The Four Pillars of Investing Part 4

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return





Pillar Three - The Psychology of Investing

Chapter 7 and Chapter 8 – Our Behaviors and how to combat them.
Richard Thaler and friend were contemplating driving across Rochester, New York, in a blinding snowstorm to see a basketball game. They wisely elected not to. His companion remarked, “But if we had bought the tickets already, we’d go.” To which Thaler replied, “True – and interesting.” Interesting because according to economic theory, whether or not the tickets have already been  purchased should not influence the decision to brave a snowstorm to see a ball game.
It is like throwing good money after bad.  Richard Thaler helped found the field of Behavioral Finance. Is there any other kind?
The problem with investing is yourself and these bad traits.
•    Human beings are very social. So be ready to invest as the contrarian.
•    We are too overconfident that we could beat paid experts in the field, and money managers who routinely do not outperform the market. You are trading with/against the money managers. You cannot time the market. The news and hype has already been priced in.  So tell yourself regularly that the market is smarter than you and there are plenty others better equipped than you. Obtain market average - Just do it cheaper and more efficiently.
•    The next major error is using the immediate past as an indicator to future returns.  The best asset classes for five years tend to be the worst performers in the following five years and vice versa.  So recognize this and forget the last ten years of performance.
•    Why don’t we index – it is boring. Gambling is more fun. And we like to brag about who and what we invest in and with. The exciting funds are probably at the top ready to go down. So be dull and index.
•    Focusing on the wrong risk. Worrying too much about the short term than the long term. Myopic risk aversion.  So check on your portfolio less often – think of your house and how you hold onto it without knowing how the price might be swinging. And/Or hold lots of cash and take advantage of short term drops in prices.
•    Finding the next Wal-Mart. Great company/Great stock fallacy. Better to stick with slow and steady growing than trying to bet on an explosive, advertised stock which will fall out of favor soon enough anyways. So be dull and index.
•    There are no patterns. The markets are random. Look long enough and find a historical pattern, but it does not work applying it forward. So be dull and index.
•    Poor accounting. Calculate your return on investment and do not bury your failures or they tear down overall performance, and the overall return is all that matters. And don’t be a “whale” feeding your money to your managers through fees and expenses.

The Four Pillars of Investing Part 3

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return

Pillar Two - The History of Investing
Chapter 5
George Santayana - "Progress, far from consisting in change, depends on retentiveness. Those who cannot remember the past are condemned to repeat it."
Larry Swedroe - "There is nothing new-only the history you have not read."

A chapter all about booms and busts.
Technological progress drives economic progress. Technological advancements come in spurts.
Stephen Ambrose, "Undaunted Courage", "A critical fact in the world of 1801 was that nothing moved faster than the speed of a horse. No human being, no manufactured item, no bushel of wheat, no side of beef, no letter, no information, no idea, order of instruction of an kind moved faster. Nothing had moved any faster, and, as far as Jefferson's contemporaries were able to tell, nothing ever would."

The revolution of communication was also dramatic. Important news could be instantaneous. Today just allows for more trivial information to be communicated instantly. :)
Four ingredients to produce a bubble.
•    A major techological revolution or shift in financial practice.
•    Liquidity - i.e. easy credit
•    Amnesia for the last bubble - or one per generation.
•    Abandonment of time-honored methods of security valuation, usually caused by the takeover of the makret by inexperienced investors.

1720-The South Sea Bubble and the Mississippi Company
Canal building - more often than not, the users of the technology prosper more than the inventors. Industry fared better from the advent of canals than the companies which built them.
England railroads bubble
Sonics and tronics and then the Nifty Fifty bubbles
The Dot Com tech sector bubble
and now the housing credit bubble

Chapter 6
The bottoms that follow the euphoria. The depressed, but great buying opportunity times.
1979 Business Week - Death of the Equities article
Best rewards come after a devastating bear market.
Busts follow the same four ingredients.
A generalized loss in the faith of the new technologies to cure the the system's ills is usually the triggering factor. Followed by a contraction of liquidity. Amnesia for the recoveries, and cheap stocks only excite the analytical minds.

