Investing Curiouscatblog

Tag: Investing

  • Dazzling Diversification

    Diversification overrated? Not a chance [the broken link has been removed] by Jason Zweig

    A diversified portfolio always has, and always will, underperform the hottest investment of the moment.

    For anyone with a sustainable ability to identify the hottest investment of the moment, diversification is a mistake. But if you really believe you’ve got that ability, you’re not just mistaken. You need to be hauled off in a straitjacket to the Institute for the Treatment of Investment Insanity.

    Exactly right. As we posted previously Warren Buffett’s diversification thoughts are similar

    If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it.

    You have to remember when Warren Buffett says “professional and have confidence” he doesn’t really mean just what those words say. He mean if you are Charlie Munger, George Soros, Jimmy Rodgers and maybe 10 other people alive today (maybe I am too restrictive, maybe he would include 50 more people alive today, but I doubt it).

    Related: Dilbert on Investing – investment risks – Curious Cat Investing and Economics Search Engine

  • Financial Thanksgiving

    photo of Frew Wube in Ethiopia

    For me, giving back to others is part of my personal financial plan. As I have said most people that are actually able to read this are financially much better off than billions of other people today. At least they have the potential to be if they don’t chose to live beyond their means. Here are some of the ways I give back to others.

    Kiva is a wonderful organization and particularly well suited to discuss because they do a great job of using the internet to make the experience rewarding for people looking to help – as I have mentioned before: Using Capitalism to Make a Better World. One of my goals for this blog is to increase the number of readers participating in Kiva – see current Curious Cat Kivans. I have also created a lending team on Kiva. Kiva added a feature that allows people to connect online. When you make a loan you may link you loan to a group.

    I actually give more to Trickle Up (even though I write about Kiva much more). I have been giving to them for a long time. They appeal to my same desire to help people help themselves. I believe in the power of capitalism and people to provide long term increases in standards of living. I love the idea of providing support that grows over time. I like investing and reaping the rewards myself later (with investment I make for myself). But I also like to do that with my gifts. I would like to be able to provide opportunities to many people and have many of them take advantage of that to build a better life for themselves, their families and their children.

    The photo shows Frew Wube, Haimanot and Melkan (brother and two sisters), an entrepreneur that received a grant from Trickle up. Trickle Up provides grants to entrepreneur, similar to micro loans, except the entrepreneur does not have to pay back the grant. They are able to use the full funds to invest in their business and use all the income they are able to generate to increase their standard of living and re-invest in the business.

    Haimanot and Melkan quickly learned the ropes of the job and started working with their brother in the business. Soon, the two girls managed the clothing business on their own, and Frew began to think about other income-generating opportunities.

    “I also save every month,” says Frew, who has over $40 stored in a cooperative savings fund. The capital he has saved with other people in his group is used to provide loans to group members at a low interest rate. Frew, now able to access credit thanks to his Trickle Up clothing business, has taken progressively larger loans from the group, including his latest loan of $300 to start a candle business.

    (more…)

  • How to Thrive When this Bear Market Ends

    How to thrive when this bear dies by Jim Jubak

    Believe it or not, someday, almost certainly within the next 12 months, the bear market will be over. Then investors will have an opportunity to rebuild their wealth if stocks come roaring back, as they typically do.
    …
    In the case of the 2000-02 bear, the initial rush after the end of the bear delivered a huge share of the 101% gain for the bull market that ran from October 2002 through October 2007. In the 16 months from the Oct. 9, 2002, low through Feb. 9, 2004, the S&P 500 gained 47%. The gains from the remaining years of the “great” bull market of the “Oughts” were rather anemic: just 9% in 2004, 3% in 2005 and 14% in 2006.
    …
    If I’m right about the arrival of a secular bear, emerging economies and their stock markets will deliver higher returns, despite relatively slow growth, than the even more slowly growing developed economies. If I’m wrong about the secular bear, emerging economies will still deliver stronger growth than the world’s developed economies. Under either scenario, investors want to increase their exposure to the world’s emerging economies, which deliver more performance bang for less risk than most investors think.

    Jim Jubak is one of my favorite investing writers. He can of course be wrong but he provides worthwhile insight, backed with research, and specific suggestions. I am also positive on the outlook for stocks (though what the next year or so hold I am less certain) and on emerging markets.

    Related: Why Investing is Safer Overseas – Rodgers on the US and Chinese Economies – Beating the Market – The Growing Size of non-USA Economies – Warren Buffett’s 2004Annual Report

  • Soros on Financial Crisis and Markets

    The New Paradigm for Financial Markets is George Soros‘ newest book. Here is an interview with him in May of this year, on PBS, Financial World Shifts Gears Amid Economic Tumult, about the ideas in the book and the current crisis.

