Advice for New Investors

Or old. My previous reference and link to Amazon’s historic stock run up was a disservice to all of the esteemed readers of the humble blog. Same with my occasional references to Apple. Please strike all my references to individual stocks from the record.

Jeff Sommer restores order with “How Stocks Can Make You Rich. But They Probably Won’t“.

Heart of the matter:

How can those two sets of facts — the underperformance of the typical stock and the outperformance of the overall stock market — both be correct?

It is because a relative handful of stocks tend to outperform all others by tremendous amounts.

The conclusion:

“. . . most people picking stocks are unlikely to do well for very long.”

In related news, during the evening commute I enjoy listening to Seattle radio’s “Ron and Don”. They care about their community, they’re funny, and they have a beautiful rapport. However, their good work is seriously undermined by their pimping of an on-line trading school. They’re smart enough to know that 99% of day traders get their asses handed to them, despite that, they promote the shit out it.

I wrote them and asked why. No reply. Yet.

The Ultimate Personal Finance Challenge

There are two types of investors, active and passive. Active investors are always educating themselves about personal finance; and paradoxically, tend to use passive funds, due to their lower fees and superior performance. In addition, they are purposeful in choosing a particular asset allocation and they monitor their progress regularly. They invest time and energy into increasing their wealth. I’m an active investor.

Passive investors, because they often think they’re not smart enough, often delegate to financial planners upon whom they depend for choosing particular investments and determining an asset allocation. Passive investors tend to end up with active funds with higher fees because they’re not paying very close attention.* They may not open their quarterly statements. Picture them falling asleep at the wheel of a semi-autonomous, financial planner driven car.

The most important thing I’ve learned in thirty years of investing is that there’s an undeniable point of diminishing returns when it comes to business smarts and investing success. Simply put, some of the most well-educated and successful business people I have ever known have made some of the worst investment decisions I have ever seen. And to add insult to injury, they’ve been unable to admit the error of their ways and reverse course. Too smart for their own good.

Personal finance research shows that once active investors master earning more than they spend, wire the difference into specific exchange traded funds monthly, and decide how best to balance bonds and stocks, additional trading detracts from their returns. Think of trading based on possible changes in the market as a “too smart for one’s own good” tax. Here’s one example.

Once you master earning more than you spend, wire the difference into specific exchange traded funds monthly, and decide how best to balance bonds and stocks, your ultimate personal finance challenge is doing nothing. Hence, consider my triumvirate of personal finance resolutions for 2017: 1) I will not be too smart for my own good. 2) I will not try to guess the market’s direction. 3) I will not trade. Or for the sake of additional research, you could guess and trade away and then we can compare returns in 11+ months.

* I hired an advisor in the early 1990s. Learned an expensive, but ultimately, invaluable lesson, no one cares nearly as much about your financial well-being as you do.

Sentence That Restores My Faith In “The Public”

From today’s Wall Street Journal.

Investors pulled $12.7 billion from actively managed U.S. stock funds in 2014 through November, and put $244 billion into passive index funds from Vanguard and others, according to Morningstar.

Related factoid:

Vanguard is undercutting many rivals on fees. Investors pay 18 cents for every hundred dollars they invest with Vanguard, compared with $1.24 for the average actively managed mutual fund, Morningstar said. The company also is beating its passive rivals, which charge an average of 77 cents for every hundred dollars.

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Spring Reading

For when you’re done with your spring cleaning.

1) Teaching Tolerance—How white parents should talk to their kids about race. A must read if your goal is to be “color blind” and raise “color blind” children. I started out skeptical thinking adult behavior easily trumps parent “talk”. But Wenner Moyer makes a convincing case for both.

My “kids and race” story from my junior year of college. I was a teaching assistant in a culturally diverse 3rd grade magnet school classroom in West Los Angeles. One day I was sitting at a round table helping five or six students write stories. One light skinned African-American girl began to rub my pinkish, freckled forearm with her hand. Thinking deeply, she finally blurted out, “You have salami skin!” Feeling a need to return serve, I replied, “Well, you have chocolate skin.” To which another darker skinned girl said, “Huh uh, she has carmel skin, I have chocolate skin!”

2. The Oracle of Omaha, Lately Looking a Bit Ordinary. Can we finally wrap up the active versus passive investing debate and move on to more pressing issues like who will replace David Letterman next year? Even Warren Buffet says Vanguard Index funds are the single best way to invest one’s money.

3. Her First, and Last, Book. Graduation season is around the corner. This is a grad story to remember. “I cry because everything is so beautiful and so short.” Paragraph to ponder:

After the crash, Marina’s parents immediately forgave and comforted her boyfriend, who faced criminal charges in her death. They asked that he not be prosecuted for vehicular homicide — for that, they said, would have broken their daughter’s heart. Charges were dropped, and the boyfriend sat by her parents at the memorial service.