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Posts Tagged ‘investing strategies’

Ripping Off Band-Aids

January 27th, 2012

There are definitely two categories of people when it comes to removing a Band-Aid… the slow, easy-does-it kind of style and the rip-and-cringe-but-get-it-over-with style. I count myself among the latter group. Although it hurts like hell, it’s over quickly and I can get on to other things.

And so it goes with the “creative destruction” reflected in foreclosures and the housing crisis. My argument is that if it’s going to happen anyway (there really is no avoiding it), let’s just suck it up and get it over with. Technically speaking, this would be the Fast Band-Aid Approach.

Government policy from the beginning of the crisis has been to try to avoid or delay the natural process that has to occur to put the crisis behind us: We have to move housing inventory from “weak hands” to “strong hands” as quickly as possible. After ten or fifteen years of government policies to encourage “weak hands” to invest in real estate, it’s going to take time to effect this evolution. It will take even longer than it otherwise would because our government designs and enacts policies every day to slow the process further.

In a bit of an “Atlas Shrugged” move, the politicos believe the process of creative destruction can be halted simply because they wish it so. But no matter how hard they wish, the process must run it’s course.

We could have done it the quick way or the slow way. Unfortunately, we’ve chosen the slow way.

ACTION ITEM: It can probably be a decent time to make some real estate investments if you can be comfortable holding it for a very long time. Although we’re seeing economic improvement which will probably help to hold up prices, it seems fairly balanced by continued slow dumping of homes on the market.

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The Monkey Chased the Weasel

January 12th, 2012

A couple of words about bonds here… and a little bit of a warning as the media-hype machine touts the past success of bonds.

(Hint: Although the monkey thought it was all in good sport, we all know what happened to the weasel next.)

My long-running pseudo-battle with Bill Gross and the Bond Sellers came to an end this fall when we exited our long-term Treasury positions. I still do not like long-term bonds as an investment vehicle right now. The simple reason is that the price is too high.

The price of the long bond (20+ year Treasury) ETF (TLT) is being held up at weirdly astronomical levels by investors who can’t think of any safer place to put their money. The troubles in Europe have driven investors around the globe out of the Euro and European country’s sovereign debt and into the dollar and US debt.

Remember this: People are not buying US debt because it’s “all that”… it’s not, and it’s providing a lousy rate of return… but, hey… we can print our own money and the Europeans can’t, so Treasuries seem to make a pretty decent “mattress” for global investors to stuff their cash into at the moment.

I have my ears to the track and I’m hearing that money has been coming out of stock mutual funds at another record pace here recently. And where is that money going?

U.S. stock mutual funds that invest in domestic equities had their second-biggest redemptions last year as record market swings sent investors to the perceived safety of bond funds.

And why do we suppose it’s going in to bond funds?

Despite a reputation for being a slow-growing alternative to stocks for the risk-averse, bonds just passed stocks’ long-term performance over the past 30 years.

Many investors chase last year’s winners, perennially dooming them to under-performance… not to mention it makes you feel like you’re always in the wrong place at the wrong time… very hard on the ego. It’s kind of like charging into real estate in 2006: It seemed like a good idea at the time.

In fact, you are actually witnessing an historical event: A bond bubble that offers the most expensive bond market in your lifetime. Don’t bite… The minute Europe straightens out their situation, the bond market bubble will pop.

Here is a very wise investment technique (good for all fields at all times): Take the time to figure out precisely what everybody else is doing… and then do the opposite.

ACTION ITEM: If you have bond investments, reduce or eliminate your allocation to them.

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Bill Doesn’t Know Me

June 14th, 2011
Rusty B-61 Mack Truck in Farmington, Georgia

Image by UGArdener via Flickr

Bill Gross doesn’t even know me. I’m a bug on the windshield of the Mack truck that PIMCO is. Except that I haven’t been squished… somehow I sneaked in the driver’s side window and I’m flying around the cab. For now.

I was implying (and actually acting on my implications) that we are poised for a rally in US Treasury debt. You can cruise some of my past posts about it here and here. At just about the same time that I was expressing my conviction that we were bound for a bounce off of the Treasury bond lows (February-ish), the biggest bond manager in all of the world announces that the treasury bond market rally is OVER… not just over-over, but really OVER! Done and done, no more rallies ever.

Don’t believe it.

So what’s happened since then? Here are a few recent headlines that pretty much tell the story without my usually indelicate prose…

and…

Gross Says ‘No Regrets’ Over Missing Short-Term Treasury Rally

and this quote from Joe Weisenthal of the Business Insider…

The “bond god” — who has been one of the worst performing managers this year thanks to his bearish view on Treasuries — is now sounding like Marc Faber or some other doomsayer, warning that the US is in worse shape than Greece.

