Today's Market
by Dr Invest

I strongly encourage you to move to the SIDEBAR and select KNOWLEDGE BASE & BOOKS. Look for Charles Ellis and "The Loser's Game". Reading this article will benefit you greatly. Below

Here is how Charles Ellis describes the investment “loser’s game”:

For professional investors, “the ‘money game’ we call investment management evolved in recent decades from a winner’s game to a loser’s game because a basic change has occurred in the investment environment: The market came to be dominated in the 1970s and 1980s by the very institutions that were striving to win by outperforming the market. No longer is the active investment manager competing with cautious custodians or amateurs who are out of touch with the market. Now he or she competes with other hardworking investment experts in a loser’s game where the secret to winning is to lose less than others lose.

Underperformance by Active Managers

Readers that have followed Investing Caffeine for a while understand how I feel about passive (low-cost do-nothing strategy) and active management (portfolio managers constantly buying and selling) – readDarts, Monkeys & Pros. Ellis’s views are not a whole lot different than mine – here is what he has to say while not holding back any punches:

The basic assumption that most institutional investors can outperform the market is false. The institutions are the market. They cannot, as a group, outperform themselves. In fact, given the cost of active management – fees, commissions, market impact of big transactions, and so forth-85 percent of investment managers have and will continue over the long term to underperform the overall market.

He goes on to say individuals do even worse, especially those that day trade, which he calls a “sucker’s game.”

Gaining an Unfair Competitive Advantage

According to Ellis, there are four ways to gain an unfair competitive advantage in the investment world:

1) Physical Approach: Beat others by carrying heavier brief cases and working longer hours.

2) Intellectual Approach: Outperform by thinking more deeply and further out in the future.

3) Calm-Rational Approach: Ellis describes this path to success as “benign neglect” – a method that beats the others by ignoring both favorable and adverse market conditions, which may lead to suboptimal decisions.

4) Join ‘em Approach: The easiest way to beat active managers is to invest through index funds. If you can’t beat index funds, then join ‘em.

The Case for Stocks

Investor time horizon plays a large role on asset allocation, but time is on investors’ side for long-term equity investors:

That’s why in the long term, the risks are clearly lowest for stocks, but in the short term, the risks are just as clearly highest for stocks.

Expanding on that point, Ellis points out the following:

Any funds that will stay invested for 10 years or longer should be in stocks. Any funds that will be invested for less than two to three years should be in “cash” or money market instruments.

While many people may feel stock investing is dead, Ellis points out that equities should return more in the long-run:

There must be a higher rate of return on stocks to persuade investors to accept risks of equity investing.

The Power of Regression to the Mean

Investors do more damage to performance by chasing winners and punishing losers because they lose the powerful benefits of “regression to the mean.” Ellis describes this tendency for behavior to move toward an average as “a persistently powerful phenomenon in physics and sociology – and in investing.” He goes on to add, good investors know “that the farther current events are away from the mean at the center of the bell curve, the stronger the forces of reversion, or regression, to the mean, are pulling the current data toward the center.”

The Power of Compounding

For a 75 year period (roughly 1925 – 2000) analyzed by Ellis, he determines $1 invested in stocks would have grown to $105.96, if dividends were not reinvested. If, however, dividends are reinvested, the power of compounding kicks in significantly. For the same 75 year period, the equivalent $1 would have grown to $2,591.79 – almost 25x’s more than the other method (see also Penny Saved is Billion Earned).

Ellis throws in another compounding example:

Remember that if investments increase by 7 percent per annum after income tax, they will double every 10 years, so $1 million can become $1 billion in 100 years (before adjusting for inflation).

Home Sweet International Home

Although Ellis’s recommendation to diversify internationally is not controversial, his allocation recommendation regarding “full diversification” is a bit more provocative:

For Americans, this would mean about half our portfolios would be invested outside the United States.

This seems high by traditional standards, but considering our country’s shrinking share of global GDP (Gross Domestic Product), along with our relatively small share of the globe’s population (about 5% of the world’s total), the 50% percentage doesn’t seem as high at first blush.

REGRESSION TO MEAN

Hussman            http://www.hussmanfunds.com/wmc/wmc050222.htm

Let's look at the data. First, note that measured from peak-to-peak, S&P 500 earnings really have grown no faster than 6% annually over time. This is something to keep in mind when you hear that “earnings are growing at 18% annually,” etc. Those figures represent trough-to-peak recoveries from depressed levels, not sustainable earnings trends that are appropriate for valuing stocks over the long-term.

