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As we head to the "Vortex" of the next election, AIMing to get one President or the other, my initial enthusiasm for Obama has softened a bit, though balanced against Frank Rich's assesment of John McCain I still lean in that direction.
Mr. Rich's column is here:
http://www.nytimes.com/2008/07/20/opinion/20rich.html
And my response:
It's our stupid primary system, stupid.
Instead of bringing people to the fore with the best qualifications, we get the ones who win by virtue of the almost military precision of a well executed campaign (Obama), or the ones who appeal the most given the range of available choices, (McCain).
That both men have their strong points and obvious weaknesses, Obama being short of real-world experience, and McCain's lack of understanding current technology, let alone economics, shows us that no matter how many times we roll the proverbial dice, the results are the same: flawed human beings, with the good, the bad and the ugly that we all share.
The reality is that the world has become far too complicated for any one person to remotely be all things to all of the people all of the time, howevermuch we'd like Superman or Superwoman in office. Ain't happening.
So we ponder the choice, cast our votes, and take our chances that we can keep this whole thing going another four years. Or so we can hope - Obama's promised us that much!
Best,
AIMster
I think I have read them all, and the robot novels as well.
<OT>
If there's ever a sci-fi novel that is begging to be made into a movie, what with all the CGI they've got nowadays, I submit it would be Alfred Bester's The Stars My Destination
http://en.wikipedia.org/wiki/The_Stars_My_Destination
Best,
AIMster
This market is SOOOO strange.
Really takes discipline to limit to one transaction per stock per month. Always afraid of missing a buying opportunity.
Hi, Al,
At this point I'm letting the market guide me along, buying when the price is <15% below the lowest price I've recorded over the history of transactions. This way I'm only buying into what are (for me at least) new price lows for each item.
That usually works out to a fair amount of time in between, a 15% drop not being too insignificant, though yesterday and today I've a had a good number of hits. But unless the bottom really falls out from here, I think those most recently purchased might take some time in presenting themselves again!
And FolioFN allows me to buy a nickel's worth of each of a few hundred stocks. I think I have about 20 folio's now. And if I start each stock with $100, then I can do a mental AIM on each one!!!! That should be a new category of AIM: The Mental-AIM ... When a folio goes to $115 from an initial investment of $100, then sell $5. And etc.
And with FolioFN, you can do that twice a day!!!!!!
WOW!! They must love you over there! Quite a bit with the fractional shares in your dealings though, eh? My own is to use in rounded to 5 share lots, 5, 10, 15, 20, and so on. Keeps it cleaner, for my needs at least.
But their incredible flexibility handles both of us (and who knows how many others with variants of what we're both doing) with equal ease!
Best,
AIMster
The recent down draft has raised my overall portfolio dividend yield to 10.36%, up at least a good 1-1.5% or so from a few weeks ago. Of course, that means a commensurate drop in the overall prices, but have been picking up a few bargains here and there at the lower prices, too. Which in the future will add to the overall dividends as well as I hope some decent capital gains in the future too!
AIM on!
Best,
AIMster
Oil is expensive, but the United States has TONS of oil that it is refusing to pump. The U.S. can develop natural gas, coal and nuclear, but seems to be refusing to allow itself to do those things and instead is frittering money away by attempting to go with very expensive solar and wind power ... those only account for about one percent of energy now and with maximum effort might get up to about three percent.
Every other country in the world is working overtime to develop oil, natural gas, coal and nuke ... except the United States. The same could be said for refinery capacity.
The notion of man-made [anthropogenic] global warming has been shown to be false every time its advocates and proponents bring up another argument in its favor.
It's a very strange notion.
Hi, Al,
Interesting post. I'll try and keep this as apolitical as possible, knowing our intended purpose is AIM and finding vehicles to use it with utmost efficiency, but I am interested in the range of opinion of the people posting.
My view is that solar and wind are renewable sources. If we were to fund development of these the way conventional energy sources have been, the cost would drop, and quickly. It's amazing to see how much solar is in use here, even though we're one of the most constantly overcast areas in the Northeast!
Oil and coal are environmentally damaging and of finite quantity. Nuke may be more efficient in the short term, but you've the long term issue of waste and expired generation facility disposal, not to mention the also thorny issue of transporting the stuff from wherever it's been made to whatever site is deemed "safe." Also the ever-present risk of creating more targets of opportunity for failure, either through operator (think Chernobyl), equipment (Three Mile Island) or terrorist. Ideally fusion would bring a little of the Sun right to the Earth, needing only hydrogen for fuel, but it's still a "Real Soon Now" wished-for sci-fi dream. Even then, the other issues remain.
Playing Devil's advocate for your position that human-generated global warming is nonexistent, my question then becomes, "Ok, even if so, where is the harm in better conservation, greater automobile efficiency and so on?" If the USA is supposed to be a world leader, being the first to do so would encourage the rest of the world to follow. Instead the mood seems to be a "damn the consequences," party like it's 1968 and gas is 30 cents a gallon. Make it the problem for the kids and grandkids, even the recent "G8" meeting deferred any significant action until 2050.
That the "developing" countries feel a need to equate their success by how quickly and well they can embrace the worst of our consumer culture shows an equal lack of vision all around.
Global warming or not, I think we all can agree that over 6,000,000,000 people are going to have a larger impact on the planet than 1/6th of them would. 1,000,000,000 being a number I read not too long ago as a reasonably sustainable population level without being too much a cancer on the planet. What about the other 5,000,000,000 - well, that's another issue, isn't it?
Best,
AIMster
Thanks for the reply. I sleep good with a 100% cash position.
As long as inflation doesn't get too excited and I'd feel better if the interest rates on the cash were more in line with historical norms - other than those concerns cash is sweet.
Best,
AIMster
There was an earthquake in Peru earlier today. That affected both FRE and PCU...
Does an earthquake count as a KA - Boom ????
So THAT explains Marvin's presence in my stream of thought..
And I didn't even know about the earthquake - though the overall shake, rattle & roll we've been getting lately has made more scared folk running about... 4 holdings are showing declines since the last price of at least 15% - looks like I'll be unlocking the cash reserve drawer in a little while if these declines hold...
