Dollar-Cost Averaging

Dollar-cost averaging involves periodically investing the same amount of funds in an investment program.

It works best when securities prices are erratic.That is, they move about from one day or one week or one month to the next. Dollar averaging is not as practical when a security is in a long-term, upward, growth trend.

There is, therefore, conflicting research on the subject.

Problem: It is hard to know in advance when most securities will be in an upward growth pattern. Most investors do not have a lump sum of funds to invest all at once. Thus, they resort to dollar averaging as a practical strategy.

Basic Finance

A population that believes in astrology, horoscopes, and tarot cards, and the effects of magnetism on health, will believe anything about what creates a sound economy and jobs, or what causes prosperity or recessions.

All I can do is comment on what I have observed over the years, and only hope my readers will open their minds.

Closed minds will continue to harbor old wife’s tales about the basics of finance in the real world.

Popular Investment Success Stories and a Lottery

The investment public is usually impressed by anyone who had invested in a security that paid off big. It makes for interesting reading or listening.

The public then attempts to follow the same strategy. It’s like trying to get lightning to strike twice or winning a lottery by choosing the winning previous number.

It does create momentum bubbles in the securities market. But never works, unless you get out of the action fast enough. Very few do.

Trying to Outsmart the Next Investor

Rules for investing are logical but they are easy to forget. Some investors never get to learn them thoroughly.

For example, the next investor may be just as smart or smarter than you. Chances are he or she has the same information about a company or security, or strategy as you are looking at, when buying or selling.

Also, for every seller there has to be a buyer. Therefore, that dog of a security you are selling is being bought by someone who feels they are getting a bargain.

And when you feel it is time to desert the market, there is someone out there who feels it is time to get into it.

Do you still think you can really outsmart the next buyer or seller? ( See the Earl J Weinreb NewsHole® comments.)

Day Trading Prospects

Day trading is for professionals and not for amateurs or those who want to act as if they were professionals.

You must understand the ground rules for day trading. They are not as simple as those you get in classes for beginners.

First, you need sufficient volume with which to work the odds to tilt in your favor. Then, there are only small profits when gains occur.

You are looking for gains of only pennies at a time. And even if you have the complex models for trading programs and securities packages, there is no guarantee they will work. None ever do for long.

Remember, you are always competing with the professionals who have more powerful money with which to trade, and in faster computers and models.

Investment Diversification

How many shares of a stock or how many bonds should you have for diversification? This question often arises and is the subject of a study I have noted, as reported in a financial journal.

Most investors believe they acquire enough diversification when they have mutual funds.The more funds they have, the better. But evidence shows that holding more than one fund often duplicates their holdings and does not add to diversification.

Then, too, there are studies about how many issues need to be in a portfolio for practical diversification. This attempt becomes doubtful because that pursuit becomes a vague effort for most investors. Diversification to overcome risk varies by investor needs and characteristics.

The solution is simple for the average investor. Buy an index, in the form of a mutual fund or an exchange-traded-fund (ETF). That generally provides diversification while allowing for certain industry or country objectives.

The Dodd-Frank Mishmash

Dodd-Frank legislation created tools for the government's attempt to identify and manage systemic risk, including more stringent capital requirements for banks, and to provide extensive oversight of the derivatives market,

It also attempted a mechanism for government shut down of large financial institutions when failure could trigger a broad debacle. And it called for a new consumer watchdog group under the Federal Reserve, to prevent deceptive financial products.

One goal was to eliminate the danger of firms that are "too big to fail" -- that a bailout would be the only alternative to a crash of the entire system. This 'too big to fail' mentality." persists, however, despite the Dodd-Frank legislation.

With the new law, the government has the power to take down any firm that poses a risk to the entire financial system, whether or not the troubled firm is actually a bank.

