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Category Archives: MPT

How to Become a Successful Long-Term Investor – Part 2 of 3 – Understanding and Reducing Risk

25 Wednesday Sep 2019

Posted by wmosconi in asset allocation, behavioral finance, Consumer Finance, Education, finance, finance theory, financial advice, Financial Advisor, financial goals, financial markets, Financial Media, Financial News, financial planning, financial services industry, Geometric Returns, historical returns, Individual Investing, individual investors, investing, investing advice, investing tips, investment advice, investments, math, Modern Portfolio Theory, MPT, personal finance, portfolio, risk, risk tolerance, risks of stocks, S&P 500, S&P 500 historical returns, S&P 500 Index, standard deviation, statistics, stock market, Stock Market Returns, Stock Market Valuation, stock prices, stocks, volatility

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academia, academics, behavioral finance, finance, financial, historical stock returns, invest, investing, investments, math, mathematics, Modern Portfolio Theory, MPT, performance, portfolio, portfolio management, S&P 500, S&P 500 historical returns, S&P 500 Index, standard deviation, statistics, stock market, stock returns, stocks, success, uncertainty

Another extremely important part of being a long-term investor is to understand the concept of risk.  Financial professionals define risk in a number of different ways, and we will examine some of those definitions.  The overarching goal is to look at risk from the standpoint of the volatility or dispersion of stock market returns.  Diversification of various investments in your portfolio is normally the way that most financial professionals discuss ways to manage the inevitable fluctuations in one’s investment portfolio.  However, there is another more intuitive way to reduce risk which will be the topic of this second part of this examination into becoming a successful long-term investor.

The first part of this series on long-term investing was a look back at the historical returns of the S&P 500 Index (including the reinvestment of dividends).  The S&P 500 Index will again be the proxy used to view the concept of risk.  If you have not had a chance to read the first part of the series, I would urge you to follow the link provided below.  Note that it is not a prerequisite to follow along with the discussion to come, but it would be helpful to better understand the exploration of risk in this article.

The link to part one of becoming a successful long-term investor is:

https://latticeworkwealth.com/2019/09/23/successful-long-term-investing/

But now we will turn our attention to risk.  Risk can be a kind of difficult or opaque concept that is discussed by financial professionals.  Most individual investors have a tough time following along.  Sometimes there is a lot of math and statistics included with the overview.  Although this information is helpful, we need to build up to that aspect.  However, there will be no detailed calculations utilized in this article that might muddy the waters further.  I believe it helps to take a graphical approach and then build up to what some individual investors consider the harder aspects of grasping risk.

Risk related to investing in stocks can be defined differently, but the general idea is that stocks do not go up or down in a straight line.  As discussed in depth in part one, the annual return of the S&P 500 Index jumps around by a large margin.  Most individual investors are surprised at seeing the wide variation.  Ultimately, the long-term historical average of the S&P 500 Index from 1957 to 2018 is 9.8%.  But rarely does the average annual return end up being anywhere near that number.

The first way I would like to look at risk within the context of long-term investing is to go back to our use of “buckets” of returns.  If you have not already read part one, I used “buckets” with ranges of 5% to see where stock returns fit in.  As it relates to risk, we are only going to look at the “bucket” that includes the historical average 7% to 12% and then either side of that “bucket” (2% to 7% and 12% to 17%).  Additionally, we will look at yearly stock returns and then annualized stock returns for three years, five years, and ten years.  Here is our first graph:

Returns on Either Side of Historical Average

The main takeaway from viewing this graph is that, as the length of time increases, more stock market returns for the S&P 500 Index group around the historical average for the index of 9.8%.  Remember that part one covered the useful information that, even though the historical average to be expected from investing in stocks is 9.8%, individual investors need to know that it can take long periods of time to see that historical average.  In fact, if we look only at one-year increments, approximately 33.9% of stock returns will fall into the range of 2% to 17%.    Or, if we use our yearly equivalent, stock market returns will only fall within that range 1 out of every 3 years.  When individual investors see this graph for the first time, they are usually shocked and somewhat nervous about investing in stocks.

The important thing to keep in mind is that as the length of time examined increased many more stock returns fall into this range.  The numbers are 65.0%, 67.1%, and 81.1%, for three years, five years, and ten years, respectively.  Converting those numbers to yearly equivalents we have about 6-7 years out of ten for three years and five years.  And, as one would intuitively suspect, the longest timeframe of ten years will have stock returns falling into the 2% to 17% range roughly 8 in every 10 years.  Now that still means that 20% to 35% of long-term returns fall outside of that range when considering all those time periods.  But I believe that it is certainly much more palatable for individual investors than looking at investing through the lens of only one-year increments.

Another aspect of risk is what would be termed downside protection.  Most individual investors are considered to be risk averse.  This term is just a fancy way of saying that the vast majority of investors need a lot more expected positive returns to compensate them for the prospect of losing large sums of money.  Essentially an easier way to look at this term is that most individual investors have asymmetric risk tolerances.  All that this means in general is that a 10% loss is much more painful than the pleasure of a 10% gain in the minds of most investors.  Think about yourself in these terms.  What would you consider the offset to be equal when it comes to losing and earning money in the stock market?  Would you need the prospect of a 15% positive return (or 20%, 25% and so forth) to offset the possibility of losing 10% of your money in any one year?  Let’s look at the breakdown of the number of years that investors will experience a loss.  To be consistent with my first post, I am going to use the “bucket” of -3% to 2% and work down from there.  Here is the graph:

Returns Less than 2%

There are 61 years of stock market returns from the S&P 500 Index for the period 1957 to 2018.  If we look at the category of 1 year, stock market returns were 2% or less 38.7% of the time (17 years out of 61 years).  However, if we move to five-year and ten-year annualized returns, there were no observations in the -3% to -8%, -8% to -13%, or less than -13% “buckets”.  When looking at losing money by investing in the stock market, a long-term focus and investment strategy will balance out very negative return years and your portfolio is less likely to be worth significantly less after five or ten years.  Of course, there are no guarantees and perfect foresight is something that we do not have.  However, I believe that looking carefully at the historical data shows why it is important to not be so discouraged by years when the stock market goes down and even stays down for longer than just one year.  Hopefully these figures do provide you with more fortitude to resist the instinct to sell stocks when the stock market takes a deep decline if your investment horizon and financial goals are many, many years out into the future.

The final concept I would like to cover is standard deviation.  The term standard deviation comes up more often than not either in discussions with financial professionals during client meetings or is used a lot in the financial media.  There are many times when even the professionals use the term and explain things incorrectly, but we will save that conversation for another post.  Standard deviation is a statistical term that really is a measure of how far away stock market returns are from the mean (i.e. the average).  It is a concept related to volatility or dispersion.  So, the higher the number is, the more likely it is that stock market returns will have a wide range of returns in any given year.  Let’s first take a look at a graph to put things into context.  Here it is:

Standard Deviation

The chart is striking in terms of how much the standard deviation decreases as the time period increases.  A couple things to note.  First, I do not want to confuse you with a great deal of math or statistical jargon and calculations.  My point is not to obscure the main idea.  Second, the 25-year and 50-year numbers are just included only to cover the entire period of 1957 to 2018 for the S&P 500 Index.  These periods of time are not of much use to individual investors to consider their tolerance for risk and the right investments to include in their portfolios.  And, as one of the most famous economists of the 20th century, John Maynard Keynes, quipped:  “In the long run, we are all dead”.  My only point is that discussion of how the stock market has performed over 25 years or longer is just not relevant to how most individuals think.  It is nice to know but not very useful from a practical perspective.

The main item of interest from the graph above of standard deviation is that you can “lower” the risk of your portfolio just by lengthening your time horizon to make investment decisions on buying or selling stock.  For example, the standard deviation goes down 46.9% (to 8.95% from 16.87%) between one-year returns and three-year annualized returns.  Why do I use “lower”?  Well, the risk of your portfolio will stay constant over time and focusing on longer periods of time will not decrease the volatility per se.  However, most financial professionals tell their clients to not worry about day-to-day fluctuations in the stock market.  Plus, most Financial Advisors tell their clients to not get too upset when reviewing quarterly brokerage statements.  This advice is very good indeed.  However, I urge you to lengthen the period of your concern about volatility in further out into time.  My general guideline to the individuals that I assist in building financial portfolios, setting a unique risk tolerance, and planning for financial goals is to view even one year as short term akin to examining your quarterly brokerage statement.

Why?  If you are in what is termed the “wealth accumulation” stage of life (e.g. saving for retirement), what occurs on a yearly basis is of no concern in the grand scheme of things.  The better investment strategy is to consider three years as short term, five years as medium term, and ten years as the long term.  I think that even retirees can benefit with this type of shift.  Now please do not get me wrong.  I am not advising that anyone make absolutely no changes to his/her investment portfolio for one-year increments.  Rather, annual returns in the stock market vary so widely that it can lead you astray from building a long-term investing strategy that you can stick to when stock market returns inevitably decline (sometimes precipitously and by a large margin).  Note that all the academic theories, especially Modern Portfolio Theory (MPT), were built using an assumption of a one-year holding period for stocks (also bonds, cash, and other investments).  Most individual investors do not fall into the one-year holding period.  Therefore, it does not make much sense to overly focus on such a short time period.

