’t know much about these markets and therefore do not invest in them.
5. Bonds- 3% in short term
6. Cash 47%
I like your allocation to cash. That, more than anything, establishes your credentials as an independent investor that is NOT following the crowd.
Following the crowd is not ALWAYS a bad thing to do, especially when we are in the middle of a major, long-term trend. It’s mostly when the crowd psychology reaches an extreme — both in terms of exuberance and unanimity of opinion — that you really need to step back and think independently.
But in the 2000s, following the crowd was usually a disaster. And in the 2010s, I think we will see a similar pattern. So continue to strike an independent course, and you should do better than most investors.— Martin
Care to give me a hand? - January 20, 2010
How do you think mutual fund money managers and Wall Street brokers and pros make these all-important decisions?
Are they just guessing? Shooting blind? Or do they have tested, reliable ways to structure portfolios that truly do minimize your risk while maximizing profit potential?
John Santa Cruz - 01.20.10 at 11:26 AM
How do you think mutual fund money managers and Wall Street brokers and pros make these all-important decisions?
Mutual fund money managers and Wall Street brokers and pros make these all-important decisions by following diversification formulas and popularized notions. They get paid anyway. The S&P does better than they do.
Are they just guessing? Shooting blind? Or do they have tested, reliable ways to structure portfolios that truly do minimize your risk while maximizing profit potential?
They are following old ideas. They worked before but are part of a confidence play. They don’t work well for long when everyone plays it (bubbles). The market is fed by greed and fear and they know that. So how do they alieve your fear but not your greed? They mostly care about their own paycheck. If you want to maximize your profit potential invest for yourself or become a broker and charge fees.
John, I agree. I don’t blame them for being wrong. No one can be right about the market all the time. The problem, as you have eloquently stated, is that they’re virtually PAID to be wrong. Reason:
• Analysts and fund managers who buck the crowd and miss the market get into big trouble. They may lose their job. They could be labeled “a loose cannon” and virtually barred from the Street. But …
• Analysts and fund managers that follow the crowd and miss the market suffer no such consequences. They keep their job. And if their firm has big profits, they may even earn bigger bonuses.
Thus, Wall Street punishes independence and rewards crowd behavior. In this environment, even if they diligently do their homework, the conclusions and recommendations that flow from that research can rarely be balanced or objective. — Martin
Ron Ross - 01.20.10 at 11:29 AM
While I don’t “know”, I suspect that fund managers have a wide range of analytical tools at their disposal and they each have an significant dependence on the select tools that have served them well in the past. This environment makes this methodology somewhat questionable. Additionally, as with most of the comments so far, I think the professions are hearing what others are saying and then using their “gut” to sway their decisions in what they believe is the best direction.
Bottom line: technology adjusted by “gut”.
Gut feelings represent the sum total of an individual’s experience and knowledge. Gut feelings include all the essential information inputs that cannot be reduced to a number or a formula. They ARE critical to investment success.
But here’s the great dilemma, Ron: It’s those gut feelings that are the most vulnerable to influence and bias, especially the carrot-for-following-the-crowd and the stick-for-mavericks that I describe in my blog response to John above.
This is why the Wall Street “quants” — those that rely exclusively on quantitative technology and strip out gut feelings from their work — have consistently performed less badly than traditional Wall Street analysts.
But “less bad” is not exactly an adequate goal, is it? For optimal performance, what’s really needed is what I call the three “I’s” — intelligence, intuition and INDEPENDENCE — to use the best tools in an environment that’s as free of bias as one can possibly achieve. — Martin
Dave D. - 01.20.10 at 11:38 AM
They have no more idea than the rest of us and simply go with the herd while their funds go up and down along with the underlying assets and if any of them dares to go contrary then he is duly chastised. Before the 1987 crash, one fund manager (I do not recall his name) wanted to break from the herd and sell at the peak but he was blocked by his superiors so he invested heavily in puts for which he was severely reprimanded but when his fund went up while others plunged, the upper management took all the credit and I believe he left the company. So much for expertize.
Great example of exactly what I’ve been blogging about, Dave! And I can give you many, many more from the decade that just ended.
• Mark Kastan of Credit Suisse First Boston issued “buy” ratings on Winstar until the bitter end. No surprise there: Kastan’s firm owned $511 million in Winstar stock.
• An analyst at Goldman Sachs oozed 11 gloriously positive ratings on stocks that subsequently lost investors at least three-quarters of their money. He got paid $20 million for his efforts. His best performing recommendations of the year was down 71 percent; his worst was down 99.8 percent.