The Multi-Trillion Dollar Debt Will Backfire

The multi-trillion dollar budget deficit may take a few years to cause severe problems but it eventually will. That’s bound to happen, no matter what reassurances we get from the Obama administration or the Federal Reserve.

Ten year Treasury bond rates may be relatively low today. Perhaps they truly reflect what interest rates may be ten or so years from now, But governments that heavily spend today cannot easily unwind obligations in the future.

When economies get out of deep recessions, inflation does take hold. The budget deficit will provide the environment for inflation to get out of hand.

Financial Opinion in Media

Articles in financial publications about the commercial real estate industry are erratic. How bad they have been, and how poorly investment institutions have fared with such investments. And how particular investment banks were disposing of major real estate investments.

Very bearish sentiments. That appears to be the slant of the articles.

However, it was reveled that other investors have been accumulating those commercial realty properties.

Overlooked point: Reports are slanted to be bearish. It could easily have been bullish for the future. The public already knows of the past commercial real estate meltdown. Would they be interested in the intentions of the buyers who have come into the picture?

That is where the slant should truly be.

The AIG Bailout Fiasco

The next time a left-leaning government says we need a bailout or more financial regulation, the public must stop and remember AIG.

AIG was a must-do rescue plan, to bail out the giant insurance company. We were told of the dire national and worldwide consequences if we did not immediately do something . The company was simply too big to fail.

In the process, the American taxpayer got stuck with a tremendous bill and 80% of diminished-value stock.

However, the insurance company had secured insurance business of many varieties, all with secured assets. Those assets were never in danger.

But AIG also insured credit default swaps (CDS) obligations. It was thought that these would not only bankrupt the company when payoff became necessary, but would cause a financial collapse of their clients as a result.

The truth about this bailout came to light in November, 2009, in a report by TARP Special Inspector General Neil Barofsky. The report said that Tim Geithner, now the Treasury Secretary of the U.S., and then the president of the New York Federal Reserve Bank, did not think that AIG’s failure would be devastating. Geithner had been closely watching CDS activity for some time up to then.

Why the rush to bailout by government? Why not wait for claims to come in? Why not depend on order-oriented bankruptcy courts should the worst happen?

In the bailout, those who held CDS obligations were paid off 100 cents on each dollar of debt. Normally, creditors of holdings in a bailout get just pennies on the dollar.

There are also questions about how bad those AIG assets really were, if a bailout was so necessary and urgent.

There are more loaded questions of our government to answer and serious doubts about politicians who constantly want bailouts and legislation, where the whole purpose is merely a device for government to get its hands on power.

Outsmarting the Next Investor

Here are some rules of investing that are so logical, they are easily overlooked. Many investors never get to learn them.

The next investor may be as smart or smarter than you. Chances are they have the same information about a company, security, or strategy as you are looking at, when buying.

Also remember, for every seller there has to be a buyer. Therefore, that dog of a security you are selling is being bought by someone who feels they are getting a bargain.

And when you feel it is time to desert the market, there is someone out there who feels it is time to get into it.

Do you still think you can really outsmart the next guy?

DayTrading Payoffs?

Day trading is for professionals and not for amateurs or those who want to emulate professionals the hard way.

Non-pros overlook the practical ground rules for day trading. They are not as simple as those you get in classes for beginners.

To start, you do not have sufficient volume and programming with which to work the odds in your favor. Then, there are only small profits when gains do occur.

When you are looking for gains of pennies at a time. And even if you have the complex models for trading programs and securities packages, there is no guarantee they will work. None work perfectly for long.

And you are always competing with the professionals who have more powerful money with which to trade, and in faster computers and models.

Securities’ Prospects Over the Long Term

Stocks have returned about 7% above the rate of inflation for the past two hundred years. And in twenty year periods, they have outperformed bonds about 90% of the time.

However, these statistics conceal important facts. Someone who had invested at the market peak in 1929 would have had to wait until 1998 to reach a return of 10% on their money. That would include dividends. This is an after-inflation yearly return of 7%. Actual returns will differ greatly, depending on the time you actually begin investing in the market.

