Investing With The Herd

 Avoid the financial community’s herd instincts that override common sense and logic, Be aware of what is often referred to as the Bandwagon Effect, the propensity of professional and following average investors to pursue the same line of investment thinking.

                       

I would like to have my readers follow up the importance of the work done by the 19th century French economist Frederic Bastiat,

                       

who said people see benefits but never the hidden costs. It is one of his lessons that goes beyond politics into the realm of investing.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Buying an Annuity?

Annuity salesmen often compare the benefits of their product

with investing risks of stocks and bonds. They mention the

hazards of securities markets and possibilities of market loss. But annuity salesmen often overlook the downside of what they offer.

                       

Annuities do have negatives. They are not for everyone.

                       

They have an insurance factor which may not be required. And if not, why pay for it?

                       

Then there are annuity management fees, contrary to some

sales pitches, and early termination charges. Moreover, the strength of the company is always important to consider.

                       

The choice of fixed or variable annuities further complicates the picture. 

Fixed annuities have set returns which means the buyer has no protection from any future inflation. Variable annuities tie into securities markets but not as directly as you may want. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Investing in Options?

Options offer an investor the right but not the obligation to buy or sell a security at a set price.

                       

They’re used for investments becoming more impervious to swings in the markets. Also, to protect shares from under-performing. And to make money when market conditions are extreme.

                       

To invest in options, you must take time to learn fully about them. Know the difference between a call and a put, strike price and all applicable terms.

                       

There is no real quick options course, Take your time learning because of the complex nature of the arcane aspect of this classification of the securities business.

                       

Do not get involved unless you learn about options both academically and in practice. Therefore, run through some fantasy dry-runs with no real funds, just to see how you would have done with real money. Then use your own real capital. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Bankers, Athletes and Income

                       

Do CEOs make too much money?

                       

They may if they earn commissions and options of hundreds of millions a year. But they do work at jobs that take years to perfect..

                       

Do athletes earn too much money?

                       

They certainly do, if they earn up to $30 million a year for playing a kid’s

 game. And which many amateurs do for nothing, but just a little less

 efficiently. The real difference in their capability is not learned but in their eyes or muscles, for the most part.

                       

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.

                       

I have had personal experience with all three working practices, It’s difficult to see how bureaucrats and politicos in Washington are so ready to damn CEOs as a group for making “too much” money while other genuinely overpaid groups are left to make their fortunes politically undisturbed.

It isn’t up to the government or its politicians to decide. If the public no longer is rabid about athletics, the latters’ income will get smaller.

                                       

Incidentally, high-priced athletes are indirectly being financed by bailout funds of their bosses’ subsidized ballparks.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Sudden Investing Changes

You know an adviser has no clue about strategy when he tells a mutual fund investor not to buy a fund that clings to a particular “style” of investment, such as small cap or large cap. But to instead choose what is right for the times.

                       

That advice will let you know the adviser has no specific strategy. The adviser is willing to change strategy to suit whatever style may be popular at the time.

                       

My experience has shown that such undisciplined investments with no set strategy will not do as well as it should. It’s a case of market timing with adverse odds.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Administration’s Idea of Taxable Family Income

                        

When the  Administration speaks about the top 1% of wage earners in this country and their domestic income, they are wrong in making comparisons and interpretations of official family income statistics of the 1980s and today.

                       

Their argument does not consider that families have changed. Twenty, thirty years ago, there may have been just one worker in a family, where today, husbands and wives more likely work. Perhaps kids are also part- timers.

                       

So families may have two and perhaps more small income providers. They could add a sum of income that may classify them as so-called “rich” by the Administration, all ready to be heavily taxed.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Still Buying Gold?

I have commented before on buying gold as an inflation hedge, and why the idea is not a simple solution to inflation, as advertised. Gold prices relate primarily to the rise and fall of the dollar, rather than inflation itself.

                       

I feel there are many other ways to protect yourself against inflation. A weaker dollar waxes and wanes cyclically. Other investments I discuss from time to time are more directly attuned to inflationary factors. And gold buyers have recently suffered stiff losses.

                       

For those who have decided on gold, however, an option that often is not fully understood is whether to buy gold mining shares, instead of gold coins or bullion.

                       

There is dividend income in holding shares as well as potential capital growth. Gold coins and bullion do not offer income. And you have to store and safeguard the physical assets.

                       

However, mining company shares run into occasional production problems and potentially negative management issues. That is a negative factor.

                       

Remember, if you must buy gold, it can be bought without physical possession, in the form of mutual funds or exchange traded funds (ETF)s(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Still Buying Penny Stocks?

I see from new promotions that penny stocks, small company issues being sold well under $5 a share, are still being offered to the unwary.

I repeat this often but some investors, who aren’t familiar with investing odds, never learn.

Small companies are hard to analyze. Those promoting them to the public are the least likely to be accurate when it comes to true corporate prospects.

Also, penny stocks are not traded in satisfactory auction markets. The latter are not liquid and can be easily manipulated. In such instances, the small investor is in a very disadvantaged position. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Expanded Federal Regulation

XBRL or Extensible Business Reporting Language can permit data to be collected and analyzed. It can be used to assess risk on about 600 mortgage points; the data may be readily tracked.