• Merrill Lynch’s Henry Blodget gained fame by predicting Amazon.com would hit $400 per share. It was soon selling for under $11. Blodget also predicted that Quokka Sports would hit $1,250 a share. It went bankrupt. Blodget issued and reissued strong “buy” ratings for Pets.com (out of business), eToys (lost 95 percent of its value), InfoSpace (shed 92 percent), and Barnes & Nobel.com (lost 84 percent of its value). Yet even while investors lost billions, Blodget and Merrill Lynch cleaned up — $100 million on Internet IPOs alone.
• Most bank stock analysts work for big banks or investment banks. So among the many that rated Washington Mutual, Citigroup, Bank of America, and others that bit the dust in 2008-2009, NONE told their clients to clear out of bank stocks prior to the debacle.
Today, next to nothing has changed. Too many Wall Street analysts and pros still push stocks because of what’s in it for them — not for how it’s likely to turn out for you.
I do not question the sophistication and utility of some of the tools used on Wall Street. Over the years, for example, a lot of solid work has been done by academics on how to balance a portfolio and minimize risk. The big issue is not the tools. It’s the bias. — Martin
Wall Street’s Achilles’ heel: How vulnerable are you? -
January 25, 2010
If you were asked to create the ideal strategy for building, diversifying and balancing a growth-oriented portfolio, where would you begin?
What reliable scientific tools would you use to identify the most profitable asset classes moving forward?
How might you decide how much money to invest in each?
And how would you know when it was time to CHANGE your portfolio structure to avoid danger or to harness emerging new profit opportunities?
Art Clark - 01.25.10 at 11:47 AM
After maintaining a matrix &/or curve of performance, Wall St. will only allow so much grow/appreciation in a given period before they step in to get their own payday; a fact. To alieviate such pitfalls, avoid the glamour stocks/mutuals & the promised high yields as these are the first Big Money/Wall St. hits. Avoid junk bonds & mutuals that Big Banking has rolled their ultra-high risk ventures into to maintain their win-win situation.
After the big plunder by Big Money/Wall St. in late 2008 & 2009, limit your investment exposure & stay with basic needs of life.
Art, you’re on the right track about Wall Street, but I think it would be helpful for you — and other blog visitors — to understand a bit more specifically what mechanisms Wall Street uses to achieve its payday at the expense of average investors:
Mechanism #1. Proprietary trading. The ADVERTISED role of investment banks and brokerage firms is to help YOU make money in YOUR portfolio. However, their primary source of profits has been from their own trading accounts. This DUAL role immediately raises a whole panoply of conflicts of interest. And these conflicts are, in some respects, reminiscent of the insider trading violations that folks go to jail for. For example: If you’re running Goldman Sachs’ proprietary trading, can you buy investments for the bank that you later tell clients to buy? Worse, can you trade directly AGAINST your clients? Recently disclosed documents indicate that the answer is “yes.”
Mechanism #2. Dumping “inventory.” The firm buys shares for its own account in a company that its research team wants to downgrade from a “buy” to a “hold” … or from a “hold” to a “sell.” The firm delays publication of the downgrade, while holding a Squawk box session for brokers and customer reps to pitch the stock to retail clients. This gives the firm an opportunity to dump their inventory in the stock before the downgrade is released.
Mechanism #3. High-risk products. Major Wall Street firms develop high-risk, high-fee products based on mortgages, and then proceed to market them aggressively to individuals and institutions around the world, presenting them as low-risk — even guaranteed — high-yield investments. Months later, based on new data, the firms’ executives reach the conclusion that the mortgages are questionable and the products are actually very high risk. However, since sales are still good and since the firms’ decisions are still driven by earlier revenue goals, they give instructions to sales departments to push forward with little or no changes in marketing language and no additional risk disclosures.
Mechanism #4. Using government guaranteed funding to pursue these activities.
Mechanism #5. Full-court-press lobbying efforts to block any changes that might alter their game … or worse, to conveniently CHANGE the rules of the game in their favor.
