Bad Investment Habits

I have written tomes about poor investment habits. You can easily look up the commentaries. My sources of original research and studies are always available for those who wish to follow up my suggestions.

 The question is whether one is prepared to break bad habits. I realize it takes lots of free will to counter the constant chatter and advice from the next media-cultivated expert who comes along.

Investors also have to counter what is known as “confirmation bias.” Folks avoid getting rid of set beliefs, or are selective in their choice or retention, despite evidence. Confirmation bias can be corrected to a considerable degree by looking at independent research conclusions. (See the Earl J. Weinreb NewsHole® comments.)

It’s Especially Tough to Evaluate Banks

I always remind investors not to bother to evaluate companies when attempting to buy securities; they will never get all the cogent facts, not from the companies, nor from the analysts whose work is to get at the facts. There is no chicanery involved; it’s impossible to do the job for the purpose of knowing everything an investor must have.

That’s why I recommend index funds.

The problem of evaluation is even tougher with banks because it’s impossible to determine value of much of the essential underlying assets. They’re simply not available or determinable.

Examples are derivative holdings and what make up much of what is considered “level 3” bank assets. (See the Earl J. Weinreb NewsHole® comments.)

Suppress Your Tendency to Quickly Trade Securities

Tests after tests by scientists indicate that investors have a natural tendency to stay with their newly-bought securities only a short time. Their impulses dictate that they sell and then opt for something else. The media chatter and what acquaintances buy and sell have a major influence.

And as a distinct rule, this hurts investors.

I repeat what I have said countless times, based on my evaluation over the years of over 1,600 investment strategies, discipline is most important. You buy every investment with a firm goal and you sell only when that goal is definitely not attainable. (See the Earl J. Weinreb NewsHole® comments.)

China Investing and Its Lack of Analysis

I find it’s tough to evaluate any corporation from the outside because the risk is that much higher. It's impossible to get all the necessary information you need. This, despite all the required filings dictated by federal and state governments.

In China, the government itself goes out of its way to prevent outsiders from getting too close to what may be going on in Chinese corporations, for fear of “spying” by foreigners. So why bother investing in Chinese securities? (See the Earl J. Weinreb NewsHole® comments.)

Mutual Fund Management Costs

There has been lots of fuss about the steep fees that board members of mutual funds get. Yes, some are too high.

But there is a remedy. Insist on buying funds where the management fees are low. Those who are accused of overpaying board members are usually operating funds with relatively higher management costs that are to be avoided.

There are some funds that get sold by brand name, what marketing people refer to as the signaling process. Unfortunately, there is a better way that too many investors overlook. (See the Earl J. Weinreb NewsHole® comments.)

Beware of Rental Investments

The folks on Wall Street are very good at inventing new types of investments for the short term, and they also have short-term memories. Thus, they are now considering the idea of buying up foreclosed residences, renting them out, and packaging those rents which they will then translate into securities.

Sound very much as the creation of subprime debt securities?

Except that these are even more problematical. The management of rental properties is far more complex than is servicing mortgages. Risks can be greater and much tougher for credit agencies to decipher. But some folks, particularly the young hotshots on Wall Street, never do learn basics. (See the Earl J. Weinreb NewsHole® comments.)

Stock Market Chatter Will Hurt Your Investments

As i have so often said, stop listening to all the chatter and noise about the stock market from so-called experts whose main goal is to be recognized as an expert by the media.

The latter are not  adept at recognizing financial experts. If you are lucky to win the sweepstakes you haven’t automatically become a guru.

So, aside from indecisive, short-term  day trading and enormously expensive advisers (see my past explanations), my suggestion is to forget all that chatter in print, on the smartphone, internet and airwaves. (See the Earl J. Weinreb NewsHole® comments.)

Cutting Our Deficit

The U.S. debt is over $14 trillion, with the federal budgetdeficit at $1.4 trillion. Add to that the liability of the federal government for Social Security, Medicare, Medicaid and prescription drugs and you have an estimated deficit ranging between 60 and 100 trillion dollars.

Entitlements now account for almost 60 percent of federal outlays.

Every year, non-discretionary spending eats up more of the federal budget.

In the past 30 years, U.S. tax revenues have averaged 18 percent of the GDP with spending, about 30 percent of the GDP.

Defense spending, which is called discretionary, totals $685 billion. Our deficit, as noted, is $1.4 trillion. So, defense spending, even if eliminated, would not solve the huge problem.

And despite what the left loves to say about the uselessness and waste of U.S. defense expenditures, it returns immeasurable benefits in the form of global economic prosperity, freedom and security. (See the Earl J. Weinreb NewsHole® commentaries.