                       

There is a far better case for using such data resources for collection and review and more transparency on mortgages, than the need for extensive federal regulation, including Dodd-Frank's.

                       

Layers of added regulation we know from experience really does not work.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Risks of Investing and Age

You can take more investing risks when you are young because there’s

more time to recoup your errors. But If you lose a big chunk of capital, it still sets you back a good deal.

Yes, it is better to lose chunks of capital at age 30 than when you’re 60, or older. Nevertheless, look at a compound interest table, and see what happens to any amount of principal, when you lose a large sum early on.

                       

Therefore, it’s essential that investment risks always be a concern in your planning.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Small Business is Targeted By This Economy

Small business employs about 50% of the U. S. work force. It makes up almost 40% of the GDP. But small business cannot get sufficient credit from banks who are worried about strict regulators who look over their shoulders to see that the books show little risk.

                       

The easy money policy of the Federal Reserve makes it far easier for

banks to borrow at little cost from the Fed and invest in government bonds. So why bother to make risky small business loans?

                       

Worse, small business cannot get meaningful relief from Washington in the form of lower taxes and less restrictive wage regulation.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Getting Credit For Small Business

                   

I have often discussed how small business has had problems getting credit amidst restrictive Washington regulations.

                       

Small business has little access to public sources of borrowing. And they are usually in no position to sell stock to investors. Where will they get funds?

                       

Credit cards are one solution. About 80% of small businesses pursue this arrangement, though rates are high. But this source is getting tougher, because of increased government meddling.

                       

Left-leaning politicians believe that anyone who charges more than what a bank does is a usurer, even when there is no money available at bank rates. That’s because such politicians never understand supply/demand economics.

                       

The next time you hear talk about real jobs, it will be mere talk. Nothing practical is being done. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Government is Fostering Another Meltdown

After denying anything to do with the past financial meltdown, the government is at it again, for the so-called good of the public.

                       

Uncle Sam is once again seeing to it that folks who cannot afford to own a house are able to buy one. Getting to buy homes with practically nothing down. 

In no time, they will join the rest of the rising numbers of homeowners in default. Will left-leaning, vote-seeking, politicos never learn?

Listen to some of the new ads advising government mortgage refinancing even where home values lag present mortgage amounts.

                       

The media will eventually repeat that the villains once more will be the “greedy” banks and mortgage brokers whose jobs depend on carrying out government edicts.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Why Many Hedge Funds Have Gone

Many hedge funds have gone out of business due to a loss of investor interest. Or so-so performance that failed to attract followers of the past.

                       

The main peeve against them are their charges. In addition to their standard management fee which is usually set at 2% of assets managed, they still get about 20% of earnings they produce. That is far too much for funds doing conventional, non-rocket-science investing.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Still Buying a Home For Investment?

Research shows that from 1890 to 1996, residential real estate values increased only about 27%. I had always advised folks to treat a home as just that, not a means of growing rich. The small increase in home values would attest to that reasoning over the years.

                       

I got lots of flak in the late 1990s and early in the 21st century. That’s because, from 1996 to 2008, residential real estate values rose sharply, about 72% on average.

                       

That up-cycle has now come to a sudden demise. And I can repeat my old admonition. Buy a home to suit your budget and your family requirements.

                       

If you want to invest in real estate there are other options. For example, commercial REIT index mutual funds or ETFs.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Do You Buy ADRs?

Investors who wish to buy foreign securities as a means of diversification may do so in several ways.

                       

One is to buy ADRs or American Depositary Receipts. These are dollar, Euro or other currency denominated participation in global issues.

I find them more expensive for those who want basic, non-technical investing. 

But why not use foreign mutual funds or exchange traded funds (ETFs)? The latter can be traded and are cheaper to transact.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

High Frequency Trading Helps Mutual Funds

While high-frequency trading benefits most market participants, there are also  hazards involved. 

The presumption is that high-frequency traders are more efficient, at the expense of the less adept. Individuals who feel they cannot compete with mutual funds or other large investors, are just one example of those who view the subject negatively.

                       

If profits are made on tiny price variations, unscrupulous players can profit in some manipulation, like that caused by rumors. However, the SEC has the ability to supervise this possibility.

                       

The SEC should protect small investors from active traders who could conceivably be hurt by high-frequency trading with their faster computers. At the same time, high-frequency trading benefits small investors who use mutual funds.

                       

That is why I feel there is no ongoing problem that some envision.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Fear of High Frequency Trading

                       

Those who defend high frequency trading say such trading improves market liquidity, It assures a buyer or seller availability whenever one wants to trade

                       

High frequency trading benefits mutual fund investors and traders in that it reduces costs. It lets investors with fast computers take advantage of small price discrepancies and brings market liquidity.

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In the past, the stock market was efficiently operated by middle men or “market-makers.” They normally completed sales by buying and selling in their own accounts, if they could not immediately match buyers and sellers. Market makers profited on the difference between the bid prices buyers were willing to pay and the ask prices sellers accepted.