These are just a few of the examples that have been disclosed so far. But, alas, it’s just the tip of the iceberg. — Martin
Chuck Bateman - 01.25.10 at 1:04 PM
I have recently retired, but still retain my RIA license. My professional career peaked while developeing investment strategies that are hedge fund level through the use of arbitrage, hedging, market timing, etc. Setting aside that level of investment management, I would recommend that investors use a combination of guidelines involving a macro-economic model indicating where we have been in the business cycle. The OECD out of France has some great ideas on how to build such a model. Coupled with that, I have put together a sector rotation guide that is an above average in returns. The key is to know the investment tools you want to use, be prepared to pull out of any position to keep losses small, always be anticipating when the money flow begins to move forward into the next “sector’s” cycle, and remain diversified across two, three, or four sectors/subsectors at a time.
After 28 years of market timing (different from the strategy mentioned above), I found that the best way to do it was to know who on wall street makes the most profits while being subjected to the least risk. There have been, and still are, those professionals that are so big that they tend to start the herd moving in the direction for which they are already positioned. The are parasites on the public. When you can determine who they are, then side with them. These wall street entities are very smart, and they do have to change the way things are done through lobbying efforts with congress and the SEC to keep the “rules of the game” in a state of flux, because people like me beging to jump on their “gravy-wagon” and it cuts into their profits. I have had to “retrench” (go back to the drawing board) and find out how to identify their positions relative to the public three times in my career. Since November/December of 2008, they have shifted things again, and rather than try to figure out a market timing strategy again, I have simply retired. The work can be exhausting, and I’ve gotten too old and lost my love for the challege.
My approach to the markets has always been quantitative in nature for determining the bigger picture. Once it is determined what kind of positions I would want to take (including the best investment tools to use), technical/analytical methods were used to determine entry and exit points, thereby allowing for minimum risk. The goal is to catch a trend and ride it, never letting losses become to great at the beginning of catching that trend.
My mentors have been, Norman Fosback, Mary Zweig, Edwards and Magee, Elaine Garzarelli, and a retired military man (whom I will not name). This man had an I.Q. of 181 and it was like walking the footsteps of the “Jolly Green Giant”. He was in crytography in the military, and his hobby was beating wall street. He applied codes to various chart patterns of the public investors’ investment patterns, and he did likewise to the professional investors. It was incredible to see that 98%-99% of the time the professionals would “dine” on the public. They didn’t have to do anything else in life to make a living — just “feed” on the public investor and live a fat and happy life. Well, it has been nice to ride the “waves” with them, but they do hate that — so from time to time they are smart enough to realize that they need to change some rules to confuse people like me. Then it is crunch time to find information to again determine how and when they are taking positions.
I would be agreeable to share some of the methods that I have used over my career as I am now leaving that arena and plan to get into politics and see if we can’t turn around this nightmare of governmental interference into our lives. I am waking up to the horrible mess America is in, and hopefully can help get government back on track to preserve the liberties and freedoms given to us by our founding fathers. Your writings that I receive have been insightful — thank you.
Sincerely,
Chuck Bateman
Chuck, all investors have a lot to learn, and you have a lot to teach with a treasure chest of wisdom to share. I find your insights on macro-economic and sector cycles of particular interest and would love to discuss them with you if we have the opportunity.
I agree with most of what you have to say, and you say it with such precision, I have little to add. My main point of disagreement — at least in emphasis — revolves around following the big money on Wall Street. Can it work well? In normal times, yes. But in this new environment we’re living in, I feel it may be too risky. As you’ve also indicated, there are some grand — and potentially very dangerous — exceptions to the Big Money success stories, such as the experience of 2008. Let’s not underestimate the possibility that, in the years ahead, those exceptions may become the rule. — Martin
Dave O - 01.25.10 at 3:06 PM
1) I treat stock picking newsletters like stocks themselves. They all have some level of money-back guarantee, I rank them buy/hold/divest based on their performance.
This sort of guarantees that the services that give me the best returns wind up driving my picks. This also drives my diversification.
At the technicals level, I (a) use stop-losses that I raise as my positions go up to move with the market and force myself to take profits off the table before the market turns against me, (b) am educating myself about cycle analysis, and Elliot Wave theory, which seems to be the minimum required to do your own basic market analysis.
At the end of the day, you can find an analyst trumpeting ANY opinion: “Gold is going to shoot the moon! Buy Gold” or “Gold is overbought, you’d better take your profits while you can.”
And it’s not that most of these people are scamming us; they genuinely believe what they’re saying. It’s just the law of the market: there are always both bulls and bears.
So who does a person believe? I’ve come to the conclusion that (a) if everyone’s saying it, then you’re probably late to the party, and (b) it’s much safer to rely on technicals like cycle analysis and wave theory than to listen to the chorus of Wall Street stories and try to sort through them all.
