The Long Term Investor

While we are on the topic of machine stock analysis and intelligence.......I assume the top HEDGE FUNDS are already using these techniques to the fullest extent possible. Anyway.....here is a fun little article that exposes the FALSE PRETENSE of the HEDGE FUNDS and their managers.

(bold is mine)

"Warren Buffett Wins $1M Bet Made A Decade Ago That The S&P 500 Stock Index Would Outperform Hedge Funds, And It Wasn't Even Close"

https://seekingalpha.com/article/41...-and-p-500-stock-index-outperform-hedge-funds

"In 2007, Warren Buffett challenged finance professionals in the hedge fund industry to accept a bet that he described in his 2016 letter to shareholders of Berkshire Hathaway (BRK.A, BRK.B) (see p. 21-21):

In Berkshire's 2005 annual report, I argued that active investment management by professionals - in aggregate - would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of "helpers" would leave their clients - again in aggregate - worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds - wildly-popular and high-fee investing vehicles - that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers - who could include their own fund as one of the five - to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?

Specifically, Buffett offered to bet that over a ten-year period from January 1, 2008, to December 31, 2017, the S&P 500 index would outperform a portfolio of hedge funds when performance is measured on a basis net of fees, costs, and all expenses. Hedge fund manager Ted Seides of Protégé Partners accepted Buffett's bet, and he identified five hedge funds that the predicted would outperform the S&P 500 index over ten years.

As I reported last September on CD, Buffett's now-famous bet was actually settled early, and ahead of schedule, because the outcome was so one-sided in favor of the S&P 500 index over hedge funds:

The Oracle of Omaha once again has proven that Wall Street's pricey investments are often a lousy deal. Warren Buffett made a $1 million bet at end of 2007 with hedge fund manager Ted Seides of Protégé Partners. Buffett wagered that a low-cost S&P 500 index fund would perform better than a group of Protégé's hedge funds. Buffett's index investment bet is so far ahead that Seides concedes the match, although it doesn't officially end until Dec. 31.

The problem for Seides is his five funds through the middle of this year have been only able to gain 2.2% a year since 2008, compared with more than 7% a year for the S&P 500 - a huge difference. That means Seides' $1 million hedge fund investments have only earned $220,000 [through 2016] in the same period that Buffett's low-fee investment gained $854,000.

"For all intents and purposes, the game is over. I lost," Seides wrote. The $1 million will go to a Buffett charity, Girls Inc. of Omaha. In conceding defeat, Seides said the high investor fees charged by hedge funds was a critical factor. Hedge funds tend to be a good deal for the people who run the funds, who pass on big bills to the investors.

"Is running a hedge fund profitable? Yes. Hedge fund managers typically demand management fees of 2 percent of assets under management," according to Capital Management Services Group (CMSG), which tracks the hedge fund industry. "Performance fees for managers can be 20 percent to 50 percent of trading profits," CMSG adds. By contrast, the costs of an average index fund are minimal. A fund that tracks the S&P 500 fund might have an expense ratio of as little as 0.02%.

Now that the ten-year betting period is officially over (December 31, 2017), Yahoo Finance reported on January 2 that "Warren Buffett has won his $1 million bet against the hedge fund industry":

With 2017 over, Warren Buffett has sealed his victory over hedge funds in a bet he made a decade ago. The Berkshire Hathaway chairman in 2007 bet $1 million that the S&P 500 would outperform a selection of hedge funds over 10 years.

As of Friday, his S&P 500 index fund had compounded a 7.1% annual gain over that period. The basket of funds selected by Protégé Partners, the managers with whom he made the bet, had gained 2.1%, according to The Wall Street Journal. Buffett agreed to give the prize money to Girls Inc. of Omaha, Nebraska, a nonprofit he has previously supported.

Buffett has long taken issue with hedge funds' promise of outperforming the market and their high fees that take away from the returns their clients earn. He has turned out to be right on both fronts. Actively managed funds have seen outflows while passive funds have gained since the financial crisis. Meanwhile, an abundance of exchange-traded funds has made it cheaper and easier for investors to buy into just about any group of stocks.

MP: The chart above shows the annual returns on the S&P 500 index and the average annual returns on a comprehensive index of thousands of hedge funds maintained by Barclay over the period of Buffett's bet: from January 2008 through December of 2017. A $100,000 investment at the beginning of 2008 would have more than doubled to about $225,586 at the end of last year, compared to only about $148,000 invested in the average hedge fund. The average annual return for the S&P 500 index over that period was nearly 8.5%, or more than double the average annual return on the Barclay Hedge Fund index since January 2008 of 4%. And except for 2008, the S&P 500 index outperformed the Hedge Fund index in every other year: 2009 (26.4% vs. 23.7%), 2010 (15% vs. 11%), 2011 (2% vs. -5%), 2012 (16% vs. 8.25%), 2013 (33% vs. 11%), 2014 (13.7% vs. 2.9%), 2015 (1.38% vs. 0%), 2016 (12% vs. 6%), and 2017 (21.8% vs. 10.8%). Not. Even. Close.

At least over the most recent ten-year period, Buffett's investment advice (also from the 2016 letter to shareholders) has convincingly prevailed

A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore, the balance of the universe-the active investors-must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors. (this bold is NOT mine)

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor's equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds." (this bold is NOT mine)

MY COMMENT:

DUH. ABSOLUTELY typical and exactly the result you would expect. I remember when the first HEDGE FUNDS came out. People were clamoring over how to get into one since they were limited to high net worth and connected ELITES......I mean people. Over the years their performance in general has been dismal, at least for the investors. It is interesting that in the bet, the hedge fund guy was allowed to pick the cream of the crop of funds to support his bet. Of course, he was still TRASHED and TROUNCED.

 

Hi Cyndi......enjoying the day? I certainly am with the DOW up 443 points as I post this. EDIT....BUMMER, I was driving around hours ago and looked at my phone and saw that the market was up 443 points.....NO...today is a holiday...that was Friday. I will leave this up since I think it is funny.

As to my MODEL PORTFOLIO. YES, I have done very well with the form of investing that I use and have used for the past 40+ years. I am sure you are aware that my emphasis is on the BIG CAP, ICONIC PRODUCT, WORLD WIDE MARKETING, AMERICAN, DIVIDEND PAYING (all reinvested),DOMINANT, company. In fact, I have done so well I sold my business and retired....on my investments gains, not my business proceeds.....at age 49 and have self funded my retirement ever since over the past 20 years and some months. My investing has allowed me to spend the last 20+ years doing what I love to do full time.