Of course, the next thought and/or comment that comes up is “what if the stock market is too high and I should sell to avoid the downturn?”.  I will not deny that this instinct is very real and will never go away for individual investors.  In fact, a good deal of financial media television coverage and news publications are devoted to advising people on this very topic every single day.   It is termed “market timing”.  In the third and last article in this series on becoming a successful long-term investor, I am going to examine “market timing” with the same stock market data from the S&P 500 Index.  You will clearly see why trying to time the market and buy/sell or sell/buy at the right time is extremely difficult to do (despite what the financial pundits might have you believe given the daily commentary).

Before You Take Any Investment Advice, Consider the Source – Version 2.0

18 Wednesday Sep 2019

Posted by wmosconi in asset allocation, Average Returns, behavioral finance, bonds, Charlie Munger, confirmation bias, Consumer Finance, emerging markets, Fama, finance, financial advice, Financial Advisor, financial goals, financial markets, Financial Media, Financial News, financial planning, financial services industry, Geometric Returns, Individual Investing, individual investors, interest rates, Internet Bubble, investing, investing advice, investing, investments, stocks, bonds, asset allocation, portfolio, investment advice, investments, Markowitz, Modern Portfolio Theory, MPT, personal finance, portfolio, risk, risk tolerance, stock market, Stock Market Returns, Stock Market Valuation, stock prices, stocks, Uncategorized, Valuation, volatility, Warren Buffett

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academics, anchoring, behavioral economics, behavioral finance, Ben Graham, Bill Ruane, Capital Asset Pricing Model, CAPM, Charlie Munger, cognitive bias, Common Stocks and Uncommon Profits, David Dodd, economics, economy, Efficient Market Hypothesis, EMT, finance, invest, investing, investments, mathematics, Modern Portfolio Theory, MPT, performance, Phil Fisher, portfolio, portfolio management, Security Analysis, stocks, uncertainty, Warren Buffett

I originally wrote about this topic five years ago.  However, I think that it may even be more relevant today.  You may have heard about behavioral finance/economics and how cognitive biases plagued individual investors when making financial and investing decisions especially during volatility times in the financial markets.

Sometimes an overlooked topic is the fact that whomever provides you with financial advice will invariably be affected by those same biases.  Yes, even the professionals cannot escape them.  One of the most prevalent and insidious cognitive biases is called “anchoring”.

In layman’s terms, “anchoring” describes the tendency of people to form a particular belief and then stick with it unless there is an incredible amount of evidence to the contrary.  It is just part of human nature; we generally do not want to admit that we were mistaken or flat out wrong.

Now when I am talking about considering the source, I am not referring to the person’s qualifications such as having a Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), or Chartered Market Technician (CMT) designation.  I am referring to the person’s investing paradigm. 

For the most part, financial professionals are influenced greatly by the time period in which they first start out in the financial services industry.  The first several of years have an outsized impact on their investing recommendations throughout the rest of their careers. 

I will give you an example in life, and then I will talk about Warren Buffett and even myself.  Take special note that I am including myself in this “anchoring” cognitive bias within the context of investing.

There have been many studies that show that the kind of music you listen to most during your teen years becomes your preferred type of music.  For example, there are many people in their early 40’s that love 80’s rock.  They would prefer to listen to that over any type of new music.  My parents are in their seventies now, and they love to listen to Peter, Paul, & Mary, the Beach Boys, Neil Diamond, Motown, and lots of one-hit wonders from the 50’s and 60’s. 

Think about your own taste in music.  Does this ring a bell?  Most people fall into this category, and it is almost subconscious.  You like a certain genre of music best, and it sticks with you.  Did you have a family member that was really into music and had a collection of records?  Sometimes you get introduced to music at an even younger age, and you are drawn to it.  You listened to it during your formative years.  The same goes for investing in a rather similar way.

If we take a look at Warren Buffett, he was definitely influenced by the time period in which he started learning about investing seriously.  Buffett read Security Analysis by Benjamin Graham and David Dodd, and he knew right away that he wanted to go to Columbia to get his MS in Economics.  The themes in the book seemed to resonate with him.  I have heard stories that the value investing class with Ben Graham and Warren Buffett was really a conversation between the two of them.  The rest of the classmates just sat back and enjoyed the “show”. 

Warren Buffett also learned a lot from a lesser known gentleman, Phil Fisher.  Phil Fisher wrote the classic treatise on “scuttlebutt” called Common Stocks and Uncommon Profits.  “Scuttlebutt” is essentially trying to gain every last piece of information you can about a company prior to investing.  This technique includes, not only speaking to management and reading annual reports, but talking to competitors, suppliers, current employees, past employees, and several other sources.

Warren Buffett remarked in the past that he was “15% Fisher and 85% Graham” in terms of his investing style.  Most experts on the career of Buffett would say that the percentage has shifted toward Fisher quite a bit, especially with the massive size of Berkshire Hathaway now.

I did not pick Warren Buffett because of his long-term track record of stellar performance.  I only picked him because many individuals are familiar with Warren Buffett.  Warren started out working for Graham in the early 50’s after he graduated from Columbia in 1951.  If you look back at this time in history, the stock market had finally gained back its losses from the great crash of October 1929.  The baby boom was in full swing, and the US economy was on overdrive in terms of growth.  The Securities and Exchange Commission (SEC) was set up back in 1933 after the crash once an investigation was done regarding the causes of this debacle. 

There were two important promulgations from the SEC in 1934 and 1940 that were issued in order to ensure that company information was available to the public and not fraudulent.  Well, there were still scams, but they were harder to pull off.  (As an aside, the Investment Advisor Act of 1940 did not stop Bernie Madoff from stealing billions of dollars several years ago).  Buffett and Graham (and Graham’s partner, Newman) loved to get their hands on any piece of information they could.  In fact, Buffett used to read entire books on every single public company. 

During that time period, information was so disjointed and hard to get.  However, it was now available to the public and professional investors who could do much more thorough analyses.  The financial markets had far more inefficiencies back then. 

This time period was before the dawn of Modern Portfolio Theory (MPT), the Capital Asset Pricing Model (CAPM), and the Efficient Market Hypothesis (EMT).  Thus, there was a great deal of opportunities for individuals like Buffett who soaked up all the information he could find.

Buffett started his own investment partnership in the mid 50’s.  It was essentially a hedge fund in most respects.  Without getting into too much of the details, Buffett was able to earn 20% more on average than the Down Jones Average annually until 1969.  The stock market at this time seemed to be overpriced in his estimation, so Buffett disbanded the partnership.  He referred his partners to Bill Ruane of the famed Sequoia Fund.  Bill was a former classmate of Warren, and he amassed quite a record himself.

So if we look at Buffett’s beginning career, he saw how doing your homework really paid off.  In fact, there are even stories that Ben Graham would use examples in his lectures about companies he was going to buy.  After class let out, all the students rushed to call, or see directly, their stock brokers to buy the companies Graham presented on. 

Buffett learned from Graham the importance of valuing a company based upon verifiable evidence and not market sentiment.  Fisher’s lessons showed him the benefit of accumulating information from different sources in order to truly understand a business prior to investing.  These formative years are still with Buffett. 

Now Charlie Munger, Buffett’s Vice Chairman at Berkshire Hathaway, has been an influence as well.  What is little known is that they grew up together in Omaha, Nebraska, and they were able to meet during this same time period.  This introduction to investing left an indelible mark on Warren Buffett that permeates his investing career today.

Obviously I am no Warren Buffett, but I started investing in mutual funds at age 13 in November 1987.  What got me so interested in the stock market?  Obviously Black Monday on October 19, 1987 really caught my attention.  It was not really the crash that really piqued my interest though.  My father told me that the market drop of 508 points on that day was an overreaction (down over 20% amazed me).  I did not know much about stocks, but it seemed to me like the world was ending.  At least that was how the nightly news portrayed things.  My father said watch the market over the next several days. 

To my absolute amazement, the Dow Jones Industrial Average (DJIA) went up almost 290 points in the next two trading sessions.  Wow!  This turn of events was really weird to me.  How could stocks move around in value so greatly?

I thought that all the big money investors in the stock market really knew what they were doing.  However, most everyone was caught by surprise by Black Monday.  The other interesting thing for me was that 1987 turned out to be a positive year for the DJIA.  If you want to get your friend’s attention, you can ask them what the return of the DJIA was for 1987 (positive return) and 1988 (negative return).  Most people will get it wrong.

Well, these events left a mark on me.  When I learned more about investing and was exposed to Modern Portfolio Theory (MPT) and the Efficient Market Hypothesis (EMT), I really did not think it was true given my start in investing back in the latter portion of 1987.  How could the value of the entire U.S. economy be worth 20% less after one day of trading? 

