Don't Try to Outsmart the Monkey

From the Ever Unpredictable Charles Hugh Smith:

In the lunar calendar that started February 8, this is the Year of the Red Monkey. I found this description of the Red Monkey quite apt:

“According to Chinese Five Elements Horoscopes, Monkey contains Metal and Water. Metal is connected to gold. Water is connected to wisdom and danger. Therefore, we will deal with more financial events in the year of the Monkey. Monkey is a smart, naughty, wily and vigilant animal. If you want to have good return for your money investment, then you need to outsmart the Monkey. Metal is also connected to the Wind. That implies the status of events will be changing very quickly. Think twice before you leap when making changes for your finance, career, business relationship and people relationship.”

I really enjoy the Of Two Minds blog written by Charles Hugh Smith. Even when I don’t agree with the author I find his work is almost always entertaining and sometimes quite insightful. In the post quoted above Smith is predicting that we are in for a wild ride in 2016. I agree with him on that prognostication.

However, I know better than to try to outsmart the monkey.

Who is the monkey? In this case the monkey is the market, the combined noise and commotion generated by hundreds of millions of irrational pants wearing simians all jumping up and down while screeching at the top of their lungs. Everything they see and hear on the Internet causes them to react in fear or greed.

They drive the market up. They drive the market down.

They cause businesses to rise. Then they cause businesses to fail.

Imagine, thousands of monkey all trying to get to the top of the same pyramid, trampling on each other on the way up and on the way down. Big strong monkeys that make it close to the top are pulled down by younger monkeys at the very moment they are beating their chests in triumph.

There is a better way. Unless you are a King Kong willing to dedicate 16 hours a day for the rest of your life to fighting other monkeys, dinosaurs, and men in airplanes make the decision, “I don’t need the market to find financial freedom.”

Isn’t that odd advice coming from someone who considers himself an investor?

Avoid debt like the plague. Live on less than you take home each month. Save until you have a decent emergency fund. THEN begin to invest.

The best plan for the average investor is an age appropriate mix of low cost index funds. This method is termed Modern Portfolio Theory (MPF). It isn’t bulletproof. Benoit Mandelbrot, Nassim Taleb, and other authors have conclusively demonstrated that the world is a more dangerous place than is predicted by MPF, but this is a good place to start. Maintain your balance between equities and bonds, cash, and precious metal. When the stock market goes up, sell some stock. Put that money in bonds or gold shares or even the bank (not much better than hiding it under a mattress these days). When the stock market goes down, cash out those bonds and buy some shares. In the first quarter of 2009, a blind monkey could throw a dart at a list of stocks and pick a winner. Products called life cycle funds or target date funds will maintain an age appropriate balance without any effort on your part. Just keep throwing small amounts of money into this machine every month during good times and bad. If you don’t put too much money in any one thing or too much money in at any one time, the chances are pretty good that you are going to do OK.

If you like to make your own mistakes, you really can’t get yourself into too much trouble buying SMALL amounts of dividend paying stocks. Dividend Aristocrats are a good place to begin the search for these companies. If a company has a long history of paying a safe respectable dividend, you really don’t need to know a lot more information. These are perfect for a Dividend Reinvestment Program (DRIP), allowing you to reinvest your dividends in more shares. This is a free service offered by most brokers on most companies. Talk about the power of compound interest. When the stock market goes down, you are automatically buying a larger number of shares in a proven winner. When the market goes up, you are automatically buying a smaller number of shares. After ten years or so, even a fairly nasty correction isn’t going to keep you awake at night. If you have significantly increased the number of shares you hold, does it matter so much if the value of single share went up or down?

Personally, I also like grab bags of utility stocks and consumer non-cyclical shares. The dividend for utility stocks is almost guaranteed by state regulators. Although even with this safety net, bad decisions can tank utilities. Still, people are going to flush toilets and turn on their air conditioners in good times and bad. As for those consumer non-cyclical companies, people are likely to smoke more cigarettes and drink more beer in bad times than in good times. Over the last 50 years the cigarette manufacturer, the Altria group has proven to be the best single stock you could own. Have you ever seen an empty CVS? Kraft, Coke, Hormel, the list goes on. People need to eat.

Dave Ramsey is fond of telling the story of an opportunity he had to share lunch with a billionaire. In the course of the conversation, Ramsey asked the man to recommend a book on investment. The billionaire suggested the Tortoise and the Hare. He said that every time he read that book, the tortoise won the race.

Go thou and do likewise.

Proverbs 13:11

Wealth gained quickly will dwindle away, but the one who gathers it little by little will become rich.