SEE.....I am a LONG TERM INVESTOR, NOT a trader. To me there is a massive difference. Today, there are a lot of "hobby" traders which to me is those that dabble in trading and are NOT able to do it as a living. In my opinion, I believe that very few of the "hobby" traders are actually matching or even coming anywhere close to the simple returns of the SP500 with dividends reinvested.....ESPECIALLY after they take into account expenses and taxes on their short term gains as taxable income. Why do I say this? BECAUSE, I know from the data that even the full time professionals can NOT beat the SP500, so it stands to reason that all of the part time "hobby" investors working a regular non-investing industry job are NOT beating anything either if they were honest with themselves.

NOW, if someone just loves the challenge of trying to trade...OK. OR, if someone does trading to learn skills and as study...OK. OR, if someone does trading as a "hobby"...OK. BUT, fooling yourself into thinking that trading is going to establish you financially.....well my opinion is it is NOT going to happen. BUT.....like they say on those commercials......"it is your money". That is why I am a stock and fund INVESTOR and NOT a trader.

That is why I do this thread and have on another site and this site for decades. This thread is, at least in my mind, a LONG TERM INVESTOR, primer. NOT organized of course, but someone could read this thread from start to finish at any time and the knowledge is NEVER outdated or irrelevant. (at least to "ME"...LOL)

If you are interested in the SP500 HERE is a SP500 RETURN CALCULATOR with dividend reinvestment. You can put in any time period and calculate the total return of the SP500 over that time period with dividends reinvested. When I use it I DO NOT have it adjust for inflation. A FUN tool to play around with.

S&P 500 Return Calculator, with Dividend Reinvestment

https://dqydj.com/sp-500-return-calculator/

CYNDI....hope you stick around on this forum and contribute by posting about your trading and investing experiences.

 

HERE is an interesting little article. It is a little on the long side so I will not post it. It also wanders around a little bit. BUT it does contain some interesting data and conversation as to the current state of the markets, trading, AI and machines, and the economy.

Here is the OPENING of the article and it goes on from here to discuss the stock market, bond market, investment reward/risk trade-off, key market stress points, and a plan. I DO NOT necessarily agree with the article but found it worth reading. I DO note that the author seems to have been in the BEAR CAMP for at least the past year. ANYWAY....here is the OPENING...

We’re in a Danger Zone for Investors Over the Long-Term

https://www.iris.xyz/markets/were-in-a-danger-zone-for-investors-over-the-long-term

"Investment markets can be confusing. To try to cut through the chatter and investment slang, we present this monthly view to you. We want to give you a 50,000-foot view of market conditions updated as our view evolves.

Currently, our Investment Climate Indicator remains at Stormy. Stormy means that bear market rules apply, and we believe could be a period of wealth destruction.

ARE THE MACHINES WINNING?
I have been in the investment business since 1986 and have been a Chief Investment Officer for over 20 years. And I cannot recall a time in which the stock market was both this dangerous and fruitful at the same time. Yes, we’ve always had volatility (well, except maybe in 2017 when it took a “gap year” like kids do after high school). But volatility today is different. It is driven in large part by value-insensitive market players that care far less about what they are buying than that they are buying it, or selling it, or both within minutes. This is what the financial advisor of today and their clients must come to grips with. And it is a blessing and a curse. But more than anything, I think it creates confusion and overconfidence. Those two things are related because the investor and advisor conflate success in the stock market over a short, fixed period of time (a calendar year, a quarter, etc.) without considering that markets are, like life, inherently cyclical. This is a great time to really hone in on one’s true objectives for their accumulated wealth, and make darn well sure that their approach to the 21st Century realities of high-frequency trading, massive amounts of assets invested similarly (S&P 500, we’re talking to you!), and an economy that continues to take advantage of every opportunity to exploit what is left of the “easy money” central bank policies of the past decade. Put it all together, and it spells, again, a market that is fruitful…until it quickly turns dangerous. December 2018 was a crash-test of sorts. I don’t know when the next one will be, but I do hope you saw that as a great time to take account of what you own, why you own it, and draw a straight line between that portfolio and your ultimate objectives for those assets.

For some additional perspective, consider that our move to the “Stormy” (most bearish) reward-risk tradeoff indicator celebrated its 1-year anniversary in late January. That 12-month period has seen a big pickup in volatility, bond rates dancing all over the place and generally negative returns across most asset classes. So yes, we do believe that “Stormy” is still the right classification for the current investment climate.

We continue to sit on the edge of the defensive “Extreme Zone” of our portfolio positioning. Higher than normal short-term cash & equivalent investments and extreme selectivity in equity portfolios remain the priority.

This is a time to consider the impact that additional major declines could have on portfolios, and be proactive in planning to combat them. In particular, recognize that when markets do have fits of rage, they tend to come on suddenly, and can move with speed that has not often been seen in the past. As I say to my own investment team, years become weeks, and months become hours during bear markets."

MY COMMENT:

Contrary to the general tone of the article, I anticipate that this year will be a GOOD one for investors with a LONG TERM FOCUS. BUT THAN.....I always have good expectation for the markets and business since I take the LONG TERM VIEW and dont care about short term flailing around. AND, to me even a span of years is SHORT TERM. I look at investing in terms of 5-10 years as my guide. My KEY time period is 7-8 years since my investing goal is to DOUBLE my money every 7-8 years and that means I am achieving a return of 10% per year average. The KEY word being AVERAGE.

Of course, as stated a few times in this thread, my other investing goal is to try to beat the SP500 every year. Sometimes I win sometimes I lose, but my long term average is still ahead.

 

Are YOU a LONG TERM INVESTOR? I obviously am. For those of us that are we are in good company. Here is a great article from Forbes detailing the life and investing of a BILLIONAIRE that achieved his life goals by being a LONG TERM INVESTOR.

The Greatest Investor You’ve Never Heard Of: An Optometrist Who Beat The Odds To Become A Billionaire

https://www.forbes.com/sites/maddie...he-odds-to-become-a-billionaire/#851885822e8a

(I have edited this down to what I consider the KEY ELEMENTS......be sure to read the entire article from the Forbes link above, this is a very good, inspirational article) (bold is mine)

"It’s 9 p.m. on the last Saturday night of the 2018 Art Basel in Miami Beach. On the first floor of the palatial Versace mansion, the well-dressed and well-Botoxed are dancing to remixes of Michael Jackson’s “Beat It” and posing for Instagram by the mosaic-tiled emerald pool.

