Increasing Investment Odds

My objective has always been to increase the odds of success for all investors. Investing need not be a toss-up type of game where an investor has to outsmart someone else in order to win more often than not. All you need for investment success is better odds, not surefire winners.

What is therefore needed to accomplish all that is a special discipline. That means a strict avoidance of the media and Wall Street/financial industry distractions and noise. The latter constantly bombard the investor from all sides.

Knowing why and how to avoid these distractions, along with how to cope in the jungle-like investment environment or “noise” are the keys to investment success.

Keep Investment Strategies Simple

Investment strategies should be tailored to individual preferences and needs. What tips the odds for each investor is the discipline employed in the use of strategy. Every investor has built into the purpose for the purchase of a security, the reason to sell it. Discipline from the original intent guides that sale.

Most importantly, strategies cannot be intermingled. You sell a stock when the purpose for which you bought it no longer holds. But there must have been only one purpose. If it was excellent earnings growth and that stopped , then sell.

Note; Low price earnings is too nebulous, vague and variable, to be a disciplined strategy

Media Reportage of Big Investment Coups

The financial media often report on killings made by some of the big financial operators and hedge funds as if following them is instructive for the average reader.

However, the average investor does not have the funds, nor credit to emulate what big investors and hedge funds attempt in the markets.

The ability to borrow the necessary capital would be impossible on the terms needed. Professional have access to the multi-millions in credit for the purpose.

It makes for good, almost fiction reading for most investors who read or tune in. But it does something else. It poorly educates the mass public into thinking about financial strategy.

The Risk of Taking Media Advice

Apropos of my recent blogs on investment risks:

There is also risk of taking media investment advice. Investment advice in the media is invariably offered to all without qualifying distinctions, whether you be a professional or ordinary investor. The same to folks in their 80s and 90s as well as those ages 20 and 30.

So read between the lines carefully, as the information most likely will not apply to your age level. Nor, for that matter, your level of risk accommodation.

Investor Adviser Stupidity

I recently had a blog on the subject of investment risk.

You have sheer stupidity that goes far beyond investment risk, when those with a modicum of investment intelligence have to rely on an investment adviser.

Example: Paying 1½ to 2% or more of your assets as a minimum charge to investment advisers can represent as much as 15%, 20% and much more of your annual investment income.

That’s outright foolish; you will be receiving little practical advice in return. Unless you have never heard of unmanaged, indexed mutual funds or ETFS, what sense does it make losing that much of your investment income every year? ( See the Earl J. Weinreb NewsHole® comments.

Mutual Fund Management Risk

There are lots of forms of investment risk form. One has to do about who may be managing your mutual fund portfolio.

Investors should consider manager risk (though I personally recommend indexed funds). They are at risk in this way by choosing an investment portfolio that's fully and actively managed.

But what happens if your investment manager leaves or fails to do as well as in the past? That is manager risk and it can't be measured by past statistics alone. ( See the Earl J. Weinreb NewsHole® comments.

Investment Risk

Risk evaluation goes beyond statistical numbers, such as standard deviation. That’s a fancy term used by financial pros looking at investment portfolios.

Standard deviation need not concern individual, everyday, non-professional investors. But if you want to know, it’s the return you get from gains and losses you may expect about two thirds of the time over a year.

A well designed portfolio will consider your acceptable risk or 'risk tolerance.' Your investment time objective, age, personal psychology and investment goals are other considerations.

To avoid basic investment risk, seek out low-cost, unmanaged mutual funds or exchange-traded-funds (ETFs), those indexed to foreign and domestic standards you want to emulate. One example would be the S&P 500. ( See the Earl J. Weinreb NewsHole® comments.

Balancing Investment Portfolios

It’s evident that most investment advisers are not really certain how many stocks and bonds go into what can be considered a “balanced” investment portfolio. Certainly, an indexed, unmanaged mutual fund or an indexed ETF, will provide sufficient diversification.

But what about market risk?

What had been a simple assumption prior to the 2008-2009 financial meltdown is now subject to lots of conjecture. That’s due to the fact both stocks and bonds fell in unison at that time. And they are reacting differently during the current recovery. ( See the Earl J. Weinreb NewsHole® comments.

