Pardon My Dissonance

Dancing Figures on Websites Lower Investor IQs
Immigrants R Us
MSN Home Page Dumbs Down in search of LCDs
P.J. O’Rourke Solves Mystery

We talked a blog post or so ago about the confusion about who to tag with the sub prime market mini-disaster. It’s mini in the investment sense. Investors big and small are always self destructing, they can’t help it. Blame for the problem reminds me of the Abbott and Costello routine, Who’s on First? Of course, that famous routine has become the template for congressional investigations and presidential debates. The idea is simple. After a lot of questions and answers, everyone is more confused at the end than the beginning.
In a more serious vein, J. Krishnamurti, teacher and world’s best self-help author, said, “The beginning is the end.” This simple, razor sharp observation covers all you need to know on the sub prime mess. And much of everything else in life.
Borrowers thought it was cute to lie about their capacity to pay the mortgage. Throw in a little self delusion, “Well honey, if we cut back on the dry cleaning, don’t go out to eat, and get used to fresh air instead of all that conditioned stuff, we can just about afford the payment. And god knows we need the extra room. You were just saying the other day that we should rent another mini storage because the one we have is already full of our cherished memories.”
Lenders thought it was cute to collect a fee for originating a loan that had little or no documentation, for a house that was grossly overpriced. Who cares if the borrower defaults? They were selling the loan as soon as the ink dried.
Investment banks thought it would be fun and profitable to chop the loans up into fragments that Einstein couldn’t understand and pawn them off to investors who pretended to understand what the investment banks didn’t. Now everyone wants to be bailed out. It smelled at the beginning, it reeked at the end.

We come from the land of the ice and snow,
From the midnight sun where the hot springs flow.
The hammer of the gods will drive our ships to new lands,
To fight the horde, singing and crying: Valhalla, I am coming!
Immigrant Song Led Zeppelin

Immigrants emigrate for a variety of reasons. Apparently they don’t like living in the dirt, or being murdered. Go figure. If illegal immigrants should be deported, we can start with the pilgrims. We’re all illegal. The Indians should have built a wall. Maybe we should be deported to Mexico.
I prefer to let the Mexicans in. When the terrorists invade, who better to fight Muslim jihadists than Catholics? Catholics invented the Crusades and the Inquisition. Bush and Cheney are the Protestant version. The only thing people learn from history is how to do the same stupid things more efficiently. Take that Santayana.
Here in California, people complain about immigrants for breakfast, then go down to the Home Depot and pick up a few to do their gardening, child care and fruit picking. If unemployed auto workers have immigrated to California to pick fruit, it hasn’t hit the papers yet.
Let’s cut to the chase. You can believe that people, and their elected representatives, are serious about illegal immigrants when you see employers doing the perp walk for hiring them. Until then, ignore the whining and pontifications.
I have a proposal. Nobody, anywhere, for any reason, can ever use the phrase “…the Founding Fathers intended…” Or any other suggestion that they have read the minds of any of the so-called FF’s. Whenever you hear the term Founding Fathers, you can rest assured the statement that surrounds it will be self righteously smug.

Smacks of a Committee Decision
I have more e-mail addresses than I need. I like to see how the various mail systems work. I started out with hotmail. Then Microsoft “improved” it and made it something called Windows Live. Now, it won’t allow me to cut and paste things from a received e-mail.
The trick I really love is that the improved version defaults to the address line when you hit “reply.” So, if you’re dumb enough to assume “reply” meant you wanted to reply, you start to type and all you do is remove the address you wanted to reply to. Microsoft stock is likely doomed to perpetually under perform for the same reason automakers and airlines do. They confuse tweaking old ideas with actual new ideas. It’s not the same thing. That’s what managers and committees do. They change the color and stamp “new and improved” on the box. Can a thing really be both new AND improved? If it’s new, really, then what’s the basis for comparison? Too metaphysical for me. Let’s move on.
The MSN homepage almost always has a box about celebrity stupidities. Stupid celebrity stories appeal to the LCD, least common denominator. If you click on the most recent celebrity stupidity, you find out something. Not stupid celebrities, about yourself.

