Personal Finance

The Top 10 Investor Errors Explained

Posted by Barry Ritholtz: The Big Picture

on Friday, 03 August 2012 07:29

1. Neglecting the Long Cycle


Societies, economies and markets all move in long secular eras. Sometimes these periods are positive (i.e., 1946-66; 1982-2000) and are called secular bull markets. Sometimes they are negative (1966-82; 2000-?) and are called secular bear markets.

Let’s use 1982-2000 era as an example. The rise of technology – everything from software to semiconductors, mobile to networking, storage to biotech et. al. drove the broader economy. This led to record low unemployment, strong wage gains and high corporate profits. As you would imagine, stocks did exceedingly well in this environment. Asset allocations that were Equity-heavy did much better than those that carried lots of bonds and cash in that period. Conversely, the cycle that began in 2000 has rewarded bond and cash heavy portfolios and punished more equity-heavy ones.

Think about the many long-lasting positive elements that drove the post WW2 period (1946-66). You can list all of the negative societal factors that were a drag on the next secular bear period (1966-82).

Not understanding this cyclical backdrop is a common error. You should be more equity oriented during secular bull cycles and more tactical (i.e. bond and cash)  during secular bear cycles.

It is an investor’s job to preserve capital and manage risk during secular bear markets. During secular bull markets, maximizing returns are the top priority.

All investors need to understand what the secular backdrop is and adjust their allocations accordingly.



Chart Source: Source: Crestmont Research

Click on each Title below for an expanded explanation



4. You Are Your Own Worst Enemy

5. Asset Allocation vs Stock Picking

6. Passive vs Active Management

7. Mutual Fund vs ETFs

8. Cognitive Deficits

9. Past Performance vs Future Results

10. Not Getting What You Pay FOR



Welcome to The Big Picture!

The blog is a compendium of what a professional money manager is looking at, thinking about, and writing on. It is written by me (& the crew) for people ranging from investment professionals to media to anyone else interested in investing, markets, and the economy.

It is, by design, laden with facts, statistics, and informed, data-driven opinions. We avoid the squishy, touchy-feely “I think/hope/want” type of fact-free analysis so prevalent in the media and on Wall Street.

I have been writing about these topics for ~15 years, and blogging since 2003. By sheer accident, TBP has become one of the best reviewed finance blogs on the web. We key in on what you should be thinking about when it comes to markets and the economy — and what you should not be doing with your money.

The writing is designed to be very accessible — no PhD required. Hell, no college degree needed. If I can make this stuff understandable to my right brain art teacher wife and my 74 year old retired real estate agent mom, then I can help you learn the basics of markets, investing and the economy


Gold & Precious Metals

The Opportunity of the Decade

Posted by Peter Schiff - Euro Pacific Metals

on Friday, 03 August 2012 00:00

"After spending the previous fall and winter testing new nominal highs above $1800, future investors may come to view spring and summer 2012 as the opportunity of the decade. Gold has shown its strength and retreated. While most investors will take that as a signal that the market has topped, some will take advantage of the general trepidation to add to their positions at hundreds of dollars off the highs".

Priced For Collapse

Where is the gold price today? If you're like many Americans, you have no idea whether it went up, down, or sideways. Fortunately, I know my readers to be more informed - you likely know that after falling from almost $1900, gold has been trapped around $1600 since early May. But you may still be curious why despite continued money-printing and abysmal US economic reports, gold hasn't been able to hit new highs.

Here's the truth: gold is currently priced for collapse. Many investors believe the yellow metal has topped out and are selling into every rally.

Nerves of Tin 

Being a gold investor is tough business. The last thing any government or corrupt big bank wants is to have a bunch of people putting their savings into hard assets - and gold is one of the hardest of all. So we're constantly up against tides of propaganda saying that gold has no value or is the refuge of doomsayers.

The effect of this is that even heavy gold investors are always waiting for the other shoe to drop. When house prices were rising, no one was worried that the market had peaked or prices were unsustainable. No one was asking whether all the thin-walled McMansions going up would actually be worth anything in a generation. But for gold, Wall Street has been shorting it all the way up!

Nowhere is this pessimism more evident that in gold mining stocks. Rising inflation has driven production costs higher, but the mistaken belief that inflation is contained and Treasuries are a safer haven is keeping a lid on gold prices. As such, many of the major producers have missed their earnings projections, and their share prices have been punished. This has placed a cloud over the entire sector. In fact, the P/E ratios of major gold miners are near record lows. Stock prices reflect future earning expectations, and judging by the low P/Es, Wall Street expects future earnings to plummet. This likely reflects their bearish outlook for gold, which is generally viewed as a bubble about to pop.