We can make our own chart following the 6% MEAN. The result is that the market is overvalued and overbought. Though the market could climb higher over the next few weeks, it would be challenging to keep that peak and the likely prediction is a regression to MEAN since we have reached peak to peak earnings. 

I encourage you to be careful with your investments. The good times can't continue to roll. 

(note: the above information is for entertainment purposes only and not to be used as investment advice. )

Today's Market
by Dr Invest
Now that the Republicans and Democrats have kissed and made up, at least until May, the immediate economic crisis is over. Now it is predicted, with the continued help of the stimulus package investing $80 billion a month between twist and mortgage buy-backs, the sky is the limit. So break out that money and get investing, so they say. Err... would you like to buy a bridge, the Brooklyn Bridge to be exact.

My conservative investment strategy has been beat to death, revived, and beat to death again, and yes, revived yet again in the whirl economic trends. I would have been relieved had the market only declined enough to hit my stop-sells, but now I'm elated that I might just get back to what I originally paid to take my present positions. By the way, my positions have been slowly improving, but still look anemic to me.

Here is today's positions:

This is almost pathetic, but I am proud to see that my overall position has finally returned to the green. With a whopping $7.66 profit, amounting to a gain of .12% today, I'm feeling just pretty rich. Obama best get his minions of tax collectors together to collect their share of these capital gains.

Invest or Not Invest

The real question right now is whether to get positioned further in more stock purchases. I am reluctant to invest further when stocks are largely overvalued, the government continues to have the economy on life support through their stimulus program, and where our government has total disregard for indebtedness.

Like every economic collapse of the past, the participants in the market are ELATED and EXUBERANT just before the calamity hits. Holding the above portfolio in past years would have easily brought 6% gains or higher, instead this portfolio reflects the inherent weakness that has permeated the market.  Market returns are pathetic, the risk is high for loss, and people are elated that the market is rebounding. Obama even referenced in his speech to our nation, saying: "and the economy is rebounding". Sorry Mr. President, which market are you talking about?

Here is the down and dirty from an analysis view:  http://hussmanfunds.com/wmc/wmc130122.htm

Hussman writes: Last week, the S&P 500 advanced the extra 1% required to re-establish virtually every “overvalued, overbought, overbullish, rising-yields” syndrome that we define – syndromes that have appeared at or close to the beginning of what investors can easily recall as the singularly worst set of market instances in history, including the 1973-74, 1987, 2000-2002, and 2007-2009 plunges. With some minor imputation (estimating bullish and bearish sentiment as a function of the extent and volatility of prior market movement), we can verify that these syndromes also emerged just prior to the 1929-1932 collapse. (see above link)

Wisdom tells me that you would be wise to heed John Hussman's advice. 

Readying to Sell

At this point, I would be happy to return to profitable position and sell all my positions, excepting gold. If central banks are buying gold or in the case of Germany, moving gold to their bank, I am very curious about what they know that I don't. I am not in a gold buying mood right now, especially after a year of declining gold prices. But if I saw gold in an uptrend, I could be convinced to buy more.  

For now, I will move my stop-sell closer to the daily closing price and hope that my positions continue to climb higher. 

(note: the above article is for entertainment purposes only and not to be used as financial advice.)

Today's Market
by Dr Invest

I wish there was something new to report, but there is little good news to report. A closer look at the housing start-ups show that most of the building was for the rental market, not new housing. Florida still has one of the highest defaults on mortgage. 1 out of every 32 home owners are defaulting on their mortgage and it is taking over 800 days to bring the owners into court to repossess the properties 

The good news is that the Federal Reserve is buying $40 billion in bonds (twist) and $40 billion in mortgages (stimulus 3) each month. Considering that a trillion dollars a year will go toward propping up the economy, it is easy to see that we will one day reap the consequences of this action. Removing all the stimulus would immediately sink the economy. The stimulus is our "life-support" and the economy could not proceed without it.

As an investor, I can't sit on my hands and watch the market's continual climb; but also, I cannot afford to take the risk of the market suddenly taking a downturn.

My total portfolio has recovered greatly. Having nearly 2.73% gains in WMT, Walmart sank around 7% after Christmas, only now nearing the original purchase price. RTH, a composite of a number of retail stores also fell into the negative and only now has risen 1.63% into positive territory. TIP has been a great performer, but has also seen negative territory. BND has been a poor performer with the Fed competing in the purchase of bonds with individual investors. I am hoping that BND will return to positive territory, where I will immediately and forcefully sell BND.  IAU, a gold trust, has fallen to a loss of 7.35% and only recently moved up to a loss of 5.21%.  The gold position is a long-term position with a window of one year to see a return.