Now, the stock market is normally efficient and stock prices are correct, but I knew that there were inflection points in the stock market where rationality was thrown out the door.  Therefore, when I learned about Mr. Market and the vicissitudes and vagaries of the stock market from Ben Graham’s books, I liked that metaphor and way to characterize volatility in the stock market. 

For better or worse, I really do not care for the academic, ivory tower analysis of behavior in the stock market.  I cling more to focus investing, value investing, and seeing the financial markets as complex adaptive systems.  I would fall into the camp of Warren Buffett and the great hedge fund investor, George Soros.  Both men have said that they would never be able to pass the Chartered Financial Analyst (CFA) exam. 

The CFA is now the standard designation for all portfolio managers of stocks and bonds.  I tried studying for it, but a lot of it made little sense to me.  I guess that is why I think it is funny when Buffett says he wants to gift money to universities to install permanent chairs in business schools to teach Modern Portfolio Theory forever.

Most of the financial professionals you meet will range in age from twenties to sixties.  You should always ask them when they started investing or their career as a Financial Advisor.  Here are the ten major events that will cover those individuals:

  • The 1973-1974 severe bear market;
  • The Death of Equities article from Business Week magazine in 1979;
  • Black Monday in October 1987;
  • The Bond Bubble Bursting in 1994;
  • The Asian Contagion and Long Term Capital Management (LTCM) incidents in 1997-1998;
  • The Barron’s article in December 1999 that questioned the relevance of the Oracle of Omaha, Warren Buffett;
  • The Bursting of the Internet Bubble in April 2001;
  • The Financial Crisis and ensuing Great Recession of 2008-2009;
  • The “Lost Decade” of Returns from the S&P 500 from 2001-2010 when stocks averaged approximately 2% annually.
  • Managing Money is Easy. Look at my investing record over the past 10 years (2009-2018).  Note that the annualized return of the S&P 500 index over that period was 13.13%.

These major inflection points in the financial markets will have a great effect on your financial professional’s recommendations for investment portfolio allocation.  In fact, I met a Financial Advisor that tells his clients that they can expect to earn 12% annually from stocks over the long term.  He uses this return for modeling how much clients need to invest for retirement.  He was introduced to investing around 1996 which is when the stock market went gangbusters. 

I know another Financial Advisor that tells his clients to never put more than 50% of their money in common stocks.  He tells this to all of his clients, even if they are in their thirties and have 30+ years until retirement.  He started advising clients in 2007, and he lost a great many clients in 2008.  Therefore, he wants to have limited downside risk for two reasons. 

First, he has seen how much the stock market can drop in one year.  Second, this gentleman wants to ensure that his clients do not close accounts and flee to other financial professionals because the stocks in their portfolio go down 30-40% in a single year.

The importance today of the long, extended bull market of the past 10 years is extremely important to take into account for all individual investors.  A recent stretch of 13.13% annualized stock returns makes it seem that investing systematically over the long term is the correct investment strategy.  I would not disagree with that thought. 

However, Financial Advisors with 10 years of experience or less will only tell clients what they would do hypothetically in the event of a major market decline in the stock and bond markets.  Hypotheticals and backtesting are all well and good. 

But it has been my experience, that there is no substitute for actually investing during periods of extreme volatility and major stock market declines (20% or more).  For example, what was the best stock investment strategy right after the Internet Bubble implosion in terms of the asset class?  The best performing asset class for the next decade was to have a larger than normal allocation to emerging market stocks (think Ticker Symbol EEM or VWO).  Do you think that your Financial Advisor would have the stomach to recommend this investment to you after seeing the NASDAQ index fall by over 50%?

As you can see, the start of anyone’s investing career has an impact on their outlook for the financial markets and how to set up a portfolio properly.  I am not saying that any of this advice is “wrong” per se. 

My only point is that you need to probe your Financial Advisor a little bit to understand the framework he/she is working with.  Thus, you can refer to the aforementioned list of ten major events in the history of the financial markets.  These events really shape the investment paradigm of all of us.  And, of course, I will admit that I am no different.

With that being said, most investment strategies recommended by Financial Advisors are borne out of those individuals first few years with the financial markets.  Some financial professionals are more bullish than others.  Others focus on downside risk and limiting volatility in investment portfolios.  Still others utilize complicated mathematics to build investment portfolios that are optimized. 

Therefore, you need to understand your risk tolerance and financial goals very well.  You have your own personal experience with the market.  If your Financial Advisor is somewhat myopic and focused on the past repeating itself in the same way over and over, you need to be careful. 

History does repeat itself, but the repeating events will be caused by much different factors in most cases.  Unfortunately, the financial markets and market participants are always adapting to changing investment strategies, global economic GDP growth, interest rates, geopolitical events, stock price volatility, and a whole host of other things. 

You can learn from the past, but I urge you not to be “stuck” in the past with your Financial Advisor’s “anchoring” cognitive bias at the expense of setting up an investment portfolio that will allow you to reach your financial goals and match your risk tolerance.

Free Book – A New Paradigm for Investing on 50 year-old Investment Advice Available on Amazon.com

13 Wednesday May 2015

Posted by wmosconi in academia, academics, alpha, asset allocation, beta, books, college finance, finance, finance books, finance theory, financial planning, Free Book Promotion, Individual Investing, investing, investing books, investment advice, investments, Modern Portfolio Theory, MPT, personal finance, risk, stock market, stocks, volatility

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I have decided to make my recently published book FREE for several days, May 13, 2015 through May 17, 2015 (it normally retails for $4.99).  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Moreover, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format here.  It actually is quite surprising how little Financial Advisors know about MPT in general and how the ideas apply to individual investors.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com Prime Members can borrow the book for FREE as well. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

  • A New Paradigm for Investing: Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well of my blog that can be found at https://latticeworkwealth.com/.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would strongly recommend following for their content and insight):

Followers on @NelsonThought:

  • The Wall Street Journal Wealth Report @WSJwealthreport – #wsjexperts
  • The Wall Street Journal Central Banks @WSJCentralBanks – Coverage of the Federal Reserve and other international central banks by @WSJ reporters
  • The Royce Funds @RoyceFunds – Small Cap value investing asset manager
  • Research Magazine @Research_Mag – Latest industry information for wirehouses and ETFs
  • Barron’s Online @BarronsOnline – Weekly financial news magazine of Dow Jones
  • Cleveland Fed Research @ClevFedResearch
  • Pedro da Costa @pdacosta – Central banking and economics reporter at The Wall Street Journal
  • Muriel Siebert & Co. @SiebertCo
  • Roger Wohlner, CFP® @rwohlner – Fee-only Financial Planner for individuals
  • Ed Moldaver @emoldaver – #1 ranked Financial Advisor in New Jersey by Barron’s 2012
  • Muni Credit @MuniCredit – Noted municipal credit arbiter
  • Berni Xiong (shUNG) @BerniXiong – Author, writing coach, and national speaker

Followers on @LatticeworkWlth:

  • Tracy Alloway @tracyalloway – US Financial Correspondent at Financial Times
  • Vanguard FA @Vanguard_FA – Vanguard’s ETF research and education
  • EU External Action @eu_eeas – Latest news from the European External Action Service (EEAS)
  • Charlie Wells @charliewwells – Reporter and Editor at The Wall Street Journal
  • Sri Jegarajah @CNBCSri – CNBC anchor and correspondent for CNBC World
  • Jesse Colombo @TheBubbleBubble – Columnist at Forbes
  • Alastair Winter @AlastairWinter – Chief Economist at Daniel Stewart & Company
  • Investment Advisor @InvestAdvMag – Financial magazine for Financial Advisors
  • Gary Oneil @GaryONeil2 – Noted expert in creating brands for start-ups
  • MJ Gottlieb @MJGottlieb – Co-Founder of hustlebranding.com
  • Bob Burg @BobBurg – Bestselling author of business books
  • Phil Gerbyshak @PhilGerbyshak – Expert in the use of social media for sales

A New Paradigm for Investing on 50 year-old Investment Advice Available on Amazon.com

01 Saturday Mar 2014

Posted by wmosconi in asset allocation, beta, business, Consumer Finance, Education, Fama, finance, financial planning, Free Book Promotion, Individual Investing, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investment advisory fees, investments, Markowitz, math, Modern Portfolio Theory, MPT, passive investing, personal finance, portfolio, risk, Sharpe, sigma, statistics, stock prices, stocks, volatility

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Amazon.com, business, economics, education, FA, finance, Financial Advisors, free books, individual investing, investing, investment advice, investments, mathematics, Modern Portfolio Theory, MPT, personal finance, statistics

I have decided to make my recently published book FREE for today only, March 1, 2014(it normally retails for $4.99).  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Moreover, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format here.  It actually is quite surprising how little Financial Advisors know about MPT in general and how the ideas apply to individual investors.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com Prime Members can borrow the book for FREE as well. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

1)      A New Paradigm for Investing:  Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well of my blog that can be found at https://latticeworkwealth.com/.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would strongly recommend following for their content and insight):

