Rethinking Investing: Common-Sense Rules for Uncommon Times

Tim,

First of all, I cannot agree with you more on this post… I’m glad to see you’re not going down the road 99% of North Americans (yes I’m Canadian) are going down with: that is carrying medium and high risk funds in their portfolio on top of paying exorbitant managing fees.

If you haven’t yet read it, Daniel R Solin’s book called “the smartest investment book you” ever read is the only book one needs to read about investing. Actually, I take that back, the only thing one needs to see is the diagram he put on page 12 which basically outlines that over the last 30 years, we’ve noticed that low risk funds give you virtually the same return as a high risk fund with out the risk of loosing money!

Keep up the great work Tim and I’ll keep reading.

My epiphany is that contrary to popular belief, Tim is highly risk-averse and micro-tests everything before trying it out. Throughout the 4HWW there were continual hints that this was the case; an adwords campaign to decide on the 4HWW’s title, praising Ed Byrd for releasing a pamphlet before releasing his product etc. It was easy to get swept along thinking that creating a successful business could be done by instinct and fearlessness. Success in anything takes, at the very least, time and hard work made obvious by superstar investor’s statement that ROI is 92% dependent on asset allocation. The investing formula seems pretty straightforward; diversify as much as possible and play the market cautiously. Aiming for a long term gain that comes eventually will leave you in a much stronger position than looking for a short term gain that could never come. Since we could argue all day about where and how to diversify; invest in something that you find relatively interesting, you will likely already be well informed about its performance.

@Tom VanAntwerp I couldn’t agree more, I have read plenty about investing but nobody has made it especially clear about how to start playing the game or investing a few hundred. I’d love to know more if anyone could make any suggestions.

@Morgan Coudray Thanks for suggesting Solin’s book, I’ll have to check it out.

Tim,

I remember you posting previously about the horse races and that during your experience you got it down to winning every race? (correct me if I’m wrong, my memory isn’t exactly the best)

Anyways, I would be very interested in learning about your experiences with betting, I’d love to see the way that you approached it, no doubt there’s something to be learnt there.

Cheers,

I just have to say Tim you are one dam inspiring guy, I love the fact that you dont just blindly follow the advice of anyone but you get to the people that count and implement solid action plans. I would say that this would be absolutley crucial in the current market and if you have no idea in investing, get one!

Rich

Tim,

Another great article. I think the Havard race test is a joke though. I took it once and tried to go as fast as possible. Here’s what I scored “Your data suggest a moderate automatic preference for African American compared to European American.” I’m white. So this would mean I favor African Amercians and am racist to European Americans like myself subconsciously. I believe this test is setup to show show a preference to white people. First of all its just putting you in a pattern of matching images and words to a certain side. Then it further stacks the deck by putting the good on the same side as the European American in the second round. Next it stacks the deck even further by putting Good and European together first, so you automatically associate them together when the swap them for the next round. I still scored opposite of what they were obviously setting me up for because I was going fast and they would put so many consecutive left or right keys in a row then throw the curve and I would hit the same key I had been hitting which just probably happened to pair a good word with African Americans or a bad word with European Americans.

Back to the main topic. Yeah, I’ve taken a big hit this year. I’ll watch the video at home when I have more time. I do like the bold parts. I’ll have to think about it and talk with my planner some more once I read the rest of he series.

Joe

If you’d like to learn more about stock options, I’ve got a video blog at http://www.investingwithoptions.com/. It’s pretty informative and has great content. Let me know what you think!

I’ve recently started to max out my 401K and am now putting about as much money as I can into a well diversified portfolio with a money manager, as I realize we’ll probably never see a better time to buy in our lives. However, I’d also like to do some investing on my own with a much more aggressive approach, but not an amount that will really affect me if I lose it, so ‘play money’ if you will.

Well, I’ve narrowed it down to they TYPES of companies I want to invest in, but I don’t know where to go to research SPECIFIC companies. I’ve basically decided that I want to find some pretty speculative stocks in the Energy Technology market as well as the Biomedical markets(stem cell treatments and biologically based medicines).

So my question is where can I go to research companies in these sectors? Are there industry magazines or websites that highlights up and coming companies? This might be a stupid question, but I’m literally just starting to invest and have no clue where to look.

Great article Tim, helps to show all different views of the market that aren’t as publicized. Also i took that race test and scored a no preference my first time…

Note that intrinsic value drives the capital allocation decision at least as much as risk tolerance.

For over a century, the S&P 500 (and its antecedents) have reverted to a mean of about 16.5 times earnings. It appears possible to somewhat predict your 20-year investment return from the current index P/E ratio. See my ancient post on the subject:

http://www.spinoffprofiles.com/proof

For most people it’s easy to understand a basic concept of investing. But to get an education of fundamentals where is the best source to turn to? text books?

Tim,

No I wouldn’t…and I’m not…wanna bet?