Upstairs, in a VIP room decorated in a mélange of styles that marry classical Greek and Roman touches, a well-dressed septuagenarian named Herbert Wertheim is sitting in front of a plate of smoked-salmon toast topped with gold leaf and shaved truffles, and scrolling through photos on his iPhone—scenes from what could only be described as a wonderful life. There are fan photos of him cooking pasta fagioli with Martha Stewart, on the slopes with Buzz Aldrin and fishing in Antarctica. There are many with his wife of 49 years, Nicole, on the luxurious World Yacht, where the Wertheims now live part of each year. He calls these extracurricular activities “Herbie time.”

If it weren’t for his trademark bright-red fedora, Wertheim, who is an optometrist and small businessman, would look like the typical senior living it up in South Florida.
But Wertheim, 79, has no need for early-bird specials. What the photos don’t reveal is that Dr. Herbie, as he is known to friends, is a self-made billionaire worth $2.3 billion by Forbes’ reckoning—not including the $100 million he has donated to Florida’s public universities. His fortune comes not from some flash of entrepreneurial brilliance or dogged devotion to career, but from a lifetime of prudent do-it-yourself buy-and-hold investing.

Herb Wertheim may be the greatest individual investor the world has never heard of, and he has the Fidelity statements to prove it. Leafing through printouts he has brought to a meeting, you can see hundreds of millions of dollars in stocks like Apple and Microsoft, purchased decades ago during their IPOs. An $800 million-plus position in Heico, a $1.8 billion (revenue) airplane-parts manufacturer, dates to 1992. There are dozens of other holdings, ranging from GE and Google to BP and Bank of America. If there’s a common theme to Wertheim’s investing, it’s a preference for industry and technology companies and dividend payers. His financial success—and the fantastic life his portfolio has afforded his family—is a testament to the power of compounding as well as to the resilience of American innovation over the half-century"

“My thing is,” Wertheim says as he reflects on his long career, “I wanted to be able to have free time. To me, having time is the most precious thing.”

Born in Philadelphia at the end of the Great Depression, Wertheim is the son of Jewish immigrants who fled Nazi Germany. In 1945 his parents moved to Hollywood, Florida, and lived in an apartment above the family’s bakery. A dyslexic, Wertheim struggled in school and soon found himself skipping class.

“In those days, they just called you dumb,” he remembers. “I would sit in the corner sometimes with a dunce cap on.".....

.........“You take what you earn with the sweat of your brow, then you take a percentage of that and you invest it in other people’s labor,” Wertheim says of his near-religious devotion to tithing his wages into the stock market.".......

......."With BPI cash flowing into Wertheim’s brokerage account, he went to work buying stocks and honing a strategy that can best be described as a mix of Warren Buffett and Peter Lynch, with a touch of Jack Bogle, given that he dislikes fees and primarily uses two discounters, Fidelity and Schwab, to manage his massive portfolio.".........

........"With Lear Jet (later known as Lear Siegler) in the late 1950s, for example, Wertheim was practicing “invest in what you know,” the strategy popularized by the famous Fidelity Magellan fund manager Peter Lynch in his 1989 book One Up on Wall Street. Lynch told readers to use their specialized knowledge or experience to gain an edge in their investments.

Instead of concentrating on the metrics in financial statements, Wertheim is devoted to reading patents and spends two six-hour blocks each week poring over technical tomes. “What’s more important to me is, what is your intellectual capital to be able to grow?” Thanks to his engineering background, the technical nature of optometry and his experience as an inventor, the patent library is Wertheim’s comfort zone. Stocks he invested in based on their impressive patent portfolios include IBM, 3M and Intel.

Like Warren Buffett, Wertheim believes firmly in doubling down when his high-conviction picks go against him. He says that if you put your faith in a company’s intellectual property, it doesn’t matter too much if the market goes south for a bit—the product, he believes, has lasting value.".........

.............“My goal is to buy and almost never sell,” he says, parroting a Buffettism. “I let it appreciate as much as it can and use the dividends to move forward.” In this way Wertheim, like the Oracle of Omaha, seldom reinvests dividends but instead uses the cash flow from his portfolio to either fund his lifestyle or make new investments."...........

.........."As with Buffett, Wertheim says finding companies with strong management has been key to his success. A great example of this is Heico, a family-run aerospace and electronics company based in Wertheim’s hometown, Hollywood, Florida."......

..........“He’s very inspirational in the way he challenges people to think big and imagine what’s possible,” says Cammy Abernathy, dean of the Herbert Wertheim College of Engineering at the University of Florida.

Still, one gets the sense that devoting time to his stock portfolio provides as much joy for Wertheim as his playful excursions and philanthropies.

He recently doubled down on British energy giant BP and now owns over one million shares. But rather than dwell on its sagging, crude-dependent stock chart, he’s betting on its hydrogen fuel cells and enjoying its 6% dividend yield while he waits for the company to recover."........

........"And Wertheim isn’t in any rush. Playing the long game is what he does best."

MY COMMENT:

PLEASE, please read the entire article, a very inspirational story and a great investing story. I continue to subscribe to Forbes as I have for many decades. The BIG KEY for this man was his drive to invest ALL available funds for the LONG TERM and to keep things fairly simple. We ALL have limits on the amount of FREE FUNDS we have to invest and most of us obviously will not become billionaires, but we will achieve WEALTH through LONG TERM INVESTING with a simple, continuous plan of reinvesting dividends and allowing compounding to do the heavy lifting for us.

 

On the topic of magazines. I DO still subscribe to a few paper magazines.....Forbes, Art and Antiques, Art News, Kiplinger, Consumer Reports, Readers Digest, etc, etc, etc. One magazine that I strongly recommend to ANYONE regardless of investing or financial education and knowledge is.....KIPLINGER. OBVIOUSLY Kiplinger is a basic financial, investing, and family money magazine aimed at the "regular" person. HOWEVER, I find it the BEST of this class of magazine. The cost of a subscription is very inexpensive and every year I seem to see some little bit of info in there about a new tax change, or some investing topic that helps me in some way. This is a FAR FAR better magazine than the other basic magazine......MONEY. In my opinion MONEY MAGAZINE in their new format aimed at MILLENIALS is ABSOLUTE TRASH. I saw a recent issue and the articles were PURE social and cultural crap. Hardly anything to do with money, taxes, investing, etc, etc.

For SOPHISTICATED INVESTORS.......there is no better way to keep up with what general AMERICANS and the general public is thinking and concerned about than reading sources like Kiplinger, Readers Digest, etc, etc in addition to your more specialized reading and sources.