Followers on @NelsonThought:

–  The Wall Street Journal Wealth Report @WSJwealthreport – #wsjexperts

–  Institutional Investor @iimag

–  The Royce Funds @RoyceFunds – Small Cap value investing asset manager

–  Research Magazine @Research_Mag – Latest industry information for wirehouses and ETFs

–  Barron’s Online @BarronsOnline – Weekly financial news magazine of Dow Jones

–  Cleveland Fed Research @ClevFedResearch

–  Euromoney.com @Euromoney

–  Pedro da Costa @pdacosta – Central banking and economics reporter at The Wall Street Journal

–  Muriel Siebert & Co. @SiebertCo

–  Roger Wohlner, CFP® @rwohlner

–  Ed Moldaver @emoldaver

–  Sylvia Maxfield @sylviamaxfield – Dean of the Providence College of Business

–  The Shut Up Show @theshutupshow

–  Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

–  Tracy Alloway @tracyalloway – US Financial Correspondent at Financial Times

–  Vanguard FA @Vanguard_FA – Vanguard’s ETF research and education

–  EU External Action @eu_eeas – Latest news from the European External Action Service (EEAS)

–  Direxion Alts @DirexionAlts

–  Charlie Wells @charliewwells – Editor at The Wall Street Journal

–  Jesse Colombo @TheBubbleBubble – Columnist at Forbes

–  Alastair Winter @AlastairWinter – Chief Economist at Daniel Stewart & Company

–  AbsoluteVerification @GIPStips

–  Investment Advisor @InvestAdvMag

–  Gary Oneil @GaryONeil2

–  MJ Gottlieb @MJGottlieb

–  Bob Burg @BobBurg

–  TheMichaelBrown @TheMichaelBrown

–  Phil Gerbyshak @PhilGerbyshak

– MuniCredit @MuniCredit

A New Paradigm for Investing: Can Your Financial Advisor Answer These Questions?

01 Wednesday Jan 2014

Posted by wmosconi in asset allocation, bonds, business, Consumer Finance, Education, Fed Taper, Fed Tapering, Federal Reserve, finance, financial advisor fees, financial planning, Individual Investing, investing, investment advisory fees, investments, math, Modern Portfolio Theory, MPT, Nobel Prize in Economics, personal finance, portfolio, rising interest rate environment, rising interest rates, risk, statistics, stock prices, stocks, Suitability, volatility

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Amazon book deals, asset allocation, books, business, education, finance, Financial Advisors, financial planning, individual investing, investing, investment advsiory fees, Modern Portfolio Theory, MPT, reasonable investment advisory fees, retirement

Greetings to all my loyal readers of this blog.  How would you like to start off the New Year of 2014 by reevaluating your investment portfolio and how you get investment advice?  This book on Amazon.com is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Please feel free to check out the titles below.  I have provided links to make it easier.   My email address is latticeworkwealth@gmail.com.

The link to the book is as follows:

A New Paradigm for Investing:  Can Your Financial Advisor Answer These Questions?

 

http://www.amazon.com/New-Paradigm-Investing-Financial-Questions-ebook/dp/B00F3BDTHW/ref=sr_1_3?s=books&ie=UTF8&qid=1388595896&sr=1-3&keywords=a+new+paradigm+for+investing+by+william+nelson

The book listed is normally $9.99 but available but I am offering it for a lower price over the course of the next week.  For most of the day today, the book is $3.99 which is 60% off.  The price of the book will be gradually increasing during the course of that period.

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

 The Wall Street Journal Wealth Report @WSJwealthreport – #wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Chloe Cho – @chloecnbc – CNBC Asia Anchor for Capital Connection show

Pedro da Costa @pdacosta – Central banking and economics reporter at The Wall Street Journal

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield – Dean of the Providence College of Business

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells – Editor at The Wall Street Journal

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

Happy New Year, Beginning Thoughts, and Information for International Viewers

01 Wednesday Jan 2014

Posted by wmosconi in asset allocation, bonds, business, Consumer Finance, Education, Fed Taper, Fed Tapering, Federal Reserve, finance, financial planning, Individual Investing, interest rates, investing, investments, math, Modern Portfolio Theory, MPT, personal finance, portfolio, rising interest rate environment, rising interest rates, risk, statistics, stock prices, stocks, volatility

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asset allocation, bonds, economics, finance, financial planning, individual investing, investing, investing ideas for 2014, investments, stocks, volatility

I am looking forward to sharing more information regarding investing, finance, economics, and general knowledge about the financial services industry in 2014.  I am hopeful to increase the pace with which I publish new information.  Additionally, I am happy to announce that I reached viewers in 40 countries in all six continents.  Countries from Japan, France, Germany, and Russia to Ghana, Colombia, and even Nepal.

Since the number of my international viewers has grown to nearly 20% of overall viewers of this blog I wanted to allocate a short potion of this post to the international community.  Some of my comments are most applicable to the US financial markets or the developed markets across the globe.  If you are living in a country that is considered part of the developing markets, I would strongly recommend that you seek out information in your country to see how much of my commentary is applicable to your stock or bond market and situation in general.  It is extremely important to realize that tax structure, transparency of information, and illiquidity of stock and bond markets can alter the value of what I might say.  During the course of the coming year, I will attempt to add in some comments to clarify the applicability.  However, as the aforementioned statistic regarding the global diversity of viewers of this blog suggests, I would be remiss if I did not acknowledge that I will not hit on all the issues important to all international individual investors.

I encourage you to take a close look at your portfolio early on in 2014.  It is a perfect time in terms of naturally wanting to divide up investing into calendar increments.  As you listen to all the predictions for the New Year, I would encourage you to look at your personal portfolio and financial goals first.  The second step is to always look at that economist’s or analyst’s predictions at the beginning of 2013.  Now I am not implying that incorrect recommendations in the previous year will mean that 2014 investing advice will be incorrect as well.  However, the important takeaway is that trying to account for the entire unknown factors both endogenous (speed of the Fed taper) and exogenous (geopolitical risk in the Middle East and Asia) affecting the global financial markets with a high degree of precision is exponentially difficult and challenging.

There will always be unknown items on the horizon that make investing risky.  You hear that we need to get more visibility before investing in one particular asset class or another.  It usually means that the analyst wants to be even more certain how the global economy will unfold prior to investing.  I will remove the anticipation for you.  There will only be a certain level of confidence at any time in the financial markets.  One can always come up with reasons to not invest in stocks, bonds, or other financial assets.  The corollary also is true.  It can be tempting to believe that it is now finally “safe” to invest even more aggressively in risky stocks, bonds, or other assets.  As difficult as it might be, you need to try to take the “emotion” of the investing process.  Try to think of your portfolio as a number rather than a dollar amount.  Yes, this is extremely difficult to do.  But I would argue that it is much easier to look at asset allocation and building a portfolio if you think of the math as applied to a number instead of the dollars you have.  Emotional reaction is what leads to “buying high and selling low” or blindly following the “hot money”; that is when rationality breaks down.

Here is an experiment for you to do if you are able.  There are two shows I would recommend watching once a week.  The first show is Squawk Box on CNBC on Monday which airs from 6:00am-9:00am EST.  The second show is the Closing Bell on CNBC on Friday afternoon which airs from 3:00pm-5:00pm EST.  You only need to watch the last hour though once the stock and bond markets are closed.  Note that these shows do air each day of the week.  It is not necessary and, more importantly, will negate the experiment if you watch them every day.  Now depending on whether or not you have the ability to tape these shows first and skip through commercials, this exercise will take you roughly 12-16 hours throughout the month of January.  You will be amazed at how different the stock and bond markets are interpreted in this manner.

When you remove the daily bursts of information, I am willing to bet that you will notice two things:

Firstly, Friday’s show should demonstrate that many “experts” got the weekly direction of the market wrong.  It is nearly impossible to predict the direction of the stock market over such a short period.

Secondly, Monday’s show should illustrate what a discussion of all the issues that have relatively more importance are.  Now this is not always a true statement though.  Generally though, financial commentators and guests appearing on the show will have had the entire weekend to reflect on developments in the global financial markets and current events.  Since the stock, bond, and foreign exchange markets are closed on Saturday and Sunday, there is “forced” reflection for most institutional investors, asset managers, research analysts, economists, and traders.  The information provided is usually much more thoughtful and insightful.

I believe that the exercise will encourage you to spend less time attempting to know everything about the markets; rather, it may be more helpful to carefully allocate your time to learning about the financial markets.

Best of luck to you in 2014.  As always, I would encourage anyone to send in comments or suggestions for future topics to my email address at latticeworkwealth@gmail.com.