How much were we betting?….My first time through the IAT

Your data suggest little to no automatic preference between African American and European American..

One must be careful about making blanket assumptions (or bets) on such things as race regardless of the statistics behind them. One must be especially careful when using a concept as volatile as racism to drive home a point about investment risk tolerance.

This all being said, I am a huge fan!

Tim, where did you get your most valuable information about options?

What is your opinion of Taleb’s trading philosophy?

I have a friend who tracked his investments for several years and checked to see which “source” of advise yielded the best returns.

For instance, out of the financial newsletters published by Agora, the fancy expensive ones did not do as well as the “staid” Outstanding Investments, which actually did best.

As for me, I lost tons of money in startup/investments of various kinds years ago. School of hard knocks. Now that even banks seem shaky it can be difficult to know where to place our funds. One huge bet we all need to think about is where we think the dollar is going. Assets can grow in dollars and shrink in real value.

To get an idea of how any investment class or stock is faring in real value, it may interest you to check out http://www.PricedInGold.com. It’s an idea that’s a little before it’s time.

As for me, I’m interested in keeping the majority of my “safe” money tied to currencies that are tied to metals. I’m not betting for the USD at this point, particularly if it appears that Obama’s policies will become actualized. History shows that those policies will hurt the dollar.

As for my “risk” money, I’m interested in investing in life settlements through a company that specializes in this. It is a zero coupon bond with funds held in eschrow by Wells Fargo, payment guaranteed at the end of term (which is usually around 36 months), whether the policy holder dies or not. (They can make this guarantee because they add 15 months onto the actuarial table estimate of death to determine term, and then buy reinsurance to pay out at end of term if the policy holder really beats the odds.)

Returns are11-15%, depending on the program (several offered each year), with huge upside potential. If the policy holder does die early (or “on time” actuarially, but before the end of the program), you get the entire payout you would have gotten at the end of the term. So return can be 30% or more, depending on time of death.

I also know a wealth manager who has a life settlement fund offering which has been returning 15% a year for years.

The other thing I will do with my “risk” money, is invest in websites. I’m able to manage them sufficiently, and I know how to buy them for less than 1x annual profits.

Tim,

Nice discussion of risk. Asset allocation is extremely important, but don’t forget about costs. That’s what Buffet was concerned about when he suggested that you invest in low cost index funds.

Paying your broker 1% and mutual fund manager 1.5-2% (no-load doesn’t mean free) may seem reasonable, but as the years pass those fees add up. They are in effect reverse compounding because you would have kept the money you paid in fees invested – working for you.

Be especially wary of any broker promising market-beating returns.

Check out this short article for an example of how your broker does better then you: http://www.efficientfrontier.com/ef/996/broker.htm

Also, John Bogle’s books are a must read to learn the benefits of index funds and the risks of paying your broker too much.

what kind of t.v. deal are you negotiating? what would be your ideal t.v. show? upon discovering you, i thought about exactly that.

Tim–

I think of you as someone who thinks outside the box, but in this article you’re firmly constrained within the box. For the most part, you’ve gotten bad advice and the wrong lessons. You’ve talked to people who have made their money in the postwar boom. That is, WWII to about 2000. Their responses reflect that market, but that is not the market we are in now.

We are now in a depression. We are now seeing the very real risk of hyperinflation. We are definitely experiencing very large inflation– about %20 a year (this was the rate before the recent “crisis”).

Thus putting your money in the US Dollar *is* an investment. Its not keeping money on the sidelines, its putting your wealth into an asset– a form of debt– that is currently being devalued.

My personal investment strategy is %30 Warren Buffett, %60 Ludwig von Mises et. al, and %10 myself. I used to think of investing much the way you are here– but that was the 1990s. That was boom times.

Ludwig von Mises is not an investor, he was an economist. You can learn anything you want to about the school of economics he founded at http://www.mises.org

This school accurately predicted the housing crisis, the CDS crisis, the failure of everything we’re seeing fail right now.

Investing without a solid foundation of economics is just as bad as investing in an asset class you don’t understand the fundamentals of– because the dollar is an asset class and buying any stock denominated in dollars involves dollar risk.

Most of the time dollar risk is negligible, but that is not the case now.

For a good introduction to money, I recommend Murray Rothbards book at http://www.mises.org/money.asp Its a short book, a quick read, and its free.

You’re a worldly guy, get your assets out of the dollar– some other currencies aren’t being debased, but buy precious metals as an inflation hedge.

Ignore anyone who tells you to “allocate” your assets. What did Buffett do? Did he buy companies based on which “category” they were and then shift that around every few years based on what was in fashion? Of course not. He bought good individual companies.

Maybe its because my strategy is a split of Buffett and Mises that I’m recommending them to you, but I think you– and your readers– are going to be painfully surprised in the next 5 years if they don’t recognize the nature of the dollar— and I think you would be well served by better understanding Buffett, and listening to people who make their money managing *other* people’s money less.

