Monthly Archives: September 2013

Buy and Hold. And buy some more and hold.

This is an excellent, positive article on buy and hold investing.  Easy to make fun of, hard to do.

I would note on his point regarding not investing cash needed in the next 10 years in the stock market, please refer to my earlier post “Stocks for the Long Run” referencing a new paper showing that for time period of only 1 year, the optimal allocation is 45% to stocks.  So, even if the market may crash, and you need the money in one year, it’s still the best bet for almost half your money.  In other words, I would keep a much smaller amount of money out of the market than even Mr. Blodget.

Also, this is more confirmation bias on  my part.

The whole thing is really good:

Here’s Why I’m Not Selling My Stocks Even Though I Think The Market Might Crash

Henry Blodget Sep. 27, 2013, 2:46 PM 17,753 41

Read more: http://www.businessinsider.com/why-im-not-selling-stocks-2013-9#ixzz2gOQBQfgE

Yesterday, I mentioned that I think the stock market might crash.

I’m not predicting a crash — I just think the odds of this happening in the next couple of years are higher than usual (logic here).

More importantly, I think the odds are very high that, even if the market doesn’t crash, stocks will return far less over the next decade than the double-digit percentages they have returned in the past four years.

In light of that view, several readers have asked why I am not selling my stocks or even going short (betting on a crash).

After all, if I think there’s a “decent chance” of a 30%+ crash in the next year or two, wouldn’t this be a wonderful opportunity to make (or at least save) some money?

That’s a perfectly reasonable question.

Here’s why I’m not selling my stocks or going short the stock market:

* My portfolio is already well diversified.  My savings are composed primarily of low-cost index funds holding stocks, bonds, cash, and real-estate. If the stock market collapsed, this diversification would cushion the blow. It would also (I hope) keep me from panicking and selling near the bottom. (This is a real risk, one I occasionally succumbed to early in my investing career.) I also have enough of my portfolio in cash that, if the market does crash, I’ll be able to rebalance into stocks at a much lower level.

* I never invest money in the stock market that I need to use in the next 10 years. The stock market does crash occasionally. And the last thing you want is to have to sell your stocks during the period when the market is “crashed.” If the stock market crashes permanently, or we get in a Japan-type situation in which stocks remain clobbered for decades, then, yes, I’ll be bummed I didn’t sell some now. But otherwise I expect any crash to be relatively temporary, just as the crash of 2008-2009 was.

* The outlook for other asset classes over the next 10 years is no more attractive than it is for stocks (and, in some possible scenarios, it is worse). If interest rates rise back to normal levels, bonds will get obliterated. Cash is earning nothing. Real-estate is also expensive by many measures. So the last thing I want to do is leap from the pot into the fire.

* There seems a reasonable likelihood that inflation will accelerate at some point over the next decade, and stocks are a good hedge against inflation. Unlike bonds and cash, stocks are “real” assets. They represent an ownership share in an enterprise whose business will adjust to inflation by raising the nominal level of prices, wages, and profits. Stocks don’t necessarily do well in high-inflation environments (stocks were flat in nominal terms from 1966-1982 and dropped considerably after adjusting for inflation). But they do better than bonds, which get demolished.

* Just because I think there’s a “decent chance” of a market crash doesn’t mean I am highly confident there will be one. I am never highly confident of any short-term market behavior. And I would suggest that anyone who is highly confident about short-term market behavior either doesn’t have much market experience or is deluding themselves. I am reasonably confident that stock returns will be crappy for the next decade — because all the valid valuation measures I know of suggest that they will. But sometimes things change fundamentally and the old rules no longer apply. And it’s certainly possible that it’s “different this time.” (That, by the way, is why I’m not 100% confident that returns will be crappy. If you ever meet someone who knows what the market is going to do, please send them my way. I always assumed this person existed, and I spent my decade on Wall Street looking for him/her, but I never found him/her.)

* I have learned the hard way that market timing is very difficult and is generally a terrible idea. It is really hard to correctly “time” major market reversals. (I learned this as an analyst during the dotcom crash in 2000, and my mistake cost me and my clients a fortune.) And it is really, really hard to correctly time two major market reversals in a row, which is what I would have to do for it to be a smart idea for me to dump my stocks now. Specifically, if I sell now, and the stock market does, in fact, drop 30%+ from this level in the next couple of years, I will then have to figure out the right moment to get back in. (Given inflation, remaining on the sidelines forever would be a disaster.) If the market drops, say, 25%, it will be because things look so terrible that it will look like the market is going to drop another 25%. And who wants to buy only to have the market crash another 25%? If I set a hard “buy” floor at 30%, meanwhile, the market will no doubt drop 28.8% and then skyrocket, leaving me alone at the station as it rolls away.