Media Gurus

The media create the analyst and advisory gurus who expound much of the doubtful and expensive investment strategies extant.

That advice should be avoided for many reasons having to do with accuracy and the law of supply/demand. Too many investors acting on the same advice bring on herd-like market conditions which sway short-term market pricing against investors.

To discipline this goal of avoiding the adverse effect of media gurus, you have to learn how to eliminate media noise from your life. To do so, minimize the amount of investment comments you read or listen to, and take them all with a grain of salt.

Timing the Market a Mirage

Despite the media’s encouragement, with its constant reportage enticing its public on suggestions about timing markets, repeated independent research has shown that market timing does not consistently work.

Yes, luck and chance with regard to time of market entry plays a major role. But allocation of assets and discipline of strategy are more important to investment success, rather than anecdotal accounts of who accidentally struck it rich while buying and selling on personal whim. ( See the Earl Weinreb NewsHole® comments.

Asset Allocation Facts

By employing the advantages of assets allocation well-qualified, time-tested research has shown that the bulk of investment success can be attributed to expert asset allocation. The other 10% or so is due to security selection and market luck.

This is a major blow to those who claim they can constantly outsmart each other by artful securities selection and market timing. (See the Earl Weinreb NewsHole® comments.)

Central Bank Independence

Central banks were set up on the premise that it would be best for a country to keep its financial system from undue political influences.

Over time, politicians have let their natural tendency to exert influence produce financial and economic pressures. It generally is harmful to change objective banking independence, particularly during stressful times.

Major global central banks are not doing well with regard to their current national financial crises,

In the U.S., the Federal Reserve Bank, which always has been loosely supervised by Congress, appears to be more under the influence of the White House and its fiscal policy than it had ever been in past administrations.

The Fed now goes more deeply into the American economy than it had before, aside from the additional Dodd-Frank legislation.

Invest or Trade in Proper ETFs

Un-managed ETFs or exchange traded funds, that follow or track various indexes, are a low-cost way of diversifying investments.

Apart from fulfilling your investment purpose, be sure to buy seasoned funds that have been around for awhile.

ETFs can sometimes be costly to trade. A big buy or sell order can adjust that price. That is, to a premium where the price is higher than underlying assets, or a discount, if the price is lower than the net asset value or NAV of that ETF. New, smaller ETFs may have this problem, which generally disappear when the fund is around a few years and has grown in size. You can check to see what the stated, recorded amounts of premium or discounts are on average.

Human Behavior Investing

Quite a bit of research exists on human investment behavior. Personal psychology has lots to do with the way securities markets operate.

I have mentioned in past comments, my studies and evaluations of over 1,600 investment strategies, and their pros and cons. In addition, I have always said there is no one strategy I have found better than any other. What makes for investment success is strict discipline of strategy use.

Furthermore, discipline can be mastered, with proper personalized control over the psychological hazards that beset investors.

I would suggest Main Street and Wall Street investors alike look at the work done by Kahneman and Tversky on investing behavior. It will provide a glimpse of how investors think, often to their disadvantage.

Psychology does affect the way folks make securities market decisions, by affecting the discipline I suggest.

Securities Earnings Potential

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 1951, received an after-inflation annual return of about 10.8%. That works out to over 6% more per year.

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

Investors are lulled into complacency with the false knowledge acquired about “average” returns. They hear what securities have earned on average going back years, and they then project the figures into the future.

Overhauling Derivatives

Remember the big noise about derivatives, such as interest rate swaps and credit default swaps? Along with their connection with subprime mortgages and collateralized debt obligations? With their role in the financial meltdown? And how they had to overhauled and re-regulated?

Well, lengthy investigations were made, and Congress made its conclusions with the Dodd-Frank legislation.

The upshot? Draconian regulation was not necessary after all. The derivative markets continue to operate pretty much as they had before the ruckus that had little to do with derivatives as investment instruments. The fine-tuning was not earth-shattering after all.

The Japanese Economy

We know of of the corporate growth of Hitachi and Nissin Foods but the Japanese economy has been flat and practically dormant for the past twenty or so years. This has been the case despite huge Japanese government spending, In fact, Japan public debt is now over 200% of GDP.

Unfortunately, it does not appear their economy will recover anytime soon.