A New Paradigm for Investing on 50 year-old Investment Advice Available on Amazon.com

03 Tuesday Dec 2013

Posted by wmosconi in alpha, asset allocation, Bernanke, beta, bonds, business, Consumer Finance, Education, Fama, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial advisor fees, financial planning, Individual Investing, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investment advisory fees, investments, Markowitz, math, Modern Portfolio Theory, MPT, Nobel Prize, Nobel Prize in Economics, portfolio, rising interest rate environment, rising interest rates, risk, Schiller, Sharpe, sigma, statistics, stock prices, stocks, volatility, Yellen

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alpha, asset allocation, Bernanke, beta, bonds, business, consumer finance, economics, education, Fama, Fed, Fed taper, Fed Tapering, Federal Reserve, finance, investing, investments, math, Modern Portfolio Theory, MPT, Nobel Prize, Nobel Prize in Economics, personal finance, portfolio, portfolio management, Schiller, Shiller, statistics, stocks, volatility, Yellen

I am happy to announce that I have published another book on Amazon.com.  I have decided to make it FREE for the rest of the week through Saturday, December 7th (it normally retails for $4.99).  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Futhermore, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com prime members can borrow the book for FREE. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

1)      A New Paradigm for Investing:  Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

The Wealth Report @wsjexperts – Wall Street Journal #wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Pedro da Costa @pdacosta

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

A New Paradigm for Investing Available on Amazon.com – FREE for Thanksgiving Holiday

27 Wednesday Nov 2013

Posted by wmosconi in asset allocation, Bernanke, bonds, business, Charlie Munger, Consumer Finance, Education, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial advisor fees, financial planning, GIPS, GIPS2013, Individual Investing, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investment advisory fees, investments, math, Modern Portfolio Theory, MPT, personal finance, portfolio, risk, statistics, stock prices, stocks, Suitability, volatility, Warren Buffett, Yellen

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bonds, Charlie Munger, consumer finance, economics, education, Fed, Fed taper, finance, financial advisor fees, Financial Advisors, financial planning, financial services, free books, interest rates, investing, investment advisory fees, investments, retirement, stocks, volatility, Warren Buffett

Greetings to all my loyal readers of this blog.  In keeping with the Thanksgiving spirit, I have decided to make my first two books absolutely FREE for the rest of the week.  These two books on Amazon.com are available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Please feel free to check out the titles below.  I have provided links to make it easier.   My email address is latticeworkwealth@gmail.com.

The books are as follows:

1)      A New Paradigm for Investing:  Can Your Financial Advisor Answer These Questions?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00F3BDTHW/ref=sr_1_1?s=books&ie=UTF8&qid=1381107823&sr=1-1&keywords=A+New+Paradigm+for+Investing+by+William+Nelson

2)       Spend 20 Hours Learning About Investing to Prepare for 20+ Years in Retirement

http://www.amazon.com/Learning-Investments-Prepare-Retirement-ebook/dp/B00F3KW9T2/ref=sr_1_1?s=books&ie=UTF8&qid=1379183661&sr=1-1&keywords=William+Nelson+Spend+20+Hours

The first book listed is normally $9.99 but available for FREE until November 30th.  The other book is normally $2.99, but it is also FREE for the same time period.

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

The Wealth Report @wsjexperts – #wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Pedro da Costa @pdacosta

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

You Purchased a Stock: Now What?

27 Sunday Oct 2013

Posted by wmosconi in asset allocation, Bernanke, bonds, business, Charlie Munger, Education, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial planning, Individual Investing, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investments, math, Modern Portfolio Theory, MPT, personal finance, portfolio, risk, statistics, stock prices, stocks, volatility, Warren Buffett, Yellen

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$WU, asset allocation, bonds, business, Charlie Munger, equity, equity selection, finance, individual stocks, investing, investments, momentum stocks, portfolio, stock pickers market, stockpicking, stocks, value investing, Value Masters, Warren Buffett, Western Union

One of the questions that I have been asked is about individual stocks, and, more specifically, how to monitor developments after the purchase.  Now I have mentioned before that I strongly recommend that you do not start off trying to buy individual stocks.  ETFs and index mutual funds are a better way to start off investing and will generally garner you higher returns in the long-run.  Why?  Well, please continue reading, and you will see how I approach the decision to purchase a stock and when I decide to sell.  Now my method is strictly my own, but you will see it closely mirrors Warren Buffett’s style of investing.  There are many other market participants that use a variation of the Buffett and Graham paradigm.  Moreover, there are literally tens of thousands of portfolio managers, hedge fund investors, research analysts, and others that value stocks every second of every day in response to company, economic, and geopolitical news.  Once you see how much work it takes, I am hopeful that you do NOT try it to begin with.

Before delving into the process of following a stock after your purchase, I will go through the steps I take prior to a purchase.  I strive for a turnover of 15-20%.  Turnover measures how long an investor holds a particular stock.  A turnover of 100% means that an investor holds a stock for one year.  Thus, my turnover equates to a holding period of 5.0 to 7.5 years.  So if I am willing to hold a stock for that long, I better make sure I am confident that it is a good investment.  How do I start?  I have a list of stocks that I am interested in purchasing.  If I decide to possibly invest, I go through a lengthy process.  Now I am not recommending any security.  However, I want to put some meat surrounding the discussion.  Therefore, I will talk about my process in terms of my decision to purchase Western Union (WU).  Western Union is now my top holding.  Should you buy WU?  Maybe so.  Maybe not.  You must do your own homework and not take my word for it.  As a show of good faith, I encourage you to look at my Twitter account:  @NelsonThought.  I have been posting information about WU for several months, so I am not “cherry-picking” to make me look good.  Let’s begin.

Regardless of where I get my ideas of stocks to analyze, I start off my analysis by learning everything I can possibly get my hands on.  You would be amazed at how much information is out there.  Prior to deciding to even value WU, I took a number of steps.  First, I read the last three annual reports for WU.  What do I focus on?  The most important part of any annual report is a section called Management Discussion & Analysis (MD&A).  MD&A is indispensable because management has a chance to be open and honest with investors.  Now when you purchase a stock, you should view yourself as a fractional owner in the actual company.  You do not own a piece of paper that says you have x number of shares.  You own a claim to the future cash flows and dividends of that firm.  Contained within the MD&A is management’s discussion is a review of the most recent financial developments, their strategy, and what management thinks is the future direction of the company.  WU’s management team talks a great deal about emerging markets.  WU relies upon the wiring of money between individuals.  The most important, growing income stream comes from immigrants sending money back home to their families.  For example, did you know that 30% of the Gross Domestic Product of El Salvador comes in the form of these remittances?  Wow!  That fact always gets to me.  Obviously you can see that the emerging markets are a great way for WU to grow earnings.  Additionally, WU has a huge market share in the correctional system.  If family members or loved ones of prison inmates need money to purchase items behind bars, they can use WU to transfer money into their accounts to buy food, hygiene products, and even other items like TVs and radios.  WU’s management speaks at length about these opportunities, and they also focus on growing their network of facilities that provide their services.  There is a “network effect” for WU.  The more money transfer centers there are, the more people in general will use their services.  For instance, if a local WU outlet is right near your house, and you need to wire some money to an individual or business, you are more likely to use it.  Well, if you need to wire money to a friend, and the nearest WU outlet is 50 miles from that person, WU is probably not a good option for you.  Therefore, it makes sense for WU to provide good incentives to build up their network.

Now I really focus on MD&A going back in time because management is telling you what they intend to do in the future.  Think about it in these terms.  Have you ever had a friend who tells you that they are going to quit working and start a business?  I know that I have.  More often than not, when I see that person in several years, they tell me that they are still working but they are starting the business soon or they found a better business to start.  It is great to have ideas, but, unless you act upon them and do it, there really is no point.  Well, the same scenario happens very often with a business.  Management might describe great plans to grow the business back in 2010.  If they never speak about it again, or they have new and better ideas when you read the 2012 annual report, that should be a red flag for you.  Now changing strategy is sometimes warranted, but management should be transparent with you.  If a strategy is no longer relevant, or it did not work out, they should explain why.  It is only fair.  You own the stock; you own part of the company.  Always take the time to compare prior MD&A with current MD&A.  This technique can save you a lot of time.  Why value a stock if management does not seem to know what they are doing?

After you feel comfortable with management and still have strong beliefs that the business is well-positioned, you can look at the financial statements of the company.  Every publicly traded company is required to file financial statements with the Securities and Exchange Commission (SEC).  The reports are called 10-Ks on an annual basis and 10-Qs on a quarterly basis.  The SEC even has a website that you can go to when you look for them.  It is called the EDGAR system can be found here:  http://www.sec.gov/edgar.shtml.  The financial statements will include the income statement, balance sheet, and statement of cash flows.  Which part is most important to me?  Well, that is a trick question.  I go to the back of the financial statements and look at the notes to the financial statements.  Do not feel bad if you got the question wrong.  When I pose the question to undergraduate students during presentations that I give, I have never had a finance student give the correct answer.