LOOKS LIKE the DOW is now positive for the day......by a little bit. Lets build on this to the close. YIPPEE-KI-YA.

 

What is this.....week 9 of the market RALLY? AND.......drum roll please.....we started the week...POSITIVE. Barely, but I will take any positive day no matter how small. WE BUILD FROM HERE......

DOW year to date +10.99%
SP500 year to date +10.89%

MY PORTFOLIO performance year to date (real data) +11.13%

 

FOR REFERENCE:

SO......here is where my various portfolios stand at this moment in time:

PORTFOLIO MODEL:

Here is my "PORTFOLIO MODEL" for all accounts managed. I am re-posting this since I often talk in this thread about my portfolio model. My custom in the past on this sort of thread was to re-post my portfolio model every once in a while since I will tend to talk about it once in a while. I "manage" six portfolios for various family including a trust. ALL are set up in this fashion. If I was starting this portfolio today, lets say with $200,000. I would put half the money into the stock side of the portfolio, with an equal amount going into each stock. The other half of the money would go into the fund side of the portfolio, with an equal amount going into each fund. As is my long time custom, I would than let the portfolio run as it wished with NO re-balancing, in other words, I would let the winners run. Over the LONG TERM of investing in this style (at least in my actual portfolios), the stock side seems to reach and settle in at about 55% of the total portfolio and the fund side at about 45% of the total portfolio over time. That is a GOOD THING since it tells me that my stock picks are generally beating the funds over the longer term. AND....since the funds in the account generally meet or beat the SP500, that is a VERY good thing.

As mentioned in a post in this thread, I include the funds in the portfolio as a counter-balance to my investing BIAS and stock picking BIAS and to add a VALUE style component (Dodge & Cox Stock Fund), a top active management fund that often beats the SP500 (Fidelity Contra Fund) and a SP500 Index Fund to get broad exposure to the best 500 companies in AMERICAN business and economy. The funds also give me broad diversification as a counter-balance to my very concentrated 12 stock portfolio.

STOCKS:

Alphabet Inc
Amazon
Apple
Boeing
Chevron
Costco
Home Depot
Honeywell
Johnson & Johnson
Nike
3M

MUTUAL FUNDS:

SP500 Index Fund
Fidelity Contra Fund
Dodge & Cox Stock Fund

CAUTION: This is a moderate aggressive to aggressive portfolio on the stock side with the small concentration of stocks and the mix of stocks that I hold and with the concentration of big name tech stocks. Especially for my age group. (65+). So for anyone considering this sort of portfolio, be careful and consider your risk tolerance and where you are in your life and financial needs. I am able to do this sort of portfolio since my stock market account is NOT needed for my retirement income AND I have a fairly HIGH RISK TOLERANCE.

MY COMMENT:

HOPEFULLY the stock portion of the portfolio will now be stable for many years into the future with good performance on the part of the various companies in their business and no trades necessary. I prefer to NOT make changes or trades, but if necessary I will pull the trigger without hesitation or emotion.

 

YOU are so right TomB16.

All of the recession mongers have now gone to ground. BUT.....they will be back as soon as there are a few negative weeks with their fear mongering. I think most of them are doing it for political reasons, or to sell books or get clicks, or to sell investing products, or because they are short sellers. The VAST MAJORITY have some axe to grind that usually means money in their pocket.

As to the MARKET ORACLES.....PURE BALONEY. If they could accurately predict anything they would not be wasting their time HAWKING newsletters, or trying to get publicity for their views on the internet and television. They would be quietly applying what they know and making millions. Kind of like all the Technicians, Traders, and other internet stock experts. If most were as good as they claim they would be snapped up by the BIG BOYS in an instant and would be professionals pulling in the big bucks......at least for a while till that big disastrous trade that always seems to happen.

That is why the ONLY way to make real money that is not a temporary illusion is by LONG TERM INVESTING. The ONLY thing that smooths out all the short term bumps is a long term horizon.

 

HERE is a little article relevant to the discussion in the two posts above. I have "BOLDED" the portions of the article that I believe are important to LONG TERM INVESTORS.

Market at the Crossroads

https://www.alhambrapartners.com/2019/02/14/market-at-the-crossroads/

"A lot of people know the song Crossroad Blues, although I imagine most people don’t know it as a Robert Johnson song. It was originally recorded in 1936 in San Antonio for ARC records along with some other Johnson songs that aren’t known as Robert Johnson songs, including Sweet Home Chicago and Terraplane Blues. It was later recorded by Elmore James in the 1950s and again by Eric Clapton (with Stevie Winwood on vocals) when he was part of John Mayall’s Bluesbreakers. God Clapton recorded it again when he formed Cream with Ginger Baker and Jack Bruce in the late 1960s. But my favorite version of the song is by Ry Cooder, an underappreciated guitarist probably best known, especially here in Miami, for his association with the Buena Vista Social Club.

So, the song has been around a long time and it has been recorded countless times. And if you mention the song to someone who knows it they’ll tell you it’s about Robert Johnson (or more likely, a generic blues guitarist) selling his soul to the devil in exchange for guitar talent. The Ry Cooder version of the song is from a movie – not a particularly good one I might add – that tells a version of this myth, albeit a kind of beige one with Ralph Macchio and Jamie Gertz.

And yet if you read all the lyrics, you will be hard pressed to find anything that even remotely supports that assertion. You can listen all you want but if you think the lyrics support that interpretation you are hearing what you want to hear. Now, there is, possibly, some social commentary in the song when he says “risin’ sun goin’ down, I believe to my soul, now, poor Bob is sinkin’ down” as that may be a reference to sundown laws, curfews for blacks during segregation in the south. But more likely the song is just a lament about not catching a ride at the crossroads – which is where anyone hitchhiking in the south back then would have stuck out their thumb – and not having a woman to keep him company. Sometimes things are just what they seem.

Investors do this all the time, see what they want to see, hear what they want to hear. Or sometimes see and hear what someone in a position of power wants them to see and hear. Their internal bias, their desire for a particular outcome, clouds their judgment and doesn’t allow them to see markets as they are. Everyone wants to know the future, thinks they need to know the future, to invest wisely and so they see in markets confirmation of what they already believe – or hope – about how that future will unfold. This is particularly so after big changes in the market as we’ve had in the last few months.

Most of what passes for “investment advice” is nothing more than speculation about an unknowable future. I read an article today – I won’t link it because it was the worst kind of linkbait – that the title implied would explain why 2019 would be “a bad year for markets and 2020 would be even worse”. When I clicked through, the only supporting evidence for this “case” (as the title called it) was a hedge fund manager claiming that we are “definitely in a bear market” and that today’s market was a “re-run of the dot com crash” at the turn of the century.

