Saturday, September 26, 2015

Are You a Market Forecaster and/or Market Timer?

This is what I often hear on Main Street and by so called experts about the economy, market, stocks and bonds, etc.

1) The market has gone up, so I like stocks;
2) the market is going down/up based on my opinion which is based on my favorite expert's opinion. He hates/loves stocks, so I hate/love stocks;
3) I can't admit that I don't understand stocks so I avoid stocks. To feel comfortable with myself, I look for forecasters and experts who support this view and advocate avoiding the stock market;
3) the Fed has manipulated the stock market and stocks will eventually crash, so I continue to avoid stocks;
4) the economy is bad, sluggish and risky so I will wait for things to get better and then buy stocks;
5)  the economy is bad and will stay bad forever so I only own treasuries at 2% yields. This is what my bond guru and/or favorite economist is saying, so I believe it. I have been in bonds and out of stocks since 2008;
6) because of Central Bank actions in recent years, I strongly believe inflation is going to take off so I am betting on this in the bond market by buying TIPS and avoiding stocks.
7) I only buy stocks when the side I am on wins the White House after the country has gotten back on track and regained its sanity after opposition is run out of office;
8) the U.S. is in a state of decline as it is not what it used to be in general, so I am avoiding stocks;
9) I am forecasting that the economy is going into decline so I continue to avoid stocks;
10) I believe the economy in the U.S, is going to significantly expand so I am going to buy stocks now or in the future;
11) China is in decline so I am avoiding stocks and commodities;
12) the economy has been sluggish, risky or in decline for several years so I have avoided stocks for several years;
13) I have missed the stock market move since 2008/2009 but do not want to miss anymore of the gains so I am getting into the market;
14) my favorite market guru has turned bullish so I am now bullish and will jump in the market;
15) I strongly believe the stock market is going up so I want to buy stocks.

Do one or more of these statements sound familiar? If so, then you may very well be a market forecaster and/or timer. The sobering truth is that if your investment decision making is based on forecasting and/or market timing you have no chance of beating the market over time. It is also true that if you consume market and economic forecasts and timing views, follow expert predictions and believe in forecasts you will be flooded with largely useless information that you do not know is useless and waste your time doing so.

In the book "Investment Fables, Exposing the Myths of "Can't Miss" Investment Strategies," 2004,  Aswath Damodaran (the highly regarded professor at NYU's Stern School of Business) said the following about market timing:

"If you can time the markets you can make immense returns, and it is this potential payoff that makes all investors into market timers. Some investors explicitly try to time markets by using technical and fundamental indicators, whereas others integrate their market views into their asset allocation decision, shifting more money into stocks when they are bullish stocks. Looking at the evidence, though, there are no market-timing indicators that deliver consistent and solid returns. In fact, there is little proof that the experts at market timing-market strategists, mutual funds and investment newsletters, for example-succeed at the endeavor.

Notwithstanding this depressing evidence, investors will continue to time the markets. If you choose to do so, you should pick a market-timing strategy that is consistent with your time horizon, evaluate the evidence on its success carefully, and try to combine it with an effective stock-selection strategy."

There has been a large amount of material written about forecasting. For a recent quality read on forecasting and the futility of predicting economies and stock markets see, "The Signal and the Noise: Why Most Predictions Fail - but some don't," 2012 by Nate Silver. I also recommend Philip Tetlock of the University of Pennsylvania who is an expert on the limitations of forecasting. Great investors such as Warren Buffet and Peter Lynch are known for spending little if any time on economic forecasts and market predictions. They are also not known as market timers.

For what it is worth, my real world experience lines up with the view of Damodaran, Silver and Tetlock as well as Buffet and Lynch.

Tuesday, September 22, 2015

How to Start

The best way to start is to put your toes in the water after you have done some reflection and made some basic decisions based on your homework and the knowledge foundation you have built. I started by buying stocks in high school. I lost money. I did not lose money because they were bad stocks or companies. I lost due to inexperience and lack of knowledge. I did not know how big my deficits were at the time as I was ignorant and did not know it. Looking back years later I eventually came to this realization.