    JUDY WOODRUFF: How do you assess the strength of the financial system today?
    GEORGE SOROS: I think this is the most serious crisis of our lifetime. It’s not just a housing crisis, but a crisis of the financial system.
    …
    GEORGE SOROS: The regulators have failed to regulate, and they really have to — they left it to the market. That was this market fundamentalist philosophy, that markets will take care of themselves.
    …
    And I contend that there’s been what I call a super bubble that has been growing over the last 25 years at least, which basically consisted of an extension in credit, increasing use of leverage. That was the trend in reality.

    And the misconception that credit is that markets can be left to their own devices. Now, in fact, they are given to excesses, and occasionally they create crises, but each time the authorities intervene and bail out the failing institutions, provide fiscal stimulus, monetary stimulus.

    So it seems like the market corrects itself, but it’s actually the intervention of the authorities that saves the market.

    Related: Soros on the Financial Market Collapse – Jim Rogers on the Financial Market Mess – Leverage, Complex Deals and Mania

  • Personal Finance Basics: Dollar Cost Averaging

    With the recent turmoil in the financial market this is a good time to look at Dollar cost averaging. The strategy is one that helps you actually benefit from market volatility simply.

    You actually are better off with wild swings in stock prices, when you dollar cost average, than if they just went up .8% every single month (if both ended with stocks at the same price 20 years later). Really the wilder the better (the limit is essentially the limit at which the economy was harmed by the wild swings and people decided they didn’t want to take risk and make investments.

    Here are two examples, if you invest $1,000 in a mutual fund and the price goes up every year (for this example the prices I used over 20 years: 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 22, 24, 26, 28, 30, 33, 36,39) you would end up with $40,800 and you would have invested $20,000. The mutual fund went from $10 a share to $39 over that period (which is a 7% return compounded annually for the share price). If you have the same final value but instead of the price going up every year the price was volatile (for example: 10, 11, 7, 12, 16, 18, 20, 13, 10, 16, 20, 15, 24,29, 36, 27, 24, 34, 39) you end up with more most often (in this example: $45,900).

    You could actually end up with less if the price shot up well above the final price very early on and then stayed there and then dropped in the last few years. As you get close to retirement (10 years to start paying close attention) you need to adopt a strategy that is very focused on reducing risk of investment declines for your entire portfolio.

    The reason you end up with more money is that when the price is lower you buy more shares. Dollar cost averaging does not guaranty a good return. If the investment does poorly over the entire period you will still suffer. But if the investment does well over the long term the added volatility will add to your return. By buying a consistent amount each year (or month…) you will buy more share when prices are low, you will buy fewer shares when prices are high and the effect will be to add to your total return.

    Now if you could time the market and sell all your shares when prices peaked and buy again when prices were low you could have fantastic returns. The problem is essentially no-one has been able to do so over the long term. Trying to time the market fails over and over for huge numbers of investors. Dollar cost averaging is simple and boring but effective as long as you chose a good long term investment vehicle.

    Investing to your IRA every year is one great way to take advantage of dollar cost averaging. Adding to your 401(k) retirement plan at work is another (and normally this will automatically dollar cost average for you).

    Related: Does a Declining Stock Market Worry You? – Save Some of Each Raise – Starting Retirement Account Allocations for Someone Under 40 – Save an Emergency Fund

  • Would the Dow Dump General Motors?

    Would the Dow Dump General Motors?

    General Motors may get dumped by the Dow Jones Industrial Average if the nation’s biggest carmaker strikes the wrong kind of bailout deal with the government.
    …
    At this point, it’s not clear if the government will be willing to take on the horribly mismanaged automaker. It’s one thing to save a financial firm that continues to make money and another thing to rescue a business that for decades has been unable to control labor and legacy costs or deliver a product that consumers want. GM could be allowed to declare bankruptcy.
    …
    But for some reason nostalgic Americans refuse to let the carmakers take a hit and learn from their mistakes. A bailout seems to be preferred. It worked so well for Chrysler.
    …
    Is it important to the Dow editors to keep an auto presence in the index?
    …
    And since the Dow is meant to be a barometer of the U.S. market, Toyota and Honda can’t be considered. Then again maybe they should leave a bankrupt company in the Dow. It might be the most accurate barometer of the market yet by tracking all the blue chips that have gone bankrupt.

    I discussed dropping GM from the Dow Jones Industrial Average in December of 2005: “I agree removing GM makes sense, though I see no reason to wait.”

    Related: Dow Jones Industrial Average Changes – Another Great Quarter for Amazon (July 2007) – Stop Picking Stocks – Curious Cat Investing Web Search

  • The Economy is in Serious Trouble

    It doesn’t take much effort to notice the economic news is increasingly dire. And this is not just a few alarmist reports, the economy is in serious trouble. The decades of spending beyond their means (for consumers and those the consumers elected to run government) are creating a very difficult situation. And the credit crisis precipitating the current slide has brought to light many failures to properly regulate the economy. U.S. Slump May Be Longest in Decades as Growth Fell Off ‘Cliff’

    The U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever, according to economists surveyed by Bloomberg News.