* The market might not crash. Instead of crashing over the next year or two, the market might rise another 10%-30%-50%-100% and then correct the “imbalance” by parking in place for 10-20 years. It will be psychologically very difficult for me to buy back in at a higher level after selling here, especially if I am still worried about a crash. (And if I wait to buy in until I am NOT worried about a crash, I’ll be waiting for Godot.)

* If I sell now, I’ll have to pay taxes. Thanks to my indexing strategy, I have captured every point of the move up from the 2009 market low. When markets crash, I also buy more of them, so I was lucky enough to get some new stock in 2008 and 2009 at much lower levels than today. So if I sell now, I’ll have some capital gains taxes to pay. (I did, stupidly, “rebalance” out of some stocks in 2011 or so, in part because I persuaded myself that we were experiencing a sort of sucker’s rally. That dumb-ass move has cost me money between then and now and reaffirmed my conviction that market timing is idiotic. But, on the bright side, I have fewer embedded capital gains taxes to pay.)

* Oddly, the best thing that could happen for my long-term stock returns would be for the market to crash 50% and then stay crashed for 5-7 years. I reinvest dividends. So if the market drops by, say, 50% over the next year, and then stays at, say, DOW 7,500 for 5-7 years, I will get to reinvest 5-7 years worth of dividends at half the price per share than I am paying today. This will result in my accumulating twice as many new shares over the next 5-7 years as I will if stocks stay where they currently are. Then, 5-7 years from now, when the stock market finally begins to recover, these new shares will act as a sort of portfolio turbocharger, boosting my returns.

In short, the only thing I am really worried about as a stock-market investor is a permanent crash. And if the stock market crashes permanently, it will likely be because the United States has experienced a communist revolution in which all private assets are seized or some other cataclysm. And if that happens, I’m going to have bigger things to worry about than my stock portfolio …

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Pimco was in on it, too.

After reading this special report from Reuters, I kind of feel like an idiot.  It’s another outrageous story of the incestuous relationship between the financial industry and the government, but it kind of looks like Gross was openly discussing it, and I really was not aware that this was happening.  Blatant conflict of interest, IMHO.

“Pimco’s winning bet unfolded like this:

* In December 2008, the Fed hired Pimco, along with three other big Wall Street firms, to implement enormous purchases of agency MBS to keep interest rates low and spur the U.S. economy.

* Over the next few years, Pimco repeatedly invested heavily in those same securities – far more than other big investors, even considering its size.

* Pimco’s mortgage plays in 2009 and 2012 – when Fed buying was heavy – handed the firm and investors in the Total Return Fund a gain of $10 billion, excluding net investment flows, according to Reuters estimates.

There is no evidence of illegality or impropriety in Pimco’s actions. Pimco says that it kept its employees who were helping the Fed at arm’s length from those investing for its funds, and that its bond-buying bet was conceived before the Fed’s program was begun. The Fed says it implemented and enforced strict controls over the trading done by the firms.

…..

For their services to the Fed in 2009, Pimco, Goldman and BlackRock were paid $11.2 million apiece, according to a 2011 U.S. Government Accountability Office report. Wellington was paid $26.6 million under an extended contract to March 2010. From then on, the New York Fed, having gained expertise in buying agency MBS, managed its own trading desk.

….

REPEAT PERFORMANCE

In November 2010, the Fed announced a second round of bond buying, known as QE2. This time, the central bank said it would buy $600 billion in longer-term Treasury securities.

Pimco didn’t do as well in its bets on the much-bigger Treasury bond market as it did on agency MBS.”

So, they made tons of money when they were both buying for the Fed and buying for their own fund, but not so hot when they no longer were doing business for the Fed also.  Nothing to see here.

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The Price of Freedom in the Era of Worldwide Terrorism

My comments and links are in italics.  I have paraphrased the talk and moved a few items around from the actual order he gave the information, but I have tried to make a fair representation.  Also, I apologize because I get all the different intelligence and defense agencies confused.  Oh, and for being a horrible writer.

Talk given by retired Erie County judge and retired Major General Mike Dunlavey to the Jefferson Educational Society on September 26,2013.  During the entire talk, he had behind him Ben Franklin’s quote “Those who sacrifice freedom for security deserve neither.”  (He was an early commander at Guantanamo Bay, Cuba camp as used for war on terror detention and interrogation.  Here is his statement regarding treatment of detainees.    Here is another viewpoint, specifically regarding torture of detainees.    And this.)

(It’s difficult to find a comprehensive resume for Dunlavey.)  He went into the Army , immediately into intelligence.  He mentioned interviewing POWs in Vietnam.  (There are references to several different posts he held within the intelligence community, including Deputy Director of NSA, that can be found online.  After retiring from the Army, he worked as an attorney in Erie, and then was elected judge, just recently retiring from that position.  He must be about 68, but he seems much younger than that.)