There are at least two problems with this “analysis”. First of all, there is no agreed upon definition of a bear market. The one most often cited is a 20% drop from a high but that isn’t as cut and dried as it seems. Is that from intra-day high to intra-day low? Or closing high to closing low? If it is the former then we are indeed in a bear market. If it is the latter, we aren’t.

Furthermore, how do we define when the bear market is over? Is it when you surpass the old high? Or some other recovery level? I don’t know and I don’t know how the hedge fund manager defines these things. But perhaps more importantly, what difference does it make? What happened in the past already happened – a 20% drop – and has no bearing on the future. What good is it to tell me we are in a bear market? What does that mean?

Second, is that there are very big differences between the technology stocks of today and what was hot back in the early dot com days. Most of the hottest stocks back then didn’t have P/Es because they had no E but the multiples put on the ones that did were several orders of magnitude beyond the hottest stocks today.

Yes, Netflix is expensive at around 50 times next year’s estimate but in 2000 Cisco had a forward multiple almost 4 times that. Oracle traded for 150 times earnings. The top 10 companies in the S&P 500 had an average multiple over 60. Today’s top 10 does include Amazon with a trailing P/E of about 80. The other tech names are much more reasonable: MSFT (25), AAPL (14), FB (21), GOOG (25). They might not be value investor bait but they aren’t dot com bubble days either.

This type of “analysis” is what investors are bombarded with on a daily basis, fear mongering based on nothing more than a desire to get quoted by CNN. Macro economic “analysis” is, if anything, worse because it is even more esoteric than stock analysis. No one can possibly fathom the interactions, the voluntary and involuntary exchanges that happen in a global economy of nearly 8 billion people.

The desire to predict the economy is so strong that people who are happy to explain to you why socialism doesn’t and can’t work are also happy to provide you with an estimate of next quarter’s GDP growth to a tenth of a percent. Or opine on the latest economic data release which is nothing more than an estimate that may prove wildly inaccurate when the actual data is all collected. Their alleged ability to predict the future based on incomplete data today is exactly what they say a socialist can’t do. And yet they seem to have an incurable urge to prove the point by trying to do what they know socialists can’t.

Investors stand at the crossroad of bulls and bears, afraid both that the bulls will pass them by and that the bears won’t. They want to believe the bulls but are mesmerized by the convincing arguments of the bears. With no way to judge the merits of the two cases, most investors become paralyzed, afraid to make a wrong move. And most of the time that’s okay, assuming you are already in the market, because the bears may be more erudite than the bulls but they are also usually wrong.

The markets and economy seem to be at a crossroad right now, investors wondering whether the tumult of the fourth quarter was just a warm-up for more pain down the road or a mere pause that refreshes a bull market that has endured more than its fair share of skepticism from its beginning. The fears of the bears and the hopes of the bulls aren’t much different today than they were in 2010, 2011 or 2015.

There are plenty of things to worry about today just as there was in those other years. The Fed could make a mistake. China could devalue the Yuan. Trade negotiations could stall, more tariffs applied to foreign goods. Europe could still fall apart. Brexit may happen or may not (I’m not sure which thing is negative this week). Democrats could make life miserable for President Trump. There are always things to worry about. But should you?

As with the song Crossroad Blues, it is probably best to see things as they are, take things at face value. Stock market corrections – falls that aren’t associated with a recession – are impossible to predict. They happen regularly and investors would be wise to see them for what they are – random bouts of selling driven by emotion rather than fact.

The selling we saw in the 4th quarter was driven by a fear of Federal Reserve policy, fear that they would tighten monetary policy too much and cause a recession. But there was no evidence of recession at the time, no evidence it was imminent and none even now. There was only fear that a downturn might arrive at some point in the future because the Fed might hike interest rates too far.

I do believe one should monitor the economy but there are ways to do so without speculating about the future. Interpreting the present is hard enough but predicting the future is impossible. Markets are not perfect but they will provide you with all the information you need to be forewarned that the odds of recession are rising. Bond markets are particularly helpful in that regard. Stock markets are not.

Correctly identifying a recession in real time is useful because stocks will likely fall much further than they did in the most recent correction. The last two recessions saw stocks fall by roughly half. That doesn’t always happen – the market only dropped 20% during the 1990 recession – but with valuations as high as they are today, one should probably expect a big drawdown.

There are only a few things you need to watch to stay informed and keep your cool when stocks are trying to scare you to death.

• Yield curve – The difference between short term and long term rates. If you’ve been reading the financial press for any time at all you know that an inverted curve – short rates higher than long – is a warning sign for recession. That is true but not the end of the story. Right before recession you should expect to see short term rates drop rapidly and the curve to steepen. As of now, the curve has not inverted and is not acting as we would expect prior to recession
• Credit spreads – The difference in yield between junk bonds and Treasuries. At the onset of recession, spreads will widen as investors start to avoid risky debts. Widening by itself may not mean much; look to the yield curve for confirmation. Today, the curve has widened some but not enough to worry about recession. And the yield curve doesn’t confirm anyway.
• Chicago Fed National Activity Index – The CFNAI is a monthly gauge of overall economic activity and inflationary pressure. It is a weighted average of 85 separate economic indicators constructed to have an average value of zero when the economy is growing at trend. It has a standard deviation of 1 (range is +1 to -1). When the gauge is positive the economy is growing above trend and when negative the economy is growing below trend. Use a 3 month moving average to smooth out volatility. A reading of -0.75 is a warning of imminent recession. The current reading is 0.12 showing growth slightly above trend.
• Conference Board’s Leading Economic Indicators – The LEI has 10 components and a long track record. It isn’t as broad as the CFNAI but does have a track record of turning negative year over year prior to recession. The latest reading in December was 111.7 versus a year ago reading of 107.

The economy is a wildly complicated, chaotic system composed of billions of individuals pursuing their own or others interests. It is, like all other chaotic systems, impossible to predict precisely. Luckily, investors don’t need a high degree of precision to succeed. If you can come within six months of identifying the onset of recession – that’s a full year window – you can probably avoid the worst of whatever bear market comes with it. These four simple indicators are sufficient for that task.

What you really need though is a strategy that allows you to completely miss the recession call and still survive the bear. That means having an asset allocation that you can stick with and achieve your goals no matter what happens, short of nuclear armageddon. The 4th quarter tumult was a tempest in a teapot, easily weathered by those with the comfort of knowledge and a reasonable, well thought out strategy. If that doesn’t describe your experience, you probably need to revisit your plan. Or get one.