Small Traders Cannot Consistently Beat the Stock Market

Experience as well as independent research show that in and out trading will not be profitable over time. Yes, occasional winners, due to rare market aberrations, are possible but this only adds to further incentives for needless speculation.

Fees, as small as they may appear, and slippage, will add in tipping the odds against you. Moreover, the market is over 70% professional and has use of more effective mathematical models for so-called flash trading that gives pros the advantage in the game the small traders have entered. (See the Earl J. Weinreb NewsHole® comments.)

The Cost of Managing Your 401(k)

There are new regulations imposed by the U.S. Dept. of Labor in 2012 on management costs of 401(k)s and comparable savings plans. The smaller plans, especially, can become expensive to manage because of paperwork and questions that may arise during plan administration. Larger plans can benefit from volume having expenses reduced.

As is the case with most government attempts, there is little an employee can do but voice opinion to company management, that will allow for competition among funds to keep such costs at the lowest possible levels. (See the Earl J. Weinreb NewsHole® comments.)

The Investment Advisory Ruse, Part 4

I have been recently writing about the absurdity of using expensive professional advisers when it’s so easy to invest these days on your own. Especially when you give up the notion you can outfox the next guy by trading stock in and out of the market, or picking hotshot winners before they become the next bonanzas.

Use low-cost indexed funds and ETFs and you’re on your way to better performance as the simplest of investors.

Besides, do you know how little institutional investors get these days, despite the advisers/hedge funds they use?  I give a 5% return as a figure in evaluating adviser true costs. However, many institutions, foundations and pension fund's using “top-notch” advisers are not getting even 5%. The California Public Employee’s Retirement System (Calpers)  had a 1% return for its fiscal year ended June 30, 2012. (See the Earl J. Weinreb NewsHole® comments.)

The Investment Advisory Ruse, Part 3

I have recently repeated my reasons why using an investment adviser may be too costly for you, when all you need is a tax or estate lawyer and/or CPA if you have the wealth suitable for management.

It’s also essential to note that good investment policy is disciplined. That means your investments will not be constantly changed or timed because the lack of discipline alone is costly.

Yet, too many advisers are guilty of making constant portfolio changes and touches just to show they’re on the job earning their keep; in the process, making results worse for the client. (See the Earl J. Weinreb NewsHole® comments.)

The Investment Advisory Ruse, Part 2

I repeatedly point out how expensive it is to use financial advisers whose fees run 25%, 30% and even more of your earnings each year. 

This sounds like an outlandish statement only because the financial media never points it out, perhaps due to conflicts of interest. And because the SEC is too busy nitpicking trivia. My past comments have explained.

Repeat:  Pay a fee to an adviser of 1½% each year (some take more) for advice you can perform for yourself, and you have saved $1,500 for every $100,000 of your assets. If you are lucky to get a 5% return these days, or $5,000 for every $100,000, that fee represents 30% of what you earned!!

Unless you are a complete economic and financial newby, there is absolutely no reason you need a financial adviser to tell you what to invest in. There are truly, simple to understand, low-cost index funds and ETFs for you to choose.

If you have a valuable estate you need a CPA and estate lawyer to assist you, but expensive hand-holding by an adviser is too much of an absurd luxury that will considerably diminish your net worth. (See the Earl J. Weinreb NewsHole® comments.)

The Investment Advisory Ruse

The U.S. has about 66,000 certified financial planners, wealth advisory firms and assorted investment advisers, whatever term they use to market their services, certified by organizations they belong to, by virtue of conventional training and tests, none of which make them truly the unusual experts they claim to be.

Some are acting as estate and administrative agents as well, but this is not a service normally attached to the conventional requirement or need. This added service is an expensive undertaking on behalf of celebrities in the entertainment world and the extremely well-to-do.

They offer the  average investor services which can be easily evaluated and bought on one’s own, without the costly need of such adviser. I constantly repeat this. Why?

Pay a fee to an adviser of 1½% each year (some take more) for advice you can perform for yourself, and you have saved $1,500 for every $100,000 of your assets. If you are lucky to get a 5% return these days, or $5,000 for every $100,000, that fee represents 30% of what you earned!! That makes a tremendous difference in your eventual net worth. (See the Earl J. Weinreb NewsHole® comments.)

Take More Risk For More Investment Returns?

The Financial Analysts Journal recently reported a study made about the ability of added investment risk to produce more returns. Many investors have the impression that high risk spells more profits down the road.

The study showed otherwise: Over 41 years, through 2008, lower-risk stocks actually performed better than higher risk types. This was not supposed to be the case, according to prevailing theoretical mathematical risk models.

Diversification of risk and avoidance of real speculation would be a solution. (See the Earl J. Weinreb NewsHole® comments.)