Achieving proficiency as an investor takes at least a decade in my opinion and possibly longer. Along the way, many successful investors I know lost money in their first decade as an investor as they lived through the process of figuring out what style and approach worked for them. It is not easy sticking it out this long if you are achieving sub par results. Developing the skills required for eventual long term success takes time and losses. Charlie Munger's quote about investing hits the nail on the head as he says something along the lines of: "investing is not supposed to be easy. Anyone who finds it easy is stupid." Howard Mark's of Oaktree Capital Management recently published a fantastic easy titled "It's Not Easy" that deconstructs Munger's quote and describes why making money by investing is so difficult. I would highly recommend Mark's essay which was published recently and can be found on the Oaktree website.

I know that losing money while you become seasoned is not appealing but a necessary ingredient for future success. In my opinion a necessary part of the learning process. The key is to figure out why you lost (and no it is not the market, economy, the US president or your neighbor's fault, etc.). The responsibility for your losses, decisions and results lie squarely with you. Once you internalize this reality you will have a chance to make progress. Some folks get here faster than others. Some folks never get here.

There are ways to shorten the learning curve to make the process less painful. One of the best methods I know is to stand on the shoulders of giants by studying what they have done and how they did it. Education and open mindedness go a long way here. However, even if you study successful investors you will ultimately be required to find your own way in this journey by making your own decisions and taking responsibility for the results.

Monday, September 21, 2015

Where to Start

The question is where to start down the investment road? The answer is with serious soul searching. This is where you should start. Serious thinking is required here. Some of the questions that should be contemplated are:

1) Why are you investing? What do you want to accomplish?
2) When will you need the money that you are investing?
3) Can you stay committed to investments that you make?
4) How will you react to and deal with volatility?
5) Will you try to beat the markets?
6) How much risk can you take?
7) Who are you? Are you humble? Are you sure of yourself?
8) What type of investments/markets are you interested in?
9) Do you have any past experience? If so, what were your results?
10) How do you deal with mistakes and setbacks?
11) How disciplined are you?
12) How persistent are you? Are you a goal setter?
13) How will you deal with losses and/or gains?
14) Have you developed your approach?
15) How much knowledge do you have?
16) What are you expectations?
17) Are you aware of common investment pitfalls?
18) How do you react to news?
19) How much time and effort will you put into the process?
20) How will you gather information to make decisions?
21) What will you do if the market beats you?
22) What are your financial goals? What do you expect to accomplish financially from investing?
23) Are you comfortable making decisions that are not in sync with the market or other investors?
24) Are you willing to learn or do you know enough already?
25) Do you want to be an active or passive investor?
26) Is there a specific investment strategy that appeals to you?
27) As an investor do you know what your advantages and disadvantages are vs. the markets or other investors?
28) Do you believe in luck, skill, probabilities?
29) How often will you make buy/sell decisions? On what criteria?
30) How much will you rely on forecasts-predictions?
31) Can you make decisions with less that complete information?
32) Will you take responsibility for your results?

The list goes on and on. How can you truly know the answers to some of these questions? The answer is you probably cannot know the answer to all of these questions until you are in the game. If you are in the game and have not been there before my suggestion would be to put less money at risk vs. more money at risk. Losing money is a decent way to focus attention and learn from mistakes. As for mistakes, it is easy to make them. Fortunately you do not have to perfect as you are going to make mistakes. All the investors I know of have made mistakes at one time or another. You should also realize that the answer to some of the questions listed here can/may/will change over time.

There are plenty of books and other material that can help you through this process and influence your thought process. Experts and others may/will influence you as well which may be good or bad. Reading and soul searching are linked here. I have found the study of psychology-behavioral economics to be helpful in learning about myself and my weaknesses. Self awareness is very important as well as the ability to deal with adversity, opposing information, confirmation bias, anchoring and other common pitfalls in the information gathering and decision making process.

In summary, the more work that is done here, the better off you will be. Be mindful of the fact that the work will take time measured in months, years, etc.

Sunday, September 20, 2015

Great Investors are Voracious Readers

I have been studying accounting, business, companies, economics, finance, history, industries, investing, math, philosophy, psychology and science, among other topics in earnest in for several decades. The acquired knowledge is humbling as I have barely scratched the surface of knowledge here. The farther one travels the less one knows.