I was making %80 a year until 2006, when I decided the housing bubble was going to pop and then start the dollar bubble, and that I needed to get money out of the US dollar and denominated assets. At that time I was investing in canadian royalty trusts– returning around %10-%15 a year in dividends, which covered my principle, and then taking aggressive positions in using options spreads– where the odds were in my favor and the pricing was right. If all the options investments had been a total loss, I would have only been down about %10-%15. As it turned out, about %50 of the options investments paid off- returning %300-%500 each, and then the ones that were losses returned %0-%50. That was very profitable, and I was betting on clear and obvious trends, hedging by using a spread, and my downside was covered with the more conservative investments.

But all of my money was in the sector that was performing at the time- commodities. No point in buying REITS in a real estate boom because the real estate bubble was obviously going to bust.

People act as if you can’t predict the future. And you can’t precisely, but you can see risks in an economy and the direction the market is going. People who were buying real estate in 2003-2006 were gambling because they knew what was happening *then* but no clue about the future.

Investment wisdom can be gotten from Buffett, and he uses a different method than me, but his perspective is sound.

But economic wisdom is the thing that would really set you apart from the mainstream as an investor. Virtually nobody really has it, and even Warren Buffett hasn’t quite got it. (notice his silver purchase– it was the right move but rather than holding it like he should have he sold out around $5/ounce. He lacked the economic perspective to know that silver was (and still is) a long term investment.

Its hard to get a whole worldview into a comment box– but I think that you will find that good economics is not dry, it is very rewarding, and it is very profitable.

Check out the Mises Institute website at mises dot org, and read whatever catches your fancy– want to know the reasons behind the great depression? Read “Americas Great Depression” — they have many books for free on the website, and the others are well worth the money.

So, why did I say we are in a depression right now at the outset of this comment? Because economic growth is under %5 a year…. yet inflation is %20. (Even using government figures its over %12). This means that the seemingly positive return in the GDP is more than offset by the devaluation of the US dollar— which the GDP is denominated in.

Thus the economy is contracting, and actually has been for several years. (High tech is still expanding, but the manfuacturing base of the country is still collapsing, and more than making up for it.)

Would your investment thesis change if you recognized we were in a depression rather than a short recession?

Hey Tim,

I think this is consistent with the NR philosophy of Cash Flow First and big pay day second. I’ll make sure that I pass this strategy over to the New Jet Set. Look forward to the next post in the series

Best,

Rob

The first book any investor should read is Swensen’s “Unconventional Success”. Swensen is all about allocation rather than stock-picking, and the book debunks the hyped alternatives to his core portfolio – methodically dissecting the returns and the fees, showing that the extra returns to those alternatives (if any) never make up for the additional risk you incur:

http://www.islandersoftware.com/weblog/2008/08/01/unconventional-success-swensen/

Also there is a site dedicated to value investors you might be interested in:

http://libertyvalley.com/

Tim – I am excited to read this series of posts by you. I previously was a corporate guy working in the consulting & IT sector and gave that up to trade commodities, stocks & options full-time. I’m now 27 & supporting myself in my own way by trading. Its an odd combination to have my own version of the 4 hr. work week & be in the finance industry.

I hate to say it, but I think you really limited yourself and what you’re capable of in this post. By the words used in it, it looks like you interviewed a lot of long-only mutual fund managers that do well in a bull market but get smoked when the market changes. ‘Diversification’ is all well & fine but I think you can do a lot better given your ability to understand more complex ideas that you have demonstrated in other posts. Watch how the correlation in uncorrelated items goes to 1 when things get ugly out there (which happened the past month or so). A sinking tide sinks all ships, whether they are red, blue or green. The majority of a stock or mutual fund’s returns are related to the overall index anyways.

I think you can do MUCH better using some more advanced techniques than long only stocks & sitting out the times that are too volatile.

Long-only funds rely on ‘hope’ that something increases in value. Warren Buffet is amazing but 99% of the people that try & imitate him cannot as they don’t have the discipline to follow his method. Also, a company is a GREAT value on paper right before it goes bankrupt & is de-listed.

I do a lot of long-short active strategies that do not require me to be in the market all the time, but rather I am only in the market when I have an edge. The edge is roughly defined as: (% Wins x Avg. Win Size(as a ratio of win/loss)) – (% Losses x Avg. Loss Size). If this number is positive over a valid set of trades (50 or so), you will make money assuming you risk at most 1-2% of your capital on a trade. Last year my win % was about 35% and I had about an 85% return on my account. I control my ‘risk’ based on how much I buy or sell (how large of a position I take). The role of the investor or speculator is to exploit this edge as much as possible.

I think that it would give you a better perspective if you tried to chat with anyone mentioned in Jack Schwager’s ‘Market Wizards’ or ‘New Market Wizards’. Also, any of the old pit traders that did NOT manage money or collect fees from anyone else will have good advice. Besides, they have great stories about fist fights and other stuff in the pits too.