Is Social Security Actually a Ponzi Scheme?

The definition of a Ponzi scheme, in part,  is one that takes funds from someone with the promise of paying it back in the future with attractive dividends or earnings. And using the funds in the meanwhile to reward another to whom the same promises were made. All of which has been done without truly investing those funds.

In that respect, Social Security fails the legitimacy test. Despite repeated political promises and certifications, there is no true investment, nor the use of a lock box or reserve accounting of funds. Nothing of what is required in a legitimate insurance program. Despite the aura of insurance, there is no element of that.

Those getting benefits are receiving them from taxes collected on plan participants still working.

Just one  example of a lack of Social Security equity that any insurance program would have: Should their husbands earn similar incomes, two spouses will get the same benefits from their spouse’s retirement, even though one wife could never have paid a penny in Social Security taxes. The working wife gets an adjustment only if she had earned more than her spouse.

There is little to show for payments made by a worker who dies before he is 65. And so on, as I have noted in the past. (See the Earl J. Weinreb NewsHole® comments.)

Buy Diamonds for Investment?

Unlike many other valuable commodities, you cannot buy diamonds in the form of shares or an ETF fund, or as a conventional commodity. It has to be bought as is.

Because you can pack lots of value in a tiny item, the diamond can be highly valuable in an emergency for someone who has to leave his country or salvage assets in a dire emergency. But how does it shape up as an investment?

Not very well for a number of reasons. Importantly, quality determination and value require expertise. There is the danger of loss and/or theft. The difference between cost and sales figures can vary greatly because of unestablished markups.

Remember also, diamond supplies have to be controlled for values to be stable on a global level, especially these days when artificial diamonds can be so close to the real thing in appearance and usage. (See the Earl J. Weinreb NewsHole® comments.)

Pressure for More Bank Credit

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

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

Banking groups are now complaining that they have the money to lend, but with less takers because of the recession.

Many thriving businesses, especially commercial real estate operations, are genuinely seeking loans from banks with funds. But, too many lenders are hesitant about extending loans they once more readily made. (See the Earl J. Weinreb NewsHole® commentaries.

The Federal Reserve’s Performance and Your Wallet

We unfortunately use Federal Reserve edicts as gospel, even though they often are proven wrong. This has been the case in almost half the decisions we have gotten under the auspices of the governorships of Alan Greenspan and Ben Bernanke.

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

In the past, those in the Fed worried we may have deflation; they therefore inflated the economy, and added too much currency. In fact, the Fed, almost automatically has been on the side of targeting some inflation, in an attempt to prevent deflation.

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

And today is aiding and abetting inflation with its loose-money policy. (See the Earl J. Weinreb NewsHole® commentaries.)

Is Back-Testing of Investment Strategy Profitable?

Professional investors use back data to sell strategy based on future events. Wall Street financial models often resort to what is known as data mining. Information on various investing strategies of the past. They are collected and tested on a “what if’ basis for the future. This is also called back-testing; the strategies of the past are used to see what would happen, hypothetically, when projected into the future. 

 

All this is based on many assumptions that the mathematical models are supposed to predict.

After my decades-long investigations of investment strategies, I can tell you this: There are some worthwhile concepts as well as gibberish in all. But no panacea exists. I would say that most of the data mining is therefore useless, except for their marketing of investment management services. ( See the Earl J. Weinreb NewsHole® comments.)

Understand Fundamental Economists For Your Pocketbook’s Sake

These days, you don’t have to go to college to understand economic basics that will help compete for a job or career, to enable you to separate political gibberish from fact, and see to it that you and your children can live your lives to maximum advantage.

The teachings of fundamental economics is readily available from internet searches. You can learn about them all, from Adam Smith to Milton Friedman and Friedrich Hayek. And John Maynard Keynes, who is the little-understood guru of the free-spending leftist politicians. (See the Earl J. Weinreb NewsHole® comments.

Thinking of a Reverse Mortgage?

You may be seeing and hearing ads about reverse mortgages for those in their sixties. (You must be over sixty one to be eligible.) Be careful, should you consider one, as the step would be similar to taking home equity lines of credit.

Larger banks no longer make reverse mortgages because of inherent problems, many from the homeowner’s point of view. Remember to be aware of all the provisions, including the fact that you have to continue to pay your real estate taxes and insurance on the property. (See the Earl J. Weinreb NewsHole® comments.)

The Importance of The Types of Securities Purchased

I have previously reported on those who suggest in and out timing of markets. When it comes to stocks this often has to do with their types or style. Whether, for example, they are considered growth or value stocks, or if they can be classified by corporate size or by industrial groups.

Over the longer-term these styles of investing really mean little. Favored industries and groups of companies often see change in their market-favored positions. Reacting to them incites useless market-timing.
(See the Earl J. Weinreb NewsHole® comments.)

