Financial Media Exaggeration

                

The media exaggerate with high-tech distribution of news, as they did when they sold only newspapers in what we still refer to as the days of “yellow journalism.”

                       

That’s not just when it comes to politics. It includes financial news.

                       

One example: When Bernard Madoff said he made off with $65 billion and was subsequently convicted of fraud, his case pointed out a problem in the financial media, as it does elsewhere.

Investigators believe the total sum involved was actually closer to $17 Billion. The sensationalist media continues to pick up the $65 billion number because it suits their exaggeration needs. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Invest in Indexed Mutual Funds

                                 

I have always commented that indexed mutual funds or ETFs, are better than managed funds. They usually outperform them, and at lower cost.

                       

Moreover, I always say the lower the fund cost, the more return an investor will get over the years.

                       

This question also will come up when a managed mutual fund you may have gets merged into another. These mergers are usually done for either or both of two reasons. To get economy of scale. Or to hide losing records.

                       

In most instances, index funds are always a better choice. So, don’t attempt to trade managed funds on relatively short term performance. Besides, their internal managements generally change constantly. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Buying and Selling Managed Mutual Funds

                   

I never recommend managed funds for a variety of reasons, including high cost and often inability to emulate indexes. Managements change and you never know who really is managing your assets.

                       

What if the fund is not doing well? That does not mean an automatic sale. Market conditions may be the cause and not management inability.

                       

The major consideration should be fund cost because that is the only factor you can truly control. All other considerations are well beyond your possible knowledge. Cost is a huge factor in fund success. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

                   

Why Credit Rating Agencies?

                    

Credit rating agencies are generally accurate but the divisions that rated sub-prime mortgages were certainly not up to par at the major agencies.

                       

One way to solve the lack of any problems we may have had with

credit ratings in the past, is to allow more competition among such services. Why not allow any company who feels qualified,to register as a ratings analyst? Today, a small handful has a government monopoly.

                       

If a company can show the Securities and Exchange Commission that it has qualified analysts and capability to evaluate bonds and other securities, why not award a license?

                       

Also: Do credit rating companies have First Amendment free speech immunity? Courts have ruled they have but plaintiff lawyers are always on the prowl. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Meaning of Credit-Default Swaps

                   

Credit-default swaps got a bad reputation for a faulty political- scapegoating reason during the 2008 financial debacle. Yet, they are still used, because they serve a useful, legitimate purpose.

                       

The problem with credit-default swaps is that the market is little understood. It provides a form of insurance that bonds will pay off, particularly when the bonds are being issued by governments whose credits are very shaky

                       

Without them, countries on the brink of bankruptcy such as Greece and Portugal, Spain and Italy, would have problems selling their bonds at any price. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Essential Duration Principle in Bond Investing

              

Here’s how professionals in the financial industry constantly get the bond market wrong.

                       

Take high yield corporate bonds, called “junk” for an unfortunate reason having to do with lower ratings. The fact they have lower ratings is compensated by higher yields.

If you buy them in a fully diversified, low-cost mutual fund or ETF, and you reinvest dividends, you have factored in risk. If the default rates of the holdings were to rise to an unusual high from

a lower level, the higher yield will more than make up for the risk. Yet, all the media will discuss is that risk of default and not the built-in compensation.

                       

I have previously commented how the media hardly discuss how you can avoid default loss, along with any inflation hit, with the proper use of bond duration. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Corporate Bonds Basic Facts

                                     

Pros in the financial industry constantly get the bond market wrong. Note that I’m referring to professionals, not amateurs.

                       

They make up well over 80% of the market so they should know better. And the media are usually also in error, when reporting about bonds.

                       

At the first sign of economic problems, there is talk about corporate defaults and their effect on the bond market. How bond prices are bound to fall because of the risk of possible defaults. And with that talk, the bond market weakens and prices do fall.

                       

But remember: The possibility of default is very quickly factored into bond prices. And the higher will be the yield, as a direct relationship.

                       

Furthermore, the media hardly ever discuss how you can avoid loss, along with any inflation hit, with proper use of bond duration principles. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Odds of Choosing Heads-or-Tails

                   

It’s interesting to note tests of folks who are asked to bet or choose heads or tails when tossing coins.

                       

The odds of a coin toss being heads or tails is always 50-50. Yet, when, for example, head comes up twice in a row, a large percentage of players will think that the odds will then favor tails as the next result.

                       

Over a total of as many as 1000 coin flips, you may not get exactly 500 heads and 500 tails, but you can expect a figure extremely close. Still, many folks continue to believe that over the shorter-term, a following coin-toss will have a bearing on past results. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Options Markets

                   

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

                       

Options thus can protect share ownership from under-performing and can make money when market conditions are extreme.

                                           

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

                       

There is no quick options course. Take your time because of the complex nature of this aspect of the securities business.

                       

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

Balancing Bonds With Stocks

                  

You hear complaints from financial experts that it makes little sense to balance stock holdings with bonds when both may move together in the markets. The conventional idea they address is that one security should go up when the other goes down.  At times, however, bonds and stocks move in the same direction.

                       

But there is another factor involved, should you attempt to time the markets to tell you how much bonds or stocks to hold and when to sell which. The matter of timing can be risky because it often fails.

                       

However, asset allocation with set percentages of stocks and bonds, is a form of market discipline and has value as such. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Use of Financial Models

                                

Mathematical models have done poorly in preventing financial meltdowns. I refer, as just two examples, to the LTCM (1998) and the subprime mortgage (2008) disasters.

                       

These math models were made up by top researchers, mathematicians, and celebrated “quants,” who figured they had anticipated all cyclic contingencies.

                       

Yet, bond markets eventually fell apart despite their calculations. Afterward, the ones responsible found they should have looked at contingencies further back than they had.

                       

I see a major weakness in math models, no matter how much research is done. It happened with the LTCM breakdown. It very definitely is what I feel was a factor in the subprime crisis, which haunts America and the world to this day.

                       

There is a common thread between such breakdowns which has to do with the fact that we react to problems with panic. That’s because our “experts” who come to the rescue are unfortunately from the financial community, attuned only to the short term. They cannot see how caution and avoiding zealous, impulsive action can overcome danger. So they act in haste.

                       

There was human error in these instances, other than in mathematical calculations. Often that error is enforced by government in the form of strict regulation that was actually a reaction with the very panic that such regulation supposedly had been developed to suppress.

                       

The math formulae probably would have worked over the longer term. These are never successful for short-term markets that regulation oversees. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)