Today’s Timeless Question
Why does it take one click more than necessary to get to your inbox?

Now that MSN has determined the functional IQ of it’s audience, they’ve decided to put what are clearly ads into the headlines within topic boxes. They appear to be news or information items, but they aren’t. They’re, so far, just more ads for mortgages. Which brings us full circle. If easy mortgages created so many enormous problems, why are they still hawking easy mortgages on every page of the net?


“Intelligence is a constant. The population is growing.”
P.J. O’Rourke

Ouch!

Nothing like the death of a thousand cuts to get the old blood flowing. Or as the Church Lady said, "Isn't that special?"
You think you got problems? My account stays someplace between 100% and 140% in stocks. I use some of the most volatile ETFs to add to the excitement.
I do this because I'm insane. Just kidding. I'm only as neurotic as the next investor, just not about investments. If you have, say 25-50% of your money in stocks, and the market's down 10%, pretty much like it is since the highs a few weeks ago, then you can imagine how much fun it is on this side of the blog.
I've disintegrated about 9.3% from my market value on 10/31 this year.
In less than a month. About the same as the Dow.
On the other hand, from 09/30 to 10/31, I was up 6.34%. (The Dow was up a fraction, basically unchanged.)
If you look from 09/30 to today, I'm down 2.9%. The Dow is down 8 or 9%. I didn't do all the decimals, that's not the point.
The point is, am I down 9.3%, or 2.9%, or what?
Are you getting the idea? I can pick all sorts of measuring periods and feel good, crappy or indifferent. Money managers pick measuring periods selectively as well. They never ever pick measuring periods that make them look incompetent. Bear that in mind when you read performance reports.
If I'm going to feel good or bad based on statement end dates, that's okay, as long as I know it's irrational.
Warren Buffet once said, "Why should investment performance be measured by the time it takes the earth to circle the sun?"
There is no reason, anymore than there's a good reason to measure it by the month, the day the hour or the second. You may as well decide to measure by every third Wednesday, or the phases of the moon. (Some goofball out there does, you know it's true. If we can think of it, somebody's doing it.)
No, I don't like watching my one month gains evaporate into a negative. I have brief moments of 'what if' when I think I could have sold out on October 31 and kept the gains. Of course, then I'd have to have a second brilliant insight and pick the day to get back in. I'm not that good. If you think you are, then by all means go for it. Throw some math at the problem, that's what made the hedge funds great.
I do have one question. My account got smashed big time in the last three or so weeks. I have to wait it out and lick my wounds. If I'd been in charge of imploding the stocks of Merrill Lynch, Citigroup or Bear Stearns, I'd have gotten millions to go away quietly.
So, where's my check?

That'll Take the Stuffing Out of Your Shorts

Wooow! What fun. The market is playing that old song, "How much pain can you stand and how long can you stand it?"
We're getting waterboarded with bad news. $100 a barrel oil, slower economic growth, dollar in the toilet. Tourist traps in India want you to pay in rupees, they won't accept dollars. Isn't that special? Guess I'll have to postpone my pilgrimage to Calcutta. Dang.
Where's the bottom? Don't ask me, I don't have the slightest idea. I do know that everything will be alright in the end. If it isn't, it isn't the end.
This is supposed to be the place where I tell you to start adding to your stock portfolio. If your asset allocation structure calls for it, then do it. If your portfolio has slipped to 25% stocks and you want 30% in stocks, then add money to stocks. You can't pick the bottom, thinking you can is delusional, so don't be delusional.
If you just can't bear to buy more stocks in the face of this, then your brain is telling you something. You had too much in stock in the first place. You don't have the temperament for 30%. That's good to know.
If you have no more money to add, then there's really no point in worrying about it. Unless you get pleasure from worrying about things you can't control. Many people do. Basically it's how religious beliefs and other superstitions are formed.
Other superstitions include technical analysis, market gurus, any television market commentator, research analysts, quants and the notion that your stockbroker has a good investment idea. If you believe any of that, call Father Merrin.

