Thursday, January 12, 2017
An article entitled “What is Your Biggest Investing Challenge?” appeared in a recent issue of Charles Schwab OnInvesting. I would like to comment and expand on some of the author’s worthwhile observations. Knowing yourself, your limitations, your weaknesses, your biases, is an essential component to self mastery as well as finding the road to financial freedom. Not playing the game is the most frequent and the most serious mistake made by most Americans. There are really only two ways to build up significant net worth. The oldest is real estate. Unfortunately, playing that game requires a lot of money. For most of us that means borrowed money. As 2006 demonstrated nothing, including real estate, goes up forever. Leverage is a dangerous friend. When the market goes south it is pretty easy to lose more than your total investment. Losing 100% of all your money is bad. Losing more than 100% is totally unacceptable. When you are far enough along to pay cash for income generating rental properties, you probably don’t need to invest in real estate except for the purpose of diversification. That means the stock market for all but a few who really understand real estate and have the resources to play in that arena. The best place to start is your 401(k), 403(b), traditional or Roth IRA depending on your particular situation. Small automatic deposits taken directly from your pretax income won’t be missed, but when these funds are stashed away in a tax sheltered vehicle over the course of a working lifetime, the results can be astonishing. This kind of investing doesn’t even require more than the initial decision to start the journey. Life cycle funds sometimes called target date funds will maintain an age appropriate balance of foreign and domestic holdings in both stocks and bonds at a very low cost. The flip side to staying out of the game due to under confidence is overconfidence. This investment sin can take many forms. The most obvious is gambling too much money in a single high risk/high reward investment—such as lottery tickets. Just joking, but I think you get the idea. Perhaps the most frequent manifestation of this mistake is holding more than 10% of your liquid net worth in shares of your company, the one who gives you a regular paycheck. Many employees have nearly all their holdings in shares of their company. If that stock tanks, not only will you lose a substantial portion of your nest egg, but you might even lose your job at the same time. However, overconfidence is something that can affect anyone, such as me, who has enjoyed some success in the market. It is easy for me to think, “I know what I am doing,” when I am riding a bull market or maybe just got a little lucky on a couple of investments. I have to remind myself from time to time that I will never outgrow the need for wise counsel and research even when investing in the most conservative funds. If I don’t remind myself, believe me, at some point the market will remind me of my limitations. The article calls out “Status Quo” as a common investment mistake. Sometimes doing nothing is the best investment decision. Sometimes it isn’t. I am a buy and hold kind of guy. This is a very good strategy for most investors. When combined with DRIP (Dividend Reinvestment Plan) that plows dividends back into new shares of stock, doing nothing can put the power of compound interest to work in some remarkable ways. A stock that pays a good dividend, like AT&T can double its value in less than ten years even if the price per share doesn’t move very much. However, sometimes things change. The recent increase in the Fed rates caused a quick drop in the bond market. A complete reliance of bond funds would have hurt a portfolio that was out of balance. I should have been warned when I heard the words, “ability to borrow money at lower rates,” but Kinder Morgan Partners had been a star in my crown for quite a long time. When the parent corporation bought out the limited partnership, I let 90% of my position in the partnership roll into Kinder Morgan. Shortly after this decision, the news came out that Kinder Morgan was carrying too much debt. I lost half my money in a very short time. I comfort myself that I lost “the house’s money” rather than any of my initial investment, but that is just my feeble attempt at dealing with cognitive dissonance. Regret aversion is the next mistake mentioned in the article. Simply put, “The burned child fears the fire.” Don’t worry. If you invest in the market you will lose money—some of the time—in something. However, Siegel’s constant tells us that over the last two hundred years, American equities have delivered a remarkably steady 7% return over any reasonably long period of time. Just hang on and scream. If you maintain that well diversified, age appropriate balance through good times and bad, you will be buying stocks when they are cheap and selling them when they grow expensive, unlike most of your neighbors who will be selling when the market tanks and chasing stars when they are at their most over valued. By the way, chasing hot returns is the last investment mistake mentioned in the article. Now take a good look at the person in the mirror. What are you doing with your money? Do you have a plan? Are you following your plan or changing it on a daily basis? Do you know your own comfort level? I have tried “trading” using technical analysis on two occasions, one was pretty successful, but I realized I am simply not wired to be a trader. I have also discovered I should stay away from individual tech stocks. As an engineer, I tend to fall in love with technology rather than with the business underlying the technology. This is a big mistake. I limit my technology holdings to mutual funds or a managed account. Finally, I love fossil fuels. Chevron has been a consistent money machine since the beginning but I can talk myself in carrying too much in energy shares. I have been bitten a couple of times by this predilection, but I hope I am growing wiser in old age. Now! For Heaven’s Sake! Let’s be careful out there!