The problem for the U.S. is that the Obama administration has been on a path to “stimulate” the American economy, much the same way the Japanese did their's two decades ago. That is, spend and borrow their way to prosperity they have failed to achieve.

Blame Bankers?

Listening to public comments and opinions of those from all walks of life, most folks know little about finance and banking. Politicians on the left are among this group of the financially ignorant. If they knew more about finance, they would not be intellectually on the left.

Thus, it’s entirely understandable that bashing bankers is fashionable, especially during tough economic times. Finding scapegoats is handy. It makes up for any guilt politicians may have in helping foment economic distress.

Government excesses, such as poor fiscal policy from the White House and monetary policy from the Federal Reserve, most often produce economic problems, not bankers who become bystanders by necessity and happenstance.

What else succeeds as political ploys when all else fails? Blame bankers! Most folks haven’t a clue to disagree.

Media Portfolio Advice

Giving advice on investment portfolios without regard to a client’s age, family condition, and needs, is ridiculous. Everyone has a different investing time horizon and current and future income needs. Those factors affect the choice of securities. In turn, they influence the percentage ownership and type of stocks or bonds to be held. And where bonds are chosen, the “duration” of the bonds used.

I would strongly advise everyone to be fully aware of what duration is and how it works. Very few media pundits write on the practical use of bond duration and its adaptation to take advantage of inflation, rather than avoidance of inflation.

Much of the practical value of media portfolio advice is, unfortunately, used merely to fill up space and not to enlighten.

Credit Card Debt Reduction

When you hear a credit card balance reduction ad, two points will probably never be mentioned about credit card use.

One: you pay income tax on any amount of debt you have reduced. Therefore, cutting that balance is not as simple as it may appear. Reduce your balance by $4,000 and it’s as if you had a taxable gain.

Two: you have hurt your credit standing by resorting to such debt reduction. This may not bother you at first, but it may eventually cost you.

Another point: How many folks who have so much credit card debt, that they have to resort to drastic measures, are actually permanently getting out of debt?

You can be sure their spending habits will be getting them into the same situation again in a few years.

12b-1 Mutual Fund Fees

Most funds no longer charge 12b-1 mutual fund fees but they are still around. These were originally permitted by the SEC to allow marketing to new investors.

These actually represent a small sales load that adds up over the years. The 12b-1 charges originally were used to pay fees for the distribution of funds by brokers. But they still persist even when brokers are not involved, but are ostensibly used for sales and marketing.

My suggestion: Avoid mutual funds that charge them. Those fees become significant deductions from your accumulated holdings over the years.

High Frequency Trading

Small investors benefit from a reduction in trading costs, High-frequency trading helps, despite much of the notoriety it’s getting in the media. Among costs are the bid-ask spread.

A wide spread means the fund must pay significantly more to acquire a stock than it could sell it for.

High- frequency trading has reduced this cost by narrowing spreads, Generally, wide spreads are seen as inefficient, with buyers and sellers having difficulty agreeing on an accurate price. Narrow spreads mean the market is working better.

Another transaction cost arises from the fact that a fund's huge trades can drive prices up or down by tipping the balance of supply and demand. High-frequency trading has helped reduce "market-impact" cost by making it easier to break big trades into many little ones while transacting them very quickly,

Trading costs from spreads and market impact have been cut in half over the past decade, From 0.5% of the trade amount for big company stocks to 0.25%. For small stocks, trading costs have dropped from 1% to 0.5%. In addition, high-frequency trading helps bring out hidden liquidity.

The positives seem to outweigh the purported negatives

Don’t Overdo Credit Card Balance Transfers

Should you get offers from credit card companies to transfer your current outstanding balance to another card because of lower charges, you may be easily tempted. Especially if you have good credit, and those offers are frequently in the mail.

But remember, you may be hurting your credit score, should you take the bait.

When you make lots of credit card transfers it appears you may be applying for fresh credit.That tends to hurt your credit card score.

Investing Overseas With the Dollar

Investing overseas is done for investment diversification. The investor wants the benefits of growth opportunities that are to be gained globally. Perhaps those prospects appear to be better than those domestically.