Best,
AIMster
Hi, Steve,
FRE:
They're making new lows not seen since '92-'93!! Could be a case of being oversold - obviously not much more down room to go, so going forward may be a bargain if it reverts to the mean closer to where the average price has been.. on the other hand I'm overhearing Marvin the Martian muttering in the corner, "Where's the ka-BOOM? There was supposed to be an Earth-shattering ka-BOOM!!!"
In the more recent perspective and adding our zigzag to the mist of the crystal ball...
shows this to be a good time, but I wouldn't do so with the whole farm.
Perhaps I can look at the others later...
Best,
AIMster
Tomorrow is my birthday
Well!!
For both your birthday and your portfolio...
Many Happy Returns!!!!
Best,
AIMster
Happy 4th Grab and Toof,
we're headed out to the fireworks shortly. It's my favorite time of year.
We've had a great day here - nice weather, huge cookout - and our fireworks were on 2 July - also a good night! Why on the 2nd and not the 4th? Simple and quite literal, actually. By not being exactly on the Holiday of the 4th, we get more "bang for the buck!" as they pyrotechnics companies charge their highest rate for the actual holiday itself.
Hopefully we'll get out of the downdraft of late, though I've my purse ready to get more bargains, should they present themselves!
Best,
AIMster
I think you'll find it here: http://www.aim-users.com/etfunds.htm (NRI)
Ah! Thank you, MM,
That's the one I was in until they closed it, merging it into another fund with substantially similar holdings and goals, etc., NRO. I've still got that one. And yes, they do have an almost 20% payout, as Yahoo shows here: http://finance.yahoo.com/q?s=nro
Just wanted to see if there was another one out there I should look at. Thanks again,
Best,
AIMster
The last buy on the REIT fund I'm using will generate an average annual yield of nearly 20%, assuming it holds up.
For those of us masochistic enough to venture back into such waters after last year's beating, which REIT fund in particular are you using, if you don't mind lifting the cover for us to peek?
Thanks,
AIMster
It looks like its going to keep running, what are some techniques to make sure I don't sell too much too soon?
Well, the question is how much is your current cash reserve % wise? If you're holding a fairly small cash percent you may want to keep selling. The way the US market's been lately having plenty of cash is a good thing right now!
On the other hand, if you're comfortable with the amount of cash reserve that you've got, you can always pull a "vealie" which as far as AIM's concerned, effectively IS a sale, though in reality you haven't sold anything. see: http://www.aim-users.com/diction.htm#q7
Best,
AIMster
Welcome, Enrico!
Nice to see you here. Any ETF can be traded using AIM, spot FOREX maybe not so much, though if anyone has such expertise I'm sure they'll chime in with the details.
Some will suggest that $1,000 is too small to start with, and it may be so depending on where your brokerage is. FolioFN which some of us use allows commission-free window trades, otherwise you'll have to consider the per-transaction cost for each buy and sell. You'll also be trading a fairly small volume so the costs will be proportionally higher. In this case you may be better served with a no-load mutual fund so you wouldn't have the per-instance costs.
It also depends on what "flavor" of AIM you want to use, the "classic" 50/50 split or the AIM-HI 80/20. Another one from the 3rd edition was a 67/33 split between equity and cash reserve.
Tom's website page here: http://www.aim-users.com/aimware.htm
will point you in the direction of a free on-line AIM parameter calculator, or optional Excel spreadsheet. Don't worry about getting any other software at this point.
More questions? Feel free to ask!
Best,
AIMster
Got one of those ubiquitious emails touting "some company" that for the late Howard Hughes was a good part purportedly, of the "engine" of most of his wealth. Of course, while they wouldn't directly mention "The Company" by name, they gave enough clues such that a couple of minutes of trolling the 'net led me to figure it out pretty quickly. It's Baker Hughes Inc, trading under BHI.
Their chart looks like it might have the sort of movement we've come to love and expect for AIM:
Due your own due dilligence, of course, but it looks fairly solid. The purport of the newsletter is some humungous oil deposit exists under the Gulf of Mexico, hard to get to, but BHI has the technology to do it and will make themselves (and you) a mint in the process!
Taken with the usual grain of salt, but as their chart looks interesting, I thought I'd at least mention it.
Best,
AIMster
Hi, Mark,
Seems your 'handle' aptus is also used as a gaming company!! Or maybe you work for them already?
http://biz.yahoo.com/bw/080610/20080610005602.html?.v=1
Best,
AIMster
There are short based ETF such as ProShares DOG which mirrors the inverse of the DOW.
Interesting post, Clive.
Not sure how much this is barking up the same tree we've considered before in inverse pairings of the broader S&P 500. Our thoughts have been generally that such might work in a short term, though not so much in a long-term context, given the historical bias toward a higher market.
That being said, being long the hair of the DOG this year hasn't been a bad place to be:
http://stockcharts.com/charts/performance/perf.html?DIA,dog
Given that the DOW and corresponding DOG are a much smaller subset of the market than the broader indicies are, perhaps this sort of play could work more efficiently than what we've considered before.
Perhaps someone can take this one out on a leash and see if this puppy's worth some tricks, or just good for another bone in our quest to extract the most from the market?
Best,
AIMster
I would agree that Obama has a Reaganisque charisma. That's about where the comparisons end. His message was get government out of the way of the people. Obama's message is I can solve your problems. Government will solve all your problems...
I think he's unique though, in the sense of getting individuals to finance his campaign instead of the "usual suspects" of lobbyists and big corporate types, aka "soft money." He's taken the stand (whether he can deliver or not is another issue, but bear with me here) that by being supported by the people, he has to answer to the people and not the lobbyists. May work. Or not. Certainly greater transparency into the workings of government can't hurt.
I think the overall situation is one of balance. Extreme bias toward individualism leads to a dog-eat-dog mentality of how much can I accumulate for myself, at the expense of everyone else? It exacerbates class differences and leads to the smashing of the middle class, with an oligarchal minority holding a vastly disproportionate amount of wealth and millions of poor underneath them. With such concentration of wealth comes an extreme concentration of power.
Dated to 2003, but perhaps still of some use:
http://www.multinationalmonitor.org/mm2003/03may/may03interviewswolff.html
Key point from that article 1% of Americans at that time controlled 38% of the national wealth! And such concentration only begets further concentration.