A Balanced Portfolio is a Sign of a Balanced Mind

We touched on rebalancing in the last post. I'd like to address the topic in a bit more detail.
If you have set up your portfolio according to the asset allocation suggestions (see 08/15/07 post Asset Allocation) then once a year you need to make sure you are still within the parameters you wanted. So, for instance, if stocks have had a blistering year, and the total you have in stocks is now 40%, but your allocation model calls for 30%, it's time to rebalance.
Sell off enough of your stock portfolio so that it is now back to 30% of the total. By default, you will be selling some stocks that went up (you're selling high) and buying some other asset class that didn't perform as well, like bonds (you're buying low.)
It's easy, yes?
No. Most people won't do it. Even though they know they should.
Why not?
Human nature. They can't make themselves sell "the good one." Let's say, small cap stocks were the market leader over the prior 12 months. Now it's time to rebalance. You look at your portfolio, small cap has gotten ahead of large cap by a fairly significant amount. You know you need to cut that back and add some money to something that didn't perform as well. Your mind screws you instead.
"But it's doing so well. And that other stuff didn't do anything. I don't want to sell the good one."
Don't be a fool. First, you're not selling all of it, you're only selling some of it. Greed kills. You are not immune. Second, you're adding the money to something nobody else wants. That by itself likely makes it a good value.
There are two rebalances. Within the asset class. If you have large, medium, small and international stocks, you rebalance that. Them there is rebalancing the entire portfolio. If you have 25% in stocks, 25% in bonds, 25% in real estate and 25% in cash (money market) and stocks after 12 months are 30% of the portfolio, then the entire stock allocation should be pared back to 25%.
I use 5% as a guideline. If I should have 25% in stocks, and at the end of the year it's 28%, I don't run up commissions to rebalance for a 3% divergence. If something gets 5% or more out of balance, then I make the adjustments.
Don't be a sucker. Don't say, "I'll let the stocks keep going and sell when they start to fall."
No, you won't. When the stock market pulls back, you'll regret not selling and want to hold on until "it comes back." Then it will fall some more, and then if it starts to plummet, you'll sell at precisely the wrong time out of fear. Sound familiar?
A bit of discipline at the beginning avoids a tsunami of regret in the end.

Be Cool, Everybody Just Be Cool

I don't likely need to tell you it was a bad week for stocks. This kind of thing happens from time to time. I find it interesting the story changes depending on what the fear du jour happens to be. You will remember recent problems in the subprime market were blamed on easy credit. Now they're blaming the market declines on "fears of a credit squeeze." In other words, that loans will be too hard to get. If they'd been harder to get in the first place, there wouldn't have been subprime lending problems. Easy credit is bad, except when it's not. Hard to get credit is bad, except when it's not. Is there ever "just right" credit?
Confused? Don't be. I can't recall the number of times in 30 years I've seen the same explanation for two contradictory events. There's a simple reason for it. These are stories made up by market analysts, talking heads and journalists to fill their various needs.
Talking heads need to tell stories in order to keep you watching until the commercial comes on.
Journalists need to fill the empty space in newspapers and magazines that the paper couldn't sell to advertisers.
Market analysts are hired by brokerage firms to cook up reasons you need to sell what you have to buy something else. If you don't move your money around, they don't make any.
If you are handling your account properly, you have some predetermined percentage in stocks, including real estate, some percentage in bonds, and some in cash.
You shouldn't care what the market does.
That's because you are going to rebalance annually. If one year the market tanks, then when you rebalance, you will add money to stocks, either from cash or bonds, to get back to your original percentage allocation. If one year the market explodes upwards, then you will sell off some stocks and put the excess in bonds, real estate or cash, rebalancing to your pre-planned allocation. That means you aren't always reacting to someone else's bullshxx story. Rather you are acting on your plan.
A second major benefit is that when you sell off some of the securities that went up and buy some of the securities that went down, you are buying low and selling high. This is the world's most sensible market advice that almost no one follows. That's because they're too busy getting greedy or scared at exactly the wrong time.