    The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11. Following last quarter’s 0.3 percent drop, the slump would be the longest since 1974-75.
    …
    Falling demand will cause an even bigger increase in unemployment than projected last month. Economists surveyed forecast the jobless rate will rise to 7 percent in the first quarter of 2009, up from last month’s forecast of 6.6 percent. The rate will climb to 7.7 percent by the end of 2009, the highest level since 1992, the survey showed.

    The jobless rate rose to 6.5 percent in October, the highest since 1994

    There is little doubt the economy is in for serious trouble. What investment moves are wise now is less obvious. I have been buying during the decline and continue to do so. I bought some Google yesterday at the same price I first bought Google for several years ago. I think in 10 years that will pay off quite well, but time will tell. My purchases of Google earlier this year would obviously have been better if I had made them yesterday than when I did.

    I discussed the Economic Crisis on my Curious Cat Management Blog last month:

    With personal finance I still believe the same smart personal financial decisions last year, or five years ago are wise today: avoid credit card debt, have an emergency fund of 6 months of expenses, save for retirement, have proper health insurance, don’t buy what you don’t need and can’t afford… The biggest change I see is that the risks of failing to do these things (and the risks of failing to have done them in the past) are increasing greatly.

    One of the challenges with personal financial matters is they are by nature long term issues. What you did over the last 5 years cannot be fixed in a few weeks, most likely it takes years.

    Related: Stock Market Decline – Bad News on Jobs

  • Scott Adams on Investing

    In his blog Scott Adams, author of Dilbert, provides often quite intelligent and interesting thoughts. In a recent post he wrote on investing and Diversification:

    When I first started making serious Dilbert money, I let experts manage half of it, and I managed the rest, as a hedge against both the experts and myself. The experts invested in Enron, Worldcom, and a number of other companies that promptly exploded. The experts reduced their portion of my money by about a third over five years. (The experts work for one of the most respected financial institutions on Earth, by the way.) My own investments did better, precisely because they were more diversified. So now I handle my own investments, probably incompetently.

    I didn’t own much in the way of stocks for the past several years, thanks to not using professional advisors. A big chunk of my money has been in California Municipal bonds of various types, and all are insured.
    …
    In order to diversify more, I started migrating money over to the stock market during this recent plunge. The market could go a lot lower still, but this is either the beginning of the end of the United States as we know it, in which case it doesn’t matter how I invested, or it is a once-in-a-lifetime stock buying opportunity. It was an easy decision.

    Related: Stock Market Decline – Warren Buffett on Diversification – Investment Allocations Make A Big Difference

    Dilbert comic on investors

  • Treasury Bought $125B in Bank Stocks

    On Tuesday the United States Treasury department purchased $125 billion of bank stocks becoming one of the largest stockholders in the world instantly.

    $25 billion was invested in Citigroup, JPMorgan Chase and Wells Fargo.

    $15 billion was invested in Bank of America and $10 billion in Merrill Lynch (which is being acquired by Bank of America).

    $10 billion was invested in Goldman Sachs and Morgan Stanley. And the treasury department invested $3 billion in Bank of New York Mellon $2 billion in State Street.

    Related: Goldman Sachs Rakes In Profit in Credit Crisis (Nov 2007) – Warren Buffett Webcast on the Credit Crisis – Rodgers on the US and Chinese Economies (Feb 2008) – Credit Crisis

  • Discounted Corporate Bonds Failing to Find Buying Support

    ‘Armageddon’ Prices Fail to Lure Buyers Amid Selling

    Yields on corporate bonds show investors expect 5.6 percent of the market to go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.
    …
    The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG.
    …
    Corporate debt has been pressured by “incessant selling by hedge funds and leveraged institutions as they unwind,” Bill Gross, manager of the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co.
    …
    Corporate bond prices plunged to 79.9 cents on the dollar on average from 94 cents at the end of August and 99 cents at the end of 2007, according to index data compiled by New York-based Merrill Lynch & Co.
    …
    “The de-leveraging that we’re witnessing will probably continue,” said Paul Scanlon, team leader for U.S. high yield and bank loans at Boston-based Putnam Investments LLC, which manages $55 billion in fixed income. “My sense is that’s not turning around in the very near term.”

    I am not very familiar with the bond market but it does seem like the panic is in full swing but calling the bottom is always hard. I would guess the de-leveraging (and investors pulling money out of bond funds) could well lead things lower over the short term.

    Related: Corporate and Government Bond Rates Graph – Municipal Bonds After Tax Return