Some of you have asked if I have some risk added investments. I would not recommend taking risks at this time but I will share with you a recent investment made at the end of December in RKUS. Ruckus Wireless is a new IPO and has some good history as a company and seems a good buy. I purchased RKUS on the 28th of December, returning 7.11% as of this date. I think that there is still some growth in this company but I would not recommend putting anymore than 10% of your portfolio into this company.

Another company I recommended was CATM. Oversold, it has begun to rebound. My suggestion was to buy CATM at the middle of December. CATM has now gained 16.34%. The immediate threat to these stocks are the decisions to be made on our DEBT CAP. The political haggling places a drag on the market and plunge the market into recession and a pull-back as much as 10%.

Rather thank blindly investing, one still needs to remain cautious, keeping stop-sells on all positions. Please go back to the SIDE BAR and look for RESEARCH AND MARKET REPORTS. Listen to me, ALL these reports are essential for your reading at this moment.

Hosington writes: The global economic environment is best characterized by an insufficiency of aggregate demand.  That is, the capacity to produce goods far exceeds the final demand for those 
products.  The root cause for this circumstance is debated, but we believe academic studies point 
directly to overconsumption relative to income in recent decades.  Borrowing, leading to overindebtedness, has funded this excess spending.  Economic systems must now repay or rationalize the debt in some manner.  Whatever the cause of the inadequacy of final demand, the result has been a deflationary environment.

This explains why an aggressive quantitative easing by the federal reserve is not moving the economy into immediate inflation and why central banks are having not better luck in moving their economies. People barely holding onto their jobs and other people without jobs can scarcely afford purchases of consumer items. The only hope of keeping profits high and world governments well funded is to keep people spending, so people without money must begin taking on debt to keep the economic cycle funded. Most Americans now have limited credit, reducing their ability to buy consumer goods; even more so in other parts of the world, the weight of debt has crushed purchasing power. The decrease of income to companies and individual provide less revenue to governments  Governments hungry for revenue, must increase taxes to pay for their own debts. As demands for goods decrease, companies have to cut prices to get more people to buy their goods. This is a deflationary condition that increases as the economy worsens.

The bottom line.... no one can predict the move of the market at this time. We will see volatility with significant rises in the market and sudden falls. Many believe we will revisit the lows of 2007. Simply go back to the sidebar and read the reports.

I suggest that you be vigilant to market movement and keep stop-sells in place. Some of these drops in the market could exceed 30 to 40%.  Your only protection is your immediate action to save your portfolio from market losses.

Note: the above information is for entertainment purposes only and not to be used in any way for investment advice.

Today's Market
by Dr Invest


Some of you have wondered about my investment position and the on-going market conditions. It is like waiting for the shoe to drop. In May, I had taken positions in two bond ETFs, TIP and BND. TIP has returned a pathetic 2.72% and BND has a loss at -.37%. These are lessons in what happens when government manipulates markets at the general public's expense. Both these very stable investments have proved to be awful investments, returning little more than a certificate of deposit. The expected return for TIP and BND should have been around 6% to 12%.

In November, I invested into two retail stocks, WMT and RTH. WMT has lost -2.21% and RTH has gained 2.46%.  As of this date, the total gain has been around 2.6%. Not a spectacular return, when you consider that had I paid a financial advisor 2%, my gain would have been closer to .6%.

Overall, the market has proven pathetic, even with the Fed devoting one trillion to buy bonds and debt in 2013. The Fed continues to be in competition with individual investors as they manipulate the market. Without the Fed stimulus, the market would collapse immediately. Presently, there are questions about the present course of the market.

In the last 6 months, the DOW has gained 5.72%. In the last 3 months the DOW has gained .62. And in 2013, the DOW has gained .71%. The political clouds rising in the month of February will likely erase any real gains we have seen in January. Expect more of the same in the days ahead: dramatic volatility in the market with stinging losses and exhilarating gains, only to end 2013 with pitiful gains that have been manipulated by the government. Look for the market to neither collapse nor to rise.

Having entered a stock position with WMT and RTH that is neither rising nor falling, I have found myself lost somewhere in stock limbo. The stock position is not rich enough to sell and has not fallen enough to trigger my stop-sell.