What follows is a lot of political intervention and new regulations to string up a scapegoat. Luckily, most have been in favor of the shareholder.
How to handle the panic? Stand pat. Stay the course. Ideally, when prices fall - increase your position by maybe 5% after a drop of 25% so as to avoid running out of cash before the real bottom.

Alphonse Karr, Plus ca change, plus c'est la meme chose; The more things change the more they stay the same.

The Four Pillars of Investing Part 2

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return

Chapter 4
(pg 107)
Let's summarize the practical lessons from the first three chapters:
•    Risk and reward are inextricably intertwined. If you desire high returns, you will have to purchase risky assets - namely, stocks.
•    You are not capable of beating the market. But do not feel bad, because no one else can, either.
•    Similarly, no one-not you, not anyone else-can time the market. As Keynes said, it is the duty of shareholders to periodically suffer loss without complaint.
•    Owning a small number of stocks is dangerous. This is a particularly foolish risk to take, since, on average you are not compensated for it.
pg(108)
In other words, since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because ti is the only factor affecting your investment risk and return that you can control.

Word to the wise. If you cannot handle the down years-then you should find a reputable financial advisor. Otherwise, the emotional response will ruin your investments.


The remainder of the chapter focuses on asset allocation. For most investors the target should be a 50/50 mix of stocks/bonds. The more risk you can handle, or the more bear markets you can weather, the higher the stock allocation. The suggested maximum is 75% stock.  As you near retirement age the % towards bonds increases because naturally your risk decreases accordingly. Additionally, the bonds should be short term instruments, and remember inflation.

Step two is to diversify abroad. Why? It spreads out the risk. This portion only affects the stock portion of the allocation. Again risk and return are the guidelines, but the suggested limits are a 15% min and 40% max of your stock holdings. Regardless, stick with it through thick and thin.

Step three is size and value. large cap and small cap, value. generally putting more to the larger side with balance in value and growth, the small cap should be more weighted to value.

Step four is sectors. REIT, precious metals are the two recommendations. Everything else is covered in the S&P 500.

Conservative example includes 35% US Total Market; 10% foreign; 5% REITs; 50% short term bonds
Middle ground example includes 25% US total market; 10% US large value;10% US small value; 5% REITs; 10% foreign; 40% short term bonds
Riskier example includes 10% S&P; 10% US large value; 5% US small; 7.5% US small value; 7.5% REITs; 2.5% precious metals; 10% European;7.5% Japan and Asia; 7.5% Emerging markets; 7.5% International value; 25% short term bonds;

The Four Pillars of Investing Part 1

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return

Pillar One - The Theory of Investing
Chapter 1 (the history chapter)
(pg 12)
The point of this whole historical exercise is to establish the most important concept in finance, that risk and reward are inextricably intertwined.
The low prices that produce high future returns are not possible without catastrophe and risk.
Chapter 2
(pg 44)
But if you can understand the chapter's central point-that the value of a stock or a bond is simply the present value of its future income stream-then you will have a better grasp of the investment process than most professionals.

Then comes a lot of equations of market value and discounting future value to present value. 
An annuity: You can capitalize(that is, discount) its payments by a low rate – say 6%. If your payments are $30,000 a year, this is the same as owning a long bond with a value of $30,000/0.06 = $500,000. If you are older, or it is riskier, use a higher rate, making the value significantly less.

Chapter 3 is all about how actively managed funds cannot and do not beat the market, and therefore, neither can the average joe investor. Total Stock Market indexing is the the key. Sector or selective stock picking increases risk and reward. Better performance overall with an index on the market - slow and steady and earn the boring market return.

The Ultimate Hitchhiker's Guide To The Galaxy

I just finished reading "The Ultimate Hitchhikers Guide to the Galaxy." I was a bit stunned by the ending.  But I think that most of that stems from the fact that the last half of the book reading was a bit disjointed for me.  The first half was smooth and continuous and read in a short amount of time - similar to any book I am enjoying, I devote a lot of time towards it and it is easy to become immersed in the story. 

However, my regular reading times were being interrupted and I was being distracted into doing other things. Such that when I picked up the book again it took a few minutes to re-acquaint myself with the story line.  Sometimes I was even forced to backtrack a few pages to clue me back in on what in the world, or galaxy was going on at the moment. 