I think that the one mistake he is making is that his bet is out sized for reasonable asset management strategies AND it is totally out of character even for him (OK, that’s two, sorry). It makes me question whether he’s gone all “Charlie Sheen” on us.

I’m humble enough to admit that Bill might very well be right… eventually. Whether he’s still managing anyone’s money at that point is a different question entirely.

It doesn’t matter though, I plan that we will be long gone from the Treasury market and onto the next opportunity well before Bill is ever right.

(Disclosure… my clients, the firm and myself own positions in US Treasuries (TLT))

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Time to Start Digging?

May 24th, 2011

There really hasn’t been any earth-shattering reason to get that lump in my gut telling me to be careful. Maybe it’s because we have guided our portfolios to some recently handsome returns and I’m nagged by a nutty old saying that occasionally bounces around in my head, “If things couldn’t be better, then things can only get worse!”

It’s difficult to check your hunches at the door, but I still manage to stay disciplined and only act on what the actual facts are saying. It also serves to remind me of the title of one of my favorite author’s books, “Dig Your Well Before You’re Thirsty.”  (Harvey Mackay, if you’re interested).

Although sales related, the basic tenet of Harvey’s book is that you need to build your network and to prepare your groundwork BEFORE they are needed. If you wait until you find yourself unemployed or looking for some other professional assistance, it is far too late to attempt to build a plan.

Now, while things are good, is the most important time to prepare a plan of action for market malfeasance. Paradoxically, this one best time also happens to be the least motivational time to do it. And it is this very recent market history with its unbroken chain of recent successes that makes me an even more vocal voice in the woods… and the same reason it gets so danged hard to get people to listen right now.

If you haven’t already done it, it is time to build in a backstop of courses of action to keep you and your investment portfolio on course to your personal goals regardless of what might lurk around the boom-bust corner that the markets have become in the past few years. My clients and I already have. See how we accomplish this here.

Why? Because things couldn’t be better.

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The Perfect Trade

May 17th, 2011

My wife is an aficionado of the second-hand; a fiend for yard sales, flea markets, estate sales, and the like. It’s not a bad thing like many people might think. Mainly because the major difference between her and the people you see on television collecting diapers and cat feces is that 1.) She knows what she’s doing, 2.) She has limits, and 3.) She loves what she does.

Oh yeah, and she’s damn good at it. Seriously… like professional-grade damn good.

Yes, she has rules too. One of her rules is that if something’s coming into the house, another item must go out. We’re way past the “accumulation” stage of our lives and we’re now in the “upgrade” stage.

(My rather crude translation of this is, “You can’t put ten pounds of sh** in a five pound bag”, but now that I’ve actually written it down, it doesn’t sound very bright.)

Another rule is that it has to be actually worth something. You would be surprised at the amount of good stuff that some people will practically give away. I can’t figure out why people do this, but they do. Too tired? Too lazy? Just way too sick of looking at their own junk? I have no idea.

But because these people are out there, my wife never goes anywhere without a jeweler’s loupe and a diamond tester. These are admittedly odd things to keep in your purse… but the payoff can be handsome for the trouble. That and she’s addicted to the hunt.

And all along the way of the Never-Ending-Great-Treasure-Hunt that her travels are, along with the gold and platinum and various diamonds, rubies and what-not gems and doo-dads and unwanted heirlooms come the oddball bits and pieces of the equivalent of the precious metal family’s loser child: Silver.

Her silver hoard was mostly represented by orphan spoons, charms, bracelets, candlesticks, and the like that have kind of come along for the ride like barnacles on the Cutty Sark. But every now and again, even the great sailing ship comes in to dry dock to scrape off the barnacles. And such it was recently for the accumulation of silver whatsits and doodads that she decided the time was ripe to be unceremoniously “scraped off”.

And in the “scraping off” process, she matter-of-factly inquired of me about the price of silver. Out of curiosity I suspect because she’d heard a blip about it on the news. Even though I don’t personally trade commodities, I still keep a sideways eye on them because they can occasionally affect the stock and bond markets and at the moment they seem to be on everyone’s mind. But I only peek out of curiosity, or if someone asks me about something commodities-related and I need to sound smart.

I was thinking it had been somewhere in the $20’s, but I was wrong… very wrong: Silver had gone vertical. After about thirty years of languishing between $5 and “who cares”, the loser child had suddenly gotten a PhD! It was almost 50 bucks an ounce. Of course, I had to check a couple of times… but, yep it was closing in on $50.

So she hustled “the hoard” down to a friend who owns a jewelry store that buys such things for a percentage of the melt value. She had a quicker step to get down there this time, I suspect because the price of the stuff seemed a bit out of line with reality. But, other than that it was all rather routine and typical. She’s a frequent customer.