MY COMMENT:

Decent article...BUT....in the paragraphs about yield curve, credit spreads, CFNAI, and LEI......the author is doing exactly what he says is....IMPOSSIBLE. There are absolutely NO indicators that will allow you to predict the economic future and there is NO reason to waste the time trying to do so. The author also implies a little bit in the last few paragraphs that investors should be trying to predict recessions.....I assume to take advantage of market timing. GOOD TRY but delusional stuff. Market TIming does not work. There is no way to predict recession or the end of a recession, when to get out of stocks or when to get back in. Those that try ALLAYS lose over the long run. A waste of time and a waste of money. I heard a lot of talk today on the talking head money shows about investors trying to decide when to get back into the markets now that we are positive for 8-9 weeks after the December massacre. WELL, those people left a good 3000 Dow points on the table and a huge amount of money.

 

Markets UP yet again. Another solid gain today in the MAJOR Indexes. We continue the march toward the all time highs in all the averages. The LAST FIVE MONTHS are the perfect MICRO example of the Ups and Downs of the markets and the POWER of simplicity and doing nothing in response to short term events and market action.

 

We are now in the midst of a nice day for stocks. Guessing that we will touch Dow 26,000 some time today although it is very early in the trading day and being a Friday we are subject to all sorts of short term upcoming weekend superstition and trading action. We have basically fully recovered from the SILLY PANIC that built through the fall to Christmas eve. BUT.....the DOW and all the STUFF that people pay attention to is nothing more than illusion. What REALLY counts is the behavior and financial results for the individual businesses that you are invested in. REMEMBER whatever you are invested in whether an index, a mutual fund, individual stocks, or any other stock based investment......it is ALL ABOUT the results and business operations of the underlying companies that make up that mutual fund, or that index, or that you hold individually.

RANDOM THOUGHTS......Buffett will be reporting Berkshire earnings today and will be releasing his annual letter. It will be interesting to see if he has much to say about Kraft Heinz. I am more interested in any comments about Oracle. It is interesting that they dumped over $2BIL of the stock, their entire position, after holding it about 3 months. Not that this is a negative for Buffett. In my opinion it shows guts. Obviously something changed in terms of how they evaluated the stock and they had the guts to dump the entire position rather than do what the AVERAGE investor would have done which is to hold on and not do anything. I am a FAN of decisive investing moves when you think they are justified. Being frozen by indecision is NOT a GOOD LOOK for an investor.

I will mention one thing since I have mentioned Buffett a few times lately. I do not follow his moves. He has been in the financial news lately so I have posted a few things. I am a fan of his plain spoken investment platitudes, I think they contain a lot of truth, but that is about it. Obviously he has a pretty good PR team and gets lots of free PR from the general media.

 

YEA....just passed DOW 26,000.....as I type this the Dow is at 26,004. NOW.......ONWARD AND UPWARD.......TO INFINITY AND BEYOND......(well lets not get too carried away)

 

ANOTHER positive week.....week 9 in the bag.

HERE is EXACTLY why I DO NOT EVER invest in international funds or companies. I see ABSOLUTELY NO need to invest in inferior foreign businesses when ALL of the companies that I invest in are WORLD WIDE leaders in their business markets. With the companies that I invest in I am fully invested around the world with my dominant, American, big cap, companies.

You're More Internationally Diversified Than You (Probably) Realize

https://www.morningstar.com/articles/914896/youre-more-internationally-diversified-than-you-pr.html

(BOLD is my emphasis)

"The United States
You have likely heard the claim that equity portfolios can't help but to be global. Multinationals account for most stock market assets, and they sell their wares everywhere. Where a blue-chip company is headquartered does not indicate its revenue sources.

In a new report, Morningstar puts that belief to the test. I can't link to the article, because it's tucked away in Morningstar Direct's institutional software, but I can provide its highlights. (The underlying data will eventually appear on Morningstar.com.)

According to Morningstar's calculations, 62% of revenues for S&P 500 companies come from the United States. As S&P 500 firms account for 80% of the Wilshire 5000's capitalization, that index scores similarly. Consequently, shareholders of major U.S. stock market index funds have about 40% foreign exposure, as measured by corporate revenues.

Other Countries
Unsurprisingly, given that the U.S. is easily the largest consumer market, this figure is above other countries'. Japan and Australia are close, with 59% of the Nikkei 400's revenues arriving from inside Japan, and 58% of the S&P/ASX 200's revenues being from Oz. Island nations! However, the United Kingdom's amount is far lower, with domestic revenues of 22%.

Which is the highest figure calculated by Morningstar in Europe. As the U.K. is realizing, no European country is anything resembling stand-alone. Almost all the continent's major companies operate mostly across national borders. Just under 20% of revenues for companies in Germany's DAX Index are local; for France's stock market benchmark, the figure is 17%.

Small-Company Effect
Everywhere, the home-nation percentage rises as the companies shrink. In the U.S., 81% of the revenues for the long-standing small-company stock index, the Russell 2000, are domestic. In the U.K.'s small-company indexes, the figures are roughly 50%, and in Continental Europe they are 30% to 40%.

With some effort, U.S. investors could largely avoid exposure to foreign revenues. In practice, however, the customary portfolio of 1) a core of U.S. blue-chip stocks surrounded by a smattering of 2) U.S. small-company equities and 3) overseas issues leads to an overall revenue mix of roughly 50/50. In other words, most American stock-fund shareholders are halfway dependent on the kindness of strangers.

The domestic-revenue percentage declines to about 40% for the typical Australian mutual fund owner (not so much because the revenue streams for Australian companies are more diverse, but rather because Australian investors own more foreign-headquartered stocks than do Americans) and 20% for European shareholders. The latter can't really avoid having an international perspective.

Varying By Industry
Industry exposures vary widely. Companies in sectors that have the most-diversified revenue streams--ranging in the U.S. up to 85% for semiconductors--make things: chips, phones, soap, plastics. Such items can readily be shipped. In addition, most can be built elsewhere, cost effectively. Coca-Cola (KO), for example, owns 57 manufacturing plants in India. That the firm is based in Atlanta is immaterial to its business.


In contrast, those with the highest local percentages tend to purvey services, which neither fit into packages, nor into cargo holds. Moving electricity is difficult, and while sending natural gas abroad can be accomplished, doing so while retaining control of the product generally cannot. Consequently, 97% of U.S. utilities' business is generated within the 50 states. Telephone services, banking, and transportation also tend to be local.