An S & P 500 investor from 1929 through 1949 received an after-inflation return of about 4.5%. An S & P 500 investor starting in 1932, and holding on until 195, received an after-inflation annual return of about 10.8%. That works out to over 6% more per year.

Obviously: Luck and chance with regard to time of market entry play a major role, so be mindful of the danger of relying on averages.

And, as I have said in earlier blogs, timing is not a panacea, It’s more luck than a sign of investor ability.

The Next Very Thin Firewall

Bank rules are being changed again. The development of a new dike to prevent an infamous financial flood such as the meltdown of 2008.

You are probably hearing of the so-called Basel Rules, whereby banks are setting up more capital to offset write-offs of potentially bad loans in the future.

This all sounds good. But it is a façade. Political gestures, more than financial acumen, to build confidence and kick the proverbial can of problems down the road.

The truth is, during the most recent financial debacle, when bank assets were “marked-to-market,” and true asset values were difficult to determine, and thus short selling decimated asset pricing overnight, capital cushions were wiped out in a fell swoop. Basic banking capital disappeared almost in a few days.

So all the media headlines about the Basel Rules are meaningless. in practical terms

Wall Street Always Forgets

Wall Street financial activity represents the only industry in which a top player can literally fall on his or her face and misbehave, short of having to go to jail for years. Or perform a job miserably, or lose billions of dollars of investor funds owing to poor judgement. And, where, in a short while, all will be forgiven.

I don’t know any other business where this is possible.

Many top investment managers who have lost tremendous amounts of their clients’ funds have come back with new operations, fresh funds, and eager investors, many of whom have been previous losers. It’s hard to keep count

Only in the Wall Street top-level community of movers and shakers,

Securities Buy and Hold Strategy

Those who have a buy and hold investment philosophy must decide what is their long term investment outlook. Ask fifty investors the question and you will get fifty answers.

The long term definition will vary. The time horizon often ends when the undisciplined investor impetuously decides to sell a security that was bought to be held for a longer term, until something more appealing comes along to replace it. The rationale comes after the transaction is completed.

The truth is, you need strong nerves and discipline to hold on to securities amidst constant advice to sell. Also, many advisers do not believe in buy and hold. For any number of reasons, most of which I find poor.

The Dow Industrial Average contains some of the largest, soundest companies, and cannot be considered speculative. Yet, the market will usually be highly volatile. So, added pressures exist for frequent buying and selling.

One solution? Once you have set your strategy, avoid the media and the advice of unknowing friends and family. ( See the Earl J Weinreb NewsHole® comments.)

Analyst Opinions

Analyst information, when given directly or from stock brokers, must be disseminated to a group, rather than to individuals. So it’s not considered “inside” or private by the time it gets to the average investor. Or,for that matter, most professionals or institutions, if it is to be deemed legal by the SEC.

But I find most analytical advice is not worth that much. What analysts get from a company is already so widely known and relatively insignificant, it makes little worthwhile difference for choosing securities.

Analysts have no real knowledge of what actually goes on in any company from the outside, despite all their pompous discourse about corporate activity.

That is why I always suggest the purchase of unmanaged, index mutual funds or exchange-traded funds (ETFs).

Disciplining Securities Market Strategy

I previously discussed the foolishness of attempting to time the buying and selling of securities. How, occasionally, investors can luck out in their efforts. But this success is accidental, and they most often never get back into the market in time.

And that my observations confirm this, having now studied 1,600 investing strategies over the years, along with their pros and cons.

More importantly, I have investigated the discipline of strategy use. Discipline is much more essential than strategy usage and prevents upsets of the market plans of the overwhelming majority of investors.

Iron-clad discipline must be part of each strategy. The reason to buy a security has to be an integral part of the eventual, consistent reason to sell.

