Forecasts: the best way to benefit from them

 

Who but a weather forecaster could be wrong most of the time and still keep the job?

Investment gurus, that’s who.

Recently, renowned economist, James Rickards  published Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos (Penguin Books Limited, Jul. 23, 2019). Daunting title, prominent author, plausible gloomy forecasts, difficult reading – only street bums with no assets could ignore it!

However, the record shows that renowned guru forecasts are worse than a coin flip. Well-known gurus predicting the stock market, economic growth, currencies or interest rates make weather forecasters look good.

Making forecasts costs nothing. Attractively packaged in a book put out  by an established publisher, such forecasts can make money for their authors.  Investing based on these forecasts is, at best, less than optimal and at worst, a money-losing activity much of the time.

The best way for Monday Morning Millionaire Program members to benefit from  “expert” forecasts is to practice the habits of Monday morning Millionaires and to ignore the forecasts. We should read them for amusement only.

Members who want to spend time studying well-documented economic forecasting history can read Larry Swedroe’s May 20, 2019 article.


Whom can we trust? Part 2.

A space photo such as the one of China above is a convincing view of the level of industrial activity. Areas of industrial activity and the related energy use are lit up. The dark areas show a complete lack of industrial activity.

This is a continuation of yesterday’s blog in which Beijing claimed that in the second quarter of this year, China had a 6.2% annualized growth. Reviewing data much of which was officially unreported, a Sunday Wall Street Journal article said: “…there is a growing belief among economists, companies and investors around the world that the real picture is worse than the official data.”

Bluntly stated, the Chinese government is lying about its economic growth. Belongs to the same club as President Trump.

Observations certified by  Space photos like the one above show a contraction of industrial activity, not growth. Then there is a web-search index which shows the number of workers who return to work after a major holiday. These numbers are down sharply.

Some Monday Morning Millionaire Program members want to know why the program does not recommend markets other than the American one.

It comes down to the third habit of the six habits of Monday Morning Millionaires, which is, buy the US economy as a whole. (That is, don’t pick stocks, don’t pick countries other than the USA.)

History shows that investors could not do much better than holding shares of the largest 500 companies in the most diversified economy in the world. Further, for investors looking for Chinese exposure, the majority of these companies have a market presence and most countries, including China. That eliminates the risk of being victimized by a culture of twisting facts.

If you are interested in details, see in the Wall Street Journal article.

 

Whom can we trust?

A space photo such as the one of China above is a convincing view of the level of industrial activity. Areas of industrial activity and the related energy use are lit up. The dark areas show a complete lack of industrial activity.

The Bottom Line

From the Wall Street Journal, September 8, 2019:

“…there is a growing belief among economists, companies, and investors around the world that the real picture is worse than the official data.”

Simply put, the Chinese government is lying.

It is well known that dictatorships show the world how and what these dictatorships want the world to see. They want investors so they entice them with rosy portrayals of economic reality.

Beneath China’s stable headline numbers, there is a growing belief that the real picture is much worse.

We wrote about that previously.

We will expand on the subject in tomorrow’s blog.

 

SPIVA®; S&P Indices Versus Active

The Monday Morning Millionaire Program (15.5% annual return since 2012) promotes passive investing.  Our survey  shows that 37% of our members spend 15 minutes per week managing their portfolio(s) and another 45% spend less than one hour.

Active investors can spend TEN HOURS a day or more, managing theirs!

Over the course of 10 years, fewer than 5% of actively managed portfolios do as well as the Monday Morning Millionaire Program.

Continue reading “SPIVA®; S&P Indices Versus Active”

Alert! Time to buy the market at bargain prices?

 

We are entering interesting market developments. What are they?

1. One of the few market certainties is that it reverts to the mean. When asked what the market will do, J. P. Morgan who dominated Wall Street at the end of the 19th and the beginning of the 20th century said: “It will fluctuate.”

We have recently entered the longest bull market in history. It will revert.

