The Long Term Investor

WHY NOT........we see investors that rely on everything else....

Wall Street investors consult tarot card reader for investment advice

https://www.foxbusiness.com/markets/wall-street-investors-consult-tarot-card-reader

MY COMMENT

Not sure how I would feel if I saw this lady coming out of a mutual fund or financial advisors office.

 

What a GREAT YEAR to illustrate the power and potential of investing for the long term. With all we have gone through.....since January 1, 2020.......here we are about 7 months into the year and........

SP500 year to date +4.01%

There is......plenty.......of potential for the SP500 to end the year between +10% and +15%. Of course with the .......potential election fiasco.....we could easily end up negative for the year. I personally PREFER to believe that BOTH the DOW and SP500 will end up positive for the year. Add in the NASDAQ and we.........could very well.........end up with a clean sweep. AMAZING.

 

NEVER look back........Zukodany. When it is time to sell........just sell and move on. That is what I do.......and......it has saved my ass many times. I try to sell as decisively as I buy. Lots of people are good at buying a stock....the hard part is selling. Most recently selling Boeing when I did saved me a lot of PAIN. With all the GREAT companies out there.....no need to hold onto anything that is not producing for you. At least you broke even and can now make a.........LATERAL......move into something else with that money.

Myself.....today......very surprised that we did not end up negative today. The open was nice but than the way the market was fading made me think we were going to end up negative. BUT.....it picked right back up and held nicely for the day. Fine with me......ended up green again. AND.....was able to beat the SP500 by .30% as a kicker.

I will probably be.........MISSING IN ACTION.......tomorrow. I will be driving a few hundred miles to a University Library to look through some archives for materials on the painting that I have been researching. Every time I think I am done, something else pops up and I have to follow it.

At least while I am running around and out of touch..........my MONEY will still be working for me.

 

Well now. I am gone for one day.......and the markets decide to have a HISSY FIT......not for any particular reason that matters.....just because it can. We got off to a great start today and looked like we were heading to a nice.....record......close.....but the markets just decided to say......screw it. Of course......I ended up RED and got beat by the SP500 by .88%. Oh well.......tomorrow is a new day and the futures look good along with a nice 5 for 1 split by TESLA. Perhaps RATIONALITY is returning along with the recent split announcements. I like this little article:

What makes a good investor? Experience is more important than intelligence

https://www.marketwatch.com/story/w...nt-than-intelligence-2020-08-10?mod=home-page

(BOLD is my opinion OR what I consider important content)

"A lot of people get into the money-management business when they are young, and they haven’t seen a whole cycle, just one-half of one

Sometimes people ask me, what makes a good investor?

I’ve had the opportunity to observe a handful of great investors over the years, and plenty of bad ones. It’s pretty clear why the good ones are good — they all have a few things in common.

The first is intelligence. They’re simply super-smart people. There is an observable correlation between intelligence and investing ability. But it is a somewhat weak correlation.

How you handle winners is much more important than how you handle losers. It has to do with your psychological need to be right — most people would rather be right than make money, believe it or not.

I know lots of smart people who are terrible investors, and I know some dumb people that are great investors. But yes, raw cognitive ability will be responsible for a lot of your investing success.

The household names in the hedge fund world are, without a doubt, very smart people. Some 160-plus IQs in that bunch. Within that group, you want to look for performance that is repeatable — someone with a long, profitable track record with minimal risk and small drawdowns has vanquished the “luck vs. skill” argument.

So yes, they are all very smart people. But that is not all.

The second attribute of great investors is experience — they’ve simply been doing it longer than anyone else. A lot of people get into the money management business when they are young, and they haven’t seen a whole cycle yet, just one-half of one. And the up part of the cycle is considerably less instructive than the down part.

I have been doing this for 21 years — I started in the business in 1999, in the middle of the dot-com bubble (the first one). I have seen a lot in my career.