That discipline isn’t easy to maintain when you have to contend with media noise, produced by a storm of opinions, most of which are salesmen-oriented, or inaccurate, or biased.

Accomplish that and you have investing odds in your favor. ( See the Earl J Weinreb NewsHole® comments.)

Timing Securities Markets and Discipline

Market-timing is hardly ever successful. Yet most everyone, whether they are market professionals or complete amateurs, still believe they can be experts at timing when to buy and sell stocks and bonds.

Occasionally investors will luck out in their efforts. Or merely boast how they bought or sold “just in time.” But you can be assured that this success is accidental. If they were truly lucky to have sold in time, they most often never got or will get back into the market in time.

My observations confirm this. From having now studied 1,600 investing strategies over the years, along with their pros and cons.

What does work is discipline. which I will discuss in the future. ( See the Earl J Weinreb NewsHole® comments.)

Coin Collecting Tips

How profitable is it to invest in old coins?

I have collected coins and have studied and written about the many ramifications of rarity and condition, along with supply and demand factors. I will sum up this very complicated investment as simply as I can.

Coin collecting is only for long term investing because of the spread between what the seller gets and the buyer pays.

Some collectors have profited by having coins regraded. That is a process of getting higher condition evaluations. That proves how risky the whole idea of coin investment can be.

Regrading of coins is highly speculative. Especially when the coins are taken from hard plastic casings, for evaluation by grading services. This is done hoping for a higher grade. However, the grade could actually be lowered in the process.

I find that coin grade often is, therefore, too subjective. And only depends on the partisan eye of the buyer or seller.

So, coin collectors, as is the case with all investors, ought to always be careful.

Residential Mortgages and the Media

About 20% of homeowners have no home mortgage. And only 5% of all Americans are not current in their mortgage or have severe problems with their payments. Moreover, 33% of Americans rent and have no mortgage concerns.

Thanks to the obliging media and the antics of the Left in government, the problems, however, will only continue to get worse.

Mortgage foreclosures rule headlines, mar public psychology, and tar the overall economy.

Thus the focus persists on a small amount of events, but obviously a very noteworthy amount. That is because of the economic impact produced by such events.

I repeat: It would have been cheaper, early on during the financial meltdown, for taxpayers to have had the government buy and raze homes that were started and never finished, just to get rid of that excess home inventory overhanging the market.

It is something that experts running our government never fully considered. Yet, it has to do with the simple rule of supply and demand.

Total All Government Debt

Many items of public debt are never totaled for the public to see. Items such as Fannie Mae and Freddie Mac obligations, are a perfect example.

As long as the U.S. guarantees the payment of any obligation, that debt ought to be part of each year’s budget and the entire public debt.

Remember Enron and Citigroup and other big banks who were bailed out with taxpayer funds? Keeping heavy debts apart from regular government business hides real problems that eventually catch up with financial reality.

Financial chicanery such as this is the means whereby politicians are able to hoodwink the public. In private business, the culprits wind up in jail.

Real Estate Direct Participation Programs

Direct Participation Programs are being sold to investors who want to invest in real estate investment trusts. However, these are not fully regulated. Most importantly, they are not as liquid as a diversified mutual fund or exchange-traded fund (ETF) that may specialize in real estate investment holdings.

What is more, Direct Participation Programs generally have high sales commissions and their management fees are generally exorbitant.

This is yet another instance when it is best to stick to plain vanilla investments, and to avoid the sharp pencil, brainy folks on Wall Street. ( See the Earl J Weinreb NewsHole® comments.)

Analyze Economist Opinions

Always investigate economist opinions, by first knowing their backgrounds.

I use my own quick screening process before I get into their opinion details. Not everyone has the time or the job of getting into them. So a quick evaluation is essential.

First, find out if the economist believes in free markets. If he or she is a favorite of a left-leaning politician, you know that economist fails the prime test.