Is a collapse of the market possible with such determined efforts by the Fed to stimulate the market? Well, yes! But these determined efforts have floated the market in hopes that somehow the market will spontaneously recover. That economic recovery has failed to materialize and some believe it is unlikely to materialize until we deal with our national debt.

(Note: the above information is for entertainment purposes only and not to be used a investment advice.)

Today's Market
by Dr Invest

Some of you have wondered if I had stopped writing. No! There just hasn't been much to report. Politicians locked over whether to spend or scrimp, locked over whether to print money or save money, finally, in fear of losing their jobs made a last minute decision that at best was poor and at worse will deepen the recession in the coming months.

See, it seems that I am repeating myself here. The market is no worse off, nor better off. As often quoted "It was the best of times, it was the worse of times." The only thing really going for the market is $40 billion monthly to stimulate the economy. Without the stimulus, we would be in the red in a heartbeat experiencing something even greater than the GREAT DEPRESSION.

I hate stocks right now, but I bought WMT and RTH at the first part of November. They have been up...close to 3% and down close to 4%. I told my wife, "If the politicians don't settle the fiscal cliff, we are surely going to see WMT and RTH hit their stop-sell with a 5% loss."

You know the rest of the story, both WMT and RTH gained 1% today and my elation was met with the fact that within three short weeks, the haggling over the DEBT LIMIT will be a new source to deflate any new found gains.

One economist said, "The politicians will put together a "last minute deal", stimulating the market long enough to please investors... then fall off the cliff." I think this to be a likely scenario. I will hope for the best over the next two weeks and tightly close my TRAILING-STOP so the stocks sell.

I don't have much faith in either the Federal Reserve, nor our government. Spending will continue at full steam and Bernanke will provide the wood that fuels the economic engine. At some point, there will be no rich to tax; the government, as has happened in so many other countries with a fiat currency, will have to TAX THE MIDDLE CLASS.

If you look closely, you will already see that the middle class is being taxed, but I'm talking about 60% of your income returning to the government. You already work 5 months out of a year to pay for all taxes (property, city, state, federal, social security). But I am saying that with in five years, you will work 8 months to pay taxes and the government will give you what is left over. Now TAX FREEDOM DAY is estimated differently by different economists and it depends in which state you live.

Now Mitt Romney got in trouble for saying what was true. At that time 47% of the U.S. population was receiving some kind of benefit from the Federal Government. Just being logical here, why would you vote for someone who would cut off your government benefits. If I were King, and I said "no more government support for art... like a crucifix in a jar of urine... or a cow and calf cut in half, in a big Plexiglas vat of formaldehyde... there would be some artists who would truly hate me. Or if a cinematographer wanted his vision painted on the big screen, of three sisters engaged upon a sexual exploration from their innocent upbringing...blah, blah, blah, and I cut Federal funding for his offbeat movie, again, I would be hated. I understand these examples sound ridiculous but each of these examples are TRUE. The list goes on and on. http://endoftheamericandream.com/archives/30-stupid-things-the-governemnt-is-spending-money-on

I only wish government wasn't wasting your tax dollars, but all of this is pushing us further and further into debt. We had the change for REAL CHANGE, but the vote was for more socialism.

Let me turn you on to Chris Martenson. He explains some of the problems of growth, but also in relation to debt. https://www.youtube.com/watch?v=bRc-YfcXVYo Exponential growth is explained, so that at the end of a growth cycle or debt cycle, the growth or debt can exceed you ability to comprehend it and happen within a blindingly short period of time.

This is exactly what happens to an individual. They fail to understand the power of compound interest. When you pay more than double the original price of your home in interest, you are losing real money. Assuming you buy a $200,000 home, you are giving $231,000 to the lender. This initially seems to your advantage because you didn't have the $200,000 to pay for the home in the first place...so you are using someone else's money.

But when you have the $200,000 to pay for a home, you are saving $231,000 in losses over a 30 year period. This is $231,000 that can go to work for you. So money, when used properly over 30 years, seems to grow slowly at first, but at the end of the thirty-year period the growth is exponential.

That $231,000 lost to interest, would have grown in 30 years, at 6% interest, to $1,210,435. Your actual loss is $1,210,435 of investment power.

For the individual, a series of loans and credit purchases can erode their wealth and set them up with so much debt, that one set of tires or an unexpected illness can bring down their whole financial house.



(note: the above information is for entertainment purposes only and not to be used as investment advice.)