Here’s a short list of things I’ve traded through: the housing bubble, the European debt crisis, the S&P debt downgrade, the flash crash, the cotton bubble, beans in the teens, rare earths, uranium, Ebola, the yuan devaluation, zero rates, negative rates, oil at $140, oil negative, COVID-19, bitcoin, the Tesla squeeze, Volkswagen, the cannabis bubble, security stocks in 2003, Ford debt downgrade, SARS, 9/11, the Iraq War, Trump’s election and so on.

The list goes on and on. A 100-year flood every year for 20 years. You’re on the wrong side of just one of these trades, you’re done.

And I remember. I remember how the market behaved in each of these events. And I remember what stocks did on a micro level, too — including the price action after payroll numbers and Fed meetings.

‘You get old; you get careful’

Experience counts for a lot, which is strange, because there aren’t too many people over 40 on trading floors (though there are more today). We still have an obsession with hiring young people — mostly because they have an enlarged appetite for risk. You get old; you get careful. Which is a pretty good argument for hiring old people.

And finally, the most important attribute of great investors is emotional fitness. This has to do with your psychological makeup.

A big part of it is humility. There is nothing more dangerous in this world than overconfidence. Yet we lavish attention on people who speak with certainty.

I find that the most confident forecasts are typically the most wrong. And the forecasts uttered nervously with numerous disclaimers and qualifications tend to be the most right.

Emotional fitness refers to how you manage risk. How do you handle losses, but more importantly, how do you handle winners?

How you handle winners is much more important than how you handle losers. It has to do with your psychological need to be right — most people would rather be right than make money, believe it or not. They fear embarrassment more than they fear financial losses. They don’t mind being wrong, as long as they have company. To them, there is nothing worse than being wrong and alone.

These are all psychological failings. Among them is an underlying, deep-seated fear of success.

Early in my career, I read all of the Market Wizards books. In those books, great investors frequently talked about how important it was to manage your emotions, to treat investing as an academic problem, rather than an epic struggle. They talked about how you shouldn’t get angry and you shouldn’t get upset.

At the time, I thought this was crap. But I was wrong. Ever since I got my heart rate down, my performance has improved dramatically.

I’m a slow learner. It’s taken me 20-plus years to learn this stuff. And I’m definitely not the sharpest pencil in the box, so the intelligence thing doesn’t come naturally to me.

One last thing that most great investors have in common: They all have money already. It’s hard to make money if you’re struggling to pay the mortgage. If you take risk, make sure you take risk from a position of “screw you.”

MY COMMENT

As usual.........so simple........yet, so difficult. Probably the least important item above is the intelligence you are born with. Especially if you understand the rest of what is above.

 

Oh yes.......my research today. A BIG GOOSE EGG. What I was looking for was NOT there in the archival boxes. It was on the inventory list.....but NOT in the boxes. I went through every box in case it was misplaced, but......nothing. Sometimes finding nothing is a good thing. At least I made sure that all possible sources and information has now been exhausted. If I had not gone and looked.......I might have been missing something. Now I know......for sure. I have gone through a LOT of potential sources lately and come up with NOTHING. That tells me that I have......probably......exhausted everything that is out there on my research topic. I am waiting to hear back from one University library in Kansas and than I will have covered EVERY base that I can think of.

For any new readers.......I am researching a certain American Impressionistic painting that I own that until now........nothing was known about it. ALL information and history of this particular painting was lost to history. I AM VERY satisfied with what I have been able to put together. BUT......it is nice to be done......finally.

 

Markets........in general......are ON FIRE today. The BIG CAP royalty of the American economy.......RED HOT. BUT.....we know what happened yesterday and we are ONLY about an hour and a half into the day. MUSK is my hero today....he ignited a market firestorm with his split announcement yesterday. How long will it last.....probably about a day or so. BUT.....I will take it.

I like this article. Nice interview and whether you agree with the EFFICIENT MARKET THEORY there is much content in this article that I believe is important for investors. The title of the article is a little misleading considering the very general discussion in the interview:

Inflation is Totally Out of the Control of Central Banks

https://themarket.ch/english/inflation-is-totally-out-of-the-control-of-central-banks-ld.2476

(BOLD is my opinion OR what I consider important content) (QUESTIONS in the article are NOT my BOLD, that is how the article was published)

"Few economists have had a greater influence on the financial markets than Eugene Fama. According to his Efficient Market Theory, competition among investors is so intense that all information and expectations are immediately and correctly priced in. Therefore, it’s impossible to beat the market in the long-term.