2. Another of the few market (near) certainties is that an inverted yield curve forecasts a market drop. We have recently entered an inverted yield curve. The market will drop.

3. An escalation of trade tensions between the US and China will certainly result in a market pullback.

Of course, we don’t know when the market reversal will take place. The chart below shows that last week, there was a drop of nearly 5%, which is a good time to rebalance our portfolios.

But not yet! Just be ready.

Our members don’t need to care about market drops if we are positioned in line with the Monday Morning Millionaire Program philosophy.

That means:

1. We have a market/cash (or near cash) asset allocation position which is appropriate for our age and risk tolerance.

My personal asset/allocation is 50% exchange-traded fund(ETF)/50% Money Market.

2. The market part of our asset allocation is an ETF which parallels the S&P 500. SPY, VOO, IVV or RSP are suitable. There are thousands of other ETFs. We can ignore them.

3. We keep our powder dry by keeping our cash in a money market fund. TDB166 pays the most. (A little over 2%)

The Monday Morning Millionaire Program philosophy allows us to buy bargains when the market drops and to take profits when it rises. Markets down or markets up, either way, we take profitable action. And we sleep well.

 

 

Exchange-traded funds (ETFs) tracking the S&P500

 

 

In 1990, the Toronto Stock Exchange launched financial history’s first exchange-traded fund. They called it “Toronto 35 Index Participation Fund” (symbol TIPs).

There are more ETFs now than there are individual stocks. We can ignore them all except the ones which track of the S&P 500.

The best ETFs to track the S&P 500 are:

  1. iShares Core S&P 500 ETF (IVV)
  2. Vanguard S&P 500 ETF (VOO)
  3. SPDR S&P 500 ETF Trust (SPY)
  4. Schwab U.S. Large-Cap ETF (SCHX)
  5. iShares S&P 500 Growth ETF (IVW)
  6. Guggenheim S&P 500 Equal Weight ETF (symbol RSP)

The first five are market-cap-weighted. The sixth one is equal-weighted.

In line with their asset allocation, Monday Morning Millionaire Program members keep form 30% to 70% in one of these with the balance in a money market fund.

 

 

Investing in derivatives (options) the Monday Morning Millionaire way

Writing in Berkshire Hathaway’s 2002 annual letter, the justly renowned “Oracle of Omaha”, Warren Buffett stated that derivatives (options, that is, puts and calls) are “financial weapons of mass destruction.”  Nevertheless, Berkshire Hathaway has some major derivatives positions. How can that be? Well, Buffett once defined risk as not knowing what you are doing. By that definition, the Berkshire Hathaway position is not risky.

Here is one example of what Buffett is talking about. More than 20 years ago, investing in derivatives resulted in a $1.7 billion loss and bankruptcy of California’s Orange County. Some 3,000 public employees lost their jobs and services were reduced. Merrill Lynch & Co., the broker involved, made millions in fees, not surprisingly.

There are other examples. Long-Term Capital Management, with some of Wall Street’s major figures as well as two Nobel Prize-winning economists needed a bailout of billions by more than 10 financial institutions in order to prevent market panic and collapse of the entire financial system.  Much of their portfolio was made up of derivatives but the company was too big to fail.

The Monday Morning Millionaire Program way of investing in derivatives is safe. For interested members, the program recommends the following:

  1. Only sell and never buy puts and calls.
  2. Do so using our recommended exchange-traded funds and not individual stocks. These are the SPDR S&P 500 ETF (symbol SPY) which has weekly expiry dates and the Vanguard Total Stock Market ETF (symbol VTI), the Vanguard S&P 500 ETF (symbol VOO) and the Invesco S&P 500 Equal Weight ETF (symbol RSP) which have monthly expiry dates.
  3. Sell puts and calls in your fun portfolio only.

Investors always make and never lose money selling puts and calls. However, they do give up the opportunity of making even more money if the underlying ETF rises above the selected strike price.