What Importance Of Timing the Market?

Timing the market does not work. I have frequently given the results of past research of its in-and-out variety.

Some individuals may do well here with longer-term trends, as opposed to the short-term, but most timers are inclined to be the in-and-out types. And the odds are usually against them. (See the Earl J. Weinreb NewsHole® comments.)

The Importance of Mutual Fund Long-term Results?

Most mutual fund management isn’t around long enough, so those on site for past performance may not be responsible for future performance. That is, if managers of funds are ever able to consistently beat the indexed averages.

Besides, as I have pointed out before, low cost of mutual fund operations is more predictable of future performance and thus important. (See the Earl J. Weinreb NewsHole® comments.)

The Importance of Mutual Fund Cost

With all the media chatter regarding optimum selection or choice of mutual funds, there is one that usually gets minimal attention for a variety of reasons. That’s because the choice is so evident and so simple, yet it cannot be helpful when the media has to rely on advertising to make its living.

Here it is: Evidence is clear that the only predictable choice for selecting future mutual fund choice is its cost of operation. The next is indexing because experts hardly ever beat performance of indexes they choose to follow. (See the Earl J. Weinreb NewsHole® comments.)

Cut Up The Big Banks?

The big banks, the ones too big to fail, are actually composed of smaller subsidiaries of varied banking types. One may be in the retail business which has a value of its own. Another may be in the investment banking business that has a value in its own right. Another section of the bank may do trust and advisory work. And so on.

Theoretically, each of the bank’s sections or subsidiaries can be made into an independent bank, operating on its own. The value in each case will depend on the sector’s profit reliability and also risk factors.

It’s been estimated that the total market value of each subsidiary of a typical giant bank will produce a market value greater than what currently  exists for the bank.

So why not divest some, on behalf of stockholders? While separating out risk that can have a domino effect on the overall bank and the entire economy? (See the Earl J. Weinreb NewsHole® comments.)

How Safe Are Municipal and State Bonds?

The safety of municipal and state bonds, often referred to as tax-exempts, these days of pension problems and budget deficits, will depend to a great extent on the type of bond involved.

This is not so much a major problem for general obligation bonds issued by those entities, as it is for revenue bonds, where the payment of interest and principal must come from revenues backing the bonds. 

Sooner or later, general obligation bonds will have to be paid by higher taxes or from savings of cutting expenses. (See the Earl J. Weinreb NewsHole® comments.)

Annuities Sales Talk

Annuity salesmen often compare benefits with the investing risks that attend stocks and bonds. They mention all the hazards of securities markets and the possibilities of market loss. But annuity salesmen often overlook downsides of their offering.

Annuities do have negatives; they are not for everyone. They have an insurance factor which may not be needed. And if not required, why pay for it?

There are annuity management fees, contrary to some sales pitches and also early termination charges.

Then there are fixed or variable annuities to select, that further complicate the picture. Fixed annuities have set returns which means the buyer has no protection from any future inflation. Variable annuities tie in securities markets but not as much as you may desire.

So always be alert to the annuity sales pitch; (See the Earl J. Weinreb NewsHole® comments.)

Undisciplined Investment

I have documented over 1,600 investment strategies used by professionals, and have looked at their pros and cons.

While there is no perfect strategy, the chief pitfall in their usage is usually the lack of discipline employed to follow through, not the strategy itself. 

 

Additionally: I discovered why markets can be so rash and erratic. When institutional investors account for 80% and more of trades, why should the markets behave so erratically? Wall Street "wizards" invariably act in an undisciplined, mob-like manner; not as true experts. 

 

Their investment results speak accordingly. (See the Earl J. Weinreb NewsHole® comments.

Buying Gold?

The answer to buying gold? The correct answer is not what you probably expect.

What type of investment are you seeking? You can trade gold as a commodity, as many do. At times, even government trades impact short-term supply/demand and thus prices.

Want an inflation hedge? Sorry. For 25 years, from 1985 to 2010, consumer prices went up a bit more than 200%. Yet, during this time, gold prices were off by about 20%,

Want to head for the hills in an emergency? Gold bars are too heavy; rare gold coins would do it. But try this only in a dire emergency.

Need a weakened dollar hedge? Gold is still not a panacea. It offers no earnings. And has storage and insurance costs if bought outright. This isn’t too bad when interest rates are low, but proves costly when interest rates rise. And you can be sure interest rates will go far higher as inflation becomes more of an economic factor for the Federal Reserve’s attention.

Moreover, higher interest rates generally spell a stronger dollar, and more pressure on gold. (See the Earl J. Weinreb NewsHole® commentaries.)