Run this kind of trend long enough and we get people who become societal outcasts - Bob Herbert gives them their five minutes of fame here:
http://www.nytimes.com/2008/06/10/opinion/10herbert.html
I agree with you that there are at least as many problems with the "socialist/communist" models as we've seen - my point being that going too extreme in any direction introduces inefficiencies that make themselves felt over time.
It may well be a pendulum swing process where people are feeling that too much has been lost by too many and that in the champion of the individual we've forgotten the religious admonishment to "be our brothers' keeper." If people can't make it on their own how much do we need to support each other? For a dear friend of mine I'm fortunately able to help her a bit with some of her medical bills as her husband runs a small business and healthcare is priced way too high for them to even think about it, let alone get it. The postwar legacy of tying healthcare to employment may have seemed a good idea then, but this is now. I think people have largely come to the point that with the costs being what they are, and only going in one direction, up, that we, (pardon the expression) collectively need to find some solution that spreads the costs around, instead of bankrupting people when they get sick. As a significant part of our population is getting older, this is only going to get worse. US News had a recent article on people going overseas for medical treatment that's become astronomical in cost here.
In terms of trying to recover a more diversified economy, i.e., bringing back some manufacturing segments, one can argue that part of the move of manufacturing jobs overseas was perversely enough caused by the excesses of trade unionism that priced American labor out of the market!
In other words, before I rant too much - there are no simple solutions to complex problems. Should the rich pay more in taxes, instead of the middle class, yes. I'd further give due consideration to abolishing the IRS altogether and putting in a system like the fair tax, this would bring all the underground and illicit money back into the mainline revenue strea. http://usgovinfo.about.com/cs/taxes/a/aafairtax.htm
The debates on merits, problems and benefits of all this will no doubt likely continue. It's what makes the national drama so interesting!
AIMster
think it is a mistake to think that a President should be an expert on most of the governmental issues the government might have to deal with. The candidate should be able to be the leader that people want.
Obama is somewhat in the mold of Ronald Reagan as an inspirational speaker and motivator. In fact, some have suggested that he use Reagan's argument when Reagan was debating Jimmy Carter*, "are you better of now, than you were four years ago?"
*I have far more respect for President Carter after he left the Presidency than I did when he was President. His work with Habitat for Humanity, willingness to engage more parties in the Middle East peace process and so on have been the best example that a useful life of public service can continue after the Presidency. Would that they all do as well to emulate him!
<OT>
Re: "Well, about this Walter for President. . .
He appears to be almost never suck for words but how will he get out of the suitcase when he gets that call at 03:00 in the morning?"
He'll keep it top secret, but it'll be an inside job.
Jose Jalapeno might use his "steek" to pop the latches or Achmed might blow a hole in it, or perhaps Walter himself will blast his way out with his gas!!! Superhero Melvin will no doubt be standing in for the Secret Service on such occasion.
Best,
AIMster
I pick B and hope that all Americans will get a new dream.
Amen, Brother!!!
I was actually the first in my family to go with Obama for President - what got me started was seeing this sermon delivered at Ebenezer Baptist Church, Atlanta, GA, 20 January 2008 - hopefully exactly 1 year to the day before he gets sworn in as President! This church, BTW was the home church of Dr. Martin Luther King, Jr. so it has deep roots in the African-American community.
You can see it on Youtube here:
any news on why clms went down so much on FRi
Article off of Yahoo finance for clms blames the usual suspects:
Small-cap stocks reversed course Friday, erasing much of the steep gains from Thursday as monthly employment data served up a shocking rise in the jobless rate and crude oil prices exploded to new record highs.
AIMster
A It is better that McCain becomes President
B It is better that Obama becomes President
Tough call, actually. Historically America's done better with a wartime economy, hence giving McCain the upper hand, theoretically.
On the other side, though, the massive $1 Trillion+ cost of the Iraq war is going to have to be balanced against other domestic issues. Some form of Universal Health care, nevermind the shifting into retirement mode of the Boomers will also have a big impact as well. If Obama follows through with more support for the middle class, that's something else to have to come from somewhere, unless the treasury starts pumping out even more fiat currency than they're already doing.
We've still the fall out of the real estate credit issues which are unlikely to be fully resolved before any candidate takes office.
So, arguments can be made for each scenario. Unfortunately my crystal ball's running a bit cloudy these days, so I can't quite discern the outcome. Darn it!!
Best,
AIMster
<OT>
Hi, Clive,
Re: politics
I guess we all take some note of what's going on politically in other countries, especially these days since we're all so much more connected. And nevermind that pesky detail of being able to blow ourselves into oblivion, that kinda helps keep me tuned in.
A question - over on this side of the pond we've C-SPAN television which will do, among other things, give a narrative view of what's afoot in our House and Senate. What's been interesting to see, on the offtimes I've tuned in is that they'll brodcast the goings on in your Parliament, the House of Commons side of it anyway, I believe. Do you folk see our goings on with a comparable channel on your side? Or is it just simple enough that C-SPAN gets relayed over satellites and you can tune in as you wish, rather than needing an explicit UK version of our channel?
I know someone at church who worked with Dr. Martin Luther King Jr back in the day. We're both amazed that in a mere 45 years since his most famous "I Have A Dream" speech in 1963 that there should stand an African-American candidate for President. Quite a journey from the confines of the back of the bus! So I have hope, even if his name is from a different linquistic and cultural tradition than those who've gone to the White House before. Truth be told, I wouldn't mind even if he were of the Islamic faith. As long as he affirmed the inherent separation of church (or mosque) and state, what better would force positive change in the Middle East than to have someone who not only shares their beliefs, but can also speak their language! That would go aeons before GWB's reconstructionist "Crusader" image. Might well be the catalyst to foster real change in that part of the world. We should be so lucky. I already thought of bringing people together over food, as I was happening to season some Australian Halal goat with Kosher salt for a goat curry dish! Life should be so simple!
Now back to our regularly scheduled discussion on AIM.
Best,
AIMster
I've got a question about the minimum trade amount. I started with 5% of the stock value. Now that I've sold some shares, should I reduce the minimum trade amount to be 5% of the value of the remaining shares or leave it at the starting value or does it really matter?
Hi, Dave,
You can leave it where it is. It will calculate itself accordingly, as a percentage it "knows" how to adjust for the actual dollar amount that the percentage represents.
