Investments (V9-I40)

September 27, 2007 by  


What Works

By Bob Wood, Muslim Media News Service (MMNS)

Recent market turmoil set in motion by the end of the housing bubble and recession fears likely have many investors wondering what should be done with their portfolio allocations. If you’re invested like I am, the answer should be, not much.

While there is no shortage of investment advice available to investors, and much of it free of cost at that, there is no doubt in my mind that most of it is worthless. There are few things that really matter to investors, and those things almost never change.

But the promoters of the stock market are always quick to offer a few fast stock tips or economic bromides that will help direct your efforts. Little if any of it matters at all.

There are things that can be considered meaningful, but those ideas contrast markedly from what Wall Street is trying to accomplish in the financial markets. Rebalancing your portfolio every year or 18 months sounds smart, but in reality, all it does is encourage excessive trading.

Looking at technical chart patters can be useful in limited ways, but how many great sounding trading systems have you been offered over the years? And making changes based on some analyst upgrade or downgrade of whichever stock could be one of the very worst things we can do.

At the heart of these bad ideas is the notion that investors will do whatever is easiest. Investing the right way is real work, and how many really have the time these days? And Wall Street sellers of stocks and mutual funds know this. And enough of us will blindly follow along, thinking that whoever is offering free advice must have done the required work.

For the most part, they have not. They are simply trying to sell us something. Let’s face it, would anyone really expect a mutual fund manager who is mandated to invest in domestic large cap stocks to tell you that the sector looks expensive but that there are great looking things to buy in foreign markets?

One thing that investors must come to grips with is that the responsibility for the success or failure of their investing efforts is completely theirs. You are on your own unless you have trusted your savings to the right manager, and there are too few of those out there who still accept new clients.

Even then, it is up to investors to keep an eye on what their manager is doing and to regularly hear from their managers what ideas are driving their actions. Is there an underlying theme to what they’re doing with your money? Did what they’ve foretold in the past look right as the months rolled along? Has their judgment been proven sound in hindsight?

To me, there should always be underlying themes at work in any portfolio allocation activities. Doesn’t it make sense that a basic set of fundamentals should apply to your investment portfolio, rather than just taking a few shots here and there and hoping to be right?

An article in the Financial Times newspaper by Mark Sellers highlights what he thinks are the five most common traits of the best investors out there like Warren Buffett, Bill Miller and Bruce Berkowitz. See if this sounds like your investment manager, or like you if you manage your own portfolio.

Number one is that ‘’they have the ability to buy stocks while others are panicking and sell stocks while others are euphoric’’. Of course, it is only after time has passed that you would know if your manager possesses this trait, or if he or she simply buys on dips that prove to be only another stop on the rocky road to lower prices still.

Number two is that ‘’great investors are obsessive about playing the game and wanting to win. How can you teach this? A person is either driven and obsessive, or not’’. Do you get the feeling that this describes your manager?

Number three, ‘’great investors are lucky enough to have an above average IQ’’. I’ll assume that this is a given for most, if not all managers today.

Number four says that ‘’they have confidence in their own opinions without tunnel vision or arrogance’’. In other words, do they run with the crowd, or go their own way when better options exist that few others see or would delve into for whatever reason? As Mr. Sellers tells us in the article, ‘’the best stocks often don’t show up in screens’’ so often used by investors to find new ideas.

Number five says ‘’they don’t require instant gratification to achieve happiness’’.

Ad which of these five traits of the greatest investors would you think is more important than all others? To me, this is easy. Number five, that those investors willing to be patient and wait for their best ideas to pay off as expected, even if it takes years, is easily the most important.

Take one look at what’s been going on in the real estate market. I would guess that more small fortunes have been made in real estate than have been made in the stock markets over the past few decades. But how many are now going broke in real estate? And didn’t they all think they were going to get rich quick by flipping houses and condos?

Fortunes both large and small don’t happen overnight. They take years to build and manage. But today’s get rich quick mentality, encouraged by Wall Street brokers who make money when stocks are bought and sold would have you think otherwise.

There are a couple of underlying themes at work in my portfolios. The first is that over time, the dollar has lost most of its purchasing power due to reckless expansion of the money supply. I don’t see that changing any time soon, especially in light of very recent events.

Owning assets like gold, energy and other basic commodities seems like the easiest call I could make. The dollar has been falling in value since the Federal Reserve was established in 1913. Now there’s a long term trend that looks to be more durable than all others!

But look at the charts for gold stocks, funds or indexes. While the Philadelphia Gold and Silver Sector Index is enjoying a nice five year rally, it is just now breaking out of a trading range that began at the start of 2006. How many investors were able to sit patiently with that allocation for over 18 months while it went nowhere? Too few, I think.

Another underlying theme I use is that the world is a changing place. It really is different this time! The economic epicenter of the world is moving to the other side of the world, mainly Asia, where it was for centuries until British Empire domination in the 1800’s.

Asian economies are enjoying the strongest growth on the planet and should continue along that path for years to come given their low base starting points. Here, in what is still considered the strongest economy by so many in the financial media, much to my astonishment, what was the greatest creditor nation on earth is now by far the largest debtor nation. How can that possibly be considered a good thing?

But how many investors get spooked out of the best markets when the inevitable market drops happen as they always do during long running bull markets? The sharp fall in the Indian stock market in the first quarter of this year is a good example of what I’m talking about.

Maybe even worse for so many investors is the lack of appreciation for these long running bull markets in gold or emerging markets. Selling too soon is one of the most common mistakes made by impatient investors looking to follow dreadful Wall Street advice to ‘’take profits’’ on positions that have done well.

How many investors in gold, having watched the price of the metal rise from about $250 an ounce in the early months of the new century, sold when the metal hit some new high level, such as the $500 mark? How does that look now with gold going back above $700 and likely on its way higher?

How many intrepid investors saw the potential in the Russian stock market when things looked bleak in the last 1990’s and bought in when that index was rising to the 200 level, only to sell when that index hit what looked like a market topping level of maybe 500? Taking profits there was a big mistake as that index is now above the 2000 mark, having taken less than ten years to get there?

Investing done right takes time and hard work. In terms of time, it takes years for your best positions to pay off. Selling too soon might be investors’ worst mistake. Finding the best secular, long term trends takes time too, but once found, you will spend much less time running screens for new ideas to add to your portfolio.

You’ll be too busy watching as your ten or twenty year portfolio develops as you thought it would. Secular bull markets tend to last for close to twenty years. All that is needed once solid looking trends have been identified is for the investor to hold on patiently while too many others are making too many changes to notice what’s working the best.

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

9-40

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