Big Deal Lucille

I don’t comment on market direction, as in picking one. The best lesson I learned in my years of studying chart mumbo jumbo, trading methodologies and so called growth or value investing is that none of it works. I expected doing a lot of research, plotting new strategies and sheer determination would magically result in superior market returns.
Think of it as digging a hole. You’re getting deeper but you’re not finding anything but more dirt. Expending time, energy, and money, only to find more of what you’ve been throwing out of the hole.
Friday, the DJIA was down 2.6%, 366 points.
So what was the big news? 366 points, not 2.6%.
Get a grip.
When I started in business, in 1980, the Dow was hanging out between 870 and 1000. If the Dow had been down 2.6%, it would have been down 26 points.
What’s my point? Points aren’t points. Percentages matter, not points.
Yes, I’m aware the Dow is off 5% from it’s very recent high. The Dow could fall 10%, or in a real ugly stretch, 20%, or more. See that prospect in your mind, feel it. Picture the equity, stock, side of your portfolio down 20%, how would that work for you?
If it raises your heart rate, then you need to have less money in the market. Not because I’m predicting a market decline of any magnitude, I’m not. I’m not predicting a rise of any amount either. I don’t predict.
That’s for television bubbleheads to scare or delight you into watching the next commercial. If your body is telling you the fluctuation is stressing you out, then reduce your market exposure. Why torture yourself?

Math Failure

I see that two rocket scientists were fired from Merrill Lynch the other day. Apparently fixed income gambling and no rules mortgage lending turned out to be less profitable than originally calculated.
Readers of this blog understand, or will come to understand, the converse of the old economics observation. You remember. If you lay all the economists in the world end to end, they wouldn’t reach a conclusion.
The converse math observation is that if you lay all the mathematicians in the world end to end around Wall Street, they still can’t calculate the butterfly effect.
The quants, the math geniuses that gave you Long Term Capital Management and it’s subsequent implosion, got busy and created more complexity in derivatives, which they assured themselves were mathematically pristine, and any little risks could be hedged away.
Oops. They lost billions too. Dang.
Think of the problem like this. The more parts in any system, the greater the chance of a malfunction. It’s particularly nasty when the failure of any one of those parts creates stress on the remaining parts, which begin to fail. You’ll recall the spreading power failure down the East coast years ago when one grid went down? Interlocking global financial markets have the same systemic problems. These are multiplied by the ability to control huge amounts of money with very little of your own money on the table. This is what happened at Merrill Lynch, UBS and other Wall Street firms, hedge funds and other derivatives players. Homeowners played a version of the game by taking no money down loans with teaser rate that readjusted two to five years out. They lived in blissful optimism, that they would keep their jobs, make more money and that real estate “always” went up. Not only didn’t they get raises, one spouse got laid off, time passed, the rate adjusted up and home prices stagnated or declined. Even if they sell the place, they still owe money to some mysterious mortgage lender.
I promise you, the math guys will keep trying. The bonuses are too big when the next new calculation tricks seem to work for a while. Then another part malfunction, and all the money will flush away.
No worries mate. Look at it this way. If you could earn millions in salary and bonuses, and the only risk is that you get fired eventually, would you go for it?

The Toxic Waste of Investment Products

I won't make extensive comments on variable annuities. It can't be said much better than the article in Smart Money. Follow the link if you want to explore the topic. To just save time, all you really need to remember is that variable annuities are sold by insurance companies. So like the sensible men of King Arthur's Court in Monty Python and the Holy Grail, "Run away, run away!!"