I look forward to the other posts in this series.

Regards,

Eric

Tim and all-

Prior to reading the 4hww, I was obsessed with learning about investing. I really enjoy the process, but I’ve found that I enjoy the returns more. I spend less and less time on investments and more time on lifestyle design. why? Well the book was REALLY convincing ( 🙂 ), I’m not Warren Buffet, and (not to be rude) neither are you. I’ve been the genius and the idiot in investments. I’ve made and lost large amounts of money. I’ve read a library of books and taken action based on my studies. In short, i’ve done it. I love it some, but I’m not wired like a Warren Buffet. I can boil it all down to two things:

1. Price is what you pay…Value is what you get.

2. The rest is noise.

99% of all so called investors cannot internalize and live these simple concepts. Most people, frankly, just aren’t wired to be good investors. If you are not single minded (like my investing hero, Mr. Buffet), then you’re better off finding someone who is and investing through them. As evidenced by 4hww, there are ALOT better things to do with your time than trying to chase yield and/or outperform markets. In fact, once you’re convinced about their quality and have demonstrated to yourself that you completely agree with their investing premise, put your money in and then get out of the way. Stay out of the way until they retire or change their premise.

Yes, markets change. The value of the dollar changes. Empires rise and fall. Noone can predict what exactly will happen in markets, but everyone is sure at one time or another that they did based on some “soft” science. Investment, however, never changes as long as markets exist…There will always be wisdom in buying a dollar for fifty cents or less. The trick is recognizing the deal, being correct in the analysis, adjusting for risk, and following through on your convictions. There are simply people that were born for this work. They’re on their “mini-vacation” at all times because they LOVE it. Are you that person? Do you love “it” or the return on investment?

If you truly love it and have the talent, raise money by attracting passive investors and go for it! If not, spend WAY less time on the subject matter and “outsource” with the best in the most cost effective manner. (For example: use your 4hww business to open a roth 401k for you through someone like Scottrade buy into a well-run fund and sleep well at night.)

Who are some of these people? I personally really admire the work of Bruce Berkowitz, but there are a few others that are also outstanding.

A few other tidbits:

Diversification should be called “deworsification” as its simply an adjustment to your portfolio for ignorance. Diversification as its typically practiced truly only means that you’ll underperform the market as your investments will utlimately reflect the markets less fees.

If you think you can’t lose money in treasuries, then you need to study more.

Learn to “sit on your ass” for better returns in the long run. Let’s say you bought 100 shares of Berkshire Hathaway when it was a newer security because you understood that Warren Buffet was a genius in finance and that he was turning it into a holding company for great businesses and then did no more than read his annual reports to ensure that he didn’t lose his mind…How rich would you be now? and how much smarter?

There is nothing in this world so magical as “compound interest”. (read Poor Charlie’s Almanack for alot more on these last two.)

.Finally, average returns mean nothing…COMPOUND RETURNS reflect the money you have at the end of the day to spend. Don’t listen to your mutual fund sales person when they tell you how great it is that this or that fund “averaged” anything. Make them SHOW ME THE MONEY!

Happy returns!

PPC4

As someone who has traded options full time I can tell you that high returns sound great until you consider the other than financial investment.

Your attention can be consumed by the markets and your life dominated by the rush of fast profits and the pain of lingering losses.

Like some people commented above – get out of the conventional investing box. Why do we really want? Reliable, passive and stress-free cash flow. If you make that the end in mind you´ll find it takes a lot less capital than you might think as a specialist in one type of investing. Plus, equally as important your mind and time will be free to live life!

Finally, I also agree that the next 10 years in the investing world will be very different to the last 20 years. Remember what the 1970´s was like. Hmmm!

I am not a professional investor. I started trading stocks only a few months ago. I did however attend the Berkshire Hathaway meeting last May and remember Charlie Munger commenting on diversifying your portfolio.

He said something like, “Diversifying your portfolio is something we’ve all been taught to think is the right thing to do when in fact most people have no clue what they’re diversified into. How can you put your money into something you don’t fully understand? It may seem more logical to invest on just a few stocks or even a single stock that you really understand know inside and out and hold on to it.”

In other words, like the old adage, “don’t keep all your eggs in one basket” could actually be bad advice, at least according to Munger.

Well I took his advice and recently sold off my entire IRA portfolio and purchased BRK:B. Do I know all of Berkshire’s portfolio inside and out? Not really. But I do know one thing; who better to manage my money than the greatest investor in modern times? Now its the only stock I look at every morning (kinda refreshing actually). So far, I’ve done ok but I get better sleep at night.

I would always say educate yourself. It is your money and even if you have someone helping you, you are the ultimate decision-maker. Unfortunately, the weakness in this advice is that there is so much junk out there written about investment, whether it be equities, real estate, or small business.