Also, I've got some cash to put to work, is it appropriate to talk about stock picking here?
To some degree it's okay. Where the line is drawn usually is when pump-and-dump penny stock promoters try and get us to buy into their latest-and-greatest. Rather than just listing the symbols, if you can have some supporting question or paste a chart from stockcharts.com to support your opinion, these are acceptable uses. Tom also has a semi-official "pick list" of stocks that may be good AIM candidates.
One of the larger "debates" in the group is individual stocks vs funds (ETF's, closed-end, no-load mutual). The prevailing wisdom is that individual stocks can give you the most "bang for the buck," but also at a higher level of risk than a fund. It is possible for a single company to go bankrupt, giving you little more than pretty pieces of now worthless paper. Funds, on the other hand are more likely to be in it for the long run. What you lose to a degree is volatility. Some of us go in for broad-based general purpose funds, others try and capture (to a degree) the benefits of momentum in using iShares sector ETF's. As in any portfolio assembly, even under AIM, being diversified warrants due consideration. You'll want to have as much non-correlated diversification as you reasonably can with whatever investment level you've got to work with. There are all sorts of breakdowns that one can use - feel free to ask if you need more direction in this part of it.
Best,
AIMster
I know I should still sell the shares AIM is suggesting but that greedy part of me wants it to go back to 180 bucks a share from it's current 164. I have watched a couple of positions I've had before go from a 100% profit back to breakeven. I've got to learn to sell!
Yes. The old maxim of "one bird in the hand is worth two in the bush" is on target to this issue. Make it a mantra, and chant it as often as necessary, "Cash is King, Cash is King!" Once you've taken the profit, you've locked it in and it's yours. Capital gains profits are those from the market to you. Whether you take them and use to fund a new position with, or add to a cash reserve to fund later down-drafts, this is essentially 'free' money that didn't have to come directly from your pocket.
Indeed, one fellow came up with the idea of "pay trading" and will take a scant 1% profit each time. Do that often enough and you'll eventually make a million. A site showing the good, the bad, and the ugly of this idea: http://www.illiteratewithdrawal.com/stock-market/paytrading/
But back to the AIM view of the world... The idea of AIM is to put a volume control on the emotions (feeling scared or greedy) so that we can invest more rationally. Especially since we're not of Star Trek's Vulcan population! Well, not most of us, anyway. Given the prudence of having a cash reserve component to act as a deflector shield whilst the buy and holders are out there getting the full blast of the phasers, nevermind the exploding photon torpedo of an Enron class device, well, you get the idea.
We all have coulda, woulda, shoulda stories, battle scars all from our learning, presumptive stupidity, and occasionally falling victim to the siren song, "this time it's different!"
But in the end, AIM works in it's own way, helping us to traverse the depths of the valleys, and not get too delirious on the mountain price peaks.
So, if it tells you to take the 25%, take it. There will be more volatility ahead for AIM to work with!
Best,
AIMster
Hi, Clive,
Good catch on that video. I wonder if they're lurkers on this board? I dug around further and found their services range, for a fee, of course, in various models from $25k minimum to $1M minimum!
For around $8 or so I can have Lichello's book and the cost of the bare-bones AIM calculator is FREE! Add a discount service like FolioFN and I'll save a fortune.
Best,
AIMster
Hi and welcome!
Seems like we're getting a good crop of newer people such as yourself lately. Sometimes it takes a while for people to find us, but you'll find yourself in good company. Feel free to ask all you want to - that's what this place is for.
AIM is telling me to sell about 25% of the current market value. My cash level is zero. My question is: Should I sell the amount indicated by AIM or adjust the PF value upward to reduce the sale but still generate some cash? My indecision rule would tell me to sell half of the 25%, and do a Veale (I'll have to read up on that) to adjust the PV.
Given that you've got a reasonable gain and zero cash, I'd say follow AIM's advice and go for the full 25%. That would put you in a good cash level for current v-Wave risk levels so you'll be well positioned going forward. Sooner or later some of the lustre will come off the silver and you'll be glad not to give back such a gain to the market! The bottom line (as you found out earlier from the commodities) is that cash is king and having plenty of it to weather through the downdrafts is a good feeling indeed!
Again, welcome!
Best,
AIMster
The other half of the total can be invested into a variety of asset classes, both U.S. and International. You might want to consider reading the article "Ultimate Buy And Hold Strategy" as a method of diversifying your Growth side.
http://www.fundadvice.com/articles/buy-hold/the-ultimate-buy-and-hold-strategy.html
Hi, Tom,
One good resource in connection to the article you mention is Index Fund Advisors http://www.ifa.com
Best,
AIMster
<OT>
did have a bookmark to a drawdown calculator somewhere. Trouble is I've now got so many bookmarks I need to create bookmarks of my bookmarks, as I just can't find it anywhere.
Hi, Clive,
For what it's worth my dad, a former reference librarian, organizes his bookmarks via the Dewey Decimal system! Not that you need to refine yours to such a level, but imposing some sort of order might help.
And I see I take a little vacation and y'all (we visited the mother-in-law and other relatives in the Carolinas, hence the acquired "y'all"), have been busy posting so I'm still trying to catch up!
Best,
AIMster
I'm looking for between 70 and 100 stocks
Hi, Mark,
I don't know the level of diversification you're after but certainly the DOW 30 industrials give you almost 1/2 - 1/3 of the number you're looking for. These are certainly good representatives of largecap widely held stocks. Further, are you interested in stocks only, or is there room for ETF's or CEF's?
Best,
AIMster
There are some good nuggets in here, mainly for general, i.e., non-AIMing investors. It continues to amaze me the simple wisdom of Robert Lichello in risk mitigation.
Why Investors Fail
by John Mauldin
May 9, 2008
In this issue:
Why Investors Fail: Analyzing Risk
Investors Behaving Badly
Tails You Lose, Heads I Win
Ergodicity
Why Investors Fail
Becoming a Top 20% Investor
Investors Behaving Badly
South Africa, Laguna Beach, and Canada
This week I am in South Africa and am not as connected as I would like to be due to meetings and slow Internet, so we are going to look at some material from my book, Bull's Eye Investing, which I think is more pertinent than ever. And since lately there has been rather large growth in the readership, there are a significant number of new readers for whom this material will be fresh. When I originally wrote much of this, the markets were coming out of the bear phase of 2001-2. I am adding a few comments in [brackets]. I trust you will find value as we look at the problems that investors face in the struggle to maximize portfolio value.