                       

The SEC is tightening its controls of high frequency trading which it’s currently suspicious of, and further studies the matter.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Does Making Big Banks Secure Always Boost Business?

As I have noted in my previous comments, Dodd-Frank is attempting to make sure that too-big-to-fail banks will not bring on another economic disaster. In doing so, they are strangling the economy with regulations.

                       

Monetary policy has been set up merely to accommodate this “too-big-to-fail” doctrine at the expense of business who cannot or will not access loans. Banks who have received government treatment get low interest rates and safe government bond investments to bolster earnings. Why would banks not play this spread rather than make risky loans to business? Especially with government agencies looking over their shoulder, suggesting that risky business loans are taboo?

                       

Only government bureaucrats can think up such absurdities with bank regs, while supposedly attempting to get business out of a recession.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Banks Too Big to Fail are Simply Too Big

One of the reasons for the Dodd-Frank Act of 2010 was fear of financial institutions failing.That fear produced monumental bailouts, resulting in extraordinary budget deficits. Which, in turn, has created legislation such as Dodd-Frank, that’s now dooming our economic prospects for decades to come.

Big banks are being fostered to become still bigger.  

                     

Dodd-Frank is ever-ready to impose layers upon additional layers of stifling regulation. Unfortunately, with no possibility Big Banks will have eliminated systemic risk.

                       

There is a simple, free market solution that has worked in the past, but left-leaning politicians have no clue nor inclinations about its implementation.

                       

They did separate commercial banking operations from proprietary trading, Banks, though, will not be smaller, less risky and less apt to fail now, than did the risk-taking and more leveraged investment entities of the past.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Government Efforts to Create Jobs

Economic stagnation persists when business cannot risk hiring permanent workers.

                       

I have often commented about jobs.. They don’t come from government hires in questionable projects. The worthwhile, stable variety generate within industry, not in a make-work program with no true productivity aim.

                       

Always keep in mind what has made the U.S. different from socialist governments with all their perfect job-planning schemes. Fancy words and plans never succeed. They may fool and appease the public, at least for awhile. But never for long. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Securities Trading By Supply/Demand Logic

 Never buy securities on the basis of a public recommendation. Many, perhaps thousands, or hundreds of thousands, are receiving the message at the same time or may have gotten it earlier than you.

                       

Remember the effect of everyone acting at once. And the law of supply and demand. That law will be working against you when everyone acts on the same news at the same time.

Simple advice. How many “smart” investors take it? (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

How Guilty Are Inside Traders?

Insider-trading prosecution trials have been confusing the investing public more than they should; convictions have unfortunately clouded rather than clarified the picture. The media have been of relatively little help in remedying this public confusion.

The problem is actually twofold: One has to do with legality. The other has to do with what investors seek as a “level playing field.” They have nothing to do with each other. The former is about a forbidden activity. The other may be about a perfectly legal pursuit, but the public opposes it for a good pocketbook reason.

In the first instance, what is illegal is the sale or divulging of information that an employee or principal is contractually not permitted to divulge. It may be part of their employment contract or obligation to their company.

As an investor, you may not be hurt by such illegality, despite what the government prosecutors are able to get judges and juries to believe. However, judges and juries, unfortunately, are not always conversant with the way the investment industry truly works. Innocents as well as the guilty may therefore get caught up in such zeal in the future.

Investors do expect federal and state regulatory agencies will help thwart any Ponzi-like chicanery. Unfortunately, many of these deceptions are never caught in time by the authorities.

What the Securities and Exchange Commission, for example, seems to be excellent at, is the ability to impose nit-picking regulations that require the costly issuance of theatrical data which most investors cannot possibly comprehend or use in a practical sense. That fuzzy data generally comes in the mail and winds up, unread, in the garbage.

Let’s now turn our attention to what investors really want, apart from justice when any criminality exists; they want a level playing field when they put their funds at risk.

There is a practical way for all investors to get that sought-for level playing field. It’s simple enough.

They can get this when they avoid the adverse impact of those I often refer to as the financial industry’s “inside players” who, incidentally, usually operate legally,

These players include stock brokers who push over-zealous traders trying to  outfox each other; advisers with “tiny” management fees that translate into as much as 20% or more of their earnings each year; hedge funds that think nothing of taking an additional 20% of any annual earnings profits on top of fees; and analysts who suggest securities of corporations they diligently evaluate, though they could not run their own profitable pushcart.

All these costs that uneven the playing field are charged without any commensurate service.

When research shows that low-cost index mutual funds and ETFs are invariably the alternative bargains to the wares of the inside-players. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Financial Ads in the Media

There always is a conflict of interest when an ad or public relations announcement gives financial advice.Especially with the repetition of ads and announcements.

                       

Because all you get is one side of the story. You get one financial idea or strategy’s positive slant. But there is always a negative factor in every financial idea or strategy; maybe more than one. Obviously, they’re never mentioned.

                       

And media financial advertising provides so much inaccurate and only “education’ for the average investor. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)