If I could make a single suggestion, I would recommend this website:

http://www.minyanville.com/

I would also remind you that when most people are offering advice or knowledge, they might be trying to sell you something and it is best to be skeptical.

@Tim:

I have actually wondered how you allocated your money, thanks for sharing. I was completely unsurprised to see what it was now, nor by the projected allocation. How about something on fixed income assets/bonds. That’s something I wish I knew more about. How did you choose yours?

Hey Tim,

i agree with you when you say that you are risk averse. I can see this from the way you test your muse/s. I guess that’s the way how investments should be looked at.. small risks vs. big rewards. Keep it up man!

You’re absolutely right about not knowing your risk tolerance. I’ve always answered that I was highly risk-tolerant, because a) I “know” that stocks go up and down but mostly up over long long periods of time, and b) I was talking about retirement savings, which I won’t “need” for several decades. But I had a real life scenario that brought it home for me recently. I work on Wall Street – still. I watched a certain Wall Street’s stock fall precipitously, from a 52 week high in the $60s, to around $7. I knew (as did anyone who read a major newspaper) that a deal was set to go through the following week that should keep the firm safe. So my husband and I discussed buying $1000 worth of stock. The upside: it was fairly probable that the stock would rebound the following week. The downside: the firm could have failed, and I’d be a lot more occupied with finding a new job than with the loss of 1k. So what happened? I chickened out. The stock is now hovering around $20 (I could have tripled my money in a couple of weeks). And I still have a job. Now, considering your larger theme… is that a good thing?

I should add to my above comment a quote from late billionaire Mark McCormack (who made most of his fortune in sports management): (paraphrase): “Close victories in sports are thrilling. Close victories in business are anything but!” He was asked repeatedly why he managed pro athletes and not rock stars, since they were temperamentally alike. He said, “Rock and roll management has too much competition.”

Excellent points by all but I would like to hear back from Tim on a few of the questions posed him. I have co-founded [a] website… that helps sort through the huge pile of information out there. Hopefully it will provide a valuable education to those seeking a “when to act” issue.

Tim –

I understand your asset allocation and don’t think it is ridiculous at all. In fact, it probably is consistent with a 4HWW lifestyle and philosophy – fire & forget. In nominal terms, you probably won’t lose money (unless your bond allocation is predominantly high yield and preferred – then that’s another story. Fixed income won’t however completely get you around the risks of inflation and currency devaluations, although TIPS might help with that, but no guarantee. In any case, the current world seems deflationary so that may be less of an immediate issue. Kudos on your one quote where cash was also mentioned as an asset class – remember, that can be cash in a multitude of currencies when needed, not just the dollar. Interestingly, that approach is advocated in some of the voluntary simplicity texts – ‘Your money or your life’ comes to mind first. (http://www.yourmoneyoryourlife.org/)

I’m enjoying mulling your methods which I do think make a lot of sense, but would prefer to approach them from (relative) affluence. You don’t need to be an accountant to recognize that a $1,000,000 USD portfolio of municipal bonds yielding about 5% (possible with closed end funds at discounts, +/- leverage) gives you $50K of tax free income withougt depleting your capital. Well, if you have your home/cars/kids college educations paid off, you’re pretty much free and clear to live without fear, if not ostentatiously. If you and your spouse can earn $50K each through your muse, $150K gives you probably a fantastic life/work balance point. (I’ll let you know when I get there) When you get to 65-70, annuitize it and enjoy yourself until you die as well. Sell the home, become a perpetual traveler, and minimize maintenence costs and inheritance taxes to boot.

Now, if I can just get to that number above…

Huge fan and long time reader. But I’m just not sure exactly what you are getting at?

So once you have micro tested and determined your risk tolerance you can make plan according to it?

What is risk tolerance? My understanding is really the ability to handle situations taking bad or unknown turn.

Don’t you think by fear setting you can define how much you are prepared to lose, do a cost benifit involving predefined goals. i.e

Are you trying to come up with a long term secure plan?

Are just trying to find the fastest way to make alot of money?

Are you using the 80/20 to find the easiest way to make money?

and then make a choice from there?

From there determine key factor use by those who have been there. Distill this into a plan, micro test certain strageies either in isolation or combonation.

Things such as

historical data

Emotion involment (if you know that people are emotionally involved in the market play off it)

Quailty

Hype

Innovation

Countless other things

Defining could be this list could as simple as 80 20 the best performing stocks. Find the most comman threads through well performing stocks. Test these. Hell, get some people in india to do that for you.

THIS IS really just your advice applied in a different area.

Personally I’m more interested in your experience with actual testing parts. Like how to know when you have expanded enough to contract without missing key concepts?

How to fear set missing key concepts?

How to stream new knowledge into a self imposed information exile?

Basically how to strike a balance between being dogmatic and being on information overload (i guess from fear of missing out on something important)?