Like all the children from Lake Wobegon, I am sure all my readers are above-average investors. But I am also sure you have friends who are not, so in this chapter we will look at the reasons why they fail at investing, and how they should analyze funds and determine risk. Hopefully this will give you some ways to help them. I will show you a simple way to put yourself in the top 20% of investors. This should make it easier to go to family reunions and listen to your brother-in-law's stories.
A big part of successful Bull's Eye Investing is simply avoiding the mistakes that the large majority of investors make. I can give you all the techniques, trading tips, fund recommendations, forecasts, and so on; but you must still keep away from the patterns which are typical of failed investors.
What I want to do in this section is give you an "aha!" moment: that insight which helps you understand something about the mysteries of the marketplace. We will look at a number of seemingly random ideas and concepts, and then see what conclusions we can draw. Let's jump in.
Investors Behaving Badly
The Financial Research Corporation released a study prior to the [2001-02] bear market which showed that the average mutual fund's three-year return was 10.92%, while the average investor in those same periods gained only 8.7%. The reason was simple: investors were chasing the hot sectors and funds.
If you study just the last three years, my guess is those numbers will be worse. "The study found that the current average holding period was around 2.9 years for a typical investor, which is significantly shorter than the 5.5-year holding period of just five years ago.
[While the research below is from a few years ago, recent studies show exactly the same, if not worse, results. Investors in general are not getting any better.]
"Many investors are purchasing funds based on past performance, usually when the fund is at or near its peak. For example, $91 billion of new cash flowed into funds just after they experienced their "best performing" quarter. In contrast, only $6.5 billion in new money flowed into funds after their worst performing quarter." (from a newsletter by Dunham and Associates)
I have seen numerous studies similar to the one above. They all show the same thing: that the average investor does not get average performance. Many studies show statistics which are much worse.
The study also showed something I had observed anecdotally, for which there was no evidence. Past performance was a good predictor of future relative performance in the fixed-income markets and international equity (stock) funds, but there was no statistically significant way to rely on past performance in the domestic (US) stock equity mutual funds. I will comment on why I believe this is so later on.
"The oft-repeated legal disclosure that past performance is no guarantee of future results is true at two levels:
1. Absolute returns cannot be guaranteed with any confidence. There is too much variability for each broad asset class over multiple time periods. Stocks in general may provide 5-10% returns during one decade, 10-20% during the next decade, and then return back to the 5-10% range.
2. Absolute rankings also cannot be predicted with any certainty. This is caused by too much relative variability within specific investment objectives. #1 funds can regress to the average or fall far below the average over subsequent periods, replaced by funds that may have had very low rankings at the start. The higher the ranking and the more narrowly you define that ranking (i.e. #1 vs. top-decile [top 10%] vs. top quartile [top 25%] vs. top half), the more unlikely it is that a fund can repeat at that level. It is extremely unlikely to repeat as #1 in an objective with more than a few funds. It is very difficult to repeat in the top decile, challenging to repeat in the top quartile, and roughly a coin toss to repeat in the top half." (Financial Research Center)
This is in line with a study from the National Bureau of Economic Research. Only a very small percentage of companies can show merely above-average earnings growth for 10 years in a row. The percentage is not more than you would expect from simply random circumstances.
The chances of you picking a stock today that will be in the top 25% of all companies every year for the next ten years are 1 in 50 or worse. In fact, the longer a company shows positive earnings growth and outstanding performance, the more likely it is to have an off year. Being on top for an extended period of time is an extremely difficult feat.
Yet, what is the basis for most stock analysts' predictions? Past performance and the optimistic projections of a management that gets compensated with stock options. What CEO will tell you his stock is overpriced? His staff and board will kill him, as their options will be worthless. Analysts make the fatally flawed assumption that because a company has grown 25% a year for five years that it will do so for the next five. The actual results for the last 50 years show the likelihood of that happening is very small.
Tails You Lose, Heads I Win
I cannot recommend highly enough a marvelous book by Nassim Nicholas Taleb, called Fooled by Randomness. The sub-title is "The Hidden Role of Chance in the Markets and in Life." I consider it essential reading for all investors, and would go so far as to say that you should not invest in anything without reading this book. He looks at the role of chance in the marketplace. Taleb is a man who is obsessed with the role of chance, and he gives us a very thorough treatment. He also has a gift for expressing complex statistical problems in a very understandable manner. I intend to read the last half of this book at least once a year to remind me of some of these principles. Let's look at just a few of his thoughts.
Assume you have 10,000 people who flip a coin once a year. After five years, you will have 313 people who have come up with heads five times in a row. If you put suits on them and sit them in glass offices, call them a mutual or a hedge fund, they will be managing a billion dollars. They will absolutely believe they have figured out the secret to investing that all the other losers haven't discerned. Their seven-figure salaries prove it.
The next year, 157 of them will blow up. With my power of analysis, I can predict which one will blow up. It will be the one in which you invest!
Ergodicity
In the mutual fund and hedge fund world, one of the continual issues of reporting returns is something called "survivorship bias." Let's say you start with a universe of 1,000 funds. After five years, only 800 of those funds are still in business. The other 200 had dismal results, were unable to attract money, and simply folded.
If you look at the annual returns of the 800 funds, you get one average number. But if you add in the returns of the 200 failures, the average return is much lower. The databases most statistics are based upon only look at the survivors. This sets up false expectations for investors, as it raises the average.
Taleb gave me an insight for which I will always be grateful. He points out that because of chance and survivorship bias, investors are only likely to find out about the winners. Indeed, who goes around trying to sell you the losers? The likelihood of being shown an investment or a stock which has flipped heads five times in a row are very high. But chances are, that hot investment you are shown is a result of randomness. You are much more likely to have success hunting on your own. The exception, of course, would be my clients. (Note to regulators: that last sentence is a literary device called a weak attempt at humor. It is not meant to be taken literally.)
