Future Stock Market Growth

The Congressional Budget Office has indicated from its studies that U.S. economic growth will average a little more than 2% a year over the next 70 years. It had been about 3,5%, from the 1950s on.

There are many reasons why estimates for future economic growth are dismal, including our enormous debt which must be serviced. Moreover, it’s highly likely future interest costs will be much higher than they are today.

The specter of inflation all this imposes makes stock market growth difficult. (See the Earl J. Weinreb NewsHole® comments.)

Is Short Selling a Dangerous Tactic?

In a previous report I mentioned the usefulness of short selling; selling borrowed securities, in the hope of buying back the borrowed security at a lower price in the future.

Without short selling, markets would become overvalued and would not be priced as rationally as they generally are.

However, during financial meltdowns or other emergencies which may affect markets from properly functioning, it may be necessary to temporarily stop such trading.

The SEC has placed restrictions on the use of short selling after a security is off 10% on the day. Unwise, because policing is difficult with the rise of lightning-fast computers. (See the Earl J. Weinreb NewsHole® comments.)

Wall Street Advice Can Be Very Costly

 
I always comment on the high cost of financial advisory services, as much as 25%, 30% and more of actual earnings from an investment portfolio; though the fee looks harmless when set at 1% or 1 ½% of total assets. (Calculate the simple math and see for yourself.)

But the Wall Street folks keep piling on layers of advisers, even advisers who select overseers of advisers.  Each layer's costs add up, while the victim (the supposedly hapless client) thinks he or she is being well-advised. (See the Earl J. Weinreb NewsHole® comments.)

Testing Financial Advisers

Want a quick test of someone who considers himself a financial guru? Ask them about buying bonds with the threat of inflation.

When he starts talking TIPS, (for inflation-protected Treasury bonds) without asking how long you intend to hold the bonds, he has flunked the first step.

Then ask him to explain the duration principle behind the purchase of bonds. And how the usage of duration can overcome the effects of inflation. Chances are he will flub that too.

( See the Earl J. Weinreb NewsHole® comments.)

Sticking to Past Financial Prejudices

 
Many investors get to learn that much of what they do is wrong. Example: That in-and-out timing the market works less than 5% of the time. That discipline is important, though they’re usually impulsive investors. That constant securities trading can be costly, and so on.

But they do it out of habit, or whatever drives them along these psychological debacle-resulting paths. (See the Earl J. Weinreb NewsHole® comments.)

How Good Are Securities Analysts?

I have noted financial media discussions about the recruiting and training of Wall Street securities analysts. Having graduated in my role as a senior analyst on the Street, I have a few cogent opinions of my own.

I learned how to become an analyst all by myself as my undergraduate degree was PreMed.  But I attended graduate school for over three years evenings to see what they could further teach me, while working as a senior analyst for a major Wall Street firm.

The upshot? I feel a good analyst cannot be taught by rote in a classroom, nor at a fancy Ivy League school.  I have been in contact with graduate analysts of all types of degrees and backgrounds; the needed ability is ingrained. (See the Earl J. Weinreb NewsHole® comments.)

Over-Confidence and Financial Information Overload

 
I have previously noted that the average investor has been bombarded with information about the securities markets from the media and ads, purporting to offer more and more data that will assure investment success. That helps produce an over-confidence that an investor will have, until reality eventually sets in.

Evidence clearly shows: Too much confidence leads to constant revamping of investment strategy and discipline unless essential knowledge and discipline prevails. (See the Earl J. Weinreb NewsHole® comments.)

Financial Adviser Ability

Most investors don’t need financial advisers for three basic reasons.

First, basic investing principles are easy to master. Secondly, what to buy is simple in the age of index funds. There is no reason to attempt to buy individual securities. I have explained why in much of my past comments and books.

And third, adviser fees eat too much out of investment earnings. I repeat this constantly. Adviser fees can account for as much as 25% and more of annual investor earnings.

The garden variety of advisers, that is the bulk of them, are not worth the money because their expertise is run-of-the-mill.

On the other hand, investors who have estate and tax questions need legal help. That has little to do with portfolio selection.(See the Earl J. Weinreb NewsHole® comments.)

Short Selling Securities

 

Populist politicians and the bulk of the media give the impression that short sellers are bad. And that short selling causes much of our financial problems.

There are times when it does. But short selling usually has a proper function in the securities business and our economy.