Wednesday, January 4, 2017
The question comes up again and again, starting when we first ask a child, “What do you want to be when you grow up?” Now, I find, as I am closing in on 66 and Social Security, I am still asking myself the same question. I think that can be healthy as long as I remember it is unlikely that God or the universe is going to give me the answer. I hope that my Calvinist brethren extend me some grace on this subject, but I come down pretty hard on the free will side of that dichotomy. While I am open to the possibility of miracles, I don’t believe that God is generally in the business of telling people where to attend school, what major to choose, who to marry, where to find employment, or the best investments for retirement. Answering those questions? That is our job. Unfortunately, we all want the “right” answer to those important questions because we know that we are not omniscient, either about the present or the future. The world is a fabulously complex interconnected system. In the present moment, we are an amalgam of everything in our past, our parents, our environment, our experiences, and our beliefs about the nature of the universe and our place in it. Given all those prejudices and short-comings that make me who I am, I have to make decisions to move forward in my life in a universe that I can not possibly understand. Even if I had a perfect understanding of the present and natural law, I still have no guarantee of finding the “right” answer. Edward Lorenz coined the term, butterfly effect, in his study of chaos theory to describe how a minute change in initial conditions can produce an enormously nonlinear output in complex systems. As the poet says, the best laid plans of mice and men often go astray. Most outcomes in scientific as well as sociological experiments are not either/or, but probabilistic in nature requiring the use of statistical analysis to describe and understand the answer. We make decisions based on our understanding, our metanarrative, the stories we tell ourselves. Then we take action based on those beliefs. Then we get results. Did I get the results I desired, the results I expected? Were my actions wise actions, unwise actions, or sin? I don’t always have enough information to answer those questions. A wise decision can produce undesirable results. Even if the answer is no answer, there is hope. We can learn from our own experience and the experience of others. We can discern what kinds of actions are likely to produce what kind of results. We can seek out counsel from those who are more experienced, knowledgeable, and successful in some particular area of interest. We can plant and nourish a network of trustworthy friends and family members who will help us in time of need. Then after “talking through” all of the possible options from beginning to the desired outcome, I have to make a decision. Relax. Don’t be so hard on yourself. Be courageous. If you couldn’t possibly know enough to make to make these kinds of life decisions, there wouldn’t be 7 billion of us humans running around on God’s green earth. I also believe in a God who is there, who wants to bless me and be a part of my life, who will run toward me with open arms if I choose to move even a step in his direction. If this wasn’t so, why would my Savior freely choose to suffer death on a cross for my benefit?
Saturday, November 26, 2016
Monday, November 21, 2016
Tuesday, November 15, 2016
Wednesday, November 2, 2016
At almost any moment of life we can be forced to make a decision based on inadequate information. P.S. Choosing not to make a decision is also a decision that can have far reaching consequences. We deal with uncertainty and the possibility of highly improbable events by plugging the facts as we know them into our metanarrative, the overarching story we tell ourselves about the universe and our place in it. What if our metanarrative is no good? What if it is a bad model of reality? Every one of us has a metanarrative and although none are perfect, some are much closer to reality than others. What happens when reality conflicts with our metanarrative? Let’s start with a relatively harmless example. I love cars. I read about cars I have no intention of ever buying just because I find pleasure in fantasying about high performance luxury sports cars while viewing glossy photoshopped images of automotive perfection. Yes, I indented that last sentence to sound vaguely pornographic. I also read about cars I could realistically afford to buy when the time comes. My metanarrative tells me that Honda Motor Company makes a reliable automobile. My 1996 Honda Prelude Si was the best car I have ever owned. It was fabulously reliable, fast, comfortable, fun to drive, and delivered good gas mileage. After 14 years I traded it in for a 2010 Acura TSX, a high end Honda product. After 6 years it is well on its way to overtaking my beloved Honda in my pantheon of automotive excellence. Unfortunately my metanarrative no longer lines up with reality. Consumer Reports has put the hoodoo on the nine speed transmission found in every Honda product I would consider buying. They are not alone. Other respected sources have lowered Honda’s standing from the top three manufacturers to the middle of the pack. This actually makes me angry, even though I believe Consumer Reports is not motivated by any conflict of interest to tell me lies. To be honest, if I had to replace my Acura today, I would have to look at a Lexus or an Audi. It almost feels like treason to make such a statement. This election is messin’ with a whole lot of metanarratives. I haven’t seen this much commotion, anger, and confusion since the elections of 1968 and 1972. First, admit that you don’t have all the facts. Then do your research. Don’t just listen to sources that will feed your assumptions and prejudices. Try to look deeply into the facts, while ignoring the stories woven around the facts by self interested parties seeking power and money at your expense. Realize that there are no objective balanced news sources in America when it comes to reporting on this election. Sometimes foreign reporting is less filled with histrionics and folly than even the best known American media outlets, but it isn’t perfect. Look at your own values. Do they really reflect what you want for yourself, your children, your nation? Once you are truly comfortable in your own skin, this may take more reflection than you think, then compare your values to what you know of a potential candidate. Try to look at the entirety of their lives. Then cast your vote remembering that fear, greed, anger, and hatred are the enemies of good decisions. It won’t be easy. There is much to consider and most of it isn’t good. Once this election is over you and your metanarrative will have a more important problem, the rest of your life. Are the stories you tell yourself about the world you inhabit useful and accurate? Will your assumptions about the universe help you to enjoy a more abundant life or will they guarantee that you will never find financial freedom? Will they hinder the outcome of the more important aspects of a balanced life, like our relationships with our family, our friends, and our God? How does this work? Suppose your boss ignores a report you send up the chain for review; does this mean that he thinks you are stupid and he hates you? Does it mean that he is busy and that you are a lower priority than some of the other irons he has in the fire? Does it mean he just forgot he told you to prepare it? How about instead of telling yourself all sorts of stories that involve your place at the center of the universe, you just ask? After allowing a reasonable amount of time to pass, this question will give you a little leverage, especially if your boss just forgot about your report. One of the things I really enjoy about the more reputable sources for financial research is that they are all engaged in a genuine search for the truth, even when they disagree. There is a blessed absence of overheated rhetoric and psychological tricks designed to activate the lizard brain. Take in a deep breath then exhale. Relax the muscles in shoulders. Say a short prayer. Then LIVE!