That brings us to the principle of Ergodicity, "...namely, that time will eliminate the annoying effects of randomness. Looking forward, in spite of the fact that these managers were profitable in the past five years, we expect them to break even in any future time period. They will fare no better than those of the initial cohort who failed earlier in the exercise. Ah, the long term." (Taleb)
Why Investors Fail
While the professionals typically explain their problems in very creative ways, the mistakes that most of us make are much more mundane. First and foremost is chasing performance. Study after study shows the average investor does much worse than the average mutual fund, as they switch from their poorly performing fund to the latest hot fund, just as it turns down.
Mark Finn of Vantage Consulting has spent years analyzing trading systems. He is a consultant to large pension funds and Fortune 500 companies. He is one of the more astute analysts of trading systems, managers, and funds that I know. He has put more start-up managers into business than perhaps anyone in the fund management world. He has a gift for finding new talent and deciding if their "ideas" have investment merit.
He has a team of certifiable mathematical geniuses working for him. They have access to the best pattern-recognition software available. They have run price data through every conceivable program, and come away with this conclusion:
Past performance is not indicative of future results.
Actually, Mark says it more bluntly: Past performance is pretty much worthless when it comes to trying to figure out the future. The best use of past performance is to determine how a manager behaved in a particular set of prior circumstances.
Yet investors read that past performance is not indicative of future results, and then promptly ignore it. It is like reading statements at McDonalds that coffee is hot. We don't pay attention.
Chasing the latest hot fund usually means you are now in a fund that is close to reaching its peak, and will soon top out. Generally that is shortly after you invest.
What do Finn and his team tell us does work? Fundamentals, fundamentals, fundamentals. As they look at scores of managers each year, the common thread for success is how they incorporate some set of fundamental analysis patterns into their systems.
This is consistent with work done by Dr. Gary Hirst, one of my favorite analysts and fund managers. In 1991, he began to look at technical analysis. He spent huge sums on computers and programming, analyzing a variety of technical analysis systems. Let me quote him on the results of his research:
"I had heard about technical analysis and chart patterns, and looking at this stuff I would say, what kind of voodoo is this? I was very, very skeptical that technical analysis had value. So I used the computers to check it out, and what I learned was that there was, in fact, no useful reality there. Statistically and mathematically all these tools -- stochastics, RSI, chart patterns, Elliot Wave, and so on -- just don't work. If you code any of these rigorously into a computer and test them they produce no statistical basis for making money; they're just wishful thinking. But I did find one thing that worked. In fact almost all technical analysis can be reduced to this one thing, though most people don't realize it: the distributions of returns are not normal; they are skewed and have "fat tails." In other words, markets do produce profitable trends. Sure, I found things that work over the short term, systems that work for five or ten years but then fail miserably. Everything you made, you gave back. Over the long term, trends are where the money is."
Becoming a Top 20% Investor
Over very long periods of time, the average stock will grow at about 7% a year, which is GDP growth plus dividends plus inflation. This is logical when you think about it. How could all the companies in the country grow faster than the total economy? Some companies will grow faster than others, of course, but the average will be the above. There are numerous studies which demonstrate this. That means roughly 50% of the companies will outperform the average and 50% will lag.
The same is true for investors. By definition, 50% of you will not achieve the average; 10% of you will do really well; and 1% will get rich through investing. You will be the lucky ones who find Microsoft in 1982. You will tell yourself it was your ability. Most of us assign our good fortune to native skill and our losses to bad luck.
But we all try to be in the top 10%. Oh, how we try. The FRC study cited at the beginning shows how most of us look for success, and then get in, only to have gotten in at the top. In fact, trying to be in the top 10% or 20% is statistically one of the ways we find ourselves getting below-average returns over time. We might be successful for a while, but reversion to the mean will catch up.
Here is the very sad truth. The majority of investors in the top 10-20% in any given period are simply lucky. They have come up with heads five times in a row. Their ship came in. There are some good investors who actually do it with sweat and work, but they are not the majority. Want to make someone angry? Tell a manager that his (or her) fabulous track record appears to be random luck or that they simply caught a wave and rode it. Then duck.
By the way, is it luck or skill when an individual goes to work for a start-up company and is given stock in their 401k which grows at 10,000%? How many individuals work for companies where that didn't happen, or their stock options blew up (Enron)? I happen to lean toward Grace, rather than luck or skill, as an explanation; but this is not a theological treatise.
Read The Millionaire Next Door. Most millionaires make their money in business and/or by saving lots of money and living frugally. Very few make it simply by investing skill alone. Odds are that you will not be that person.
But I can tell you how to get in the top 20%. Or better, I will let FRC tell you, because they do it so well:
"For those who are not satisfied with simply beating the average over any given period, consider this: if an investor can consistently achieve slightly better than average returns each year over a 10-15 year period, then cumulatively over the full period they are likely to do better than roughly 80% or more of their peers. They may never have discovered a fund that ranked #1 over a subsequent one- or three-year period. That "failure," however, is more than offset by their having avoided options that dramatically underperformed. Avoiding short-term underperformance is the key to long-term outperformance.
"For those that are looking to find a new method of discerning the top ten funds for 2002, this study will prove frustrating. There are no magic short-cut solutions, and we urge our readers to abandon the illusive and ultimately counterproductive search for them. For those who are willing to restrain their short-term passions, embrace the virtue of being only slightly better than average, and wait for the benefits of this approach to compound into something much better..."
That's it. You simply have to be only slightly better than average each year to be in the top 20% at the end of the race. It is a whole lot easier to figure out how to do that than chase the top ten funds.
Of course, you could get lucky (or Blessed) and get one of the top ten funds. But recognize it for what it is and thank God (or your luck if you are agnostic) for His blessings.
I should point out that it takes a lot of work to be in the top 50% consistently. But it can be done. I don't see it as much as I would like, but I do see it.
Investing in a stock or a fund should not be like going to Vegas. When you put money with a manager or a fund, you should think as if you are investing in their management company. Ask yourself, "Is this someone I want to be in business with? Do I want him running my company? Does this company have a reasonable business objective? What is their edge that makes me think they will be above average? What is the reason I would think they could discern the difference between randomness and good management?"
When I meet a manager, and all he wants to do is talk about his track record, I find a way to quickly close the conversation. When they tell me they are trying to make the most they can, I head for the door. Maybe they are the real deal, but my experience says the odds are against it.
It's about not settling for being mediocre. Statistics and experience tell us that simply being consistently above average is damn hard work. When a fund is the number one fund, that is random. They had a good run or a good idea and it worked. Are they likely to repeat? No.
