On the program this week I conclude my coverage of the five choices or decisions that everyone faces when they want to be a successful investor. In summary the five choices are:
1) Should you do it yourself or hire someone to help you manage your investments
2) The asset allocation decision (stocks, bonds, cash)
3) Whether to diversify or not (broad and deep diversification or something less)
4) Active vs. Passive (To beat the market or to find the most efficient way to harvest market returns)
5) How often to trade your portfolio (rebalancing)
In this program I cover items three, four and five on the list. I also spend part of one segment highlighting the excellent and timely article from Jim Parker entitled, “The Devil Wears Nada”
I hope you enjoy the program and find it useful and informative. Until next time, all the best – Gary
The following article by my friend Jim Parker as mentioned on the air this week is a good one comparing the world of high fashion with the world of financial services. Some may think there is nothing to compare between these two worlds, but Jim has done an excellent job of it in his article entitled, “The Devil Wears Nada”.
The Devil Wears Nada
The global fashion industry is fickle by nature, pushing and then pulling trends to keep hapless consumers forever turning over their wardrobes. Much of the financial services industry works the same way.
Fashion designers, manufacturers, and media operate by telling consumers what’s in vogue this year, thus artificially creating demand where none previously existed. What turns up in the boutiques is hyped as hip by the glossy magazines to make you feel like you “have” to buy it.
Likewise, much of the media and financial services industries depend on fleeting trends and built-in obsolescence to keep investors buying new “stuff.” Driving this industry aren’t so much the real needs of individuals but manufactured wants with short shelf lives.
Just as in fashion, many consumers jump onto an investment trend after it’s already peaked and the market has moved onto something else. So their portfolios can end up full of mismatched, costly, impractical creations such as hybrids, capital protected products, and hedge funds.
These products tend to be created because they can sell. So in early 2005, Reuters wrote about how banks were manufacturing exotic credit derivatives (instruments designed to separate and transfer credit risk) for investors looking for ways to boost yield at a time of narrowing premiums over risk-free assets.1 (A credit default swap is a credit derivative. It’s an over-the-counter financial instrument whose value is determined by the default risk of an underlying asset.)
Four years later, in the midst of the crisis caused partly by those same derivatives, the shiny new things were “guaranteed” or “capital protected” products as financial institutions rolled out a new line of merchandise they thought they could sell to a ready market.2
Some investors made the mistake of swinging from one trend to the other, ending up with overly concentrated portfolios—like a fashion buyer with a wardrobe full of puffy blue shirts. While some of these investments may well have found a viable market, it’s worth asking whether the specific and long-term needs of individuals are best served by the design and mass marketing of products built around short-term trends.
Luckily, there is an alternative. Rather than investing according to what’s trendy at the moment, some people might prefer an approach based on long-term research and built upon principles that have been tried and tested in many market environments.
Instead of second guessing where the market might go next, this alternative approach involves working with the market, taking only those risks worth taking, holding a number of asset classes, keeping costs low, and managing one’s own emotions.
Instead of chasing returns like an anxious fashion victim, this approach involves investors trusting the market to offer the compensation owed to them for taking “systematic” risk—those risks in the market that can’t be diversified away.
Instead of juggling investment styles according to the fashion of the moment, this approach is based on dimensions of return in the market that have been shown by rigorous research as sensible, persistent, and pervasive. Instead of blowing the wardrobe budget on the portfolio equivalent of leg warmers, this approach spreads risk across and within many different asset classes, sectors, and countries through a technique called diversification.
And instead of paying top dollar for the popular brands at the expensive department stores, this approach focuses on securing good long-term investments at low prices relative to fundamental measures. Buying high just means your expected return is low.
Most of all, instead of focusing on off-the-rack investments created by the industry based on what it thinks it can sell this week, this approach can help deliver long-term results based on each individual’s own needs, goals, and life circumstances.
To paraphrase the legendary designer Coco Chanel, investment fashion changes, but style never goes out of fashion.
1. “Demand for Exotic Derivatives Seen Growing—Bankers,” Reuters, Jan. 18, 2005.
2. “Investing: Storm Shelters,” Money magazine, Oct. 1, 2009.
I included a picture of Jim just to clear up any confusion that the picture above might be him! Jim is a little more conservative with his dress and tries not to get caught up in the latest fad.
Conventional Investing Versus Evidence Based Investing
Over the past few weeks on the program, I have spent time discussing the differences between speculation and investing. Many people might have a problem with the idea that they are speculating. In order to better explain the difference between how many people invest versus what I believe is better way, I will call it conventional investing versus evidence based investing. By using conventional investing versus speculation, what I hope is people can focus on the difference between the two types of investment that I am speaking about.
On this week’s program I will continue the conversation about evidence based investing and how you or your advisor can implement such a philosophy in order to put the odds in your favor. If you have been listening over the past few weeks, we will finally finish the process. If you have missed the prior shows, you can listen to the podcasts on this site. I hope that you can join us this weekend for the conversation on KNBR 680 San Francisco at 8 AM.
My show from Sunday, March 23, 2014 is now available for your listening pleasure. This show continues our conversation into how to be a successful investor instead of a speculator. The program centers on the primary choices or decisions that a person should focus on to make financial markets work for you instead of against you.
It is that time of year when people break out into a fever as speculation runs rampant picking winners and avoiding losers. Speculation is in full swing as America fills out brackets and tunes in to see colleges play against one another without a clue who is on either team. The good news is most people realize that picking brackets is truly just speculation since no one knows who will win a basketball game on any given day.
As I write this post on Friday afternoon, we have already seen a number of significant upsets in the tournament. Mercer over Duke! Come on, how many people even knew that Mercer University was in Macon, Georgia and it fielded a men’s basketball team? Harvard on a roll? The madness continues.
