Archives For February 2013
1. Once you marry, you’re responsible for your spouse’s debt.
2. Credit cards from your favorite retailers are a good deal.
3. You’re too rich for federal student loans.
4. Dutifully paying off your mortgage each month will do wonders for your credit score.
5. Money from a family member makes an easy down payment on a home.
6. Today’s tight lending criteria apply to auto loans too.
7. If you agree to separate your debt in a divorce, it’s separate.
8. A high income and credit score means you’ll be pitched the lowest interest rates on credit cards.
9. If you’ve looked up your credit score, you know your credit score.
10. A late credit-card payment will damage your credit.
11. All mortgage and home-equity interest is deductible.
12. Buying a home with cash is the best option, if you have the money. The author mentions the mortgage interest deduction, which does reduce the cost of the mortgage. I look at the opportunity cost than the interest deduction. Forking over $150,000+ for a house means you no longer have that $150,000 for something else like investing.
I wanted to take a deeper look at one-year returns for the S&P 500*. I looked at the following:
• I began with January 1926 and calculated the one-year return. Then, I moved to February 1926 and calculated that one-year return. I repeated the exercise for every rolling one-year period through 2012.
• I also looked at and calculated the monthly DCA for each period (Personal Rate of Return).
• I looked at what a lump sum grew to over each one-year period.
• I calculated the average and geometric average monthly returns for each one year period.
• Finally, I calculated the monthly standard deviation for each one-year period.
There were 1,033 one year rolling periods.
I found a friend of mine who created a macro for me that made my analysis MUCH easier.
So, here is a summary of my findings. NOTE: If you would like a 33-page PDF of my findings, send me an email (JLP – at – AllFinancialMatters.com) and I’ll email it to you. It’s a large file and I don’t want to make it available for download off the AFM site.
And finally, here is a PDF with additional information:
Ugh! If we need any more proof that we’re too dependent on government, this list of “7 Spending Cuts You’ll Really Feel” should cover it:
1. Shrinking unemployment benefits. Some 3.8 million Americans estimated to collect unemployment checks between March and September will feel the pain the most. That’s because unemployment benefit checks are being pared by 9.4%. On average, it would mean a cut of $400 over that period. I know many will disagree with me but I have heard stories of people turning down jobs because they made more off unemployment (or unemployment made it easier to stay home rather than take a job).
2. Beef and chicken to cost more and even face a shortage.
3. Granny won’t get her lunch.
4. Your preschooler could be stuck at home. Some 70,000 children from lower income families will not be able to enroll for pre-schools and daycare centers run by Head Start programs this fall, thanks to at least $400 million in cuts. Unless you are using preschool as a daycare, take your preschooler to the library, art museum, teach them to write and cound on your own. You don’t need preschool.
5. National parks will close campgrounds or open late.
6. Longer lines at the airport.
7. Roofs blown off by Hurricane Sandy won’t get repaired. Isn’t this an insurance company’s responsibility?
I love this song. My favorite parts: The guitar solo and the upright bass played with a bow. Wow…
Jason Kelly, author of The Neatest Little Guide to Stock Market Investing: 2013 Edition*, was kind enough to answer some questions via email for AFM readers. Here is that interview:
• It’s been awhile since we last talked. Tell us what you have been up to the last year or so?
I was working on the 2013 edition of my stock book in the first half of last year, then focused on upgrading my weekly newsletter site to add in features that subscribers had been requesting. The site began as just a repository for past notes, but over time I added commenting and a podcast and a watch list, and so on, but everything had a tacked-on feel to it. So, my designer and I spent months figuring out what people valued most, how to arrange it so that the most popular uses of the site appeared immediately when subscribers logged in, and then making it all more attractive. Website design is a lot of work, and the irony is that when it’s done best it looks easy as pie, giving the impression that it was just whipped together in an afternoon. Anyway, I’m happy with the result and so are subscribers.
• What did you think of the election results last November? Were you surprised?
I’m discouraged by how little difference any candidate makes. Strip away all speeches and make a spreadsheet of the practical results of any administration and we find little reason to be upset or happy regardless of who wins. More and more people are onto this, so apathy is an understandable problem.
As for the last election, I follow polls closely and know which ones have the best track records, and they all favored Obama at the end. Given how close it was, I can’t say I was confident that Obama would win, but I did think the odds favored him. I rolled my eyes when so many announced after the fact that they had known Obama would win and then began calling his victory a landslide. Nobody knew ahead of the fact and he did not win by a landslide. Besides, it’s awfully hard to separate lucky guesses from skill in coin flip contests, right?
To remove suspense from future elections, I recommend monitoring the odds at FiveThirtyEight, the Princeton Election Consortium, and Votamatic. All three are scientific, dispassionate, and very good.
• What do you think the reelection of President Obama means for the U.S. economy and stock indexes for 2013? What about the rest of the world?
His reelection doesn’t mean a darned thing for the economy or stocks. They would do what they’ve been doing regardless of who won in November. Obama has neither hurt nor helped stocks, and no president ever does. The impact of the White House on markets is negligible.