This is the practice of selling borrowed securities, in the hope of buying them back at lower prices in the future.

Without short selling, overheated, overvalued securities would continue rising and add to dangerous bubbles, and thus prevent markets from being priced more rationally.

Short selling generally keeps markets honest. Dictating when to stop or retard its use will only exaggerate market extremes. (See the Earl J. Weinreb NewsHole® comments.)

Investment Information Overload

The average investor has been bombarded with information about the securities markets from the media and ads purporting to offer more and more data that will assure investment success.
All the research I have done on investment strategy and discipline and on the markets has shown that the more information an investor gets, the less essential knowledge and discipline will prevail.
Constant market chatter helps trading volume and Wall Street operatives, but does little for the individual investor’s accurate decision-making and bottom line. (See the Earl J. Weinreb NewsHole® comments.)

Avoiding Further Severe Financial Meltdowns

Short-term, in-and-out, frenzied trading by the pros is what aggravates financial meltdowns. It is the segment of Wall Street that I always avoid in good times. Imagine what can happen in dangerous markets.

This is precisely what aggravated the 2008/2009 market selloff, aided and abetted with mark-to-market and short-selling. True, erratic markets create opportunities for professional traders, particularly those I call inside players. But not the vast majority of investors. (See the Earl J. Weinreb NewsHole® comments.)

The Public is Stupidly Avoiding Bank Services

The media has been reporting that more and more Americans are avoiding bank account transaction's in order to avoid transaction fees which banks have been imposing to offset costs that have arisen thanks to added government regulations.

Unfortunately, the use of these newly implemented financial instruments, such as pre-paid debit cards and small loans, entail fees that often are greater than those charged by those “greedy” banks.  Another instance of the public refusing to evaluate simple dollar and cents everyday financial options. (See the Earl J. Weinreb NewsHole® comments.)

Collecting “Original” Signatures of Celebrities

While on the subject of collections (see my previous blog on original prints), I would like to comment on autograph collections and manuscripts that show famous signatures.
Content is a factor. Letters and manuscripts are worth more than signed photographs.
And, apart from all-important rarity, originality is essential. You must be certain the signature is genuine, that is, that it’s signed by the famous person and not by a secretary, or underling, or by a machine.
In this regard, provenance is a factor. How did the signature come about and can the source be trusted for proof of being genuine? (See the Earl J. Weinreb NewsHole® comments.)

The Art Collector’s Fantasy With Price Tags

I have written extensively on the subject of original prints. Too many would-be art devotees have no clue of the value of art, or what may constitute value in art. They certainly have no idea that original art, by definition, can come in multiple, though limited copies.
As a result, they buy their art by price tag. The more expensive the item, the higher the value the collector will impute to them. (See the Earl J. Weinreb NewsHole® comments.)

Investing With The Yield Curve

One of the strategies suggested in the financial media is the “yield curve.” This has to do with the difference in yields of the different maturities of U.S. Treasury bills, notes and bonds.

There is usually a normal difference in return, depending on years to maturity of the security. But this can change, depending on economic conditions and influences, including fiscal activity of the Treasury and monetary action by the Federal Reserve,

But playing yield differences is a timing, short-term exercise which is tough enough for pros to succeed at. It’s best that average investors forget about this strategy. (See the Earl J. Weinreb NewsHole® comments.)

The AIG Panic -- More Imagined Than Real

 
Human error was instrumental in the financial meltdown of 2008/2009,and various bubbles that we have had in the past.

In each case, there has been finger-pointing, usually by anti-business politicians and by bureaucrats whose immediate impulse is to blame big business and bankers; the usual scapegoats. That is the litany in left-wing lexicon.

I have always blamed human error. Whether it be loose monetary policy of the Federal Reserve, in inflating currency, or inappropriate accounting rules for normal securities market situations, actions that hasten the ruin of investment liquidity.

In the case of AIG, the value of its derivative insurance coverage was also being determined on the basis of fictitious existing market value. This time, not on possible claims in the future, at the maturing of company obligations, but at supposed current valuations.

That produced a condition that induced premature bankruptcy, in a panic venue; a rush to judgment when cool heads ought to have been the hallmarks of expertise. (See the Earl J. Weinreb NewsHole® comments.)