What a Little Rate Cut Will Do

The purpose of this commentary is not to run my head about every little twitch and hiccup in the market, even the two or three hundred point hiccups. Today was a big upside day, 300 plus points on the Dow.
First, at 13,500 on the Dow, a couple of hundred points isn’t what it used to be. When the Dow was 1000, a hundred points was 10%. Now it’s well under 1%.
Second, without volatility, there is no market. (Only hedge funds live in the delusion there are market returns with less risk. Only hedge fund investors live in the delusion that they can give up 20% of the profits to the managers and outperform the market on the same day.)
I looked up hedge fund performance statistics, then compared them to the index averages. What’s amazing is that, the best I can tell, they not only on average failed to beat the S&P 500, but report their returns BEFORE fees.
Essentially, what that means is that they say they got a 12% return, but that’s not what the investor got. If an investor put up $100,000 and the fund earned 12%, that’s $12,000. THEN the fund manager takes his cut, upwards of 20% or $2,400.
The investor gets a profit of $9,600 or 9.6%.
So did the hedge fund earn 12% or 9.6%? Depends on whether you ask the manager or the investor.
The real lesson of big jump days is the old 40 best days story most investors have come across by now. You know, if you missed the 40 best days over the last 20 years, your return went from 10% to 1.5%. (These are pretty close stats for the time frame of 1983 through 2003.) You can Google more examples if you like.
Naturally, if you could market time, and figure out how to miss the worst days, you’d be Super Investor. You’re not. Neither is anyone else, even very sharp guys with PhDs in math. Not even the guy who can calculate who owes who what after the golf match, including handicaps and pressed bets. I don’t much like golf, particularly that guy.
Don’t reply and carefully explain how the XYZ hedge fund outperformed some index in the last 3 days, 3 months or 3 years. I’m certain it’s true. The problem is not reading history, librarians can do that. The problem is predicting the future, which past performance cannot do. Your personal hedge fund pick will always outperform the market, until you actually invest in it.
So what do you put the money in? Here’s a clue. Go to ishares.com. Look over the various index funds. Read about ETFs (exchange traded funds.) Play with the asset correlation tools, portfolio construction tools, even desktop widgets. Have fun, it’s free. You will learn by doing. I’m not schilling for ishares. You can go to Morningstar as well, they have some neat stuff, so does Vanguard.
In future blogs, I’ll make some suggestions as to what to look for and how to enjoy the game, not get an ulcer over it. And you don’t have to listen to the golf guy. Do you notice that the golf score statistician never owes money after the round? Never buys a round of drinks? He’s probably a hedge fund manager.