In dropping and lateral markets, this approach outperforms. In rising markets, it underperforms.

On another issue, we recently introduced Level 2 and Level 3 to the “Our Programs” tab. I just finished the first session with a member who scored 47 on our scorecard exercise. He was tasked with five action steps in preparation for our next session. 

Do you see many actionable suggestions in today’s flood of investment writing?

If you know people who could benefit and they subscribe to our Level 2  program thanks to a recommendation from you, you get a $100 Starbucks gift certificate for each subscription.

”There are very few rich professors.” The Motley Fool

In a Nov. 27, 2013 article titled  50 Unfortunate Truths About Investing, in point 17, The Motley Fool stated: ”Most of what is taught about investing in school is theoretical nonsense. There are very few rich professors.”

The implied message is that the folks at The Motley Fool know something that could make you rich that economics professors don’t know.

I personally know a few economics professors and know of many by reputation. All of them know the meaning of enough. None is interested in the personal bankruptcies which are inevitable given the mindset required to create great wealth. The famous economist Lord Maynard Keynes did become extremely wealthy but he did go through personal bankruptcy.

In a 1999 August issue of the Wall Street Journal, the renowned columnist Jason Zweig stated that an investment system promoted by The Motley Fool was “investment hogwash in its purest form”. Writing in a later edition of Benjamin Graham’s The Intelligent Investor, Zweig called it “one of the most cockamamie stock-picking formulas ever concocted”.

While The Motley Fool is unlikely to swindle subscribers or do anything illegitimate, they do promote their subscriptions aggressively.

The Monday Morning Millionaire Program approach to investing allows members to maintain their career income levels into retirement without encroaching on principal. Investors looking for more need to search elsewhere.

Perhaps follow the advice given by The Motley Fool? Hmm…

On another issue, we recently introduced Level 2 and Level 3 to the “Our Programs” tab. I just finished the first session with a member who scored 47 on our scorecard exercise. He was tasked with five action steps in preparation for our next session. 

Do you see many actionable suggestions in today’s flood of investment writing?

If you know people who could benefit and they subscribe to our  Level 2  program thanks to a recommendation from you, you get a $100 Starbucks gift certificate for each subscription.

Monday Morning Millionaire Scorecard Exercise

To help you assess your situation and clarify your goals as a do-it-yourself (DIY) investor, we invite you to do our Monday Morning Millionaire Scorecard Exercise!

 

1 I do not have a clear vision of my future. 1 2 3 4 5 6 7 8 9 10 I have a clear, well-defined vision of my future.
2 I do not have clear financial goals. 1 2 3 4 5 6 7 8 9 10 I have clear financial goals.
3 I do not have a strategy to achieve my personal and financial goals. 1 2 3 4 5 6 7 8 9 10 I have a strategy to achieve my personal and financial goals.
4 My investments am not doing as well as the market. 1 2 3 4 5 6 7 8 9 10 My investments are growing with the market.
5 I do not feel I have control over my portfolio. 1 2 3 4 5 6 7 8 9 10 I am in control of my portfolio.
6 I am nervous about being DIY investor. 1 2 3 4 5 6 7 8 9 10 I am excited about being DIY investor.
7 I don’t know what questions to ask or how to best educate myself about the market. 1 2 3 4 5 6 7 8 9 10 I am well educated and know where to go find answers about the market.
8 I am worried about losing money as DIY investor. 1 2 3 4 5 6 7 8 9 10 I am confident that my portfolio will grow as DIY investor.
9 I don’t know where to go to guide me as a DIY investor. 1 2 3 4 5 6 7 8 9 10 I am open to a support group for DIY investors.
10 I do not have as much confidence in the future as I would like. 1 2 3 4 5 6 7 8 9 10 I have a strong sense of confidence about the future.
 

ADD COLUMN TOTALS

 

YOUR SCORE ________

If you score under 60, consider contacting us and schedule a free half-hour discussion to see whether our Level 2 Program might be suitable for you.