Chronic Memory Loss

Unfortunately, there is no public validation for those who have proved the gold doubters wrong. A couple of years ago, I predicted gold would cross $1500 and even my own staff thought the call was too risky, too extreme. But I knew then, as I know now, that at the end of the day the gold price is not a mystery - it's a proxy for dollar weakness.

Since most investors do not truly understand gold's economic role, they assume the 10-year bull market must be a mania. But manias show parabolic growth detached from any fundamental driver. The definition of a mania is the bidding up of an asset quickly and beyond all long-term justification.

Gold, however, has grown steadily in inverse correlation with real interest rates, as explained by Jeff Clark and Mark Motive in past issues of this newsletter. As a reminder, here's a chart detailing the correlation:


The Opportunity of the Decade 

After spending the previous fall and winter testing new nominal highs above $1800, future investors may come to view spring and summer 2012 as the opportunity of the decade. Gold has shown its strength and retreated. While most investors will take that as a signal that the market has topped, some will take advantage of the general trepidation to add to their positions at hundreds of dollars off the highs.

While I think gold is a bargain at $1900 considering today's circumstances, the market phobia of a price collapse is allowing us to buy at well under established highs. It's as if you already wanted to go swimming, but you found out when you got there that the pool was heated.

What Happens Next

I've seen markets like this before, and by making some reasonable inferences, I have a good picture of how this could play out. Gold will continue testing the $1600 barrier until it surprises to the upside. This could be spurred by the announcement of QE III, a calming of fears in Europe, or any shock to the Treasury market. Treasuries have temporarily overtaken gold as the primary safe-haven asset. Once that dynamic is broken, I believe the counterflow into gold will be tremendous.

Right now, there is a haze over investors. Frightful news from Europe and a slowdown in Asia have shaken confidence in any asset that doesn't have the steady track record of US debt. But as I often remind my clients, past performance doesn't guarantee future results. Any news that wakes investors up to the coming collapse of the Treasury market will likely trigger a rush into the one asset with a track record as long as civilization itself.

Prepare For Collapse

The key to this market is to understand that a price collapse is coming - but not for gold. Instead, the market for US dollars and dollar-denominated debt is headed off a cliff, which will send the price of precious metals soaring.

Now is a time for uncommon confidence. Everyone knows Treasuries to be safe, just as they knew house prices would always rise. Then as now, gold's value and utility are doubted. But my readers know better.

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.

For the latest gold market news and analysis, sign up for Peter Schiff's Gold Letter, a monthly newsletter featuring contributions from Peter Schiff, Doug Casey, and other leading experts. Click here for your free subscription.


Timing & trends

Bill Gross: ‘Stocks Are Dead!’

Posted by Robert Zurrer for Money Talks

on Thursday, 02 August 2012 11:00

Bill Gross runs PIMCO's $252.2 billion Total Return Fund. With such a massive fund investing in income bearing instruments during a collapse in interest rates, its no wonder many call Gross the world's pre-eminent bond fund manager.

As for Gross's calls on the stock market,  the chart below shows that that he was consistently wrong on his macro stock market calls. He was negative throughout the 6000 odd point Dow Rally from the Stock Market bottom in 2002. Negative again for most of another 6000 point Dow Rally from the early 2009 stock market bottom. . 

Specifically Gross says that "The cult of equity is dying",  that stock investors should rethink the age-old investing mantra of buying and holding stocks for the long run. He says consistent, annual returns from stocks are a thing of the past.

Gross makes the case that stocks have averaged a 6.6% annual gain on an inflation-adjusted basis since 1912. That said he thinks that the 6.6% return was a  "historical freak" that is unlikely to occur again because of slowing economic growth around the world. He says that return "belied a commonsensical flaw much like that of a chain letter or yes—a Ponzi scheme.". In short that with growth on the US economy averaging 3.5% over that period of time, "investors were "skimming 3% off the top each and every year." 

Of the $1.8 trillion Pimco has under management in its various funds, only about $6 billion is in active equity assets.

With Gross's track record in calling stock market moves so negative, one has to wonder if its not time to buy. Be sure to click on the chart below and view his track record. 