Assessing Performance
The question arises: How do the sources of a revenue stream affect a stock's returns? For example, if a company based in the U.S. generates 50% of its sales at home and the other 50% in Europe, will its stock move in tandem with the stock of a European company that shares its industry and revenue mix? Or, will the location of their domiciles send those two stocks scurrying in different directions?

You got me. Morningstar has yet to study that subject, and because the global data are only now becoming available, neither have many academic researchers. (No doubt some have, but my admittedly brief Internet search yielded no results. If you know of such a study, please let drop me a line.) This field has not been well-explored.

When the papers are released, I suspect that their findings will be, "It depends."

For one, the studies will be difficult to conduct. No two companies have identical revenue streams, and no matter how closely their businesses resemble one another's, there are still large discrepancies, which must somehow be considered in the calculations. Controlling for all relevant effects will be a chore indeed--and will make the resulting estimates loose rather than precise.

The Middle Ground?
For another, the truth likely falls somewhere in the middle. Researchers have documented that even in the simple, obvious case wherein the same company's equity is dual-listed and available for sale on two countries' stock exchanges, its performance reacts to its whereabouts. The two versions of the shares do not move in lock step, although both logic and conventional financial theory suggest that they should.

Also relevant is the performance of real estate investment trusts, equities that hold real estate. One might think that investors would "look through" REITs' structures, but that is only partially true. REITs trade as hybrids. To some extent, they offer real estate exposure, and to some extent they are small-company U.S. stocks. A bit of this, a bit of that.

Which, eventually, will be the verdict for most of the world's blue chips. They sway to their home country's winds. However, as their businesses are thoroughly global (aside from certain services companies), they cannot help but to be affected by what happens elsewhere. The giant firms that dominate the stock indexes offer substantial international diversification, whether the investor desires that attribute or not.

The Last Word
Famously, Jack Bogle maintained that U.S. investors did not need to hold foreign stocks. He offered several arguments besides what this column has given, including the claim that dollar-based liabilities should be supported by dollar-based assets. But one of his key contentions was that international diversification comes out in the wash, because big business is global. Morningstar's recent release supports that point.

Foreign Customs
Earlier this month, my wife and I were in an airport, in a country that shall not be named (so as to protect the guilty). She ordered a hot tea. The attendant at the kiosk handed her a cup. My wife took a sip. "That's not tea, that's coffee!" The attendant apologized, made a tea, and gave it to her. My wife stepped aside.

The next customer approached the counter. "Coffee, please." The attendant handed him … my wife's cup."

MY COMMENT:

I have followed the same course as Bogle for decades. There is ABSOLUTELY NO reason for me to invest in foreign or International funds or companies. I have massive world wide exposure and sales in my world wide American companies. In fact, if I owned international investments in the amounts commonly advised all over the internet by various brokerage firms and advisors, I would probably be WAY OVER invested in International investments. In addition, looking at the statistics, I see NO advantage to holding international companies or funds. I see nothing to be gained and much to lose with such investments. This illustrates the DANGER of following investment mix platitudes about the investment mix you should hold. Just because everyone says it does not make it right or accurate.

 

REALLY NICE little article here with much common sense information that is very relevant to business and investing. At the end of the article are links to other articles on their site that look interesting. (I have not read them....yet) As usual the "BOLD" portions other than headings represent my opinion of the critical content and my comment on where the focus should be for readers of this content. A VERY NICE weekend piece to get some thinking started for the business and investing day tomorrow.

Different Kinds of Stupid

https://www.collaborativefund.com/blog/different-kinds-of-stupid/

"“The older I get the more I realize how many kinds of smart there are. There are a lot of kinds of smart. There are a lot of kinds of stupid, too.”

– Jeff Bezos

You can ace the most prestigious grad school and then spend years in prison for insider trading. It’s happened. And the decision to risk everything on a trade that nets you a few percentage points is the kind of thing someone with half the IQ will look at and say, “How stupid are you?”

There are types of smart that have nothing to do with intellect. And there are types of stupid that have nothing to do with unintelligence.

Smart is the ability to solve hard problems, which can be done many ways. Stupid is a tendency to not comprehend easy problems. It’s also is a diversified trait.

A few kinds of stupid prevalent in business and investing:

1. Intelligence creep: Not knowing the boundaries of what you’re good at, and assuming talent in one area signals skill in all others.

Dictators are never marketed as just good at politics. They’re portrayed as superhumans, masters of everything. Joseph Stalin was born Joseph Jughashvili, but changed his name to a word that translates to “Man of steel.” North Korea said Kim Jong Il shot 11 holes in one on his first round of golf, was an architectural master, and a music virtuoso.

An innocent version of this happens when you’re good at one thing, so you and those around you assume you should be good at all other things.

Take the investor who is gifted at, and made a lot of money doing, one kind of strategy (merger arbitrage) and then extrapolates that confidence into something they have no experience in (gold, macro, politics, predicting recessions). The odds of a disappointing outcome then round to 100. Of course they do – the kind of nuance and skill needed to, say, forecast global interest rates is not the kind you thing you can pick up in a year.

The important thing is most investors without big success in one strategy would never consider betting their portfolio on a new, disparate strategy. They’re more likely to stick to what they know. You need intelligence in one strategy to make you think, with confidence, that you’re good at all the other ones.


An important investing skill is defining what you’re incapable of and staying away from it.

2. Underestimating the complexity of how past successes were gained in a way that makes you overestimate their repeatability.

There’s a thing in biology called Dollo’s Law that says organisms can never re-evolve to a former state because the path that led to its former state was so complicated that the odds of retracing that exact path round to zero.

Say an animal has horns, and then it evolves to lose its horns. The odds that it will ever evolve to regain its horns are nil, because the path that originally gave it horns was so complex.

Dollo’s Law affects investors and CEOs with a unique kind of stupid.

There are things that, once lost, will likely never be regained, because the chain of events that created them in the first place can’t easily be replicated. If you realized how valuable those things are you’d be more careful about risking their loss.


Brand is one. Brands are so hard to build, requiring the right product at the right time targeted to the right users who want that one thing, produced in the right way by the right people, all done with consistency. Once lost it is nearly impossible to regain, because of odds of building a successful brand in the first place were so low. So when management cashes in brand equity for short-term gain, I want to shout, “Stop! This isn’t a factory that you can just rebuild when it’s broken. If you lose that brand it’s gone for good.”


Teams are another. Success is often personalized among one person, discounting how important members of their team were to a win. That one person will often marginalize their team, or go out on their own, only to learn the hard way how vital others were to what they considered to be “their” success. And once disbanded that specific team will likely never return.