Diversification

Everyone claims to understand diversification, lots of people think they have a diversified portfolio. Lots of people think that reading history will keep them from making the same mistakes other people made. After 3000 years of war, and 2000 plus years of recorded history, someone will have to explain to me how studying history prevents war.
So, now we know that what lots of people think is crap. That is, it is not just useless, what most people think is detrimental to their investment performance.
Where to people go consistently wrong in diversifying? If you look at almost any individual’s so called diversified 401k, for instance, you’ll see several different mutual fund selections. When you dig into the holdings of these different funds, you find that 40%, often more, of the same stocks are in each mutual fund. Quit looking at the name of the fund, look at what the fund buys to find out if you’re diversified. One man’s growth and income is another’s value. One manager’s growth at a reasonable price is nothing more than the typical list of big names you can find in any large cap stock portfolio.
There is NO SUCH THING as sector analysis, top down market timing, bottom up market timing, dividend plays or allocation strategies (dressed up market timing.) There is no such thing as “growth” for that matter. In a large actively followed market, any of the ones you are likely to invest in, there is no such thing as “value.”
Every actively traded stock is priced to reflect all the information that is known and can be known about it. It’s past earnings, its past earnings relative to other stock in its market, it earning prospects, its cash flow, or lack of it, its debt structure, market shares, products in development and the prospects for products in development are all known quantities. Hundreds of thousands of intelligent knowledgeable investors have put their money into it, or taken their money out of it, all based on the same factors available to everyone else. You do not possess any special information, you do not have any special ability or mystical powers. You cannot outguess the collective wisdom of all other investors. You broker can’t, money managers can’t, Zelda the mind reading dog can’t.
Within any given asset class, there is only one way to diversify, buy different things. Different, not the same 40 stocks packaged in 3 mutual funds with different names. If you insist on buying mutual funds, or if you have no choice, as in a 401k, then you have to take time to look under the hood and make sure you are really diversifying, by examining the stocks each fund holds.
For the stock portion of your portfolio, always use only ETFs, Exchange Traded Funds if possible. They have little turnover, buying and selling, unlike your mutual fund who likely can’t seem to find a stock they like for more than 6 months. Every time they change stocks, guess who pays the bill?
In stocks, there are only three kinds, no, not too hot, too cold and just right. The three kinds I’m talking about are large, medium and small. This refers to market capitalization, how “big” the company is. This only matter for one reason, risk.
Across the universe of stocks, it is generally true that big stocks have a bit less risk than middle sized ones, and small ones have the most risk. In general, then, small stocks perform better than their bigger cousins. Except that’s not exactly true. For the most part, mid size stocks do the best, go figure. I’m not going through all the proof here, you don’t believe me, go to the various ETF websites and do some hypotheticals. I’ll be here when you get back.
Therefore to diversify within your stock allocation, divide up your money into the three sizes, equally will do. You’ll understand why when I get around to rebalancing.
T o diversify in bonds is fairly simple. I’ll explain that in a special section on bond, or fixed income investing.

Asset Allocation

Asset allocation isn't just for the wealthy. It's very important for investors in 401ks, or in any other basket they use to buy bonds, stocks or real estate. It doesn't need to be complicated, unless someone is trying to sell you their investment services, then it needs to seem very complicated so you'll throw up your hands and tell them to do what they think best. Too often, what they think best is best for them, not you.
Asset allocation is how you divide up your investments, into what types of investment. There only a few choices.
Money Market Funds, or what's referred to as "cash." Money you can get at quickly with no loss of principal.
Bonds, one year maturity or longer. There is no point in buying 90 day treasury bills, or 6 month CD's. Just use a money market fund. If you're the really tense type, use a government bond money market fund. If you're that tense, then the rest of the investment choices don't matter, you shouldn't invest in them if you're temperamentally timid.
Stocks. I'll show you how, in later posts, to buy a truly diversified stock portfolio, that you don't have to pay either a broker for or a "manager" to play with.
Real Estate. For most people their house is their real estate. That's fine, you need a place to live, but it's hardly diversified. I'll tell you how to have a diversified real estate portfolio without the hassle of management, paint or toilet repairs.
I do not include any other forms of "hard" assets in my asset allocation model. Commodities, diamonds, gold or coins, stamps or art are all things that interest some people. Those are hobbies, not investments, despite what the guy who's trying to sell you gold coins says. Anything you have to "store," or that doesn't have a ready market, or a reasonable, clear cut way to determine actual value, isn't an investment. Stocks, and sometimes bonds, can be speculative enough. There's limited to no likelihood you're going to develop enough expertise in coins or art to make those things profitable in a financial sense. If you like to look at the pretty pictures, go for it, but it's not a source of retirement income.
That leaves us with the basic four categories, cash, bonds, stocks and real estate. Only you can decide the next step. Sorry.
Cash and bonds, at least the kind I recommend, don't have risk in the sense of losing your original investment, the principal. Stocks and real estate go up and down, unpredictably, despite what some market prognosticators want you to believe.
So here's your first decision. How much of your money do you want invested in the things that go up and down unpredictably? Is it half, 30%, do you want to bet most of the ranch and make it 80%? You make this decision by the sleep factor. If you can invest all your money in stocks and no amount of market gyration keeps you up at night, then do it. If that bothers you, then reduce the percentages in stocks until you can get enough sleep. If you're married, then there are two sleep factors. I know your spouse is neither as fearless nor as intelligent, but if he or she can't sleep with the portfolio, I promise you it won't be worth the fight. Reduce the risk until everyone is happy, the divorce will cost more than the extra returns.