Remember, currency moves are always involved. Will the dollar be getting stronger or weaker? If the dollar gets weaker, as is currently the case, such investments become more valuable as translated currency works in favor of the U.S. investor. (Travel overseas becomes more expensive.)

However, should the dollar get stronger, the reverse is true. Investments become less valuable as translated currency works against the interests of the U.S. investor.

Maxing Out Your Credit Card

It may be necessary to take down the maximum amount of credit your credit card permits, but it does not help your credit score. Therefore, do so only in an emergency. It’s nice to know that your credit permits you a certain liberty, but don’t take extreme spending binges.

Of course, if you don’t use your card at all, or only occasionally, you may be dropped or the maximum available credit may be reduced.

That’s because credit card companies are getting more sensitive about account activity. Despite public misinformation, credit card companies are not doing well. They have written off lots of bad debt. So, use credit cards intelligently.

Managed Mutual Funds or Indexes

Don’t bother looking for the best mutual fund managers. You will be wasting your time. Experience and research show that the “best” in any year are achieved mostly by chance.

In any category of mutual funds, only a small percentage of active managers beat the performance of indexes or unmanaged funds. Furthermore, those who distinguish themselves in any one year, generally cannot repeat their performance the next, or on any consistent basis.

A very isolated few managers can outperform indexes over the years, and if they do, it’s pure luck.. ( See the Earl J Weinreb NewsHole® comments.)

Teaching Consumers Finance

The recently passed Dodd-Frank , or Wall Street Reform and Consumer Protection Act law covers consumer protection.

Much of the law has yet to go into effect; many parts that involve consumers are not yet clearly set so it isn’t yet clear how the consumer will benefit.

Consumer education was a major consideration but the question is still how Dodd-Frank will do this. There are about 150 pages of the Act that explains the creation of the Consumer Finance Protection Board (CFPB).

The board's chief function involves financial educational programs, and collecting, investigating and responding to consumer complaints. It’s to research consumer financial markets that affect consumers.

Also included is the mortgage disclosure form from a combination of suggestions from the Real Estate Settlement Procedures Act and the Truth in Lending Act, and existing laws.

True, consumers need help. From my experience, too many consumers are ignorant of basic finance, including the role of interest costs.

But I cannot see how this can be accomplished by consumer-oriented documents alone. It can be taught in schools early on.

Creating more informed consumers cannot be practically accomplished by regulators.

Stimulus Action and Recessions.

Why hasn’t the government’s stimulus program worked? We know it has not produced needed jobs.

It has also done havoc to interest rates because of meddling. When left alone, interest rates usually adjust to supply and demand forces and adjust economic events. However, when government imposes stimulus proposals to raise credit and lift the economy, the system is disturbed and distorted.

This unbalances the economy and does the exact opposite of what has been intended.

Ludwig von Mises wrote fully about the phenomenon in the 1920s. However, the fashionable economist during the 1930s recession was John Maynard Keynes. He became the poster child of that recovery movement.

The Keynes government pump-priming thesis that employed prolonged stimuli actually deepened, and helped induce the Great Depression. Nevertheless, it is the premise of the Obama administration’s failed current policy.

Politics and Bank Credit

Banks are not making sufficient loans to small business, even when they have the ability to do so. They make more money these days by borrowing cheaply from the Federal Reserve and investing in government bonds.

Also, there is political meddling and too strict bank supervision adding to the bank lending confused picture.

Some banking groups are now complaining that they have the money to lend, but with few takers because of the recession.

Yes, commerce is in a slump. But many viable, thriving businesses, especially commercial real estate operations, are genuinely seeking loans from banks who have funds.

Yet, too many lenders are hesitant about extending loans they once more readily made.

Why Rely on the Federal Reserve?

We make a habit of using Federal Reserve actions as responsible, even though they are often proven wrong. This has been proven by the decisions we have gotten in the past couple of years.

We have to remember that economists are fallible, even when they direct the Federal Reserve.

In the more distant past as well, those in the Fed worried we may have deflation and therefore inflated the economy, and added too much currency. In fact the Fed, almost automatically, has been on the side of abetting inflation, in an attempt to prevent deflation.

Thus, the Fed has been the chief culprit causing the bubbles which invariably lead to busts and eventual recessions.