Ultimately, pondering this made me wonder if this is why some people struggle with reading altogether anyways.  Unless you have a regular reading schedule, or read through a story in short order - it can be very difficult to follow and even to enjoy.  I found that my infrequent reading spells near the end also included much, much less of outbursts of laughter. Whereas, in the beginning, I was constantly laughing out loud and drawing attention to myself. 

Some of that may have been that the first few novels were a bit more entertaining, but I think it was compounded by the fact of infrequency and not following or remembering why the characters were in places as they were.  Extending this idea to mainstream public and I can think of a few good examples.  Scriptures.  Not a lot of people have really read them cover to cover. But if you draw out the process for ever and are infrequent in your reading, I can easily see how the story loses interest and distractions come or are chosen more often. However, when you are immersed in the story, it is easy to forgo anything and just allow yourself to be carried along for a few hours as you turn page after page.

Before college I was an avid reader and enjoyed spending time on the couch in a different world and completely ignoring my own world and the chores I was supposed to be doing. College ended all of that and my reading time was entirely focused on my engineering textbooks.  I was afraid, I think, to crack open a book because I wasn't sure I had the discipline or the time.  I always dreamed of the days after college when I could begin consuming the literary world once more with a renewed passion finally free of the restraints, self-imposed I will admit to some degree.

However, life after college has proven to be more difficult in renewing that passion than I had anticipated. True, I work full-time and sometimes part-time and I also have a long honey-do list and a wife and baby and a new house. However, I am also starting to think that a part of my difficulty in my renewal comes because I simply have fell out of habit and practice. I still have a long list of books that I would like to read and others that I would like to re-read from my youth. 

Returning finally to the origins of this entry - I thoroughly enjoyed reading "The Ultimate Hitchhiker's Guide to the Galaxy." It was an incredible journey and so much fun and humor. I always laughed when Marvin the depressed robot was around. I actually saw this movie a few years ago. The movie did a good job.  The ending left me wanting though. I didn't feel quite right about it, a bit unresolved and not entirely all explained properly.  I fear some of that is due to my choppy reading at the end, too.

I finally understood so many of the jokes and different things that my good friends and other engineers would say in reference to the book. It made me smile and laugh some more. I could see why it is an engineer's favorite and loved to contemplate the mysteries of the universe and the travel and the technology.  If only I could have known of this book sooner.  This has definitely been a great birthday present.

Internet Scams

Buying and selling a home can be a stressful event. Whether you decide to do it yourself or if you team up with a real estate broker. One way to do it yourself is to use Zillow.com. It is similar to the MLS but open and almost free. You can browse listed homes for free, you can even post your home and a "Make me move" price for free. Just this last week though, they started charging to actually list your home as "For Sale."

I used to have a listing on Zillow and was surprised by the number of Realtors that called me up wanting to list on the MLS with them. I had more activity from Realtors trying to get my business than I did of potential home buyers. However, I did have one interested buyer that I thought was just too good to pass up. I will post our email conversation below. The first message was sent through Zillow to me.

From Zillow:

RAPHAEL TUFOUR (raphael_tufour@yahoo..com) is contacting you about your home. Here is the message:
------
HELLO I AM INTERESTED IN BUYING THIS PROPERTY OUTRIGHTLY. COULD YOU PLEASE EMAIL ME TO CONFIRM IF IT IS STILL AVAILABLE IN THE MARKET FOR SALE. REGARDS, RAPHAEL TUFOUR
------
Please be aware that once you respond to RAPHAEL TUFOUR (raphael_tufour@yahoo.com), your e-mail address will no longer be anonymous to them.

Thanks for using Zillow.

Usually, I would have just junked this email right off. The indicators - all caps, misspellings, 'outrightly'.
But just for fun, I decided to use a secondary email account and respond.

Raphael,
This home is still available. What is your offer?

The next day he responded.

Sir,

I don`t believe in offer and counter offer. Just let me know the net/bottom price and if it is ok by me we proceed. 

Thanks

Raphael Tufour

I replied with the following in kind and mimicking his salutation.