Each year, the NCAA tournament provides a great example of the unpredictability of the future. The nation’s collective basketball wisdom comes together to seed the teams and the crowd goes wild filling out brackets in search of big payoffs. There is no denying that March madness is a lot of fun and very entertaining. But only a few folks take it seriously enough to think they have a real chance of predicting the final four and the eventual winner through skill instead of luck.
Unfortunately, investments is a similar but different exercise. Far too many people think they have the skill to outsmart the market and somehow beat it. Even more preposterous is the hollow promise of Wall Street saying it can beat the market for you. There is a mountain of evidence that shows just how badly they have delivered on that promise. While it is fun to be a speculator on basketball brackets, speculating is harmful to your financial life.
After spending several weeks on the dangers of speculation, I unveiled part of the process of becoming an investor on last week’s program. This week, I will cover in detail the five important choices or decisions that guide an investor through thick and thin. A prudent investment process is paved with strong convictions and a steady hand even as short-term events rattle financial markets.
This weekend, I will outline specific steps on how to be an investor instead of a speculator. Whether you make your own investment decisions or you have an advisor, these are steps an investor focuses on.
Remember, financial markets should be working for you instead of against you. You don’t need to outsmart or outperform financial markets to achieve your wants and needs. I don’t know how many people selected Mercer over Duke in this year’s NCAA tournament, but I still have not met anyone who predicted financial market tops or bottoms either. The great news is you don’t have to! Don’t confuse your role as an investor, which is to provide capital to financial markets and to harvest the gains over time. Stop speculating and stop following the advice of speculators. That is a game not worth playing.
Sit back and enjoy the tournament and leave the speculation on the basketball court. Tune in on Sunday morning at 8 AM on KNBR 680 AM to learn how to be an investor instead of a speculator in financial markets. Enjoy the weekend!
Interview with John McGuire, Founder & CEO of Active Mind Technology/Game Golf
On this week’s program we feature an interview with John McGuire the engaging founder and CEO of Active Mind Technology and Game Golf. You will find that interview in segments 3 and 4 of the show. Also don’t miss the bonus interview materials with John that is highlighted in a different post. That material covers the personal side with John, his management style and some advice from him for others.
Here are this week’s segments: Segment 1: The continuing story of speculation vs. investment (focus on asset allocation) Segment 2: A short segment previewing next week’s program Segment 3: Interview with John McGuire, CEO of Active Mind Technology/Game Golf (Part 1) Segment 4: Interview with John McGuire, CEO of Active Mind Technology/Game Golf (Part 2)
The Personal Side with John McGuire, CEO and Founder of Active Mind Technology and Game Golf
This is exclusive material you will find only on this website as I ask John questions on the personal side about his management style, his vision of being a CEO and the challenges he faces. This segment provides you with some personal time with the CEO and what is on their mind. Enjoy this bonus segment as a follower of my blog. This interview was conducted on March 14, 2014.
How to be a Prudent Investor
On my program this weekend I will continue my conversation on how to become a successful investor by eliminating or at least controlling speculative behavior. I will carry on with the specific steps to be an investor instead of a speculator. Whether you make your own investment decisions or have an advisor, these steps will help you to ensure you are focusing on how to make financial markets work for you instead of against you.
Interview with Active Mind Technology Founder and CEO John McGuire – Game Golf – Changing the World of Golf
Later in the program, I will share with you a conversation I had this week with Mr. John McGuire, the CEO and founder of Active Mind Technology and Game Golf. The company has created a fascinating wearable technology solution that is poised to change the way the average golfer looks at his or her game. Imagine, for better or worse, the ability to know at your fingertips the actual results of every shot of every round you ever play? To be able to visualize each shot and to share it with anyone, anywhere in the world.
Finally, the ability to harness this data and to have access to it gives every golfer the ability to understand their game like never before because they will have easy access to the type of information pro golfers use to dissect their game. It is a fascinating conversation about the melding of technology and golf like you have never seen it before. And if golf is not your game, don’t worry, Active Mind Technology has big plans to change many sports and many active experiences that people enjoy. And look for a bonus post of additional interview materials with John after the Sunday broadcast is over. I hope you enjoy the program this weekend.
From Speculator to Investor
This week’s program is now available as broadcast on the air in four segments for your listening pleasure. Hope you enjoyed the program live, but I am thinking a lot of people might have tuned in a little late as the clock jumped forward an hour due to Daylight Savings. Not a problem because we have the whole show for you right here on this blog.
Segment One – The Safeway buyout; a warning on alternative investment mutual funds from the SEC Segment Two – Becoming an investor; the mindset and the five choices you face Segment Three – Choice one; deciding if you want to do it yourself, or hire someone to help you Segment Four – What to look for in an advisor and a preview of next week
Time to move your clocks forward for Spring… and a great time to update your outlook on investing too!
After spending two weeks on the show covering the warning signs of speculation, it is time to spring forward and share with you how to be a prudent investor. This weekend, I will outline specific steps to be an investor instead of a speculator. Whether you make your own investment decisions or have an advisor, these steps will make sure you are focusing on what I believe makes sense. If you are interested in learning how to make financial markets work for you instead of against you, this is the show for you. Tune in Sunday morning at 8 AM on KNBR 680 AM.
Set your clocks forward on Saturday night! Daylight Savings is here and if you forget to change the clocks, you might miss the program. The great news is we will have the replay for you right here. But I sure hope you can join us live on Sunday morning. Have a great weekend, I know it will be for me since the family is throwing me a little birthday party. Enjoy!