Click on the Chart or HERE for Larger Image. To read Bill Gross's entire commentary "The cult of equity is dying" go  HERE



Personal Finance

Brace for an era of crisis aftershocks

Posted by David Rosenberg - Gluskin Sheff

on Thursday, 02 August 2012 08:33

Here is the reality. We have intense uncertainty on US fiscal, energy and health policies. Nobody knows what their effective tax rate is going to be next year so they cannot plan.

When you model that uncertainty in economic terms, you end up with higher liquidity ratios in business and rising savings rates in the personal sector. This damps spending growth and spending is what gross domestic product is all about.

On top of that, we have an export shock from the spreading European recession that is only now starting to show through in the data, such as the plunge in US purchasing managers’ orders.

Now, if the baseline growth trend in the US economy was in the old paradigm range of 4-6 per cent for this stage of the cycle, we could certainly absorb these negative shocks.

But the underlying trend in the pace of economic activity is somewhere between 1 and 2 per cent, so there is little margin for error: the cushion is razor-thin.

....read more HERE

Picture 1


Stocks & Equities

Jim Rogers: The New Safe Haven For Equity Investors

Posted by Tom Stevenson via The Telegraph.co.UK

on Thursday, 02 August 2012 07:31

So I wasn’t unduly surprised to read recently that he believes Burma to be “the best investment opportunity in the world, with North Korea not far behind”.

He exaggerates to make a point, but his comments gave me pause for thought because I am as guilty as anyone of lazily describing the investment world as a three-legged stool, as if the US, Europe and China were the only markets that mattered. In particular, his interest in Burma and North Korea is a reminder that there is a lot more to Asia than the Middle Kingdom.

Some of the countries that make up the ASEAN region have been among the best places to ride out the financial crisis. Stock markets in Indonesia and Thailand, in particular, trade at a healthy premium to their pre-crisis levels, while the world average remains deeply in negative territory compared with five years ago.

South-east Asia as a safe haven is a novel concept for anyone who remembers the region’s own devastating financial crisis in the late 1990s. I have a cartoon on my wall from a newsletter I published at the time showing a row of sick-looking tigers in hospital beds with thermometers in their mouths. The region has never really shaken off its image as the riskiest of emerging market bets.

But confidence is growing in a region of 600m people, with a fast-expanding middle class driving consumption and economic growth. The International Monetary Fund recently downgraded growth for the ASEAN region, showing it cannot completely buck a slowing global recovery. But it has still pencilled in 6.1pc growth next year, compared with 0.7pc for the euro area and 2.3pc for the US.

The ASEAN should not be underestimated. With a combined stock market capitalisation of more than $2 trillion and trade with China expected to top $500bn by 2015, the region is grabbing the attention of increasing numbers of investors. In the first half of this year, almost as much money flowed into ASEAN funds as flowed out of China. Having been the first investments to be liquidated in an emergency, they are taking on the characteristics of a port in the storm.

Many of the region’s attractions are familiar to China bulls. Rapid urbanisation and infrastructure build tell a similar story, for example, as do the robust government finances that make a high level of public investment possible. But there are differences, too. China’s one-child policy is leading to a rapid ageing of its population, but in South-east Asia more than 40pc of the population is under 25, putting the region in a demographic sweet spot. The ASEAN region is extremely diverse, however, so it is not possible to generalise beyond the obvious themes of higher consumption and investment. Vietnam and Singapore share membership of the economic organisation, but little else. Some of the region’s countries are rich in natural resources that others lack. Inflation is a problem in some places and not in others. Local knowledge is key.

One of the most interesting markets in the region is Thailand, and not just because it might be the best way to tap into the opening up of Burma. Thailand’s stock market has risen by 16pc so far this year, beating all the other main indices in Asia.

In part that reflects a quicker than expected recovery from last year’s floods. But it is also a consequence of a raft of pro-stimulus policies from the country’s populist government, including a 40pc rise in the minimum wage and a sharp reduction in corporation tax from 30pc to 23pc, with 20pc in the pipeline for next year.

Foreign investment is pouring into Thailand, with Japanese car makers seeing the country as a safe destination for companies seeking to escape the high yen and energy shortages following the Tohoku earthquake.

The government is playing its part, too, spending heavily on dams and flood defences as well as rail and road projects to help promote the country as a distribution hub for the region, linking China with frontier markets such as Cambodia.

Thailand might seem a bit mainstream for someone weighing up an investment in North Korea, but less adventurous investors than Jim Rogers probably won’t mind that.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63



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