If anyone subscribes to our  Level 2  program thanks to a recommendation from you, you get a $100 Starbucks gift certificate.

 

 

The dartboard portfolio re-visited

Here is the bottom line for this blog:

If the pros tried to select the worst-performing stocks, their results would be similar when compared to their efforts to select the best-performing ones!

They would be in the same league as Princeton professor Burton Malkiel’s dart-throwing monkey. As unbelievable as it is charming!

Much of what you see below is from our March 12, 2018 blog.

Prof. Malkiel’s idea is based on Eugene Fama’s Efficient Market Hypothesis which states that stock prices reflect all known information (see chapter 1 of the Monday Morning Millionaire book) therefore they move randomly and unpredictably. The concept was Fama’s 1960 Ph.D. thesis1 for which he received the  2013, Nobel Memorial Prize in Economic Sciences. 

The details of the efficient market hypothesis have been debated by academics and respected professional investors ever since its initial publication. Nevertheless, most of them accept it, albeit with some caveats and reservations arising from investor psychology. Most agree that it is exceedingly unlikely that, over the course of decade or more, you or I or the “pros” could build a stock portfolio that would outperform the market, the market being represented by a low-cost, broad index exchange-traded fund (ETF) as shown in the chart below.There isn’t a single evidence-based study that shows that professionals can effectively build a portfolio or time buy/sell orders to beat such an ETF.

Fama’s 2012 study with Kenneth French confirmed this view, showing that the distribution of returns of US mutual funds is very similar to what would be expected if no fund managers had any skill—a necessary condition for the EMH to hold.2

For more detailed explanation of the EMH, check the wikipedia and investopedia pages.

Evidence-Based Findings

S&P500 index ETF, symbol SPY

The results that the pros get and their ability to get returns better than those shown in the above chart have been thoroughly examined in the literature.3,4,5,6 The published papers report that the pros cannot get better results than simply buying and holding a market index exchange treated below – the Monday Morning Millionaire Program philosophy.

The pros disagree violently, of course, entirely in line with Upton Sinclair’s memorable statement that “it is difficult to get a man to understand something when his salary depends upon his not understanding it.” Or a woman, as well.

The pros are well trained, well motivated and well equipped but facts are facts. So yes, they can equal the results shown in the above chart (many pros have been accused of being closet indexers), but they do need to buy groceries and pay the rent. Their compensation needs to be subtracted from the results they get. And what do we get?

Gaining A Year’s Retirement Income; Easily Beating Pros with Mathematical Certainty

When the pros’ fees, commisions, upselling and incentives are subtracted from portfolio performance it is a mathematical certainty that self-directed investors will beat the professionals and save a year’s retirement income.  Supported by the Monday MorningMillionaire Program, they can do so in less than half an hour a week.

Bibliography

  1. Fama, E. F. (1965). “The Behavior of Stock-Market Prices” The Journal of Business 38, No. 1, pp. 34-105 The University of Chicago Press
  2. Fama, E. F.;French, K. R. (2012). “Size, value, and momentum in international stock returns” Journal of Financial Economics. 105 (3): 457, doi: 10.1016/j.jfineco.2012.05.011
  3. Rompotis, Gerasimos Georgiou, “Active vs. Passive Management: New Evidence from Exchange Traded Funds” (February 4, 2009). Available at SSRN:https://ssrn.com/abstract=1337708 or http://dx.doi.org/10.2139/ssrn.1337708
  4. Blake, C.R., Elton, E.J. and Gruber, M.J., 1993, “The Performance of Bond Mutual Funds”, Journal of Business 66 (3), pp. 371-403.
  5. Malkiel, B.G., “Returns from Investing in Equity Mutual Funds 1971 to 1991”, Journal of Finance, 1995 50 (2), pp. 549-572.
  6. Gruber, M.J., 1996, “Another Puzzle: The Growth in Actively Managed Mutual Funds”, Journal of Finance 51, pp. 783-810.