Never shy of making pointed statements, the Professor of Finance at the University of Chicago doubts the power of the central banks. «The business of central banks is like pornography: In essence, it’s just entertainment and it doesn’t have any real effects», he says. In contrast, he warns that investors could begin to question the credit worthiness of governments because of the high national debt levels.

In this in-depth interview with The Market/NZZ, which has been edited and condensed for clarity, Prof. Fama explains why he welcomes the boom in passive investing and why he sees no problem in the high capital concentration at tech giants like Apple, Amazon or Microsoft. In his view, absurd price swings such as negative oil prices are no reason to doubt the rational behavior of markets.

Professor Fama, the efficient market hypothesis has revolutionized the way people invest. What goes through your mind when you look at the wild swings the stock market made this year?

The market seems pretty good. It held up even though the economy is deep in the bucket. This is a good example of how forward looking the market really is: It’s looking past what we are going through now, and it’s saying that the future doesn’t look that bad.

Do you think that’s the correct assumption?

If I could forecast, I wouldn’t be a professor.

Still, since the crash in February/March, we basically went from 1929 to 1999 in just a few months. What are the chances stocks are in a bubble?

Bubbles are things people see in hindsight. They don’t identify them in advance. Sure, you can look at the behavior of prices, and you may be able to identify cases where they are too high. But if you only look back and say: «Oh, stocks went down a lot, so that was a bubble», then that’s 20/20 hindsight. At the time, there was no evidence that there was a bubble.

On the other hand, sometimes there are obvious signs of excess. Let’s take the final stage of the great dotcom bull market of the late nineties as an example.

Let’s go back to that period before the crash. Alan Greenspan, the head of the Federal Reserve, made his famous «irrational exuberance» speech about the market being too high in early December 1996. But even after the crash, the market never went back to the level when he made that speech. So what do you think of that forecast?

Is there really no way to spot a bubble?

Here’s another example: In the fifties, there was a famous professor at Stanford who was an agricultural economist. He brought plots of agricultural prices into the faculty lounge and asked people to identify bubbles. Of course, they saw the ups and downs, and all of them identified bubbles. Afterwards, he told them that these were just numbers he had randomly generated. That tells you how good people are with identifying bubbles.

Against that backdrop, what do you make of the growing discipleship of behavioral finance which focuses on the influence of psychology on investment decisions and questions the efficiency of markets?

What I say is that we agree on the facts but we disagree on the interpretation. In my view, there is no such thing as behavioral finance. Essentially, it’s just a criticism of efficient markets. They don’t have a theory of their own. Hence, that makes me the most important person in behavioral finance. Without me, they don’t have anybody to disagree with. So I think behavioral finance is just a branch of efficient markets.

But what about factors like emotions, herd mentality or cycles? Aren't they important at all?

Tastes and behavior are important in economics. Nobody denies that. But you have to translate these things into something testable, so we can take the data and test it, looking forward and not looking backward. That’s my response to all that stuff. It never works out.

Yet, we also know that investors regularly mix up similar-looking stock tickers or company names and thereby cause absurd movements in stock prices. How is this rational behavior?

It isn’t. You can identify mistakes like that. It’s common that names confuse investors and as a result, you can get temporary price movements. But they are usually tiny and go away quickly. I don’t say markets are completely efficient, but they’re efficient for most questions that I address. Models are never a 100% true. If they were, we would call them reality, not models. But for almost all purposes, market efficiency is a very good approximation. I’ll go even further: Almost all investors should regard markets as efficient for their own investment decisions. If they do that, they will be better off in the long-term.

Still, recently we saw some truly strange things that are hard to explain rationally, like negative oil prices or credit spreads on fortress balance sheet companies like Apple exploding. Is this the way rational markets are supposed to behave?

