Another Reason to Tune Out Market Gurus

If the examples in my book didn’t already convince you of this, the latest flip flop on Marketwatch should convince you that the so-called experts don’t know what they’re talking about.

On Jan 24, the head of the world’s largest hedge fund said, “if you’re holding cash, you’re going to feel pretty stupid.” That’s the gist of it, but if you click through you’ll hear some blah blah justification about how the market is rising, valuations are reasonable (even though by CAPE they’re expensive), and that there’s still room to run.

Then we had the 10% market swoon in the beginning of February.

The next time we hear from the same guy, he’s singing a different tune: “I think we are in a pre-bubble stage that could go into a bubble stage.” He goes on to say that the chance of a recession are 70%.

Luckily, though Marketwatch doesn’t call him out on the rapid change in tone, it does provide helpful links to his prior comments. Any discerning reader with even a modicum of financial knowledge would think that this guy is utter crap and going along with the prevailing tone, fanning the flames in a bull market and turning on a dime at the slightest whiff of panic. Why would you entrust your money to someone who doesn’t know what he’s talking about?

It amuses me to have recently received mass emails from both Fidelity and Schwab advising clients to stay calm in the recent market turbulence. It seems that with each boom-bust cycle, we attract new speculators without any inkling of what it means to truly invest. What am I doing? Tuning out the noise, rebalancing, and overall staying invested in a stock:bond ratio that matches my risk tolerance and time horizon. The market’s short term gyrations don’t matter a whit.

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Unfair Comparisons on Cost of Living

I’m livid after reading Marketwatch’s recent article on cost of living differences, in which it tries to make a blanket comparison between Asian cities and American/European ones.

The key part is in how they designed the study:

The study rated the cities according to how expensive it is to buy basic items there at supermarkets, mid-priced stores and specialty outlets, using the price of food, drinks, clothing, recreation and entertainment and the cost of buying and running a car (including the cost of gasoline).

It also includes recurring expenses, including the cost of renting a home, utility bills, private schools and domestic help.

I understand why they’re doing this – to create an apples to apples comparison. However, there’s a reason the government changed the index of inflation to account for substitutions. Essentially, to have the same or better lifestyle in an Asian city vs an American one, you can go without certain things. The cost of owning and operating a car in Tokyo, Singapore, or Hong Kong is exorbitant because of incentives/taxes against congestion. Plus you don’t need a car to get around anywhere. It’s actually probably faster to take the metro/subway to avoid the surface congestion. Whereas in an American city you absolutely need a car to live.

Another aspect is private schools. I understand why they’d want to keep that in the comparison – the article is geared at high powered corporate expats who want to replicate a western lifestyle in Asia (note that they include domestic help in the calculations). However, again in the US you need to send your kids to a private school to get any kind of decent education. Not so in Asia. There, the locals hardly ever do so because public schools are so good (extremely competitive by world standards). This is anther example of a cost that’s not experienced evenly between Asia and America.

Finally, I’m not sure how they calculate food, but in my experience food in Japan (assuming you eat Japanese style meals) is much cheaper, tastier, and of better quality than the equivalent American ones. Restaurants are also cheaper, mostly due to not having to pay tip.

My gripes about this article are similar to my wife’s experience moving back to the US from Asia.

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Don’t Do Something, Just Stand There

Another week, another all time in the stock market. North Korea’s saber rattling and the devastation wrought by the hurricanes don’t seem to have put a dent in the market’s relentless ascent. Furthermore, with this being the “most hated” bull market in history (or so they all say), things don’t seem primed for a major collapse. A mild pullback on the order of 5-10%? Sure, perhaps it will happen within the next year, but a major recession doesn’t seem to be in the cards.

What’s the best mentality for an average investor to have? The same as always – don’t change your long-term strategy due to short-term circumstances. Ignore the noise going on around you and robotically invest what you won’t touch in the next 5-10 years. The mantra that my mentor in medicine told me, which brings “do no harm” into the modern world, is encapsulated by the title of the post. Sometimes it’s simply better to do nothing than to react like a jumpy cat to every slight movement.

Take this advice of this article for instance:

“If you don’t want to invest in equities because you fear a market crash, then you should never be in equities, because equities always crash,” Ritholtz said, speaking at Morningstar’s annual ETF conference.

He noted that there was a bear market in equities—defined as a 20% drop from a peak—every five years, on average, although the recent market environment has been bereft of even much smaller declines. Current valuations have led to concerns that such a crash could be imminent, but “If you’re under [the age of] 50, you should be rooting for a market crash, because it would be nice to have a 20% discount and then 20 years to compound that discount.”

He added, “there’s no escaping this: markets go up and down, that’s what they do. But if you’re still worried, you should significantly lower your expectations for future returns” by buying safer—but lower growth—alternatives. He noted that over the past century, U.S. stocks have returned about 10 times what Treasurys have, although they also experienced numerous massive selloffs over that time, something the government bonds hadn’t.

“The risk you assume when you buy equities is that there will be a significant drawdown in the 20 to 30 years you own them. But you get rewarded for that risk. Treasurys don’t have the same kind of drawdowns, but don’t deliver the same kind of returns.”

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To Buy or Not to Buy at Market Highs

There is always a bit of fear when evaluating buying in at all time highs. The sentiment is understandable. Everyone is afraid of buying in at a market peak and eating the recession that follows. After all, after almost a decade of uninterrupted growth, aren’t we due for a downturn?

However, the data analysis (done by someone else!) and existing scholars such as Tobias Moskowitz supports momentum investing. In other words, when the market or an individual stock is rising, it’s more likely than not to keep rising than to suddenly reverse.

Applied to current market highs, I would still encourage ordinary people to invest their new capital in accordance with prior allocation ratios, to achieve a healthy rebalance despite stock market highs. More likely than not, the market will be even higher (even after adjusting for inflation) in the next decade. If prior trends hold, we may be on the cusp of a 1-2 decade run of sustained all time highs.

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