He began his talk by showing a clip of Julius Caesar, the “Friends, Romans, Countrymen, lend me your ears” speech.  By a very young Marlon Brando.  The important takeaways from that speech are the repetition of “honorable man” in reference to someone doing some very dishonorable stuff, and the final quote of a bystander, “I fear what comes after him.”

This talk was about the data that the NSA is gathering on all Americans.  MD noted that when PRISM was first introduced at the NSA, 3 top officials resigned in protest and went public with the information.  The media did not register this at all, at the time.  MD recommends the book “Hitlerland,” which describes capture of the media.  Snowden is no hero but the conversation needed to happen.  People have probably died as a result of the documents released by Snowden.

NSA chief is an honorable man.  But the program is basically the same thing that was going on with Watergate.

MD gave the Don’t Talk To Cops speech!  (I love it!!  A lot like this one.   Only shorter.  :))

He also recommends “A Nation of Sheep” by Vance Packard.  (But I think he meant by William Lederer.  Probably not the one by Andrew Napolitano.  But who knows.)

Discussion of the investigation of reporter James Rosen.  How the (not sure which) intelligence people wanted to get a FISA approval, so they put on the warrant that he was collaborating with terrorists and other lies.  The FISA court was skeptical and said they would not approve it unless Eric Holder signed it.  Which he did.  Later he testified to congress that he knew the allegations were lies.  In addition, his wife, parents, and children were all investigated also.  (WTF!!!)  But Holder is an honorable man.  Besides, he is USA’s top prosecutor.  Who prosecutes him?

Director of National Intelligence Clapper testified earlier this year that no information was being gathered on millions of Americans.  NSA director made the same statement last year.  We now know that this has been going on during both those times.  3 NSA employees had already resigned and gone public but were ignored.  Clapper later stated that he responded in the least untruthful way that he could.  Compared this to Clinton trying to redefine sex.  Defies common sense.  But Clapper is an honorable man.

As a result of the spying on Americans associated with the Watergate scandal, the FBI was prohibited from sharing information with the department of defense intelligence.  This was to prevent a Gestapo-like law enforcement – military – investigative kind of bureaucracy from forming, or continuing.  Then 9/11 happened, and the Patriot act undid all of that.  Now we see investigations of reporters, not just Rosen, but 50 AP reporters, etc.  Treasury secretary has admitted investigating private interest groups.

Comments regarding FISA court.  These are judges pulled out of other courtrooms, who serve short terms, appointed by SCOTUS Chief Justice Roberts.  They do this in addition to their normal duties.  They do not receive any special training regarding intelligence or anything else about this special job.  They frequently refuse to rule on warrants, instead asking for more information.  This is why it seems like they approve nearly all requests.  They don’t, but they also don’t necessarily directly deny them.

Dunlavey also noted that under Obamacare, all of our health records will now be kept by the IRS.  And the IRS director just this year took the 5th in congressional testimony.  He handed out a copy of the FISA court order requiring Verizon to release phone records, which came from the ACLU website(Ironically, the ACLU got this document from Glenn Greenwald at The Guardian, published June 6, which means it was very likely from Snowden).

MD described how the Ben Franklin quote, which has been widely disseminated in slightly different forms, really applied at the time of the revolution, because King George was saying, hey, those soldiers are there to protect you guys from the French and Indians, not to forcibly collect taxes, or break into your homes and search you and live in your house.

Also mentioned Animal Farm and 1984(MD needs to publish a reading list online someplace.)

This is the point where we should fear what comes next.

Power corrupts, but absolute power corrupts absolutely.  All the conference calls that the NAACP leadership had with each other were wiretapped by the FBI.  The warrant was signed by Bobby Kennedy.  He also had a guy at the Lincoln Memorial for MLK’s I Have A Dream speech ready to cut all the power to everything if the speech got subversive.

Dunlavey wrote over 700 letters recommending over 350 Guantanamo Bay prisoners be released.  ALL of those letters “disappeared.”  Just this year a reporter from Der Spiegel called him and had a copy of the letter he had written about a German national recommending his release.  The reporter faxed the letter to MD.  He had gotten it by making an FOIA (German equivalent) request to the German government, and they gave it to him.

Dunlavey recommends that everyone should make an FOIA request to the FBI to get a copy of their own folder.  (What a cool idea!!  I CANNOT WAIT to see what they have on my mom!!!  She is such a troublemaker!!)