Aside: Does ? go after or before brackets? Can never remember.

Braydon

Tim,

Thanks for quoting my comment in your blog post… I’m glad to be helpful.

One other piece of advice I’d give to somebody as conservative as you is this: THE STOCK MARKET IS RIGGED.

Its human nature… once there is a financial incentive to cheat, people will cheat. Insiders know both how to cheat, and not get caught. Big fortunes are made because of barely legal bribes that yield barely legal insider information. The individual investor is usually a sucker, ripe for the picking.

Where does this leave you? Out of the game? No… you simply need to understand how to make money on a rigged game. You need to use “investment judo”, to use the insider’s knowledge against them. You need to think hard about how somebody could rig the system, then invest in such a way to minimize the negative effects on you. I have some tips here [URL].

Also, always keep this in mind: YOUR STOCK BROKER IS A SALESMAN.

Repeat both of those statements ten times whenever you get the urge to invest. If you still feel good about your purchase, then it was probably a good deal.

Other than that, asset allocation is key… but even then it can be problematic. The whole point of allocation is to have groups of investments that have ups-and-downs at different times. Basic example, gold is usually up when stocks are down, and vice versa. So people can hedge their bets: when one investment is up, sell it, and “rebalance” your portfolio by purchasing what’s down. Buy low, sell high, basic stuff.

However… if EVERYBODY uses the same formula for asset allocation, then suddenly all the assets in the stock market are TIGHTLY coupled. When one goes down, they ALL go down. The current market collapse has something to do with this fact: everybody used the same formulas, but the geniuses who developed those formula didn’t do the math properly. They accounted for market risk, but ignored capital risk… which is the basic fact that credit gets more expensive during a recession.

So be weary… take a simple formula that everybody is using, figure out how it could be rigged, then make sure you can dodge the con.

+1 Drsteph

At some point you have to decide how much $ you want. Once you have all your needs covered, why risk your hard-earned $ just to earn more – esp. if your portfolio keeps you awake at night? As the above poster suggests, a million USD can give you a nice income.

If I had a business which generated enough income to live, the ability and drive to continue to work into my old age, and a million $ I think my asset allocation would focus on preservation of capital, too. Although I don’t have the data to back this up, I think if you examine the portfolios of millionaires you will find that they keep more of their wealth in “conservative” investments like real estate and bonds than in stocks.

I’m looking forward to the next post — esp. “redefining ‘investment’, and questioning the wisdom and pillars of retirement planning altogether.” Surely if retirement is obsolete, then retirement planning — which suggests you must balance your portfolio between equities and fixed income — is as well?

Looking forward to the second part. I love the test everything approach. It’s been a long time since I read your book. I’m working on my second business with a muse business model. In another year or two I might actually have some money to start investing.

On a second note, I’ve been working on a small marketing campaign for Barack Obama. Tim I was hoping you could post this video and ask people to spread it.

Check out this video –> http://www

success

“Vote For Hope”

“With the 2008 presidential election, Americans face a pivotal choice between not just two candidates, but two paradigms. We need someone who understands the complexity of our time. Someone who believes in investing in renewable energy, in education, in women’s rights, in civil rights, in healthcare for Americans. Someone who believes in dealing with global issues with diplomacy so we can restore our respect in the world. Barack Obama represents the change we need and can lead us into a brighter future.”

Oh yeah, avoid financial advisors like the plague. Learn how to do it yourself, set up a low-cost portfolio, and get on with your life.

One more book recommendation; just got done reading “The Snowball” – the authorized bio; offers good insights into Buiffett’s success; although investors following his methodology should be aware that a lot of his value add is through ownership control of companies, not just through superior stock picking:

http://www.islandersoftware.com/weblog/2008/10/25/the-snowball-warren-buffett/

Dave

Good article! Money corrects the world!!!

Here’s my second two cents: There are a lot of comments on this page, but the most useful were from:

Sarah

Jay

Tanveer

Bex

Steve metz

I urge everyone to search this page and read and re-read their comments.

Jeff,

How to Win Friends and Influence People…. forget investing why not make friends first : )

Jose

Also,

Let’s please go ahead and call “investing” what it is, so that whoever reads this, if anyone reads this, you can’t castrate me by saying what I am doing is not investing.

Investing is betting. Pure and simple, betting is what it is. Do you think Warren Buffet dropped 10 billion bucks into those companies because he likes them a lot and hopes they do well? Hell no! He did what he did because he thinks those guys are going to make him money. He is betting on it in fact.

If you really want to play in the markets, diversification is not the answer. Especially in times like these.

Defining risk tolerance is not the answer.

Neither is asking Warren Buffet.

The goal is to buy something today that will be worth considerably more tomorrow or at some future time. That is asking a lot considering I don’t know any humans that can predict the future with a strong degree of accuracy.