Investing Jargon Make You Feel Dumb?

I know you’re out there. You don’t really have a clue what the talking investment heads are talking about, you don’t really understand your broker, or what you bought in your 401K. (The company helpfully handed you a stack of paper and said “pick something.” Nobody will talk to you about it except the company know it all and you don’t really understand what he’s talking about either. Or almost worse, you have some method to “pick stocks,” or mutual funds and you look up your stuff everyday to see how it did. “You know something’s happening here, but you don’t know what it is, do you Mr. Jones?” (Thanks Bob Dylan.)
I’m going to point some things out, like below in The Only Investment Formula You’ll Ever Need.
I’m going to tell you how to do a simple asset allocation, and even tell you in human being terms what that means, and why it should be simple.
I’m going to explain diversification the same way, then rebalancing.Then I’m going to tell you exactly what to buy and why. If you have to pick from a selection of mutual funds in your 401k, then I’ll give you enough information that you can tell which funds match up with the Exchange Traded Funds I use, known as ETF’s.
I am going to tell you how the style funds I use performed over the last few years, then I’m going to tell you why that is only a very small part of the reason to use them.By the end of that, you will have everything you need to have a rational, long term investment portfolio, with minimal need for maintenance, and even less need to pay a broker for his or her, at best, marginally useful advice on what to buy or sell. If you choose to use them, at least you’ll know what to let them do, and what not, what to pay them for and how much. Yes, an advisor can be useful, even worth paying, but not for the reasons you think.

Books to Consider

Against the Gods: The Remarkable Story of Risk
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
Against the Gods: The Remarkable Story of Risk
The Arithmetic of Life and Death
The Art of Asset Allocation : Asset Allocation Principles and Investment Strategies for any Market
Asset Allocation: Balancing Financial Risk
Advances in Behavioral Finance, Volume II (The Roundtable Series in Behavioral Economics)
Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
The Fortune Sellers: The Big Business of Buying and Selling Predictions
The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New
Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies
The Great Mutual Fund Trap: An Investment Recovery Plan
Heuristics and Biases: The Psychology of Intuitive Judgment
Judgment under Uncertainty: Heuristics and Biases
The Psychology of Judgment and Decision Making
The Misbehavior of Markets
The Only Guide to a Winning Investment Strategy You'll Ever Need: The Way Smart Money Preserves Wealth Today
What Wall Street Doesn't Want You to Know: How You Can Build Real Wealth Investing in Index Funds
Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today
Patterns in the Dark: Understanding Risk and Financial Crisis with Complexity Theory
Puzzles of Finance: Six Practical Problems and Their Remarkable Solutions
Randomness
Rational Choice in an Uncertain World: The Psychology of Judgement and Decision Making
Sources of Power: How People Make Decisions
The Winner's Curse
Winning the Loser's Game
The Wisdom of Crowds
Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics

The Only Investment Formula You'll Ever Need

Well, that’s a little exaggerated, you do need to figure out what percentage of your portfolio should be in stocks, how much in bonds, or in money market funds.
But for picking stocks, this formula will guarantee you avoid costly investment mistakes.

A = Total Stock Market
B = Active investors (traders, stock pickers, money managers, hedge funds)
C = Passive Investors (index buyers)
Y = Rate of return for the market
X = what we want to know

If Y, the market rate of return, is 12%, then the rate earned by C, passive investors, must also be 12%.
Let’s say for now that 70% of the investors are active, and 30% are passive index investors. So out of 100, or any number you like, could be a million or a skillion, but 100 will serve for now, there are
70 active investors
30 passive investors
Y is 12%
Plug in the numbers: 12%(A) = X%(B) + !2%(C)
So, given these facts, what did B, active investors, earn?