But being in the top 50% every year for ten years? That is NOT random. That is skill. That type of consistent solid management is what you should be looking for.
By the way, I mentioned at the beginning that past performance was statistically useful for ascertaining relative performance of certain types of funds like bond funds and international funds. In the fixed-income markets (bonds) everyone is dealing with the same instruments. Funds with lower overhead and skilled traders who aggressively watch their trading costs have an edge. That management skill shows up in consistently above-average relative returns.
Likewise, funds which do well in international investments tend to stay in the top brackets. That is because the skill set for international fund management is rare and the learning cost is high. In that world, local knowledge of the markets clearly adds value.
But in the US stock market, everybody knows everything everybody else does. Past performance is a very bad predictor of future results. If a fund does well in one year, it is possibly because they took some extra risks to do so, and eventually those risks will bite them and their investors. Maybe they were lucky and had two of their biggest holdings really go through the roof. Finding those monster winners is a hard thing to do for several years in a row. Plus, the US stock market is very cyclical, so that what goes up one year or even longer in a bubble market will not do well the next.
Investors Behaving Badly
Gavin McQuill of the Financial Research Center sent me his rather brilliant $5,000 report called "Investors Behaving Badly." He was the author and he did a great job. I read it over one weekend, and refer to it again from time to time.
Earlier we looked at a report which showed that over the last decade investors chased the hot mutual funds. The higher the markets went, the less likely it was that they would buy and hold. Investors consistently bought high and sold low. Investors made significantly less than the average mutual fund did.
McQuill focused on six emotions that cause investors to make these mistakes. You should read these and see whether some of them are familiar.
1. "Fear of Regret - An inability to accept that you've made a wrong decision, which leads to holding onto losers too long or selling winners too soon." This is part of a whole cycle of denial, anxiety, and depression. As with any difficult situation, we first deny there is a problem, and then get anxious as the problem does not go away or gets worse. Then we go into depression because we didn't take action earlier, and hope that something will come along and rescue us from the situation.
2. "Myopic loss aversion (a.k.a. as 'short-sightedness') - A fear of losing money and the subsequent inability to withstand short-term events and maintain a long-term perspective." Basically, this means we attach too much importance to day-to-day events, rather than looking at the big picture. Behavioral psychologists have determined that the fear of loss is the most important emotional factor in investor behavior.
Like investors chasing the latest hot fund, a news story or a bad day in the market becomes enough for the investor to extrapolate the recent event as the new trend which will stretch far into the future. In reality, most events are unimportant, and have little effect on the overall economy.
3. "Cognitive dissonance - The inability to change your opinion after new evidence contradicts your baseline assumption." Dissonance, whether musical or emotional, is uncomfortable. It is often easier to ignore the event or fact producing the dissonance rather than deal with it. We tell ourselves it is not meaningful, and go on our way. This is especially easy if our view is the accepted view. "Herd mentality" is a big force in the market.
4. "Overconfidence - People's tendency to overestimate their abilities relative to individuals possessing greater expertise." Professionals beat amateurs 99% of the time. The other 1% is luck. The famous Clint Eastwood line, "Do you feel lucky, punk? Well, do you?" comes to mind.
In sports, most of us know when we are outclassed. But as investors, we somehow think we can beat the pros, will always be in the top 10%, and any time we win it is because of our skills and good judgement. It is bad luck when we lose.
Commodity brokers know that the best customers are those who strike it rich in their first few trades. They are now convinced they possess the gift or the Holy Grail of trading systems. These are the people who will spend all their money trying to duplicate their initial success, in an effort to validate their obvious abilities. They also generate large commissions for their brokers.
5. "Anchoring - People's tendency to give too much credence to their most recent experience and to show reluctance to adjust their current beliefs." If you believe that NASDAQ stocks are the place to be, that becomes your anchor. No matter what new information comes your way, you are anchored in your belief. Your experience in 1999 shows you were right.
As Lord Keynes said so eloquently when forced to acknowledge a shift in a previous position he had taken, "Sir, the fact have changed, and when the facts change, I change. What do you do, sir?"
We expect the current trend to continue forever, and forget that all trends eventually regress to the mean. That is why investors still plunge into index funds, believing that stocks will go up over the long term. They think long term is two years. They do not understand that it will take years - maybe even a decade - for the process of reversion to the mean to complete its work.
6. "Representativeness - The tendency of people to see patterns within random events." Eric Frye did a great tongue-in-cheek article in The Daily Reckoning, a daily investment letter (www.dailyreckoning.com). He documented that each time Sports Illustrated used a model for the cover of their swimsuit issue who came from a new country that had never been represented on the cover before, the stock market of that country had always risen over a four-year period. This year, it is time to buy Argentinian stocks. Frye evidently did not do a correlation study on the size of the swimsuit against the eventual rise in the market. However, I am sure some statistician with more time on his hands than I do will brave that analysis.
Investors assume that items with a few similar traits are likely to be associated or identical, and start to see a pattern. McQuill gives us an example. Suzy is an English and environmental studies major. Most people, when asked if it is more likely that Suzy will become a librarian or work in the financial services industry, will choose librarian. They will be wrong. There are vastly more workers in the financial industry than there are librarians. Statistically, the probability is that she will work in the financial services industry, even though librarians are likely to be English majors.
South Africa, Laguna Beach, and Canada
South Africa is still on the top of my list of places I enjoy. Today I am speaking at a conference for 1,000 investment advisors at Sun City. Sun City is one of the most amazing conference facilities and hotel complexes I have ever been to. The vision to build this fabulous resort in the middle of the South African bush and then believe everyone would come is truly unique. The attention to detail on the art, decoration, landscaping, and the numerous entertainments is impressive. If you ever get the chance to come, you should take it. And let me take this time to thank partners Prieur du Plessis and Paul Stewart for being such good hosts, even if they do work me a little hard trying to get all the value from the time I am here.
At the end of the month, I will fly to Laguna Beach to spend a weekend at good friend Rob Arnott's annual thinkfest at Research Affiliates. That meeting is always one of the highlights of my year, both from the perspective of meeting old friends around great food and wine, and also for the sheer massive investment brainpower in the room. And in June I'll make a quick trip to Montreal to speak for Cannacord.