As for the economy and stocks, I see the former improving gradually and organically as it has after every other credit-based recession of the past, and I think stocks will provide uninspiring returns until their next major setback, which will create the atmosphere of fear that’s best for buying ahead of a subsequent recovery. Despite media obsession with the horserace aspect of stock investing, long-term success is more about reversion to the mean and exploiting deviations from that mean.
• With advancements in technology, is it still possible to be a value investor? How is the average person supposed to find an undervalued company with so much competition out there from mutual funds, hedge funds, and other investors?
Sure. In fact, the advent of technology has made it easier for disciplined investors to rise above the clamor because there’s more noise to distract beginners and the less disciplined. I love seeing a person glued to real-time updates because I know that’s one less person that will be hard to beat. Too much information is a killer in the stock business, at least to the long-term value approach that’s best for most individual investors.
It’s a fairly straightforward process to look at a company’s past financial performance, stock valuation trading range, current position, and future projections, then to determine a fair price to pay today that will offer reasonable odds of price appreciation in the future and, in some case, a predictable flow of dividend income. Then, just wait for the fair price to appear. Get enough of these on a watch list, and it doesn’t matter if 90% of them never get cheap enough to buy. The 10% that do will provide plenty of profit with little stress.
• In your book, you don’t talk a lot about index funds. Are you not a fan of index funds?
I write about them as much as is needed, given their simplicity. Frankly, I think I’ve come up with the best way to use indexes, and it’s through the leverage and value-averaging techniques presented in Chapter 4: Permanent Portfolios. The plans are so simple, and indexing so straightforward, that it doesn’t take long to get somebody started on autopilot with these permanent portfolios. Thus, most of the book is dedicated to the more complicated art of finding value in individual stocks.
You raise a good issue, however, one that others have brought to my attention as well. The index-based plans are so simple that nobody takes them seriously. In my view, the 3% quarterly growth value-averaging plan is about all anybody needs for the long term, superior to individual stock-picking for almost all individual investors. To bring it to a wider audience in a way that makes people believe in it, I’m working on a book dedicated to a complete exploration of the plan, and variations on the core method.
• In your experience, what do you think is the most common mistake investors make when it comes to managing their portfolios?
Believing that there’s something special about them that will overcome base rate results from investment history. This tendency leads to forecasting a future that’s rosier than is likely, which creates shortfalls that American society makes easy to overcome with debt, the killer of financial freedom. Always assume historical market returns and then invest in ways that provide a chance of upside surprise beyond them, which should be treated as a bonus, not necessary for survival.
• In your book you talk about several styles of investing along with an overview of several different investment professionals. Which style do you use personally?
Value averaging** for the core of my portfolio, the 3% quarterly growth method mentioned above. When picking individual stocks, I’m a patient value investor, awaiting cheap prices that I project will provide a good chance of market-beating results in the future. For example, Apple’s recent stumble caught my attention. I’d been watching and waiting for it to settle back, and it finally did.
• What’s one or two of your favorite books that you have read recently?
Revolutionary Road by Richard Yates, which illustrates the ease with which people who consider themselves extraordinary can become the very conformists they want to escape in society, and how lacking the guts to make bold life decisions is a sure path to mediocrity. I believe most people should reserve their boldness for exciting life choices rather than for the stock market, where it usually gets them into trouble.
• Got any new books in the works?
Always! I’m focused on the one mentioned above, which will provide a full background on the 3% quarterly growth plan, explore variations on it, consider objections and common ways that people ruin the plan by trying to improve it, and so on. I hope it changes the way people manage their 401(k)s and other retirement accounts, putting them on effective autopilot so they can devote their energy to living and loving and seeing the world.
• Finally, what are your plans for this year? Got any big travel plans in mind?
Yes! I just returned from a week in Nicaragua, where I researched small coffee farms with my sister and business partner, Emily, and other people in the industry. We jointly own a coffee shop in Longmont, CO called Red Frog Coffee. The Nicaragua trip was an eye-opening experience that made me want to travel among other coffee regions of the world. I like travel with a purpose much more than I like sightseeing, so this struck a chord in me. Emily and I would love to see coffee regions in Africa, especially Ethiopia and Uganda.
For fun, I’m going with my family to Newport Beach, CA this summer. We used to do this as kids, but stopped six years ago. We’re resurrecting the tradition in the same beach rental house we used in the past. Making new memories in a place filled with old memories adds depth to my life. All of us are looking forward to it.
Thank you for this enjoyable conversation!
Thanks for your time, Jason.
**A future AFM topic
I just listened to the first part of a podcast by Paul Merriman on “10 Things Every Investor Should Know.” Here are the first five points:
1. There is no risk in the past. This is so true and yet people tend to forget this important detail.
2. Diversification is the only free lunch in the investment process. I think he’s off a little here. Diversification doesn’t always mean safety. Think back to 2008 when nearly every asset class dropped at the same time. But, in general, he is correct.
3. Investors should never take a risk that they can’t expect a premium for that risk.
4. There is always good news in the market and, there is always bad news.
5. Every investor should know what their primary goal is. This will help them stay on course and not be bothered by current market conditions.
I’ll post the next five as soon as they are available. Meanwhile, take some time to listen to his “10 Things Every Investor Should Know” podcast. Good stuff from Paul.