 Why do I say the notes?  For one, I have an accounting undergraduate degree, so I am interested in them.  You can always get financial statement ratios and earnings expectations online, but they rarely incorporate information from the notes.  Now the notes to the financial statements tend to be boilerplate to begin with.  The accounting firm that audits the financial statements of a firm will explain that the company used generally accepted accounting principles (GAAP) and disclose the accounting methodology utilized when GAAP allows different choices.  After all these disclosures, you will find lesser known items.  The second reason why I look at the notes to the financial statements is to see if there is something I do not understand.  What do I mean by this?  You may remember the downfall of Enron.  The downfall of Enron was right in plain sight all along.  Enron had a disclosure “buried” in the notes that talked about Special Purpose Vehicles (SPVs).  What is a SPV?  I still really have a vague understanding, but here are the basics without getting too technical.  A SPV is a separate legal entity that is set up to own assets and incur liabilities.  It is really like a subsidiary of a company but, since it is a separate entity, the assets and liabilities of the SPV are not required to be reported on the company’s balance sheet.  What?  This phenomenon is called off-balance sheet reporting.  Essentially it is a way to not disclose liabilities.  Think about it in terms of the federal government.  The federal government does not consider future Social Security and Medicare benefits to be necessary to be reported in the current budget.  Thus, the $50+ billion of future payments of benefits is not reported; only think tanks talk about it periodically.  Now I do not want this to be a political discussion.  That is not my intent.  I simply bring it to your attention as a more familiar example of this topic.  Thus, Enron had liabilities that it had to repay in the future, but, if you only examined the financial statements, the future payments were not on the balance sheet.  The auditors did not look too closely.  Why?  I liken it to this.  No one wanted to raise his/her hand and say what is this SPV thing.  In general and in business, people do not want to look uninformed or “dumb”.  If you see something in the notes to the financial statements that you do not understand, I would suggest that you pass on the purchase of that stock.  When I look at the notes for WU, there is nothing that bothers me in particular.

After I look at the notes, I focus on the statement of cash flows, balance sheet, and then the income statement.  I look at them in that exact order.  Now I do not prepare a model at this point to value the company.  Rather, I do some calculations in my head.  Is the company actually generating cash from the operations of the business?  Does the company have enough assets to invest in the business?  Are earnings coming from sources that will either never occur again or have nothing to do with its core business?  These are very vital questions to ponder.  Why do you not value the company at this point?  Now I really have a number in mind for what the stock is worth, you still need to compare that to the sub-industry and industry that the company operates within.

As one reader commented, he was probably going to use this discussion to cure his insomnia ailment.  Hopefully you made it this far.  Are we having fun yet?  I promise we will get to the discussion of how to follow a stock after making a purchase, but I need to lay the foundation to ensure that my method makes sense.  Not that it is right, but the logic of the paradigm is plausible.  As it relates to the sub-industry and industry, I perform what is referred to as a SWOT analysis.  SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.  Now I already know the S and W part from my review of MD&A and the review of the financial statements issued by the company.  The O and the T refer to the industry and competitors.  The main competitors in this space to WU are MoneyGram International and Euronet Worldwide.  How does WU match up against these two?  These two companies are smaller than WU, but bigger is not always better.  These two firms are constantly innovating and trying to make inroads into the niche of WU.  They are referred to as firms within the sub-industry.  The industry as a whole is the financial services industry.  Now WU is able to grow significantly in the emerging markets because the banking industry is not very developed in these countries.  It is easier at this point to simply pick up a wire transfer at a Western Union outlet than to open a checking accounting.  I can assure you that banks have noticed taking note.  Banks are trying to come up with ways to make it easier to open an account and simply have the money deposited there.  That is the most common way to look at the industry.  Now sometimes it is easier to ignore other developments, but I try to take everything into account.  Did you know that you can make wire transfers at most Wal-Mart stores now?  That development might be a game-changer.  Think about it this way.  Why should you go to WU when you can simply do your normal shopping at Wal-Mart and then send your wire transfer?  Remember that there are a plethora of Wal-Mart stores, so they already have a built in “network effect”.  They are a definite competitor even though they are technically in the retail industry.

After my entire analysis, I was confident that the purchase of WU would be a good investment.  How do I go about valuing any stock?  As I mentioned previously, I use a method that Warren Buffett has perfected over the years.  Trust me, I am no Warren Buffett.  If I were as good as Warren Buffett, I would not be writing this blog.  However, his method (coupled with Phil Fisher, David Dodd, Charlie Munger, Bill Ruane, and a few others) makes sense to me.  Think about stocks like bonds.  Bonds are much easier to value.  Why?  They are a promise to pay back money loaned to them.  The only return from a bond held to maturity comes from the coupon.  The coupon is simply the interest rate.  As an aside, you will hear coupon over and over again.  Where does the term come from?  Back in the older days, when you would purchase a bond, the company would give you a certificate that actually had coupons.  When a payment was due from the company, you would take the coupon to your local bank and get your money.  The bank would collect all the coupons and present them directly to the company.  This was prior to the introduction of computer systems to monitor who owned which bond.  That is why you will hear the term coupon.  Anyway, the interest rate of the bond does not vary over time.  A bond is worth a set amount that you will receive upon maturity and the periodic interest payments, but you need to remember that the payment is fixed.  What if interest rates fall?  If you purchased a bond that had a 6% coupon and the prevailing interest rate for the same type of bond rises to 8%, how are you able to sell the bond?  Why would I buy your bond if I can simply buy one with an 8% coupon?  You can sell me that bond by lowering the price.  A corporate bond is usually issued in $1,000 increments, so, if interest rates rise, you can simply lower the price to make its return equivalent to owning an 8% percent bond.  This is what is referred to as an inverse relationship.  It works the same way in reverse if interest rates fall.  If prevailing interest rates fall to 4%, you can afford to charge what is referred to as a premium because buyers in the marketplace cannot find a better opportunity with your 6% coupon.  Therefore, you can charge more than $1,000.  How does this relate to stocks?  Stocks are nothing more than bonds with variable cash flows.  Now if you ignore the fact that owning a bond makes you a creditor and holding a stock makes you an owner of the firm, you really need to value it in the same way.  However, it is infinitely more difficult.  Why?  You do not know how the company will fare in the long-term.  Will the strategies work out, will they be executed properly, will another competitor overtake the company, or will a new technology displace the service provided by the company?  I have already talked about the competitors of WU, banks knocking at the door, and the “invasion” of Wal-Mart into the space.  All of these elements cause the future earnings of WU to be unknown and variable.  I am still confident with the prospects of WU, so I move to valuing the company and approach it in the same manner as I would a bond.

To me (and many others), a stock is only worth what a company can earn in the future.  If you have a friend that has a business idea but you can see that it is unlikely to work, would you invest in the firm?  Probably not.  When I look at WU, I see that it is likely to earn money far into the future.  What are earnings?  You will hear many different terms because there are many different types of market participants and other stakeholders.  I focus on a concept called owner earnings.  Owner earnings are a combination of Free Cash Flow (FCF) and changes in Plant, Property, and Equipment (PP&E) and working capital.  FCF is simply the cash that comes from ongoing operations of the firm.  However, you need to remember that the firm needs to make future investments in technology and other items.  Thus, when you look at depreciation of PP&E which is only an accounting convention, the company may need to make more or less investments into the business in order to keep competing.  Additionally, the company needs cash to simply pay current bills that come due which relates to working capital.  If you calculate FCF and adjust for PP&E additions and working capital, you come up with owner earnings.  Once you calculate owner earnings, you know that the firm will be able to grow owner earnings over time.  If they cannot grow owner earners in the future, you probably would not be at this point in the analysis right now.  Well, you also need to remember that these earning will occur in the future.  Why is this important?  Think about loaning $100 to a friend for a year.  If he/she tells you that they will pay you the $100 back sometime next year, you will most likely want more than $100.  For one, you automatically know that under normal economic conditions, it will cost more than $100 to buy the same amount of products or services next year.  Additionally, you could have bought something else with the $100 and enjoyed it right away.  This is the concept of utility.  For example, you could have purchased 5 or 6 Blu-Ray discs and enjoyed watching these movies.  You are forgoing that consumption because you loaned out the money.  In order to make it worth your while, you might tell your friend that you will loan him/her $100, but you want them to pay you $110 next year.  This will compensate you for inflation and delaying your consumption.  The same economic principle applies to the purchase of stocks.  You could spend your money, or you could invest in another stock.  Therefore, you will only purchase a stock if the price will increase satisfactorily in the future such that you can make money.  You need to discount these future owner earnings.