There is a huge, huge variety of options you have on your plate when you decide to play in the market. You can buy stocks, bonds, mutual funds, ETFs, REIFs, etc. You can buy long on the margin. You can buy short on the margin. You can seek more leverage by buying long calls or long puts. You can even create your own calls and puts and sell them (when you guess right, its like printing your own money, but extremely risky because an option is a contract that if you sell, you are responsible to make good on it). There are these new cool things called FRO – fixed return options–that give you a fixed return when you call it right and go to zero when you guess wrong (upside is limited–I wouldn’t buy them, but I am considering writing them and selling them).

With all these things to consider, is today going to be an up day? Hard to tell, but until a strong GDP number comes back, it is a safe bet that tomorrow will be down and if it’s not, a safer bet still that the next day will be. The same is true after a strong GDP number hits. When a strong GDP number comes in, markets have more up days than down days as a general rule. If you guess wrong the first day you enter the market, you have a pretty good chance that it will rebound soon–within 5-7 trading days. If you make trades based on this mentality, you would be wise to keep a lot of your money out of the market so you can lower your average cost on those days that you don’t quite guess write.

I’ve been experimenting with some things for the past 16 months or so. At first, I bought calls on China Mobile (CHL) and China Life (LFC). Those were my first two moves in the market and I was fortunate to hit it right and nearly doubled my investment and sold strait away. I did a few more plays with these companies making a few dollars here and there and then I started buying calls on Google (GOOG). I have made about 250-300 trades since I have started. My trade fees alone were over 100% of the amount that I originally started with.

Google has made me so much money in call options it really is unbelievable. After about a year of doing this, I started to loose. As a matter of fact, I lost all the money I made in the market and then some. Then I stepped back, took a deep breath and I started buying puts. I didn’t like the idea at all. I don’t like making bank when others are suffering. I was in a very torn situation emotionally about it, but I was making money and not harming or causing the downward trend. I kept buying puts, and I still am buying puts and I regained all my original play money, plus about 120% annualized. I felt good about that so I took all of my original money off the table plus 20%. I have one put contract on Google right now actually. (Futures are up, I might loose some on this Monday)

I am 22 years old and I graduate from college with a degree in Economics and a separate degree in Marketing in December. A lot of really smart people think I am unwise. A lot of them don’t think I should be “investing” this way. Don’t get me wrong, I’ll have some more losers probably, but my strategy provides me with a lot of flexibility, regardless of what the market is doing. To me, that flexibility is my biggest strength. If I screw up today, I can learn from it and readjust and play again. If they screw up with their extremely long term plans and goals and asset allocations and 10% here 20% there, they cannot adjust. They have little flexibility. I need them though. I need them to move the market the way I think it will move. I need them to panic and sell or get over confident and buy.

I’m not here to qualify myself, but I do see a problem with “Investing”.

With “investing”, the risks are defined. You know the maximum amount you can loose. Yet so many people play with money that they can’t loose. They justify this because it is “investing” and not “gambling”. Folks, if you invest, be prepared to loose it all, because that can happen. If you want a situation where the most diversified portfolio is screwed think about what the Russian government did to their markets. They closed them. No buys, no sells, no market, no money. I’m not saying that the U.S. will ever do that, but if it happened, would you be ok? Could you still buy food and pay your mortgage? Yes, I know, that is the worst case scenario, but a probability exists that the market will close completely and you will loose all of your money you have “invested.”

My advice to people is only play with money you can loose and still survive with a decent retirement because there are a lot of big boys, and girls, that survive off of you in the market. Don’t throw yourself in the sacrificial furnace because of what some financial adviser tells you.

Tim,

I just viewed that Matt Lauer “TODAY” show interview, and I thought it was a bogus interview, and VERY disrespectful toward you.

Donny Deutch, who was handed a successful NYC Advertising Agency by his father, and who never had to work a day in his life, totally pounced on you, telling you that you don’t know what you’re talking about, and that everyone who is “Successful” works 60-90 hours per week.

I was especially incensed when Donny put his hand on your shoulder and said…”You look like such a nice young man”……with little experience, and you’re wrong.

I wish you had said…”Donny, do you think your minions who slave away for you at your offices would agree with you?…I think not.”

I have read your book twice, and I think you’re telling us to get MORE out of our lives than just working for a Paycheck…and “WORKING” on what WE want to work on, WHEN WE want to work on it.

Obviously Donny Deutch hasn’t read your book. You NEVER said anything about NOT working…you said to be Ultra-Productive and work 4 hours to make our pay to live on, and then WORK on whatever it is that we REALLY want to work on.

That is the BEST Message I have ever heard from ANYONE in my entire life.

That interview probably bothered me more than it did you. I was outraged, and I think I will email Donny Duetch to tell him what an arrogant and uniformed ass he was.

Keep up the great work!