The deal was done, a check was pocketed and it was back to business as usual for the Never-Ending-Great-Treasure-Hunt that her travels are.

And during the next two weeks (right up to today even) the price of silver has collapsed. It’s lost about a third of its value: It was around $48-plus an ounce and now it’s in the low $30’s. It’s been an historic selloff… dramatic and speedy.

I know my wife doesn’t care. She accumulated a large position at cheap prices over a long period of time. She then sold her entire position, without emotion when the market appeared to have lost its senses. And then she moved on to “business as usual” without another thought.

She just executed the perfect trade.

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A Lesson in Contrary Thinking

March 10th, 2011

In my last couple of posts about what I believe to be a profitable opportunity in Treasury bonds (while everyone else has been declaring the death of the Treasury bond market), I’ve come off as a bit of a “contrarian”.

It isn’t my typical “modus operandi” to be a contrarian just for the sake of being contrary as an investment strategy. I really am a believer that the specter of inflation isn’t as certain as “experts” would have us believe. I explain a couple of my thoughts behind my thoughts here and here.

It makes it all the more exciting that a viewpoint that I feel strongly about happens to run counter to “conventional wisdom” (which is an oxymoron) AND I can see a trade-able opportunity develop AND it is so easily demonstrable to my readers.

So, here it is… the Treasury market is up pretty big today and it was up pretty good yesterday as well. OK, so what’s the news? The news is that the manager (Bill Gross) of the biggest bond fund in the WORLD (PIMCO) announced that he had DUMPED every single Treasury bond in the portfolio last month and he urges investors (in general) to do likewise. Buried in his statement is this little gem also…

Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Why the rally then? Here is where you get to exercise your yin-yang muscle:

  • THE biggest US holder of US Treasuries is no longer a seller.
  • He also cannot be a seller in the near future (remember, he now owns none)
  • The biggest bond fund in the world has now further stated that they would likely be buyers of Treasuries in the future if prices deteriorated further. This supports prices against further declines… removing much of the risk from the trade.
  • Therefore, the supply-demand equation moves favorably to one of more potential demand than supply.

Not to mention the fact that Bill Gross is not going to do “telegraph” his strategy before the fact. If you’re thinking of selling your Treasury bonds now, forgetaboutit… you missed it.

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The Problem with Investment Models: Part 2

January 27th, 2011

In my previous post, The Problem with Investment Models: Not Keeping it Real, I wrote of the well-known investment guru, Nassim Taleb, to validate my position on the use of investment probability models such as Modern Portfolio Theory (MPT). Allow me to expand somewhat on our reasons behind our difficulties with MPT.

In his best-selling 2007 book, Black Swan: The Impact of the Highly Improbable,” Taleb argues that these models are essentially useless because they ignore the stark reality of cataclysmic-sized risks that have rocked the financial markets time after time. He contends that probability models are based on a dilution of major, market shifting events (black swans) that, while rare, have the effect of rendering the models nearly ineffective.

Models that only assume the existence of white swans rely upon scenarios that exclude the real possibility of events such as the Lehman Brothers collapse, the near failure of AIG, or the collapse of the housing market, and the potential financial collapse of several European countries. With such events occurring more frequently, it seems that we’re surrounded by more and more cliffs.

This leaves investors who ascribe to MPT or other probability models in a perilous position where probable risk has been severely underestimated, and without a way to react except after the damage has been done. While MPT may be an appropriate tool to analyze historical returns, its danger as an investment tool is that it can provide a gilded view of future performance. Those investors utilizing MPT may, in fact, be walking backwards towards the cliff with their eyes on past investment results and little concern for impending disasters.

In our previous writings we have been fairly clear on our stance that MPT doesn’t work because it is largely based on risk calculations that implies knowledge of future uncertainties, which is impossible.  It also assumes that people, as a whole, do act rationally, which has been disproven time after time. Investors cliff

We have also politely suggested that, absent a crystal ball, investors who formulate their own thoughts and opinions, or who are thoughtful enough to seek the advice of those who follow their own thinking, are better positioned to survive, and even thrive in uncertain times.

Taleb reinforces this principle in a list of his own ten principles for protecting your portfolio against “black swans” that were quoted a couple of years ago in the Financial Times.  His ninth principle states, “Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbor the certainties that normal citizens require.

We believe that, if you “definancialise” your investment approach and, instead, focus on what it is that is most important for you to achieve, you’ll not only avoid the cliffs, you will gain a firmer grasp of your financial future.

The approach is simple, easy to understand, and it centers on you.  Please feel free to contact me for a brief overview.