Sir,
Compiling data from many sources I was able to come up with an asking price of $250,000.
Let me know what you think.
Thanks.

Of course the funny part was this was way more than what I had listed as my asking price. He must have liked the price, or that I was communicating because he went back on his word and countered my offer for a price that was still higher than my listed asking price, and he also went back to all caps again.

WHAT ABOUT $220,00 SIR?

Confused, I wrote back.

I thought that you said that you "do not believe in offer and counter offer."
What is wrong with $250,000? Are you trying to cheat me?

Now he was confused.

Cheat you in what way sir? How do we proceed?? What is the requirements???

Thanks,

Raphael

What 'are' the requirements. Well, I only require you to be honest in your dealings. Let's see if he can do that.

Well, if you would like to proceed with the purchase price of $250,000 then I will contact my realtor and we can begin work on getting all the paperwork in order that is necessary to complete the sale.

 He must have thought that that was okay.

I would like us to proceed.

Raphael

Turn about's fair play. Let's see what he thinks of me requesting information from him.

To begin, I will need some basic information to prepare the forms.

What is your contact information?
Where do you live?
What is your primary purpose for making this purchase?
What will be your form of payment?

We may also request a current pre-approval letter from a reputable lender.
We may also request a copy of your credit report.

Thanks.

He responded quickly - but not with information. Rather with excuses.

Thanks for your email.
I will provide the requested information necessary to prepare the forms, but please let it be noted that i am a civil servant/government official whose account is highly monitored and regulated in line with civil service bureau for code of conduct for public servants.

In line with the above and as soon as we get things fixed,my handler may be coming with the funds cash in consignment for the invesment matters as the funds may not need to go through the usual banking system until the funds arrives at your end.

Let me know what you think about this.

Thanks
Raphael Tufour

And the truth comes out. He cannot deal honestly with others. I shot back a short reply.

I will tell you what I think about this. You failed to respond to my questions.

I never received another email in reply. It was kind of funny for a while. But sobering to think about how many people still get ripped off from shady internet scammers offering a deal that is too good to be true.
Do you have a story about Internet Scams or phishing emails?  Comment below and let us know.

GPS Buying Guide

Magellan Maestro 4700

I finally purchased my Christmas present last night! I scored my gift via an Amazon Gold Box deal of the day! My parents gave us some money for Christmas and we had decided that with our upcoming move that a GPS for our car would provide useful help and lots of help navigating the East coast and all of its treasures. But which one should we get?  What GPS do you have?

We knew that, for us, we could probably find one that would do the job for near $100 or be extravagant for $200. We had a mental limit in mind of not crossing the $150 mark.

The blessing and curse of internet shopping is understanding your purchase better and the competing options. The curse is that you can very easily become mired down in the information and suffer from analyis paralysis. Making a decision is often better than not making any decision at all.

I compared the Garmin, TomTom, and Magellan brands. I used Amazon and BestBuy for most of my research. I found a very useful Magellan Comparison Chart via BestBuy. Via Amazon, you can browse nearly any Garmin Nuvi and find a section called, "Which nüvi is Best for You?" right below the Product Description and What's in the Box. I found this comparison chart very helpful in narrowing down the models I was interested in. Stylistically, the TomTom and Garmin are very different. Their approach to marketing and their user base is different although the GPS is still a GPS.

Last night's purchase was not a purely impulsive buy. We decided more than a month ago that we wanted one, and applying the 30-day rule, we found that we still wanted one. I knew last night that I wanted the Magellan brand, however, I was not as familiar model on sale as I would have liked.

When you have narrowed down your field of interest it is in your best interest to still be aware of the higher end, more expensive models so that you can spot a great deal when they go on sale. This is a fine line to walk because you have to be careful not to let yourself be overcome by feature creep.

Overall, we are excited with our purchase and we are glad that we used the 30-day rule to be sure that we really wanted a GPS. We are also happy that we could find a better model than we were expecting to purchase because of the daily deal sale price. I hope that when it arrives I can give a positive review and share some of our traveling experiences later this year.

Have you ever purchased something, or not purchased something, when it was on sale, but before your 30 days were up? Please share your dilema below.