My humble opinion is that you cannot succeed over time as an investor without reading in these areas and others. You will need to read extensively over the entire course of your investing life. Intellectual independence and curiosity is a common trait of successful investors. Furthermore, you will need to specifically learn how to read as an investor due to the massive amount of information flowing at you on a daily basis. Learning how to process and use information is a critical skill for successful investors. More on this later.

I learned accounting by earning a CPA certificate in national CPA-Consulting firms. I also learned about business as well as a large number of companies and industries. If you have not done this, it is safe to say that you will not need to become a CPA but will need to learn accounting which is the basic language of business and a required skill needed to read company financial reports (a significant activity for advanced investors), among other things. Knowledge of businesses, industry and business models, etc. is important. I also added to my knowledge base by studying the CFA body of knowledge for levels 1 and 2 of the CFA program.

Listed below is part of my historic reading list in select areas of investment and finance relevant to individual investors. I consider this list to be foundational in nature and critical as the starting point for the development of the essential knowledge needed to be a serious investor:

  • All the major books written about Warren Buffett over the past 25 years plus Berkshire's annual reports - letter to shareholders.
  • Most of the major writings written by and about Charlie Munger.
  • All of Peter' Lynch's books. In the case of "One Up On Wall Street" about 10 times.
  • George Soros, "The Alchemy of Finance."
  • David's Swensen's, "Unconventional Success" written for individual investors.
  • Peter Bernstein's book about risk titled "Against the Gods."
  • Marty Whitmans's books on value investing.
  • Jack Schwager's trader interview-investor book "Market Wizards."
  • Charles Ellis, " Winning a Losers Game,"
  • Howard Marks, "The Most Important Thing."
  • Robert Menschell, "Markets Mobs & Mayhem."
  • Aswath Damodaran, "Investment Fables", "Investment Valuation" and others.
  • John Mihaljevic, "The Manual of Ideas."
  • Guy Spier, 'The Education of a Value Investor."
  • McKinsey & Company, "Valuation."
  • The books and writing of John Bogel, founder of  The Vanguard Group.
  • Benjamin Graham, "The Intelligent Investor" plus Graham and Dodd's "Security Analysis."
  • Joel Greenblat, "You Can Be a Stockmarket Genius."
  • John Train, "The Money Masters."
  • Peter Tanous, "Investment Gurus."
  • Dimson, March and Staunton, "Triumph of the Optimists."
  • Michael Mouboussin, various research reports and books ("Expectations Investing" and "More than You Know").

People who are serious about developing basic knowledge and skills needed to become skilled investors should start with this list and find their own path. Please keep in mind that this list is not complete and is viewed as a starting point. My actual list is longer and I have put this together based on my recollection of books that have had the biggest influence on me over several decades. I have reread many of the books listed here. I will add to this list over time. This list is the beginning as there is work to do in other areas to acquire basic and more advanced technical skills essential to the art/craft of investing. Please note that my focus here is on books as I will address other key reading/information sources in future posts.

Saturday, September 19, 2015

Current Holdings

Life has been busy during 2015 outside of my portfolio but relatively quiet in terms of portfolio activity. Current portfolio holdings (in order of position size) include Costco (COST), Berkshire Hathaway (BRK-B), Google (GOOG), the S&P 500 ETF (SPY), IBM (IBM), Microsoft (MSFT), MSCI (MSCI), American Express (AXP), Union Pacific (UNP), Express Scripts (ESRX), Caterpillar (CAT) and Full House Resorts (FLL).

COST was purchased over a decade ago at approximately $30 per share. BRK was acquired in recent years at approximately $65 per share, GOOG was purchased about a year ago, MSFT was purchased around $20 per share and AXP was purchased at around $78 dollar per share after the loss of the Costco card agreement. IBM and ESRX were acquired due low valuation.

CAT and UNP were purchased during 2015 due low valuation/stock price weakness tied to the decline in oil-energy-commodity prices and perceived weakening demand in China. MSFT, MSCI, AXP and FLL were value bets and/or special situation positions with activist investor activity.

Based on topics included in my January 3, 2015 post combined with discussion of past, present and future holdings I will attempt to answer some basic investment "how to" questions for emerging non-professional investors.