It’s always foolish to look at individual cases because every individual case is different. I don’t know how to judge those particular events and I don’t get into the business of valuing individual companies. But the fact that the oil price went briefly negative tells you that all storages were full. Therefore, people weren’t able to buy oil since there was no place to put it. The negative price didn’t last very long, but it shows you that once you start producing oil, this stuff keeps coming out of the ground no matter what. That means the price can go negative, and someone who has storage capacity can make money at that point.

Would you ever have expected to see negative oil prices?

We’ve seen a lot of things that we thought could never happen before. But they did, like negative interest rates all over the countries in Europe.

Negative interest rates are turning the financial system upside down. Are markets still able to function efficiently when bonds are yielding less than zero?

Negative interest rates tell you that there is some cost to storing cash. That’s why you get negative rates, mostly in short-term bonds. The alternative to holding those bonds is to hold cash, but holding cash is apparently not costless. This means you’re bound by the cost of holding cash. So, what do you do with your cash? If we’re talking about a position of hundreds of millions of dollars you don’t want to have that in cash.

And what about the fundamental consequences of negative rates? How are they impacting the real economy?

I don’t’ think they impact the real economy, but it’s a problem for the financial system. What’s more, in 2008, in response to the financial crisis, the Fed started to pay interest on its reserves. But there is no interest on the currency, and currency is exchangeable for reserves on demand by the banks. So based on classic monetary theory, you don’t really know what’s determining inflation at this point. There is no control over the stock of what qualifies as money, since reserves aren’t really money anymore because they are paying interest. That means you can't control the currency supply. In other words: Inflation is totally out of the control of central banks.

In the coming months, the Fed is expected to make a major commitment to ramping up inflation soon. What would it mean for investors if we really get inflation?

Inflation and return on investments is a tough topic that’s been around since the early seventies. In principle, you can see the effects of inflation on long-term interest rates, but you can’t see them in stocks very well because the volatility is so high. Hence, we don’t know what effect inflation will have on markets. It depends on the effect on real activity: High, but stable inflation wouldn’t be a big deal. What’s really a big deal is when it gets unstable.

It’s not just the Fed, around the globe central banks are flooding the system with liquidity like never before. Is this a reason for concern?

Frankly, I think this is just posturing. Actually, the central banks don’t do anything real. They are issuing one form of debt to buy another form of debt. If you are an old Modigliani–Miller person the way I am, you think that’s a neutral activity: You’re issuing short-term debt to buy long-term debt or vice-versa. That’s not something that should have any real effects.

Then again, the financial markets sure seem to love it. At least it looks like that the S&P 500 is moving upwards in tandem with the expansion of the Fed’s balance sheet.

Every day we hear a story about the movement of stock prices. But the story is different each day. So basically, these stories are made up after the fact. But when we look at it systematically, we don’t see a big effect of Fed actions on real activity or on stock prices or on anything else. That’s why I use to say that the business of central banks is like pornography: In essence, it’s just entertainment and it doesn’t have any real effects.

But how about the effects of this «free money» on borrowing? Isn’t the record amount of corporate and government debt a real problem?

That really bothers me. We haven’t hit it yet, but there has to come a point where people start questioning whether government debt is really riskless. Piling on debt even in good times is a new thing: In the US, we cut taxes and increased the deficit as a consequence, but that happened when the economy was booming. How are we going to pay that back? It has to come out of taxes in the future. As a matter of fact, we didn’t really lower taxes. What we did was we lowered them now and raised them in the future, when we have to pay off that debt. That’s why I worry that investors will become skeptical of whether governments can actually pay off so much debt. Now, we’re piling on like crazy because of the Covid-pandemic. That was unavoidable, but it was avoidable in the past, when we did it in good times. When does the market say «enough»?

In recent years, we’ve also witnessed a revolution in passive investing. How does the amazing indexing and ETF boom impact valuations of stocks and bonds?

That’s a complicated question, and nobody knows the answer. For almost sixty years, I have been saying that there should be more passive investing since there’s no evidence that active managers generate a superior performance for their high fees. Finally, passive investing is catching on. Of course, you can’t go 100% passive because somebody has to determine prices.