3. Discounting the views of people who aren’t as credentialed as you are, underestimating the special knowledge they have since they’ve experienced a world you haven’t.

A different kind of stupid is not believing that there are different kinds of smart.

Only seeking the input from those who fit your singular definition of smart misses the masses whose knowledge wasn’t measured by standardized tests. And those masses, with lower credentials than you, have likely experienced a world that you haven’t, which gives them a perspective you don’t have.

Solving problems means understanding how people behave. And you’ll only understand how lots of people are likely to behave if you open your mind to their views, opinions, goals, and solutions. Even people who are different than you. Especially people who are different than you.

4. Not understanding that in the classroom the game is you vs. the test, but in the real world it’s you vs. coworkers, employees, customers, regulators, etc., all of whom need to be persuaded by more than having the right answer.

This is a cousin of #1 above. It’s common when technical founders assume their ability to design a great product is correlated with their ability to manage hundreds of people, when in fact those things can be miles apart.

People who create the best products are often able to do so specifically because their thought process isn’t restricted by norms that ground most people. But that same trait can make them counterproductive bosses, because the “rules-don’t-apply-to-me” mindset that’s so effective when building a new product can be disastrous when managing people, especially as a company scales. Very talented engineers, designers, product people can make HR and managerial decisions for which the only response is, “How stupid are you?”

The first rule of natural maniacs: No one should be shocked when people who think about the world in unique ways you like also think about the world in unique ways you don’t like.

5. Closed-system thinking: Underestimating the external consequences of your decisions in a hyperconnected world, or dismissing how quickly those consequences can backfire on you.

There’s a thing in economics where the professor says “assume a closed economy.” You model how an economy works assuming zero trade with, or influence from, other countries. Then you drop that assumption, view at the world as it actually operates, and BOOM … the original models are useless.

One kind of stupid is when you assume your business decisions live in their own closed economy, and the things you do either don’t affect others, or if you know they do, you underestimate those people’s ability to turn around and stick it back to you.

This is especially true in today’s world where things aren’t just connected; they’re an untangleable web where nothing is more than a few degrees removed from everything else in the world. If you mistreat your employees, or your customers, or your suppliers, and assume that it’s OK to do so because those actions will be contained to those people, the odds that your actions will eventually become known to someone who’s indispensable and who you rely upon are greater than they’ve ever been.

Bernie Madoff summarized this idea a year before his scheme unraveled. “In today’s regulatory environment, it’s virtually impossible to violate the rules,” he told an audience in 2007. “This is something the public doesn’t really understand. It’s impossible for a violation to go undetected. Certainly not for a considerable period of time.”"

MY COMMENT:

It is amazing how often the very simple is actually the truth and if applied leads to success. Of course, most people reading simple ideas just dismiss them with.....DUH....."everyone knows that", if they even give it any thought at all. I have found that the best business people and the best investors understand the "simple" things and how they add up and lead to success. they also understand and have the ability to do the same thing over and over and over with success without getting bored or infatuated with their own perceived ability and expanding what they do till the point that it no longer works and they fail.

On the other hand, especially in business but also in investing, there is potential to get trapped in your "system" and fail to see the changes that are going to impact or kill you and therefore NOT adapt to a changing environment. I see this happening RIGHT NOW with many of the BIG consumer product names, especially in the food product area. Kraft Heinz, Campbell Soup, General Mills, Kellog, Proctor & Gamble, etc, etc. ALL FAILED to see and understand the Millenial and young woman driven push to "healthy" eating. Personally, I see a lot of this as FAD and BALONEY when I look at the research on organics, etc, etc. BUT, whether true or not it represents a HUGE generational shift in thinking that is currently HAMMERING the old school consumer companies. How long it lasts, time will tell, but there are moments when change is necessary to continue to be successful. The MILLENIAL generation is now LARGER in numbers than the baby boom generation. Add in the generations before and after them and you have a business, investing, society and culture changing event of EPIC PROPORTIONS happening right now. This is why a while back I revamped my portfolio to the current holdings. Prior to the revamp I held many of the old BIG NAME consumer companies. I DID NOT change my investing style.....BIG CAP, AMERICAN, DIVIDEND PAYING, ICONIC PRODUCT, WORLD WIDE MARKETING, GOOD MANAGEMENT, companies. BUT....I did change the companies that fit that definition in my portfolio to weed out those that seem to NOT be on top of the LONG TERM CONSUMER trend that we are in right now.

BOTTOM LINE for me as a LONG TERM INVESTOR....you ride your winners for as long as possible BUT when they start to falter in a critical fashion, you move on to other LONG TERM INVESTMENTS with more potential. I AM NOT a fan of recovery projects in my stock holdings. I WILL reinvest in a company that makes a good turn-around and reestablishes itself as a long term market leader, but I will not hold onto a company through a many year recovery process. A HUGE consumer company that is forced to go through a many year recovery project due to failing market for their core products is usually a symptom of bad or complacent management.

 

I used to listen to an investing radio show back in my business ownership days when I would be working on a Sunday alone in the office or late at night. The show was Bob Brinker. The show and his analysis and discussion with callers was EXCELLENT. Of course, he was somewhat of a market timer and had a newsletter to sell, but his show was very good. He had a concept that he often talked about.......CRITICAL MASS. That being....the point where you had invested and compounded your returns to reach FINANCIAL FREEDOM.

Young people starting to invest NEED to realize that the early years can be a LONG SLOG. To me the CRITICAL MASS POINT is reaching that first $100,000 of value. It can take a long time to get there, slowly adding to your account and reinvesting dividends and capital gains. BUT......YOU WILL GET THERE. It might take ten years of investing as much as you can...BUT YOU WILL GET THERE. So if you start to invest in your taxable brokerage account and your deferred accounts like an IRA or a 401K with match and do so consistently, in ten years or so you will hit that MAGIC $100,000 level. At that point is where you will REALLY see the power of compounding and LONG TERM INVESTING. If you can average the 10% that the SP500 will give you over the span of your life that $100,000 will turn into $200,000 in 7.2 years and that $200,000 will turn into $400,000 in 7.2 more years, and on and on and on....doubling as you go. (SEE RULE OF 72's) AND hopefully, at the same time your income is increasing and you are continuing to do additional saving and 401K investing.

It is AMAZING now quickly the number can grow once you hit that first milestone. That is the power of compounding and LONG TERM INVESTING for young people with VISION and RESOLVE. It is the CLASSIC.......turtle and the hare situation.