Joe

Check out the blog World Beta and Faber’s upcoming book “The Ivy Portfolio”

http://worldbeta.blogspot.com/

http://www.amazon.com/gp/product/0470284897?ie=UTF8&tag=worbet-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0470284897

VERY DIFFERENT STRATEGY. i differ from the conventional wisdom here. no stocks, bonds or mutual funds — their performance is outside my control. i’m 100% in boston/cambridge multifamilies (3-4 unit buildings). i have been buying property since 2003. i live cheaply but well, off my cashflow and am young and semi-retired. i like to travel and in 2008 alone i went to London, Paris, New York, Montreal and Chicago. i’ll be leaving again this week to get away for the winter: christmas in London, new year in Paris, and sunny Bangalore in Jan 2009. yes, i’ve made mine an e-business (e-leases, online rent collection, emergency maintenance person only, etc.)

BACK TO BASICS. i’m originally a techie/geek (systems architect & analyst) and don’t know much about business, but i do know people need a home before they need Coca Cola or a cell phone. so i invest in rental property, not Coca Cola stocks or Verizon. in this way, i play conservatively.

UPSIDE OF DOWN MARKET. about the down market is that RENTS ARE UP. yes, because no one is buying property, most people are renting and so demand is up. my “No Vacancy” sign went up (metaphorically) a full 30 days earlier from last year. i am looking to buy good property, but even in this market, good deals are hard to come by.

LOOKING FOR 10% RETURN HEDGE. the only hedge that i am looking into is to put money into mutual funds or government secured funds in india (my country of birth). the indian economy is strong at the moment, and i have some money in a HELOC at a 10% interest rate that i want to move elsewhere, outside the lender’s control. this is because they have frozen this secured line of credit once before and may well do it again. so i am looking for something that pays out 8-10% with little to no volatility (to cover the cost of borrowing the money). this is the money i use to finance new acquisitions.

Tim

just found your blog and I must say am happy to ready your blog.

@Sarah good comment

Buy and hold my be dead. The retail investor may be gone. Either that or the government will socialize the markets to the point where us pattern traders will be toast!

Great blog post!

“Here is my advice: Don’t invest into anything, even so called “risk free” U.S. government bonds are pretty high risk if you think about it. How much are these gonna be worth if the U.S. defaults on their debt? 0. What’s the likelyhood? I don’t know, but what I do know is that they will never be able to pay off their debt. Would you lend someone money if you knew that they would never be able to pay you back?”

There is no true “non-investment” except giving it away to charity. Even cash is an investment. It’s like that line from Rush: “If you choose not to decide

You still have made a choice”

Your investments are worth the cash that they throw off in the form of earnings, interest and dividends minus taxes and inflation. Few people involved in the markets are actually investors; most are just chasing price movements. These stock “investors” are hoping for someone to pay more for their piece of paper than they paid.

Personally, I invest in stocks and other securities because of the convenience factor. It’s the easiest investment vehicle, in the long run, to earn a yield in excess of inflation. I don’t want to be a landlord, or take on huge amounts of debt – so real estate is out – and I work full-time as an employee so I don’t have time to own/manage a business that I can control. I’m young yet my portfolio is relatively conservative, a mixture of long-term investments that have growth potential (equities), pay income (bonds, closed-end funds, REIT’s), and inflation hedges (precious metals).

If I ever get to $1M USD I’ll concentrate on income-generating inflation hedges like real estate.

“How much would diversification have helped you the last few weeks?”

Being down only 10 or 20% sure beats the losses suffered by some equity-only investors. Some sectors have already recovered so even diversifying within the market would help you avoid the catastrophic losses some have suffered by concentrating in the wrong sectors like finance or commodities.

Tim, lots of opinions. My suggestion is follow the evidence. The evidence demonstrates that the largest asset class for the wealthy is real estate. Not only personal residences (where folks have 2-3-4 or more) but investment property. Since you have plenty of cash flow, you can leverage the real estate investment, but not so far as to preclude cash flow. These assets are also great for taxes with lots of tax advantages. Finally, you will be able to leave a legacy to your eventual heirs that could last for generations. Learn as much as you can about real estate investing obviously, but there are many experienced folks out there to guide you. Now here is the other suggestion. Instead of trying to beat Warren Buffett, join him. Take 20-30% and buy BRKbs. No tax issues until you sell, highly liquid, and talk about low expenses! Remember that Berkshire Hathaway own outright over 60 companies and large stock blocks of at least 10 more companies so it is well diversified. And you can’t beat its performance (21% over 44 years).

So here is what the evidence on wealth tells us. Invest 60-80% of your investable $$ in cash flowing investment real estate with good fundamentals. Invest the other percentage in a niche business or stock of a niche business (my choice is Berkshire Hathaway) again based on fundamental research. A couple of hours a month reading about the economy and thinking about your investments is all you need from there on out. If you don’t know what fundamental research is for stocks or real estate there are many books on this subject.