As a further fast check, I look to see if the economist has had an entrepreneurial, industrial or business background. Many free market economists, such as Milton Friedman, never came from industry, but nevertheless, fully understood industry’s optimum needs.

If the economist believes in free markets you will get a totally different perspective on real-life economics, as opposed to any left-leaning view that has accomplished so little success the world over.

High-Frequency Trading

Well over 70% of securities trades arise from high-frequency trading procedures. Anyone with fast computers can participate, so it is not so exclusive a financial club as some critics make it out to be, And not a devilish cabal.

High-frequency trading helps lower costs and pricing for all investors, large and small. It does tend to exaggerate volatility.

It is little understood and the media does a poor job of educating the public that the politicos love to rile up. So, it has attracted their ire, when they have little positive to contribute to helping solve our real financial problems.

Money Spent on Health Vs Comparable Government Spending

Arch liberals in this country worry that Americans spend too much for health needs.They don’t appear to care much about outlays on food, housing, cars or clothes, as they do for health.

But what Americans spend on different items always vary. We spend more on health because health providers offer better services than do those in countries where such expenses may be less. We do have more and better doctors, testing, and health facilities.

This does not indicate waste, as the Obama administration has said. The only major excess occurs in over-testing, which can be sharply reduced with tort reform. The Left will not touch that for its own political reasons.

The poor can always be given health care assistance, the way food stamps and other forms of help are provided.

What ought to be considered is that government health spending will control one sixth of our entire economy, while taking individual choice away.

Anticipating the Black Swan

The term, Black Swan, is used to depict a financial catastrophic downturn for which no one is prepared. (Black swans were once considered non-existent, until they were found to exist.) So, when such once-in-a-lifetime occurrences do occur, financial managers attempt to be ready.

Such as with use of prearranged derivatives. Such attempts are usually not more than luck in timing, if at all successful. In fact, lots of hindsight often go into commentary as to how to counter the next financial meltdown after a fiasco occurs.

I doubt the efficacy of any attempt at risk control in advance when traders use highly leveraged speculative instruments.

What the Failed Stimulus Hid

The relatively unknown, yet academically noted 19^th century pro-capitalist economist, Claude Frederic Bastiat, was correct again. Yet few American citizens have learned his lesson well. Bastiat dwelt on the difference of economic consequences of what are seen and what are unseen.

Relative to the Obama stimulus: We see and hear about the government spending almost a trillion dollars to pump up the American economy. But we cannot see any positive effects on the economy. Only failure.

What if the trillion dollars were not spent? Were the funds taken from the public as taxes or loans not been spent by government, would they have been used more efficiently by other, private means?

And remember another lesson learned over the years by many governments the world over: You cannot increase consumer spending and thus avoid recessions, by mere government spending.

“Flash Orders”

Wall Street, it appears, is there as a scapegoat for left-leaning politicians to attack. Except when campaign funding is necessary.

Flash trading orders appear quoted for a split second. Customers with extremely fast computers get a quick look at pricing. But anyone with a fast computer can play.There is no other way you can monopolize that information, picked up about securities’ supply and demand.

A relatively small amount of trades were flash orders until the regulatory forces got into the act. Nevertheless the SEC started proposing a ban on them. Right now, for the most part, there have been voluntary restrictions.

Brokers and Fiduciary Rules

The SEC has decided to change its regulatory rules concerning stock brokers, in keeping with new governmental regulatory policy. I wonder how long they will be operative. The new regulations will simply be too restrictive on brokers, to a point, where sooner or later, they must be modified.

Stock and bond brokers now are to observe fiduciary rules when discussing investments with clients. In the past, all they were obligated to do was see that investments were suitable for their clients.

Now, under fiduciary rules, brokers can be sued by tort lawyers for any imagined infraction and/or lack of explanation. This makes the broker’s job too scary for any practitioner to contemplate keeping.

A market downturn will result in a spate of unwarranted lawsuits.