But aren’t ETFs undermining the generic price discovery of markets? In principle, they just buy stocks mechanically and don’t care about prices or valuations.

They don’t but the people who buy ETFs pay attention. But here’s the key issue: Who are you knocking out of the market when you go passive? Are you knocking out bad active investors or good active investors? If you are knocking out bad active investors, you are making the market more efficient. If you are knocking out good active investors, you are making it less efficient. In general, there are very few good active investors. That’s what all the evidence says, going back fifty years now: It’s very difficult to find people who can beat the market.

How about Warren Buffett for starters?

The real question is: How do you pick Warren Buffett? The way you pick him is after the fact, since he has done very well. Now, suppose I take 100,000 investors and say: Let’s let them run for 30 years and pick out the winner. Because you roll the dice so many times, even if none of them is a good or bad investor, many investors will do well and many will do poorly purely by chance. Statistically there is also going to be a big winner, but solely due to chance. In other words: There will be extremely good outcomes and extremely bad outcomes, but you just can’t tell who is successful because of luck and who because of skill.

So you’re saying that Warren Buffett was just lucky?

The problem with picking a winner after the fact is you can’t tell. If you would have identified him fifty years ago and you looked at him and would have said: «That’s the guy!», then I would believe you that you can tell if someone’s going to be an investment genius. But you couldn’t do that fifty years ago, because there’s a statistical problem.

Another concern people are talking about is the extremely high market concentration. Today, five tech giants make up more than 20% of the S&P 500. What does this mean for the efficiency of the stock market?

In the past, it’s always been the case that the largest fifty companies account for more than 50% of the total value of the market. Now, we’ve got a technological revolution, and it turns out that there are five or six big winners, these trillion-dollar companies. They are a pretty large fraction of the market, but they did it through innovation, not through theft or any other illegal behavior. So I don’t know why that’s a negative. These are all new businesses that provide new services we didn’t have before.

In addition to that, more trades than ever are based on algorithmic high-speed trading. How does that impact the functioning of financial markets?

This has been an open question for around fifteen years. No one really knows what effect high speed trading has on prices. One of my colleagues has worked a lot on that topic. His suggestion is to slow trading down to something like a tenth of a second between trades and thereby kill the advantage of these fast traders. I don’t see any problem with that.

There’s also a fierce debate about factor investing. For example, value has underperformed growth for the past decade. Is value investing death?

Who knows? The problem is that you can’t tell from ten years of data. We don’t know if the last ten years are just a statistical blip or not, because the variance of returns is so high. Ken French and I recently published a paper called «The Value Premium». We basically say that it’s not just ten years. If you go back 28 years and compare that period to the previous 28 years, you cannot tell whether expected returns have changed, or whether the premium is zero, or equal to its historical value. The volatility is so high that you can’t make any statements like that. There is no way to know the answer. Besides, the value premium has done poorly in the US, but not in international markets.

What does this mean for investors?

The challenge in asset pricing is to come up with the right dimensions of risk and how they relate to expected returns. That’s been a challenge as long as I have been in the business. I suggested solutions every twenty years or so. None of them worked perfectly. Sometimes they work for a while, and then they don’t seem to work anymore. The problem is that we’re always buried in volatility which makes it hard to tell what’s right and wrong.

What exactly are these risks?

We’ve identified what we call the five potential dimensions of risks: Stocks relative to bonds, small relative to big stocks, value relative to growth stocks, high versus low profitability stocks, and high investment versus low investment stocks. All of these things seem to capture some of the variation in returns. But whether that’s the right breakdown or not is hard to tell.

What sort of lesson should investors take from that? For example, can we say that small stocks should theoretically perform better than large stocks over the long run?

It’s really hard to tell because you get buried in volatility. For instance, the January effect, which refers to a premium of small stocks in the first month of the year, was identified in hindsight. And, once it was identified, it wasn’t there anymore. That begs the question whether the value premium, the size premium, the profitability premium or the investment premium were also temporary. If they are not real dimensions of risks and if they are not things people are concerned about, then you would expect them to go away because that’s fundamental economics: If there is a profit opportunity out there, and it’s generating expected returns, people will bid up or down the price on those things so that they disappear.