Credit Default Swaps Again

 

Just a few years ago CDS, or credit default swaps, were considered by some politicians to be the cause of the financial meltdown 0f 2008-09..

Politicos thus conveniently forgot the real cause of the financial meltdown, which would have pointed to much of their past political activity. That financial debacle owed much more to Washington antics and influence than it did to Wall Street.

But Credit Default Swaps are back because they are needed in a burgeoning market by a number of industries, particularly big banks. Even the debt of General Motors Co. debt which doesn’t presently exist, but may in the future. (See the Earl J Weinreb NewsHole® comments.)

The Risk of Use of TIPS and I-Bonds

I repeat what I have been saying for years: TIPS and I-Bonds are not a panacea to avoid risks of the market place that pertain to inflation, one of many varieties of risk that beset the investor.  

You get the secure return that the U.S. Treasury provides and an inflation cover. But you can get risk mitigation with ordinary corporate bonds, provided you use the wise principle of “duration” I describe in my writing, And with diversification, using low-cost mutual funds.

Risk avoidance does not mean an avoidance of secure wealth accumulation over the years.(See the Earl J. Weinreb NewsHole® comments.)

Dodd-Frank Actually Assures Too Big to Fail Banks

The Glass-Steagall Act, created under the Banking Act of 1934, was terminated during the Clinton administration. It had separated regular banking from investment banking activity.

However, it’s easier to talk about the problems of not having the legislation, than the separation of investment banking and ordinary banking, once the two have been so connected for years.

The question of proprietary trading arises. Both regular and investment banks had executed such trades, ordinary banks to a lesser extent. Moreover, such trading generally represented a very small, insignificant amount of activity and income.

Furthermore, the definition of what is a proprietary or “prop” trade is hard to delineate.

With all our populist politicians, we now have bombast, finger-pointing, and economic damage. We wound up with Dodd-Frank, a complex maze of regulations that has, as one of its missions, an attempt to separate commercial and investment banking. And preventing banks from getting too big to unwind as failures.

The result so far: Banks are getting bigger and the risk of failing is ever-larger.(See the Earl J. Weinreb NewsHole® comments.)

Do Bankers Really Earn Too Much Money?

They may if they earn commissions and options of hundreds of millions a year. 

But who is to say what is too much? Some politician or bureaucrat with favors to hand out for votes?

Do baseball players also earn too much money? They certainly do, if they earn up to $30 million a year. And which many sandlot amateurs do for nothing, but just a little less efficiently. The real difference in their ball-hitting capability is not learned the hard way but in their luck in having eyes to see the ball.

Do gymnasts deserve more than they earn? They get practically no income despite all the incurred pain, and years of training and practice, and the need to overcome initial physical fear. Unless there's media hype in the Olympics.

From my personal experience with all three practices, it is difficult to see how bureaucrats and politicians in Washington are so ready to damn bankers for making “too much” money while other genuinely overpaid groups are left to make their fortunes politically undisturbed.

While ballplayers are indirectly being financed by bailout funds of their bosses’ subsidized ballparks. (See the Earl J. Weinreb NewsHole® comments.)

Conforming to Teachers’ Prejudices

I did it in graduate school. I followed what my instructors or professors said were financially or politically correct, while knowing the correct version I had wanted to express.

Unfortunately this is the case too frequently in all grades of our schools and also our universities, When instructors are found, by survey to overwhelming follow only one political slant, it affects all ideas they convey to students.

Not only effects on political slants but also interpretations of financial problems and their remedies. This is very evident today with the economy and the huge ongoing budget deficits.(See the Earl J. Weinreb NewsHole® comments.)

A Poor Common Stock Outlook?

 

This is a follow-up to my previous reports on the bleak common stock future.

There is a possible solution to the quandary of a poor future common stock market. It concerns the use of the corporate bond market and proper implementation of "duration" to suit the investor’s personal horizon.

I have broadly commented on the subject. But be sure you invest in a low-cost bond mutual fund where dividends earned are automatically reinvested in shares of the same fund each month.

Corporate bonds can help overcome inflation and the dearth of income and potentially limited growth from stocks. Estimated earnings can well be at least 6% on a net, net, net basis,if strategy is wisely used. (See the Earl J. Weinreb NewsHole® comments.)

Common Stock Performance in the Future?

I find a major disconnect among investors about what they expect to earn from their securities portfolio over the next ten, twenty and more years, after tax and inflation.