About Guantanamo Bay.  Most of those prisoners were guns for hire, not committed idealists.  However, anyone put into a closed community like that must assimilate.  So anyone who was there for any length of time was a committed idealist (terrorist) by the time they were let out.  It happens in any US prison (inmate will become gang member) and another good example was the prison the British set up in Northern Ireland, which produced lots and lots of extra terrorists.

There were changes to the Patriot Act in 2009 (under Obama).  These changes are what has allowed this NSA data gathering to accelerate.  But Obama is an honorable man.

Is all this surveillance preventing terror attacks?  The most scary and difficult attack to defend against is the one from inside the US.  So that might be a good reason to do this.  But what about the Boston bombers?  Not only did that NOT occur only within the US (older brother went to a terrorist training camp in Chechnya) but we got a DIRECT warning from the Russians.  Plus we now know that these guys visited MANY websites that maybe should have set off alarm bells.

Also the terrorist cell in Buffalo.  Was found out about because of info from a foreigner.

So what, exactly, is the value of all this information?

And what, exactly, are the risks and possible costs?  Even (or especially) if it is all being conducted by “honorable men”?

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Help with Obamacare

Good article on what we all need to know.

A few highlights:

Initial enrollment. From October 1 though the end of March 2014, the 24 or so million Americans eligible for exchange coverage can sign up online at HealthCare.gov or with the help of specially trained navigators. That includes people already in the individual market and those who are newcomers.  Beginning in 2015, open enrollment will start October 1 and end December 31.

People with employer-provided insurance may still need to visit the exchange to see if they’re eligible for exchange coverage (they may be, if their share of the premium for employer coverage is more than 9.5 percent of their income). Employers with more than $500,000 in annual sales that offer group coverage must give all workers a document that tells them about the existence of the exchanges, and the premium that a worker would pay for the lowest-priced plan the employer offers for single coverage. This form lets workers know if their employer coverage is affordable according to the government. If it isn’t, they can shop in the exchange and receive a subsidy. Their families, however, cannot receive a subsidy.

Provider choice. Choice, choice, choice! We say we want it, but in the new insurance order we may not get it. As a trade-off for lower premiums, many companies selling in the exchanges are limiting their networks only to those who agree to steep discounts for their services. Those discounts allow companies to offer cheaper premiums. As a result, consumers may find that particular doctors, specialists, or even certain services are not available in the network for a policy they choose. It’s possible insurers selling similar policies outside the exchanges have a better selection. And that brings up yet another thing to think about. Consumers must look to see if their plan has out-of-network coverage. Some plans may not, and that limits consumers’ choices if they want to go to a super duper cardiologist who’s not in the plan. Most plans will have a list of drugs on a formulary that they will pay for. Consumers must make sure their list of drugs matches that of the plan. But beware, next year the plan may have different drugs on their formulary.

And most importantly:
Finding and reading the disclosures: The Affordable Care Act called for a disclosure document to help shoppers compare plans, and the form that was created is pretty good as these documents go. Shoppers can find out about the policy elements, deductibles (and what they apply to), coinsurance and copays for different services (especially common ones like diagnostic tests and outpatient surgery), amounts for different services, and fees. It also spells out some services that are not covered and provides sample charges for common conditions. But consumers must take the initiative to find the disclosures, says Lynn Quincy, senior health policy analyst at Consumers Union. “It’s not the health plans,’ employers,’ or exchanges’ responsibility to insure the consumer has seen these. If a consumer requests one, they have to make it available.”

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Deming

I love Deming.  And I guess I’m not the only one.  From Ritholtz. 

The comments there are excellent also. One was kind of funny, how Deming made that person a liberal.  It had the opposite effect on me.  Yes, it’s all about process, but process is completely the responsibility of ownership/management.  Another commenter mentioned Juran.  Brings it all back.  🙂

It amazes me that this is new to anyone.  So basic.  I learned it in Detroit at a GM factory in the mid ’80s.  Yes, it went almost completely unused there, but at least I was able to really learn it and understand it.  And the corporate culture there really clearly showed the results of what happens when you do the opposite.  They also put me through a TM class, on site (awesome!!).

“Long-term commitment to new learning and new philosophy is required of any management that seeks transformation. The timid and the fainthearted, and the people that expect quick results, are doomed to disappointment.” -W. Edwards Deming

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Spy Activities

First saw this at ZeroHedge.

Then cross posted by Ritholtz

Then on Lew Rockwell.

So, yeah, it’s kind of important.  It’s a listing of all the stuff that the spy agencies are doing to us.  And it’s horrifying, and infuriating, and if you are feeling particularly sensitive, it might inspire the kind of fetal-position crying jag that all of us Steelers fans are learning to get used to anyway.

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UFOs

Well, this looks like fun.  And why not?  Why wouldn’t there be aliens?  I wish I had enough internet to watch it.

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