Investing Blog

Investment Selection and Patience Are Keys to Long-Term Success

I’ve been fielding a lot of questions on my website about how to take advantage of the current market. The market is bullish, so many feel it’s time to go all in. In response, I caution patience and selectivity. If we ignore our selection criteria to take advantage of a hot market, we make one of the classic mistakes in investing: seeing opportunities because we want them to be there, not because they’re actually there. Read more

Quarterly Update

This was another quiet quarter for the markets. There was a brief dip early in the quarter, but mostly the market moved slowly upwards. It’s an interesting time for markets, valuations are on the higher side, but the economy continues to show signs that it has reached escape velocity from the sluggishness created by the Great Recession. I’m maintaining my target of about 15% cash for client accounts right now because there isn’t a lot of value out there. When a market correction creates more value, I’ll put that money back into the market. I’m not targeting a higher percentage in cash because, despite my expectation that there will be a near-term market correction, the market may not correct in a significant way for a while. Short-term market movement is unpredictable and beating the market in the long-term is about holding superior stocks, not market timing. Read more

What China’s Ownership of U.S. Debt Tells Us about Emotional Investing

There are many economic pressure points that push often rational people into the outer reaches of emotional hyperbole. China’s ownership of U.S. debt is a great example of this. As Vox writer Matt Yglesias put it: “No subject attracts as much wrong commentary from people in positions of authority and influence as China’s purchases of American government debt.” Part of being a value investor is looking for the most rational explanation to potential threats or market events. Even when there is a chorus of opinion, by very smart people, value investors dig into the facts. Read more

The Dangers of Market Timing

Investor John Hussman runs the Hussman Strategic Growth fund and is bearish on stocks and has been for a long time. With the S&P 500 up near all time highs, his pessimism continues. Last year, he wrote that he believes that it is plausible to expect the S&P 500 to lose 40-55% of its value from its peak.

It is true that market valuation is high and I, along with many other investors, believe that there will be a correction sooner rather than later (although I would expect something much smaller than the 50% correction Hussman is looking for). I have a current target of 15% cash for client portfolios for that reason, so we can take advantage of better values when there is a correction. But the reason that hedge is small is because I also understand that the market will behave irrationally, and I don’t want to carry large percentages of cash, or more aggressive hedges, in the hopes of catching the market right when it falls. Read more

Take Advantage of Time Arbitrage

Many worry that insider trading, or stock price manipulation, undermines the fairness of the stock market. They worry that even if you pick the right stock, price manipulation will rob you of your chance for profit. It’s axiomatic that there’s always someone on the other side of your trade, and they may know more than you. Read more

Expect Market Crashes and Profit From Them

Market crashes are part of the volatility investor psychology bakes into the stock market. Large crashes are rare, but one can expect stocks to fall at least 10% once a year, 20% once every few years, and 30% or more once or twice a decade. A 50% or more drop, like we experienced during the great recession, only occurs once or twice during your lifetime. Read more

The Advantages Independent Investors Hold

The markets met the past quarter with more sanguinity. We had a dip in February, but the markets ended the quarter mostly flat. There are many positive economic signals: job numbers continue to improve, economic growth was revised upward for the previous quarter, the EU hit its highest consumer confidence in half a decade, and housing numbers are on track. For the most part, the market brushed aside events that at other times might cause significant downward movement, like the Russian invasion of Crimea. Many Wall Street analysts are predicting a multi-year spell of lowered stock volatility. That may happen, but it’s certainly not something one can predict with any accuracy. So, thinking about all those professional investors that are basing their strategies on those predictions, I wanted to touch on two of the advantages independent investors hold over Wall Street: the freedom to admit uncertainty and the absence of pressure to react to every market event. Read more

Why Benjamin Graham is Relevant Today

I first read about the forefather of value investing, Benjamin Graham, in the late 1990s. In the investing world, value investors have never been in the majority (or even the plurality), but Graham had then, and still has, a strong following. I was interested that a historical figure would have so much influence in modern investing. In a world of computers, instant data, and new economic conditions, I wondered whether Graham’s advice was still applicable. After years of research I came to believe Graham’s teachings were highly valuable, even if some of his formulas were now outdated. Graham’s principles became the foundation for my investment philosophy. Read more

Investors Should Be More Suspicious of Dividends

As a general rule, I avoid companies that pay large dividends. I do this because in the best case, it is a sign from management that investing its cash back in the business will not yield a solid rate of return. That is, management would rather give the cash to shareholders than invest it to grow the business. In the worst case, management will raise dividends even when that cash could yield a good return on reinvestment, or is needed to pay down debt. Read more

Why Most Investors Fail to Win at the Short-term Game

My approach to investing is founded on buying businesses for the long-term, not trading stocks for the short-term. At times of market volatility (for example, the start of this year), this might seem an illogical way to look at a stocks. The common thought is that these price swings have to mean something. Commentators on CNBC offer a trade of the day five days a week. Other commentators discuss the emerging technical patterns that will dictate price. There is plenty of pressure on investors to trade often and try to catch the market, or a stock, at the perfect time. The key concept to remember, however, is that most of the time short-term price movement doesn’t mean anything. It’s not a rational response to macroeconomic events or microeconomic news. It is what statisticians call noise. Try to outsmart the market’s short-term reactions and the market will leave you behind. Read more

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