Admittedly, that is a tough prediction because investors must take income taxes and inflation into account, along with projected securities’ yield and market returns. That isn’t simple.

In one survey, the net/net/net predicted return by a number of experts over the next fifty years, estimated returns ranged only between 2% and 3% annually.

That is unusual and shocking. Investors’ experience from the past would have had expectations to be close to about 6%.

In fact, many securities markets observers believe that potential, along with taxation and inflation bites, will impair future market returns. (See the Earl J. Weinreb NewsHole® comments.)

Picking Stocks as a Long-term Owner Would

I have found and investigated over 1,600 investment strategies. There are many an investor can use, in which he can imagine they would be his own business.

The investor can take the same attitude as any owner would. The strategy can revolve around what he wants the company to accomplish. Everyday stock prices and values never enter business consideration while the business is on a growth path.

Short-term, quick-buyers and sellers often are trading company names. They really have no clue about what the business is. Most of the financial reports they see are little more than hearsay and gossip from Wall Street pundits looking over each others’ shoulders.

The clunker stock the short-termer is selling is probably considered a diamond-in-the-rough by the buyer. (See the Earl J. Weinreb NewsHole® comments.)

Importance of Stock Market Psychology

Market psychology is always a serious factor that dictates the lack of discipline in investors. Most take what profits they see on the way up, and run; no matter what their original strategy or purpose was for buying that security. So the odds of achieving huge winnings are always steep.

And besides, it is almost impossible for an outside observer to properly evaluate management. Analysts who make it their profession cannot evaluate managers wisely or adeptly from the outside. Why believe the public can?

Therefore I have found the odds of this sweepstakes are too steep in the long run. I suggest investing in low-cost index funds as your best bet. (See the Earl J. Weinreb NewsHole® comments.)

The U.S. Should Provide Some Currency Convertibility into Gold

Even free market monetarists believe some version of a gold standard
is necessary to keep politicians honest.

The Federal Reserve System has become a shambles, too beholden to free-spending tendencies and more in line with the executive branch of government’s Treasury Dept and its fiscal policies.

The Fed’s role is primarily monetary and the stability of the dollar. It also has been given the job of creating jobs, which ruins its basic function.

There has been some talk of a Gold Commission. Perhaps a form of gold convertibility will come of discussions this time. (See the Earl J. Weinreb NewsHole® comments.)

The Inept Federal Reserve

I should first point out that I have spent over 3 years studying the Federal Reserve systems as M.B.A. study, evenings at New York University. I have been a life-long observer of this institution which has been known to be quite fallible.

Despite all the loose money policy of the Fed, there is less usage of funds which the Fed efforts have failed to stimulate, with all its vaunted expertise. In fact, our money usage today has become less and less volatile. (See the Earl J. Weinreb NewsHole® comments.)

Trying to Pick Stock Winners?

It's tougher to pick stock winners than you may think from reading or listening to the financial media.

Everyone believes they can, but after all the effort, how many do they really find?

You hear about big winners but how many of those are available? How many are recognizable early on? It’s always easy to find those who did, after the fact.

Moreover, when you look at these relatively small numbers, you find that they had their periods of ups and downs. The profit numbers look excellent only after years of market wear and tear. How many investors had the stomach and discipline to buy those stocks at their lows and hold on to them to their highs?

None of the successful securities had gone up in a straight line. They hit bad cycles when most of the original holders lost faith, deserted ship and sold. (See the Earl J. Weinreb NewsHole® comments.)

Discipline Essential for Investing

I have found from experience that the average investor does well by avoiding trading extremes. That’s possible by sticking to a disciplined, favorite strategy and then forgetting daily market prices. 

You don’t need constant financial news, unless your investment strategy calls for it, Relatively few strategies do. ( See the Earl J. Weinreb NewsHole® comments.)

Criticising Wall Street

There has been too much Wall Street bashing from left-leaning politicians.

I have myself directed some criticism at Wall Street who may have contributed to actions that helped foment financial panic.

But I always have made this distinction: It’s both an investment and also a constant-trading medium. Both are essential. But trading aspects can go to extremes. When extreme actions occur, there can be potential danger. It is thus essential that the public understand how Wall Street operates.

In that regard, you must always remain disciplined in your use of investment strategy. ( See the Earl J. Weinreb NewsHole® comments.)