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The Problem with Investment Models: Not Keeping it Real

January 24th, 2011

To my chagrin, I am often reminded, by well-meaning clients, that our investment philosophy seems to run counter to the mainstream thought which relies heavily on popular investment theories and hypothetical models such as Asset Allocation and Modern Portfolio Theory.  Not one to take up the whiteboard and start lecturing, I simply point them to our appraisal of these academic theories and their near ruinous application in the real world of investing (How Investing Got Broken).

By no means is this a source of frustration for me.  I know how difficult it is to run against the herd.  It’s natural to feel isolated and vulnerable when you see the masses moving off into a different direction leaving you to your own doubts about the validity of your direction.  Would you feel any different if you knew they were heading towards a cliff in the dark of night?  While that is not necessarily a certainty, our contention is that an overreliance on lab-generated portfolios can lull investors into a blinding complacency that will impede their ability to change direction before they reach the edge.

Rather, my frustration is channeled into the army of well-meaning, but misguided advisors out there that continue to promulgate investment myths based on flawed models that have yet to prove their validity, and, in fact, have led many institutions and millions of individual investors over a cliff.

Nassim Nicholas Taleb, one of my favorite investment philosophers, has been on a mission to expose risk models, such as MPT, as pure academic folly, and his latest rant actually is an indictment of the Swedish Central Bank (the issuer of the Nobel Prize in economics) for legitimatizing a theory that has led to market crashes and huge government bailouts. (‘Black Swan’ Author Says Investors Should Sue Nobel for Crisis. Bloomberg. Oct 2010).  Taleb holds no malice for the theorizers. He wants to hold Nobel accountable for rewarding a destructive fallacy.

While that may seem like a drastic, and perhaps, improbable step, Taleb has cast a light of controversy on the underlying problem of probability models that have undeservedly earned academic respect and legitimacy for which there is no valid basis.

Stay tuned for my next post wherein I dissect the controversy of probability models as they apply in your investment decision-making.

If you have questions or comments regarding the use of investment models, I would appreciate hearing from you.

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Outlook for the long bond

December 10th, 2010

We’ve had this running conversation about Treasury bonds for a little over a year now, as we suggested here in late November 2009 that you might want to get involved in Treasuries for a portion of your account.

We didn’t really broadcast our spring Treasury buying spree (we have to keep some things “client only”), but our clients saw it in their accounts… and this has been the last time (March – April 2010) that we did any serious accumulation of Treasury bonds in client accounts.

In my late August post, we suggested that if you are “following along” you might want to consider moving out of the longer-term treasuries.  We didn’t really offer up the mechanics of why we were suggesting this, we just offered up that we were liquidating Treasury positions in client accounts.

Although we’re not purposely contrarian in our investment style, our way of thinking typically puts us at odds with the mainstream. Apparently, many in the media are seeing an end to a multi-year bond run as of the past few weeks.

Bonds have been a major magnet for new money over the past two years – until last month. According to the Investment Company Institute (ICI), the weekly net new cash flow to the bond market eclipsed stocks for two years, until the two weeks ending November 23.

Click to enlarge

Paradoxically, to us it’s beginning to look interesting again!

I don’t know what the rest of the financial press has been looking at (maybe nothing?), but the chart to the left is what we’ve been watching for the past couple of years.

Just so you know where we’re coming from.

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Stalking Opportunity

November 10th, 2010

Yesterday, I had a client mention to me that I had “been busy” lately… which is code for “making his portfolio a lot of money recently”.

Since we don’t believe in the old-school “buy-and-hope” investment strategy (see “How Investing Got Broken”), we tend to sit around for a while (usually in cash) waiting for opportunities… and then we strike and sometimes make a whole year’s worth of returns in a few months… which is a little bit of what happened recently.

In it’s simplest form, asset allocation for most people means that they hold varying percentages of different asset classes all the time. The theory is that when one asset class performs poorly the other asset class will be performing well… thereby smoothing out the bumps… and unfortunately, guaranteeing mediocrity.

Our approach is a little different (see “How We’re Fixing It”) because we prefer to sit on the sidelines until the time seems reasonable to make a move. We don’t feel like we have to be doing something for the sake of keeping busy or pretending that “busy-ness” is the same as profitability.

In an off-the-cuff moment to my client, I equated our management style to that of a hyena stalking prey. We sit in the grass off of the side of the path watching and waiting for an easy opportunity to pass by. We are conserving energy (capital) while we wait so that we will have the energy (capital) to pounce immediately when opportunity presents itself.

There can be long periods of solitude followed by intense periods of feasting, but there is also relatively little risk to the hyena’s life. And this fits our style nicely, thank you.

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