Dave
Dave, for someone like me who writes and publishes investment newsletters, this is valuable feedback. Thank you! My policy is simple: I do not tell our analysts what to say or write — let alone what to think. What I do require is intellectual honesty. My primary message to them and all of us: (a) Make your judgments based exclusively on independent analysis, regardless of what the crowd may be saying. (b) If you don’t truly believe in an investment, don’t recommend it. And equally important, (c) if you have recommended an investment you no longer believe in, don’t let anything stand in the way of recommending its sale. — Martin
Are U.S. stocks a “sucker bet” now? -
January 26, 2010
Is this a good time to be buying or holding U.S. stocks and equity funds?
Zachary Ryan - 01.26.10 at 12:36 PM
Hi Martin!
Stocks a suckers bet? This can be a very complicated question. Merely speaking in light of the current conditions I think that it could be too early to tell. As we know stock prices are a function of how well earnings meet estimates, period. The current economy must be able to grow on it’s own. The current leading indicators may only reflect, as much of the “recovery” does, a positive economic reaction to gov. intervention. Sustainability, will be the result of how well Joe and Jane American fixed their debt situation as well as Corporate America-this will enable economic expansion. If they did’nt, the recovery will be short lived. Add on to this the increases in taxes and changes in tax code due to deficit pressures, another bite into bottom lines, they have better paid their debts. Quite frankly, I don’t see a years time being long enough to allow the majority of Americans to right their finances. I honestly see natural resources i.e. commodities the best way to go.
Back to stocks..we all know that stocks are like racehorses. The horses can get smaller and run slower but once the crowd expects a slower race the bets/prices can go back up. Stocks may have another correction but shortly they will have priced in all of these titanic changes. So, depending on your financial situation, one may want to allocate money to some stocks once this recession/recovery decides where it’s going-or even now depending on fundamentals with the individual company.
I hope the recovery continues.
Regards,
Zach Ryan
Well said, Zack!
Brokers will tell you that stocks always perform over the long term. But there are several fundamental fallacies in that argument.
(1) It generally assumes that you did NOT start investing at high points in the stock market’s history — such as late 1929 or late 1999.
(2) It excludes companies that failed, left investors penniless and were dropped out of the stock market averages.
(3) It fails to factor inflation and the declining purchasing power of the dollar
(4) It fails to recognize that our nation today is NOT the same country that it was in 1900, 1946 or even 1980.
I agree it’s an overstatement to say stocks are a “sucker’s bet.” We must not paint them all with the same brush. But it is an even graver error to assume that stocks are the right investment for everyone all the time — let alone for all of your money. — Martin
Günter Apfeld (Carsten Roth) - 01.26.10 at 2:18 PM
Should I invest in American stocks today? No, I wouldn´t. The Dow is up, shares are expesive. Why should I buy expensive stocks today when I can get them much cheaper later? There seems to be a bear-market in the US. But I think the Investors who have driven the market will soon cash in their gains and the shares will go back to their fundamental value. I´d go with the “Value-Investors”: Buy good shares when they are cheap, wait long enough and sell them when they are expensive again.
In the meantime I save the money or pay down the mortgages on my real estate with extra-payments. That brings me a gain in the scale of the interest I have to pay. Would I get gains in that scale with other instruments (WITHOUT any risk!)??? I don´t think so.
Greeting from Germany, Günter
Günter, thank you for the input! Based on the precept that money saved is money earned, I agree that paying down mortgages at a faster pace is great way to, in effect, “earn” high interest with no risk. With respect to U.S. stocks, I also agree there are far better opportunities elsewhere. Just remember, there are exceptions to every rule. — Martin
R.T. Barz - 01.27.10 at 12:21 AM
Martin, It all depends on which stocks you hold. Here in the USA my personal outlook to what’s coming is very grim. The only bright note is energy stocks and the race that has began to come up with the newest alternative fuel, or the further development of previous abandoned plans in alternative fuels. I agree with you to load up on inverse ETF’s just in case. The other play is currency and if you are not in it now it might be too late to make adjustments if the market goes south in flames.
Yes, R.T., I definitely favor inverse ETFs. But as with any investment, don’t go overboard. More so than ever before, you need a portfolio that is
• spread out over the five major asset classes (domestic and foreign stocks, bonds, gold, other natural resources and currencies).
• has a solid, scientific, basis for determining when and how much to allocate to each
• can also bet against key asset classes in major down markets.
— Martin