How do you discount the owner earnings?  I come up with my financial model at this point.  I determine how much WU will earn over the next five years, the five years after that, and then for the rest of its existence.  Once you have calculated the next five years, you need to remember something.  If a certain company is earning what is referred to as “excess profits”, other firms will come into the market and try to do the same thing because it is lucrative.   Additionally, there might be other technological advances which make the wire transfer business of WU less attractive or obsolete, which is even worse.  Thus, I assume that WU will grow at a certain rate for five years, a lower rate for the next five years, and then a growth rate similar to the general economy forever.  The last part is somewhat of a plug figure.  Most stock analysts will say that WU (or any other company) cannot keep growing at high rates forever, it will eventually grow owner earnings very similar to GDP growth in perpetuity.  Now I use an assumed growth rate of 3.5% which is higher than the domestic economy because WU has a significant presence in the emerging markets which are growing at a faster clip.  Now that I have a stream of owner earnings, I need to discount them to the present.  The discount rate is a subject of much debate.  I use a rate of 7% or the equivalent of the yield on the 10-year US Treasury.  Other investors will use a higher rate.  I won’t get into a debate about the proper discount rate to use.  I simply follow the advice of Warren Buffett.  Here is a link to see his rationale:  http://www.sherlockinvesting.com/help/faq.htm.  If I discount that owner income stream back to the present at that discount rate, I come up with what is referred to as an intrinsic value.  Intrinsic value is a concept that was coined and explained at length by the father of value investing, Benjamin Graham.  The intrinsic value is what I think WU is worth right now given the current business environment and likely future prospect.  Now since I am fallible and the future is uncertain, I use the margin of safety concept also introduced by Benjamin Graham.  I take the intrinsic value figure and reduce it by a certain amount.  For WU, since it is in a somewhat stable industry and finance is my background, I use a margin of safety of 20%.  Therefore, I multiply my intrinsic value figure by 80% (100%-20%).  If the current stock price of WU is lower than my calculation, I am inclined to buy.  The intrinsic value I get for WU is significantly above the current stock price.  I purchased WU at $14.24 average cost, and it now trades at $18.36 as of August 9, 2013.  I still hold the largest portion of my portfolio in WU because I see the intrinsic value of WU as being higher than that presently.

As you might imagine, this entire process took me roughly 55-60 hours.  Surprisingly, there are many stock analysts that may say that I was not thorough enough.  An example would be the famed hedge fund investor Bill Ackman.  I am willing to bet that I spent more time prior to the purchase of WU than you will spend on financial planning over the course of your lifetime.  I do not mean this in a condescending manner.  I only point this out to simply show why the purchase of an individual stock is not right for everyone.  I tend to refer to myself as a “dork”.  I am passionate about investing, and I love to perform this type of analysis and calculations.  If you are not willing to put in that type of time to do your homework, I would stop at this point.  I will repeat again that ETFs and index mutual funds are much better choices for individual investors.  If you would like the chance to beat the index averages, I would rather see you invest in actively managed mutual funds or separate accounts than try your hand at selecting individual securities.  With that being said, I will now turn to what I promised to in the beginning.  Please forgive me for what might seem to be a circuitous route.

I intend to hold WU for a long time.  I have a set intrinsic value, and I am willing to stick to holding the stock through all the “visiccitudes and vagaries” of the stock market.  My emotional intelligence is higher than most investors.  I view investing as an intellectual exercise.  The money is secondary.  As soon as you start focusing on the money, you may be tempted to sell your stock if it falls in price significantly for what might seem like no apparent reason.  If I need to wait for 5-10 years for WU to reach its intrinsic value, I am willing to do so.  Does this sound like fun?  Well, it is to me.  Unfortunately, this has really nothing to do with what you read in most financial news publications or see on financial media.  However, you need to remember that I am an investor in the company and not trading pieces of paper.  I can confidently say that the way investing is portrayed in the financial media is much more akin to speculation.  My suggestion is to go to the casino if you want to try to double your money.  You will have more fun.  Investing in stocks to gain significant riches immediately is a fool’s game in my opinion.

What do I focus on after the purchase?  The first thing I do is to read all the earnings transcripts of the firm.  After each quarter, the company will file a 10-Q with the SEC and announce financial results to the public.  Management will then talk to analysts on an earnings call to recap the quarter and then answer questions from a selected group of research analysts.  I try to see if the earnings results match up with MD&A and if management uses any “excuses”.  An example of a typical excuse is the weather.  If a retail outlet has depressed earnings, they tend to use bad weather as an excuse at times.  It may be likely, but, more often than not, it is a way to hide poor execution by management.  Any particular quarter should not affect your intrinsic value calculation much.  In the short-term, there can be developments that affect earnings for a temporary time.  I do not worry about quarterly earnings, but I am interested in how the company is doing.

The second thing I do is to keep up with general economic conditions.  I visit the Bureau of Labor Statistics (BLS) website on a periodic basis.  The link is as follows:  http://www.bls.gov/.  The BLS is the agency of the government that monitors and releases economic statistics like GDP growth, new housing starts, the trade deficit, and a lengthy amount of others.  I focus on leading indicators, but I also am interested in the so-called lagging and coincident indicators released by the BLS.  Why do I pay attention to this?  I do so for one primary reason.  I am very confident in my calculations of future owner earnings for WU.  However, I usually extend that to include a three-part probability exercise.  For example, the likely path of owner earnings for WU is definitely affected by the current/future state of the economy.  I have a percentage for normal, boom, and bust scenarios.  The normal part gets the highest weight, and I then attribute different percentages to the other two.  Now I will admit that these are very subjective, but they are imperative.  How does the calculation work?  Well, I assume that WU will earn more money if the economy does better than expected or less money if the economy enters a recession.  Therefore, I multiply these scenarios by three different percentages.  For example, I currently weight my estimates of future owner earnings by 80% normal, 15% boom, and 5% bust.  Therefore, if the state of the economy changes or its future trajectory, I alter the percentages.  Since WU relies so much on remittances across borders, if global growth slows significantly, I need to weight the stream that assumes a recession much higher.  Using this approach, I do not have to recalculate owner earnings for WU again.  I simply use the three different scenarios and weight them differently.  Trust me, it saves a lot of time.

The next thing I do is to follow the developments of competitors.  I read the earnings transcripts of these firms, do a cursory review of financial statements, and look at how the industry is possibly changing (for better or for worse in terms of WU’s positioning).  It is extremely valuable to be constantly testing your investment thesis.  You need to be ready to admit that you made a mistake.  You can lose a lot of money otherwise.  I can attest to that via Best Buy (BBY) and Citigroup (C) stock holdings in the past.  With that being said though, you need to do that without referencing the case laid out by speculators.  If someone tells me that WU will have a bad third quarter, I really do not care.  I am willing to ride out stock price volatility because I know that WU is worth more than the current market price.  The advice from speculators relates to traders of stocks (owning pieces of paper) and not investors.

I also follow market developments.  Although I do read the Wall Street Journal and Financial Times, I try not to get too hung up on the current news of the day.  You can get in trouble that way by feeling itchy and pulling the proverbial trigger and selling in a panic.  I commented on this in more detail in a previous blog as it relates to the entire stock market.  The link is as follows:  https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/.  I tend to put more weight in The Economist, Barron’s, Bloomberg Businessweek, and trade journals.  I even read a few publications that seem unrelated but can make all the difference.  One great source is the Harvard Business Review.  This magazine is technical and “heavy duty”, but it can be a great way to identify mistakes that WU management is making or how they are behind the curve when it relates to business strategy.  This information helps me to determine whether or not my calculation of future owner earnings is correct and will come to fruition.

My next technique is a little odd to some.  I have found that I can learn a great deal about investing from other disciplines.  In fact, I will devote an entire post to the name of my firm.  I use what Charlie Munger, whom I lovingly refer to as Warren Buffett’s sidekick, calls the latticework of mental models.  This approach is to acknowledge that ideas from other discipline are germane and pertain to investing.  A perfect example is psychology.  There has been an explosion of ideas in the disciplines of behavioral finance and behavioral economics.  These fields do not assume that market participants are rationale.  Humans have innate biases and make consistent mistakes.  As an investor, you can use this to your advantage.  The one adage along these lines comes from Warren Buffett:  “Be fearful when others are greedy and greedy when others are fearful”.  If everyone is telling me that WU is going to the moon, I start to question my investment thesis.  Now as a contrarian investor, if everyone is selling WU for reasons that are temporary or are related to general market selling, I perk up and even look to add to my position.  You can read more about the latticework of mental models in an excellent book by Robert Hagstrom called Latticework:  The New Investing.  I use the concept of complex adaptive systems from biology, and the concept of nature searching for equilibrium from physics all the time.  In fact, there is an entire website that you can learn a great deal from.  It is called the Sante Fe Institute.  This think tank is not devoted to investing at all, but they are looking for common themes among different disciplines.  Take a look; I promise you will not be disappointed:  http://www.santafe.edu/.  I now will turn to the little talked about decision to sell a stock.