Let me simplify life for you, no matter what numbers you use for the market return, or the percentages of active versus passive investors, the answer is the same. In this case 12%.
Yes, the % earned by active investors averages the same percentage as both the market and passive investors, and obviously, not all active investors earn the same thing. some earn more, some less. The problem is that year over year, there is no way to predict which active investor will finish ahead, or which one will fall behind. It only looks that way when you look at the single most misleading, portfolio damaging indicator in the world, past performance.
I will discuss the absolute uselessness of past performance data in another section.

Before you challenge me on any of this math as flawed, let me point out it wasn’t me who thought it up. The general topic is discussed in Commentary, and a link to the article can be found in Referenced Articles. It is also referenced below
The formula used here is adapted from The Successful Investor Today, by Larry E. Swedroe,
St. Martin’s Press 2003.
For most equity investors, I believe in passive, index investing. I refer you to The Arithmetic of Active Management by William Sharpe, Nobel Laureate and Professor Emeritus at Stanford University as to the specifics of why. You can find that article in the section of this site called "Referenced Articles."
Essentially, Sharpe demonstrates mathematically why it is impossible for active investors as a group to perform any better than indexes, before costs. After costs, active investors must do worse. Are there active investors who will "outperform" from time to time? Of course, but always at the expense of other active investors who underperformed. Passive investors, by definition, get the market's rate of return, no more, no less. By the way, the active investors who do beat the market in any given year are almost never the same ones who beat it the next year. The simple arithmetic is that some fund manager will beat the market, but it's not likely to be the one you choose, and if it is, it's not likely that he can repeat the following year.

Basics

1) Stock prices are mostly efficiently priced, incorporating all known information about the company.
2) Based on the above, it makes no sense to attempt to buy "good" stocks and sell "bad" ones. It wastes energy and money, your money.
3) Portfolio development should be based on client objectives, temperament and financial resources.
4) There are 4 factors that determine investment success. Here they are.

A) asset allocation-how the portfolio is divided up between stocks, bonds, real estate and cash
B) diversification-a variety of securities in each of the asset classes above.
C) rebalancing-adjusting the portfolio to keep it allocated according to the plan we devise for you. Keeps one asset class from getting too fat while the other gets too lean.
D) advice-you need it. You can read why in the Commentary Posts.

There is a 5th factor which is essential, but doesn't involve the structure of the portfolio as in the 4 factors above. The 5th element is time. Investors are way too antsy. Good investment results take time.
As Warren Buffett is fond of saying, "You can't make a baby in one month by getting 9 women pregnant."

Who is Investment Advisor?

That's a blog name, it's meant for anyone who is tired of trying to follow so called "investment advice," and finding out, whether it was free or very expensive, it not only isn't worth much, it costs in losses beyond fees and commissions.
So, you know the nonsense, from likely painful personal experience. Or you'd like to avoid the costly problem in the first place. You will find this information and commentary useful.
The author has some reasonable credentials. A near 30 year veteran of the securities industry, as a financial advisor, CFP, branch manager and securities industry arbitrator. I am not an expert on securities law. If you need that sort of thing, it's advice worth paying for, so find a knowledgeable attorney and follow their advice.
I am as expert as one can get in securities market investing. Through training and personal experience, through originally trying to pick winning stocks, commodities and options. I know what I'm talking about because I've made all the mistakes, with my money. When I was in the business, I never experimented with client money. Clients generally felt I was too conservative. I've tried all manner of trading schemes, followed systems, sent money to mutual funds and money managers. In 28 years, I've learned some things I will share with you. Most of you won't follow the suggestions, it's human nature. It's also why the suggestions will work, they take human nature into account.