I am getting ready to speak now, so it is time to hit the send button. This afternoon we go on a game run in one of the better game parks, so we should see a wide variety of animals in the wild. Then Sunday we will be in Cape Town, and if the weather permits we will take a helicopter tour of the wine country. So, it is not all hard work. I am taking time to have some fun and smell some roses. And as I go through the years (I don't like to use the word old!), I more and more realize how important it is to enjoy where you are and not wait until some time in the future to get the most out of life.
And I hope you enjoy your week.
Your hoping to see the Big Five game animals this afternoon analyst,
John Mauldin
John@FrontLineThoughts.com
Hi, Alton,
Whether straight inverse or doubly so, as long as it moves up and down, that will work for the volatility capture part of AIM. It should be noted, however, that the discussion of these has come up before. As such, the consensus of people on the board feel that these are best suited for more short term, rather than long term use. Reason? Historically, the Stock market has moved up, so in the longer term these will underperform, relative to taking broad positions in the market overall.
In other words you'd be left more in the DOG house, or feeling like you've got a good case of "hair of the DOG" and so on.
Best,
AIMster
Nice earnings spike on RAS gave me a quick 28.41% average gain as the shares went out-the-door to the Greedy, all too glad to snatch them up!!! This gain from 31 March 2008. I'd have preferred a long-term rather than short term gain, but they wanted their RAS shares, and they wanted them NOW!!! So who am I to stand in the way?
Next!!
AIMster
Where could I find information on the HUSKY technique? I've checked aim-users.com and googled for it on advfn.com and didn't find a description.
Hi, WB,
HUSKY's a development of fellow poster Don Carlson. Ask nicely and he might send you a spreadsheet. Be prepared for something huge and quite in-depth!
AIMster
First and foremost for me is the realization that I don't hold all the correct answers. I also don't have the only clear view of reality. Perception and reality do have some relationship, but so much is dependent upon background information that we've accumulated during our lives.
Well said, Tom,
Another important part of this board is the people. We must be a bunch of serious "Mafiosi," because we treat each other as gentlemen of Respect. (Certainly the Ladies too, whenever they stroll through). Not only that, but we're each treating our investments as a "family business," which we take very personal. After all, who cares more about your money than you? Well, maybe Uncle Sam in the US, and similarly taxing national characters elsewhere, I'm sure.
Also, whilst "Don" Lichello provided the framework, we've made some "improvements" which I think he'd approve of. Fine tune the performance in our respective territories for maximum return. And the beauty of our widely-syndicated operation here is that we all win. What Tom does in Wisconsin, or Clive and others across the "pond" won't affect what I'm doing here. We all march to the beat of our own drummers, together we make quite a percussive chorus.
So yes, one posting might light the proverbial "idea bulb" above my head and get me thinking in another direction. But out common goal, no matter what means we use to get there with is a simple one, "buy low, sell high," or as Tom's so well phrased it, "Buy from the Scared, sell to the Greedy!"
Best,
AIMster
I went over to StockCharts Point & Figure charts section. There does not appear to be a "Linkable Version" tab for the PnF charts that you find on the line, bar & candlestick charts. Guess there is another way to post PnF charts, or else I am probably overlooking something.
Hi, Ray,
The other way round it would be to save the image to a .JPG file, upload that to a website, then make the link from there.
In Windows you can do this:
1) Get the chart you want in your browser page. Make sure you can see the whole chart. Minimize the toolbar and get rid of any other distractions, i.e., use the browser in full-screen, rather than windowed mode.
2) hit the print screen button.
3) Open Microsoft paint. Edit, Paste the image. Answer "OK" if you're prompted that the import is larger than the predefined image size.
4) File, save-as: your_JPG_Name.jpg
Then upload to a website and link to that. I think there are some freeware sites around where you can upload pictures to.
Best,
AIMster
How do you guys have charts directly in the post?
Encase the URL of the image (without the http:// prefix) in between [ chart ] and [ /chart ]
For Conky-
Also from stockcharts be sure and click the "Linkable version" link right under the chart before you copy the image address. A small but important detail I sometimes overlook! Which may be why the P&F chart didn't post right for Ray.. Is there a linkable version for that one?
AIMster
Last week's Milwaukee Journal-Sentinal stated that S.E. Wisconsin (the main center of population if you're not a cow) real estate prices had not only shored up, but had actually risen ever so slightly in the latest reporting period. So, maybe Wisconsin is an island onto itself or maybe the rest of the news is just sensationalism.
Well, Central NY in the Fingerlakes region has been largely resistant to the housing downturn. Banks in our area weren't in the business of giving you a ridiculous loan as long as you were breathing enough to sign all the paperwork. In fact, our assessment went up slightly. The downturn's impacted more areas where the speculation was greatest. I suppose if someone could do a statistical heatmap overlay of the US and housing price changes, you'd get quite a topographical overlay.
Best,
AIMster
Ok. A one year backtest of IHF, starting with $10K investment using the 'by-the-book' 50/50 AIM parameters returns:
AUTOMATIC INVESTOR HISTORICAL ANALYSIS FOR IHF
======= PERFORMANCE =======
Current Portfolio Value: $9,224.93 (103 shares owned)
Profit or (Loss): ($775.07)
Simple Return: -8%
Annualized Return: -8%
Buy/Hold Portfolio Value: $8,362.00 (168 shares owned)
Buy/Hold Profit or (Loss): ($1,638.00)
Buy/Hold Simple Return: -16%
Buy/Hold Annualized Return: -16%
Return on Capital at Risk: -15.38%
Average % Capital at Risk: 50.38%
Analysis run on 03-May-08
AUTOMATIC INVESTOR HISTORICAL ANALYSIS FOR ITB
======= PERFORMANCE =======
Current Portfolio Value: $7,315.37 (344 shares owned)
Profit or (Loss): ($2,684.63)
Simple Return: -27%
Annualized Return: -27%
Buy/Hold Portfolio Value: $5,716.48 (276 shares owned)
Buy/Hold Profit or (Loss): ($4,283.52)
Buy/Hold Simple Return: -43%
Buy/Hold Annualized Return: -43%
Return on Capital at Risk: -35.11%
Average % Capital at Risk: 76.45%
Analysis run on 03-May-08