I think about WU in these terms.  If I come across another investment opportunity that is better than WU, I will sell WU.  If management or the state of the economy changes, I will sell WU.  If you are in a tax-deferred account (401(k), 403(b), Roth IRA, etc), you do not need to worry about taxes.  However, my individual stocks are in a taxable account.  While taxes should not guide your sell decision, you must take them into account when deciding if another opportunity is truly better.  Why?  You should only care about terminal values.  If you sell WU and buy another stock, that purchase should increase the value of your portfolio in the future.  That makes sense intuitively.  However, your mind can play tricks on you.  What if I am expecting to earn 9% a year from WU and another stock comes along that I can earn 13%?  Should I sell WU and earn the 13%?  The answer is that it depends.  Here is a typical scenario.  Let’s say I now own $20,000 of WU and purchased WU with an original investment of $10,000.  Thus, I have a $10,000 capital gain that is now subject to a 20% capital gains tax.  If I decide to sell WU and receive $20,000, I have to pay $2,000 ($10,000 * 20%) to the federal government come tax time.  Let’s look at the scenario in terms of expected yearly results.  If I sell WU to earn 13% in another stock, I am really only investing $18,000.  If I decide to keep WU, I still earn the 9% and avoid a capital gains tax.  What happens at the end of the year?  If my scenario holds true, I will have $21,800 ($20,000 + $20,000 * 9%) in my brokerage account at the end of a year if I earn 9% from owning WU.  If I decide to sell WU and buy the other stock, I will have $ 20,340 ($18,000 + $18,000 * 9%).  Yes, I earned 13% on my new stock, but I have a lower amount in my brokerage account.  Why is this a common phenomenon?  Well, most people file their taxes and pay any capital gains tax from their checking account.  The money does not come out of the brokerage account directly.  Your net worth goes down overall, but your brokerage account “misleads” you into thinking you made a great selection because you earned an extra 4% by owning this other stock.  In fact, you would need to earn 21.1% in order to have $21,800 in my brokerage account by being able to pay the capital gains tax and then have the same terminal value as I would by simply holding WU and earning 9%.  If you ever wondered why Warren Buffett holds onto Coca-Cola (KO) and American Express (AXP), taxes factor in greatly.

Now for all of you readers that are not asleep, I appreciate you bearing with me.  As I mentioned before, investing is not meant to be fun or exciting.  It is only fun and exciting if you like the intellectual challenge.  For all of us “dorks”, we go through this analysis because it is truly fun to us.  For most people, they would much rather not spend 60 hours finding a stock to buy and then 20-25 hours per year following your stock after the purchase.  Luckily, you can own an ETF or index mutual fund and likely match my investment return in WU or even beat it over the long term.  For more information on the style of Warren Buffett, I refer you to the following series of books by Larry Hagstrom (mentioned him before):

1)       The Warren Buffett Way

2)       The Warren Buffett Portfolio

3)       The Essential Buffett

4)       Security Analysis by Benjamin Graham the sixth edition

You will note that my investing style is similar to Warren Buffett, but I have incorporated elements from other famous investors and from other disciplines.  I will never be another Warren Buffett.  However, I can strive to use a similar investing paradigm.  Hopefully this discussion was helpful in thinking about one possible way to monitor your stock purchases.  Yes, it is a great deal of work and time consuming.  You will have much better investment results though, if you know as much as you can about your stock.

When It Comes to Your Investments, Are You Smarter than a 14 year-old?

12 Saturday Oct 2013

Posted by wmosconi in asset allocation, Bernanke, bonds, business, Charlie Munger, Consumer Finance, Education, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial planning, GIPS, GIPS2013, Individual Investing, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investments, math, Modern Portfolio Theory, MPT, NASDAQ, personal finance, portfolio, risk, statistics, stock prices, stocks, volatility, Warren Buffett, Yellen

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That is a great question.  I will save you the suspense and give you the answer.  You are as smart as a 14 year-old when it comes to your knowledge of your investments.  What 14 year-old teenager am I referring to?  I am referring to myself.  I started investing when I was 13 back in November 1987.  (If you do the math, you can figure out how old I am).  After spending a year studying the financial markets, I had amassed quite a bit of understanding.  How does this relate to you?  Well, if you have been following my blog, I have not revealed any information that I did not already know by then.  Now my writing style has improved and I have incorporated innovations introduced after 1988, the topics I have written about are not that complicated.  Before you continue reading, I would like to state at the outset that I was not some sort of child prodigy when it came to finance.  I was good at math and retained what I learned.  I am no genius and have no delusions of grandeur.  As I sometimes tell my friends, “If I really knew what I was talking about, I would be running a $10 billion hedge fund”.

With that being said, you also have the good fortune of learning from approximately 25 years of mistakes in investing and misunderstanding about the financial markets and the impacts of exogenous and endogenous events.  I could go on and on about my mistakes; however, I will mention a few here.  First, I had the opportunity to invest in two shares of Berskshire Hathaway Class A (BRK.A) stock back in 1991 when it traded a little above $8,700 per share.  Of course, Berkshire Hathaway is the company run by the famous investor Warren Buffett.  As of August 5, 2013, BRK.A’s closing stock price was $177,300 or a bit over $350,000 if I would have purchased those two shares back in 1991.  Why did I miss out on this opportunity?  I did learn everything I could about Warren Buffett once my economics teacher talked about him and his investing paradigm.  It really made sense to me from the start.  Unfortunately, I pass up on purchasing the shares because I would only be able to own those two shares and one other mutual fund.  As a young man, I was hyped and yearning to pick a number of different investment choices.  Best Buy is one of the best performing stocks in the financial markets and trades over $30 now.  I purchased Best Buy about 7 years ago and paid $42.  I did sell quite some time ago, but I took a huge capital loss.     Second, I wrote a paper during my MBA program that talked about the risk management procedures of Citigroup.  As I look back on that paper written in 2005, it is curious to note that, besides AIG, Citigroup went through the pain of learning the limits of risk management and it had a bailout of epic proportions.  I guess my paper was not the best in retrospect.  Finally, I had a terrible habit of picking the current “hot hand”.  I tended to switch my mutual fund holding way too often when I was in my teens.  It was really attractive to calculate how much money I could earn in a mutual fund that made 20% per year.  Wow, I could double my money in less than four years!  As you always see now, past performance is not indicative of future returns.  I really ignored that statement and invested many times based upon hopes and extrapolation instead of rational thought.  My emotions got the best of me.

I did have quite a few wins along the way.  For example, I was invested in the famous Fidelity Magellan mutual fund when it was run by Peter Lynch.  Peter Lynch is a legend among mutual fund managers.  At one point in time, Fidelity Magellan had more assets than any other mutual fund in the country.  Oddly enough, that was its eventual downfall.  Another example would be that I was able to learn how to successfully manage my father’s 401(k) portfolio from 1988 to the present.  I have seen many bull and bear markets and never had his eventual retirement portfolio take a significant hit in terms of poor returns.  My experience investing over the last 25 years has shown me that there will be many times when the financial pundits say this time is different, new industries are going to blow away the Old Economy, or that news events should cause investors to reallocate investment portfolios dramatically.  Even though I have been investing for 25 years, there have been very few seminal financial market events, the global economy may be different but the laws of finance and economics still hold (or they eventually bring prices back to earth), and new industries tend to bring more innovation and tools for existing, mature industries.  An illustration would be the early Internet companies lost money and burned through enormous amounts of cash.  However, the technologies they introduced allowed existing businesses to use the Internet in unique ways to either generate additional revenue or improve productivity.  A direct example would be how airplanes revolutionized leisure and business travel, but the airlines have been a wealth-destroying industry.  On the other hand, there are a myriad of business that used the services of airlines.

My overall point is that if you take one hour per week for about four months, you will be able to get through the five books I recommended on investing.  Additionally, you can spend another 30 minutes looking at a few financial websites just to increase your knowledge of investment products, finance terms, and keep abreast of news in general.  As a reminder, the list of five books can be found here:  https://latticeworkwealth.com/2013/07/23/spend-20-hours-learning-about-investments-to-prepare-20-years-of-retirement-2/ .  As another reminder, some recommended financial websites can be found here:  https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/ .

My entire goal with this blog is to save you lots of time.  Rather than being bombarded by disparate information regarding the financial markets and how to approach investing, I am trying to give you a shortcut.  I am hopeful that, if you have a roadmap that is clear, you will be more motivated to learn about investments and eventually become more comfortable with the process of building an investment portfolio to meet your financial goals, while ensuring that your emotions do not get the best of you.  At the end of the day, many individual investors pay fees to financial professionals to save themselves from enemy #1.  Who?  I mean that sometimes individual investors act rashly and keep buying and selling stocks and bonds at inopportune times just because a bad news event comes along or via peer pressure.  Remember that, if you have read all my previous posts, you are more than likely in the 90th percentile of individuals understanding of how the financial markets work.  Keep in mind there have not been that many posts to my blog, so I hope you realize that it is not as painful as you might have once thought learning about managing your investment portfolio and the financial markets is.

As an aside, please feel free to reach out to me if you have a recommendation for a topic I can discuss.  Please remember that this is a website geared toward individual investors who are novices or have not been investing for too long.   Thus, I am not looking to discuss how one might use ARIMA modeling to understand how macroeconomic variables affect the financial markets or individual stocks/bonds.  I appreciate you keeping it relatively simple.  With that being said, if enough people contact me in regard to one specific topic, I will definitely take a closer look.  Thank you in advance for your participation and time thinking about what would be more useful to you.  Furthermore, I am hoping that I cover topics that apply to everyone.  If the collective investment intelligence of the group steps up a few notches, I will cover the topic.  Please send me an email:  latticeworkwealth@gmail.com

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