Is there anything you now would watch out for specifically as an investor right now?

This experience we’re going through is totally unusual. If you go back in the past, we experienced the same kind of pandemic in 1918 towards the end of World War I. But at that time, we didn’t take the same measures we’re taking now, shutting down whole economies. So we really don’t know what the response will be if and when there’s a cure for this disease. For instance, what will the response of consumers be at that point? Everybody wants to know if we are going to get a V-shaped response. But nobody knows because you don’t know what people are going to do when this is over.

What’s your advice for investors in this environment?

I don’t do investment advice. But the general prescription is to decide how much risk you’re willing to bear and then let that be guiding your decision into how much to put in stocks versus bonds. Also, stay away from hedge funds because you’re going to lose a lot of money fast."

MY COMMENT

One thing above that I BELIEVE is critical for any investor is RISK ANALYSIS. As said....."decide how much risk you’re willing to bear and then let that be guiding your decision into how much to put in stocks". The HARD part is coming to a realistic evaluation of your TRUE risk tolerance........compared to your FANTASY risk tolerance when the markets are booming. MOST investors do a terrible job of risk analysis and GROSSLY OVERESTIMATE their risk tolerance........and......pay the price with very poor performance.

I thought it was interesting that the actions of the FED are described as pornography above. A continuation of my little comment the other day describing ALL the current day to day MEDIA opinion crap that you see every day about stocks and investing as......MARKET PORN. UNFORTUNATELY.....the VAST VAST MAJORITY of media "stuff" that you see every day in the financial and investing media is just DRAMA QUEEN hindsight..........or............click bait.

 

EMMETT KELLY

Still hanging in there on your APPLE trade? Do you have a plan as to when you plan to sell? I am interested in your thoughts as to why you made the trade, how long you plan to hold, your price target, etc, etc.

GENERAL INFO.......DOW is now ONLY 2.13% from being positive year to date. SP500 is +4.54% year to date. This year will be a pretty TELLING year.......for active investors to review their results compared to the passive averages.......at year end.

 

NO.......I am not targeting any specific piece of art. I am just trying to add some funds to my art budget. I plan to bail some time just after the split......at least as of now. The stock has been a long term holding for some time.......and.......I do NOT want to add to the long term position.

NOTE: When I say I plan to BAIL after the split........I mean ONLY the shares involved in my short term trade.......NOT my long term holding shares.

 

WOW.......big day today....especially for those that own the BIG CAP AMERICAN companies. Tesla really jump started the markets today. HOPEFULLY.......this will carry through to the end of the week. As you would expect.......with my particular portfolio.....I was rewarded very nicely today with BIG GREEN. AND.....icing on the cake.....I beat the SP500 by 1.06% today.

HERE are a TRIO of takes on potential outcomes as we continue with the last half of the year:

Warren Buffett said this metric signaled the 2001 crash — now it’s sounding the alarm on global markets

https://www.marketwatch.com/story/w...e-alarm-on-stocks-around-the-world-2020-08-12

AND

The S&P 500 is about to hit record levels, and that could be the start of another big move higher

https://www.cnbc.com/2020/08/11/the...-be-the-start-of-another-big-move-higher.html

AND

Will The US Economic Rebound Falter In 2020’s Second Half?

http://www.capitalspectator.com/will-the-us-economic-rebound-falter-in-2020s-second-half/

MY COMMENT

Of course.....you could find as many opinions on the rest of the year as there are investors. Being a LONG TERM INVESTOR.......this is one reason that I simply stay fully invested for the long term.......all the time. Number one......the data and research supports this approach. AND......number two......to predict or anticipate short to medium term moves in the markets is IMPOSSIBLE. Keep in mind that there is SOME potential for a correction between now and the end of the year. If one happens it will NOT be the end of the world and will be a NORMAL market event. As usual......with a correction......I will do NOTHING.